Please explain "Exponential money growth" for a dummy?

[Eclipsenow]

Hi all,
I've been googling and I just can't seem to find any FREE 'economics 101' podcasts that explain the basics.

I remember reading a depletionist / Malthusian claim that modern economies were all addicted to growth because of our money system. The argument seems to be that there is SO much money being created so fast, that the economy has to grow at about 3% per year or 'bad things happen' (like inflation).

In other words, from a resources and environmental perspective, if the earth ever became 'full' and all resources were 'maxed out' (just hypothetically speaking for now, I do not want to get into another resource debate here), would our money system need completely rehauling with 'zero interest banking' as some argue below, or is the money system NOT addicted to growth and able to handle a zero growth economy?

If anyone has a podcast that explains this really well for newcomers to economics, I'd love to listen to it. Or if there's a page that replies to this theme in basic language?

This was not just crazy hippie stuff, but Phd math's types writing for the CSIRO in Australia. See the essay Debt as the driver of economic growth and excessive consumption; (about 6 page PDF from memory), his argument is shorter.
http://www.bml.csiro.au/susnetnl/netwl55E.pdf

I just watched some videos on money creation over here as well.
The Crash Course | Chris Martenson
http://www.chrismartenson.com/crashcourse
Chapters 5 to 11.

Here there's a whole free book on the thing.
Feasta - The Ecology of Money
http://www.feasta.org/documents/moneyecology/index.htm

But I honestly can't make heads or tails of monetary policy which is supposed to combat this stuff. My economics mate says that money creation is neutral to whether or not an economy expands or shrinks, but the guys above seem to imply that EXPONENTIAL money creation DEMANDS a growing economy or the value of money just has to shrink.

Is there anyone out there that can explain this, to me, a non-economist, in a way I can understand... or at least put me onto a podcast series that might help? (I've tried to read about this stuff at Wikipedia but my eyes go... )

[lumberjack_jeff]

1. I was poor. I bought an apple and polished it. With the proceeds, I bought two more.

While in the orchard, I had sex with the owners wife. They got divorced, I married her.

The secret of success.

[Eclipsenow]

2. You are the government in this analogy?

I see, it all makes perfect sense.

[Eclipsenow]

3. Bacteria and money supply

As far as I can tell, it's like this...

"Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minuet, and it's in the finite environment of one bottle. I want to ask you three questions.

Number one; at which time was the bottle half full? Well, would you believe 11:59,one minute before 12, because they double in number every minute?

Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well let's just look at the last minute in the bottle. At 12 noon its full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem? "

and then this...

"A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.

When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating."

http://www.chrismartenson.com/the_end_of_money

[Eclipsenow]

4. Anyone?

It's like I need to understand the equations and tools used to measure the economy and SEE for myself how exponentially more interest debt doesn't force us to grow our economy in tandem with the money supply to fight inflation.

Raising interest rates fights inflation by taking money out of circulation and storing it with the bank, but in turn creates higher debt through more interest, and in my mind makes the problem worse by — while slowing money circulation through the economy temporarily — creating more money in the long term. Or at least, that's what I think Chris Martenson and friends would say.
http://www.chrismartenson.com/debt

If you ever come across any papers that explain where all the extra money goes, I'd love to see it. Cheers.

[Hannah Bell]

5. here's my tentative thought, fwiw:

Imagine an economy where everything - land, resources, businesses, etc. is owned by someone.
Imagine the money supply (MS1) represents that total wealth.


B. gets bright idea & goes to bank to borrow $10,000 to implement it.

This $10K is 10% real, already existing MS1 money & 90% new, "created" money.
(I didn't look up real reserve reqs, this is just for example).

He uses the $ to buy resources at their already established MS1 cost & hire workers to make his product.

He sells the product for $20K.

The 20K he receives is $ already existing (MS1). This money has simply changed hands, gone into his pocket from someone else's.

He takes $10,800 & repays the bank: $10K + 8% interest. The guy has a profit of 9200.

Now the $10K is off the bank's books: the new money that was created with the loan is extinguished.

