The World's First Trillionaire

[TimG]

The rest is just an abstraction that facilitates and simplifies the process which is, as it has always been, people who need money trying to borrow it from the people who have it.

It is more than an abstraction. The money supply would be fixed if it was not for the money created by loans. It is not fixed - it expands and contracts constantly. This means there is more capital to go around.

The value of labor is shrinking, and the power of having capital is only growing as our financial system becomes more and more tailor to meet the interests of the most powerful financial entities. The economy is growing, but most peoples' income is stagnant and the only people seeing real gains are those at the very top.

This is only true if you draw arbitrary lines on maps and only look at people inside some of the lines. If you look at global median incomes they are rising.

The question I have is: why do you have a problem with wealth accumulation when every citizen of a rich country is rich by global standards because they benefit from wealth accumulation?

How can you logically argue for income equality without arguing that Canadians should see their incomes reduced to the global average (an 80% cut from current levels)?

Edited July 20, 2014 by TimG

[Argus]

Anyone who gets a mortgage is borrowing money created by the banks. They are not borrowing from existing holders of capital. Same thing with credit cards. Banks charge you interest because when you go and spend the money loaned someone will get and come back to the bank and demand interest on this newly created money.

Banks do not 'create' money. Whatever they give or loan or spend is money from deposit holders or money they are given by someone else in exchange for some service.

Edited July 20, 2014 by Argus

[TimG]

Banks do not 'create' money. Whatever they give or loan or spend is money from deposit holders or money they are given by someone else in exchange for some service.

Nope. Read what the Bank of Canada says on the subject: http://www.bankofcanada.ca/wp-content/uploads/2010/11/canada_money_supply.pdf

Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money.

Banks create a loan first.

The money is then spent and it always ends up as someone's asset but the money did not exist prior to the loan.

Edited July 20, 2014 by TimG

[kimmy]

It is more than an abstraction. The money supply would be fixed if it was not for the money created by loans. It is not fixed - it expands and contracts constantly. This means there is more capital to go around.

The money supply is fixed. It's fixed by the M1 money supply (ie, the cash and bonds issued by the central bank) and the required reserve ratio (ie, rules specifying that the banks must have enough cash to meet some percentage of their deposits.

If you disagree with my premise regarding the increasing value of capital and the decreasing value of labor, how do you explain that even though productivity is higher than ever before, the income of most workers has remained stagnant and the only people seeing their income grow are the very richest?

This is only true if you draw arbitrary lines on maps and only look at people inside some of the lines. If you look at global median incomes they are rising.

The question I have is: why do you have a problem with wealth accumulation when every citizen of a rich country is rich by global standards because they benefit from wealth accumulation?

How can you logically argue for income equality without arguing that Canadians should see their incomes reduced to the global average (an 80% cut from current levels)?

First off, I don't recall that I've ever argued for income equality.

And I don't think that we send our elected officials to Ottawa to make decisions based on what's best for Filipinos or Bangladeshis or whoever else. Until such time as those people are paying costs of living and taxation comparable to those in Canada, those lines on the map aren't arbitrary. Seems to me that we only hear this plea to "think of the poor Filipinos!" when companies are trying to defend their offshoring/outsourcing practices.

I don't object to the accumulation of wealth in and of itself. I'm trying my hardest to accumulate a little wealth while I still can. But there has to be some balance. As I said before, I worry about a future where the value of labor continues to erode, while wealth draws more wealth to itself like a magnet. The table is becoming too tilted.

-k

[TimG]

The money supply is fixed. It's fixed by the M1 money supply (ie, the cash and bonds issued by the central bank) and the required reserve ratio (ie, rules specifying that the banks must have enough cash to meet some percentage of their deposits.

Reserves only put an upper limit on the money supply. The money supply in use constantly changes as people borrow money/payback loans. More importantly, banks are still creating new money without having to get it from capital holders.

If you disagree with my premise regarding the increasing value of capital and the decreasing value of labor, how do you explain that even though productivity is higher than ever before, the income of most workers has remained stagnant and the only people seeing their income grow are the very richest?