However, $800 in new (interest) money remains, & the bank owns it.

Now there's a new money supply: MS2.

Supposedly, this represents new value injected into the economy: the guy's idea, production process & new products.

But it all goes to the bank. The guy's profit comes entirely from the existing (MS1) money supply, i.e. from existing money changing hands. He gets more, someone else has less.

Seems to me this is a recipe for increasing the power of banks & those who own & control them.

Over time, they come to control a higher % of the money supply, which means they're able to buy/control a higher % of real physical wealth & human labor.

It's also inflationary, but in a not quite straightforward way.

If we just look at the product side, the added $ injected into the economy seems necessary: before, there were only (e.g.) 200 things to buy with $200, now there are 250 things to buy with $200: if you didn't increase the money supply, prices would rise.

But when you look at it from both resource & product sides, you get a little different picture, because ecologically, nothing "new" is really created, things just change form.

So injecting new $ into the economy, while assuring that most of the new $ goes to lenders & their associates, will inflate certain values (competition between major money-owners), & that's a more complicated question.

To me, the question is, who winds up owning what, & thus who can dictate to who. It's fairly clear that the majority of people own comparatively little.

[Hannah Bell]

6. so i guess here's what i'm thinking:

i've seen some of those articles about lending that focus on the fact that the $ lent aren't "real".

to me, this seems dumb: if there were a requirement to lend only real $, no $ could be lent without theoretically reducing someone else's economic activity, i.e. it would be very difficult for economies to expand production.

& on the inflation angle: inflation (& deflation) is only problematic because of its unequal effects: if all prices rise tomorrow, but EVERYONE gets equivalent $ to cover it, not really a problem except the inconvenience. Economic activity, theoretically, won't shrink or expand.

But normally, someone's getting screwed, typically ordinary people first, & specific segments of the ownership class, second. While someone else is making out like bandits.

So my feeling is those presentations typically focus on the wrong issues, i.e. they're distractors.

[A HERETIC I AM]

7. I see a bit of a flaw in your analogy.

My comments in italics

Imagine an economy where everything - land, resources, businesses, etc. is owned by someone.
Imagine the money supply (MS1) represents that total wealth.


B. gets bright idea & goes to bank to borrow $10,000 to implement it. Is the bank completely separate from the above group? Or is it also owned by this same "someone"?

This $10K is 10% real, already existing MS1 money & 90% new, "created" money.
(I didn't look up real reserve reqs, this is just for example). What you don't mention here is that the borrower almost always has put up something of intrinsic value as collateral. This collateral is tangible and represents an asset on the banks books.

He uses the $ to buy resources at their already established MS1 cost & hire workers to make his product.

He sells the product for $20K.

The 20K he receives is $ already existing (MS1). This money has simply changed hands, gone into his pocket from someone else's. But that someone else received a product worth $20,000 to him.

He takes $10,800 & repays the bank: $10K + 8% interest. The guy has a profit of 9200.

Now the $10K is off the bank's books: the new money that was created with the loan is extinguished.

However, $800 in new (interest) money remains, & the bank owns it. And the bank is entitled to it because they took a risk in making the loan in the first place.

Now there's a new money supply: MS2.

Supposedly, this represents new value injected into the economy: the guy's idea, production process & new products.

But it all goes to the bank. The guy's profit comes entirely from the existing (MS1) money supply, i.e. from existing money changing hands. He gets more, someone else has less. Completely not true. The "guy" sold a product, as I stated above, to someone else who valued it at the price paid for it. The person who's pocket the money left is not out the twenty grand, he has a product, something he presumably could not make himself to show for the $20K. It isn't simply a one-sided operation. It is a transaction. Both parties benefited.

Allow me to take your example a bit further, because you stated;

But when you look at it from both resource & product sides, you get a little different picture, because ecologically, nothing "new" is really created, things just change form.

Ecologically? Is a Milling machine still Iron Ore? No, it is not. The primary ingredient in making a Milling Machine may be nothing more than a specific type of dirt, but it has been altered on an atomic level by a very specific process (Steel making) and even if it rusts away to nothing in the junkyard, it will not revert back to Iron Ore.

You also said;

So injecting new $ into the economy, while assuring that most of the new $ goes to lenders & their associates, will inflate certain values (competition between major money-owners), & that's a more complicated question.

I disagree wholeheartedly with this statement. Injecting new money into the economy overwhelmingly tends to result in the production of more goods. The money does not stay with the "lenders & their associates", it often creates far more value in the marketplace later on. Again, transactions where someone give another money for a product or service are not one-sided. When you come across a good or a service you deem too expensive you tend to not purchase it, regardless of what it is (or at least purchase less of it than you otherwise would have). When the price comes down to a point where you feel the value of the product is equal to the cost, you do buy it. You might be out the cash, but you now have a Milling Machine or a sweater or a bag of groceries or a house. Granted, certain classes of products have a finite life and/or depreciate in value over time. Sweaters wear out. Milling Machines are made with better features, etc., but it isn't as if every dollar "created" stays with the banks. If that was the case, we would all be naked, starving and living in caves and the only people with clothing, food and shelter would be the "lenders & their associates".

[Hannah Bell]

8. "ecologically, nothing "new" is really created, things just change form."

>>Ecologically? Is a Milling machine still Iron Ore? it will not revert back to Iron Ore.<<

exactly...in the sense that no new matter or energy has been created, things have just changed form.


>>I disagree wholeheartedly with this statement. Injecting new money into the economy overwhelmingly tends to result in the production of more goods.<<

which doesn't argue either for or against what i said.


>>transactions where someone give another money for a product or service are not one-sided.<<

you missed the point.

[A HERETIC I AM]

10. The way I read it, your point is "All extra money goes to the banks"

And I disagree.

">>Ecologically? Is a Milling machine still Iron Ore? it will not revert back to Iron Ore.<<

exactly...in the sense that no new matter or energy has been created, things have just changed form."

Is it your understanding that a blast furnace is a natural process? Sorry, but the "things" in this example have by no means "just changed form". It is really hard to make any kind of complex tool, instrument or product if all you have to work with is a pile of rocks.

From a pure physics perspective, sure, no new matter is created. But this is presumably a question about economics, not physics.


You stated

"Now there's a new money supply: MS2.

Supposedly, this represents new value injected into the economy: the guy's idea, production process & new products.

But it all goes to the bank. The guy's profit comes entirely from the existing (MS1) money supply, i.e. from existing money changing hands. He gets more, someone else has less."

I say bullshit. The "someone else" does NOT have less. He has a product he valued at the price he paid for it. He's out the cash, sure but he got something in return. All the profit does NOT go to the bank.

What if that twenty grand bought him a milling machine (or any other item needed in another production process) that he could not do without. Having that machine allows this person to produce goods that HE can sell at a profit. Does THAT profit go to the bank that lent the original ten grand?

The part I disagreed with wholeheartedly was your statement that "most of the new $ goes to lenders & their associates".

It is simply not the case.

If I have somehow missed your point yet again, so be it.

Perhaps your grasp of this esoterica is beyond mere mortals.

[Hannah Bell]

11. Do you agree that once the debt is repaid, the original loan is extinguished,

& that the repayment of the loan offsets the original infusion of cash the borrower put into the economy by buying materials & labor?

Do you agree that at the end of the entire transaction, there's some new product, but the only new money is the interest payments taken by the loan agency (usually a bank)?

1. The economy-wide money supply is $300,000 at point 1.

2. I borrow $10K from a bank. Now there's (with 10% reserve requirement) a $309,000 money supply.

3. I buy $5K of supplies & $5K of labor to make some products.

4. I charge $20K for my products, & people buy them.

5. I repay the $10K I borrowed, + $800 interest.

6. That means: though I spent $10K into the economy to make my products (or 9K, if you assume 10% was real bank deposits), I'm now removing that $10/9K. So now there's $300,000 in the economy again.