I don't actually disagree. I was simply pointing out that a fiat banking system is something that helps remedy the situation by making capital available to more people at a lower cost that it would be in a system with a fixed money supply.

I don't object to the accumulation of wealth in and of itself. I'm trying my hardest to accumulate a little wealth while I still can. But there has to be some balance. As I said before, I worry about a future where the value of labor continues to erode, while wealth draws more wealth to itself like a magnet. The table is becoming too tilted.

It is good that you understand the nature of the system and that you do benefit from the inevitable inequality in it (at a global scale) and any policy changes are self serving as opposed to altruistic. I also see the need for balance and am interested in changes that provide it. The question becomes: what balance? Punitive taxes on designated "evil" people seems ham handed and counter productive because it won't bring in that much money. Funding for education and healthcare? Yes - but not a blank check because it is too easy for money allocated to end up increasing worker benefits without improving service. More corporate taxes? That just leads to the US situation where profits are kept overseas or, in the worst case, encourages large corporations to relocate and only punishes the small home grow businesses we want to encourage (i.e. the next RIM).

What else? I don't see any answers because every possible policy comes with so many disadvantages. What would you change?

Edited July 21, 2014 by TimG

[dre]

Interestingly enough the modern banking systems and fiat currencies actually address this issue reducing the value of capital (i.e. if money can be created from nothing then people don't need to get money from existing holders of capital if they need it). I realize that this has created a regulatory headache and requires that governments bail out private businesses from time to time but such hassles are price worth paying if means more people can access capital when they need it.

No thats not true, modern banking systems are doing the exact opposite. Apon its adoption we immediate saw wages begin to stagnate.

A recent study by Canadas conservative government found that inflation is wiping out the middle class, and that the only people that benefit from it are the super wealthy. A report by the OECD that almost all of the benefits from global economic growth are going to the wealthiest 1 percent.

http://www.cbc.ca/news/business/current-inflation-is-killing-off-the-canadian-middle-class-don-pittis-1.2711415?cmp=rss

http://www.cbc.ca/news/business/top-1-taking-lion-s-share-of-global-growth-oecd-says-1.2627154

The fact is inflation and modern banking are extremely REGRESSIVE.

Edited July 21, 2014 by dre

[TimG]

the only people that benefit from it are the super wealthy.

False. Inflation helps people with debt and hurts people with savings. The middle class people with mortgages benefit because inflation reduces their debt load relative to income and asset value. The government also benefits because it means the debt burden as a percentage of GDP declines even if it is not actually paid back. This leaves more money for program spending.

It is easy to rant about the problems with the fiat system but I don't think you have a comprehension of the problems that are inherent in alternative systems. Sky high interest rates and reduced access to capital are much bigger problems than a little inflation.

Edited July 21, 2014 by TimG

[dre]

The middle class people with mortgages benefit because inflation reduces their debt load relative to income and asset value.

This is flatly untrue which is what the report by the conservatives shows. Inflation is at 2.4% but wages are only growing by 1.9 percent. This reduces the ammount of money you have for debt maintenance, and everything else you buy, and what the report find is that its actually causing people to need to take on more debt.

Sky high interest rates and reduced access to capital are much bigger problems

But shrinking wages and low interest rates have not stimulated investment. In fact new research out this week from the C.D. Howe Institute shows Canadian companies continue to sit on their cash piles.

Inflation helps people with debt and hurts people with savings.

A better description would be that it helps people with LOTS of debt and hurts EVERYONE ELSE. Inflation is basically an extremely regressive consumption tax. It disproportionately benefits the wealthy because they are much more likely to carry long term debt, much less likely to "rent" and so on.

[TimG]

Inflation is at 2.4% but wages are only growing by 1.9 percent. This reduces the ammount of money you have for debt maintenance, and everything else you buy, and what the report find is that its actually causing people to need to take on more debt.