7. Except for the $800 in interest. Where does that come from? I think there are only 2 possibilities:

a. The $800 comes from the original $300K money supply such that the distribution changes thusly from the beginning to the end of the transaction:

Borrower: 0 goes to $9.2K (0% to 3.067%)
Bank: $1K goes to $1.8K (.33% to .6%)
Rest of Economy: $299K goes to $289K (99.67% to 96%)
Total money supply: $300K stays at $300K. (100% = 100%)

b. OR: The banking system as a whole expands the money supply to create new money representing the interest, e.g.

Borrower: 0 goes to $9.2K (0 to 2.98%)
Bank: $1K to $1.8K (.33% to .58%)
Rest of economy: $299 goes to $289.8K (99.67% to 93.8%)
Total money supply: $300K goes to $308.8K (100 to 102.9%)


In case a, the rest of the economy ("society") has given money to the producer in exchange for goods & to the bank, for whatever: society has less money, the producer & the bank have more.

In case b, the rest of the economy has given the producer money, & the bank has created some new money & taken possession of it.


Case B is the only case where new money is created, & in that case, the new money goes to the bank, to do with what it wishes. Keep as reserves, divvy out to stockholders, buy drugs with, whatever.

[Hannah Bell]

12. ...

"Is it your understanding that a blast furnace is a natural process? Sorry, but the "things" in this example have by no means "just changed form". It is really hard to make any kind of complex tool, instrument or product if all you have to work with is a pile of rocks.

From a pure physics perspective, sure, no new matter is created. But this is presumably a question about economics, not physics."


it's my understanding that yes, you're rearranging what already is. doesn't matter if it's "hard" or "easy". You're just changing the forms of what exists & materializing human labor & intelligence.
Nothing new - in this sense.


Building a house is "hard" - harder than just letting things be - it requires energy & thought.

In the end, you have a clearing where the trees were, & a house made of the trees.

People "need" houses, yes - but are they "new" wealth?

Moreover, need we pay a yearly commission to a bank just to have a house?


If you follow the math of the examples, & assume that at least 1/2 of economic activity is debt-finance - over time, this system results in an ever-increasing fraction of the money supply being owned by the bank.

[TroubleMan]

9. Two great videos that would answer a lot of your questions.

The first one is about exponential growth. It's been on DU before, but that was a few years ago. This is a math lecture from a Professor Emeritus at University of Colorado-Boulder.

It's called Arithmetic, Population & Energy:
http://www.guba.com/watch/3000053112

It's about an hour long, but it gets very, very good. The first part is kind of slow, but it's the set up. Once you get to the middle part it's gripping.

The other one is Money As Debt.
http://video.google.com/videoplay?docid=-9050474362583451279

This explains how a fractional reserve banking system works (which is what we have here), and it goes into great detail about the money creation you've talked about.

[Eclipsenow]

13. Truly alarming

That second video is truly alarming. The first video, good old Dr Bartlett's "Arithmetic, Population and Energy" is a classic and I've given away about 15 copies on DVD.

The classic quote is something like "If the human population continued to grow at today's rate of about 1.3% per annum, then in 780 years there would be 1 person per square meter of dry land on earth, and in 2000 years humanity would have the same mass as the planet earth!

But the second video deals with the economic question and I either just can't get something fundamentally basic about our money supply, or it really is broken!

The only thing that sends of 'alarm bells' about the second video is that it seems to be conspiratorial, which usually shows a warping of the data.

However, the basic premise is that if we express ALL the money in existence as X, and it has been loaned into existence by an exponential interest mortgage, then the sum total of debt is about 3x.

How can X ever pay 3X?

It can't. So the system has to grow... but because all money is loaned into existence with the expectation of greater return on it tomorrow, the total debt is always going to be more than the total money supply... ad infinitum, continually growing.

The system requires exponential growth at every level — as the saying goes, "No one loses musical chairs until the music stops". Because babies born today will see "peak everything" the music stops with this generation! I think only peak oil will shatter our illusory money system, let alone peak minerals, metals, fisheries, wood, freshwater, climate, etc.

A sustainable money system is a question for today, as is a sustainable energy system, food system, etc.

[TroubleMan]

15. Exponential growth of the economy and money supply is fine if

you have infinite resources. When they came up with this system a long time ago, it looked like the world had infinite resources, and this system provided the liquidity and extra money supply to fund a boom or expansion when it was ready to happen. Now the end of many essential resources are in sight in my lifetime, and this system cannot survive in a world of finite resources.

Putting those two videos together is a great one-two punch. One video shows that our whole economic system is based on exponential growth, and the other video shows the perils of exponential growth and that it's unsustainable. We're in the predicament that we have an economic system that can't crash without exponential growth, but exponential growth will eventually cause our downfall. We're in a Catch-22. I hate to think this, but I don't think any leader is going to do anything about it except stall and hope it doesn't happen when they're in charge.

[WillYourVoteBCounted]

14. Buy Euros and stay out of the stock market.

that is what I have been hearing.

[dtotire]

16. See this video

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x42543

[Eclipsenow]

17. Give the job to the government!

How long is that video Dan? I'm near the end of my bandwidth...

also, Hannah Bell wrote:

<i>If you follow the math of the examples, & assume that at least 1/2 of economic activity is debt-finance - over time, this system results in an ever-increasing fraction of the money supply being owned by the bank.</i>
Totally agreed! The examples above indicate that over time the banks will end up owning everything... and yet what do they actually produce? It's the greatest con of all time. I wish the government lent out money, did not charge exponential interest but maybe charged some extra tax for loans, and managed the money supply by 'creating' and 'destroying' money as needed in balance with the overall economic system (not like Zimbabwe!)

Money growth and creation would then be a matter of democratic choice, not financial imperative. These decisions would be accountable to the public. When was the last time you heard of voters deciding upon a party based on their track record of handling money supply?

[TroubleMan]

18. It's the same one I posted above (Money As Debt), but

it's broken up into 5 pieces.

[AdHocSolver]

19. "Exponential money growth" and all of the explanations are part of "voodoo economics".

You are safe to assume that 90 percent of what "professional" economists say is pure bullsh*t.

From what you have written in your post, what the term "money creation" refers to is banks or other financial institutions making loans. If a bank loans someone $100,000, then the bank has "created" $100,000 to circulate in the economy that didn't exist before. If the borrower takes that money home and stuffs it in a mattress, then no "real" money was created.

You wrote: "the guys above seem to imply that EXPONENTIAL money creation DEMANDS a growing economy or the value of money just has to shrink."

This is a convoluted way of saying that if the money supply increases faster than the goods you can buy with it, those with more money are going to bid up the price of goods against others since they have more to spend. An example is the low interest rate loans that poured huge amounts of dollars into real estate. Because of these low interest loans (courtesy of that vampire Greenspan), people offered more money for homes than the then current value of the home, since they could get lower payments. The "increased money supply" due to the artificially lowered interest rates (higher demand) against a near term fixed housing stock (fixed supply) caused price inflation. This practice led to the housing bubble we experienced with its predictable collapse when all of the free-flowing credit was suddenly cut off.

The stock market bubble was also promoted by "cheap" money, when people threw money at the stock market. The buying frenzy bid up the prices on a slower growing supply of stocks so that a stock market boom was created a la Enron which tanked when the stock prices got so high and people maxed out their ability to borrow.

Inflation occurs when the dollar is devalued. Sellers want more dollars for their goods as they don't feel that they will be able to buy as much with what they receive for selling their product. If the supply of goods increases as the money supply increases (ie., more loans) than sellers will not demand higher prices as they have competition with other sellers to deal with.

It all gets down to simple supply and demand. More money than goods means that the buyers with more money will be willing to pay more. Conversely, more goods for sale relative to the number of buyers to purchase them means that suppliers will lower prices (put on sales) so as not to get stuck with excess inventory.

This is not rocket science. If you can't understand what some economist says, 90 percent probability it is bullsh*t.