Even if wages are not growing the value of debt decreases as a percentage of the asset value. Debtors still benefit in the long run.

A better description would be that it helps people with LOTS of debt and hurts EVERYONE ELSE.

This makes no sense. Everyone with debt benefits from inflation and the biggest debtor is the government and inflation means it can spend less on paying back debt than it would otherwise. This, in turn, allows governments to spend more on programs than they otherwise could.

But you completely avoided the other side of the question: where is your evidence that people would be better off in a system where the supply of debt/capital was limited by the supply of some arbitrary commodity?

Edited July 21, 2014 by TimG

[dre]

This, in turn, allows governments to spend more on programs than they otherwise could.

Yup this has already caused some national governments to collapse/default, and overly easy credit to crash the world economy. Not to mention that when governments can enact large expensive programs without having to go to the voters and ask for more taxes they tend to spend that money rather poorly, and one day someone is going to left holding the bag for these massive unfunded mandated.

But you completely avoided the other side of the question: where is your evidence that people would be better off in a system where the supply of debt was limited by the supply of some arbitrary commodity?

I never said we should switch back to a commodity. But its worth noting that the best system in recent history for the average citizen was the watered down hybrid BW gold/fiat system that we had from 1949 to 1972.

What i said is that inflation is extemely regressive and causes wealth to concentrate and wages to stagnate. Its helping to create a new a new system where we have barons and serfs and not much in between.

[TimG]

Yup this has already caused some national governments to collapse/default, and overly easy credit to crash the world economy.

Government spending always comes with this risk. That is why it is necessary for politicians to be responsible and generally keep the books balanced. But it does not change my argument that inflation reduces the government debt burden over time.

I never said we should switch back to a commodity. But its worth noting that the best system in recent history for the average citizen was the watered down hybrid BW gold/fiat system that we had from 1949 to 1972.

A system where governments arbitrarily adjust the exchange rate with a fixed commodity is the same as a fiat system but slightly less flexible. It worked OK from 1949 to 1972 because there was no economic crisis. It was dumped the second a crisis hits (the oil shock) because governments realized the alternative was an economic collapse. Modern economies need the flexibility of a fiat system.

What i said is that inflation is extremely regressive and causes wealth to concentrate and wages to stagnate.

Wages stagnate for many reasons - one of which is people have become overpriced and the market needs wages to go down. Inflation makes this process easier because the an actual wage cut is too much of a psychological barrier for many people. Inflation is not the cause. Edited July 21, 2014 by TimG

[dre]

It was dumped the second a crisis hits (the oil shock) because governments realized the alternative was an economic collapse

No thats not what happened at all. It was dumped because the US had printed tokens for gold it didnt have and countries were starting to demand gold for their greenbacks.

As for there being no economic crisis, you are less likely to have huge asset bubbles form and burst if theres at least SOME constraints on the central bank to flood the economy with easy credit.

Inflation is not the cause.

Inflationary monetary policy IS the cause right now.

[TimG]

Inflationary monetary policy IS the cause right now.

Inflationary monetary policy is keeping the economy out of another great depression. You can argue that it is better to experience large short term pain for long term gain but it is silly to argue that current policies are making it worse for the average person. The problem is the economy needs a major structural adjustment and is not currently sustainable. Governments don't want to massive social disruption that comes with a quick adjustment - so they go with the slow approach that uses inflation to hide the necessary wage/benefit adjustments. Edited July 21, 2014 by TimG

[dre]

Inflationary monetary policy is keeping the economy out of another great depression. You can argue that it is better to experience large short term pain for long term gain but it is silly to argue that current policies are making it worse for the average person. The problem is the economy needs a major structural adjustment and is not currently sustainable. Governments don't want to massive social disruption that comes with a quick adjustment - so they go with the slow approach that uses inflation to hide the necessary wage/benefit adjustments.

Wage decreases are not necessary though, and all they are doing is changing capital allocation to concentrate wealth. This does nothing to make us more competitive or make our economy more sustainable.

[TimG]

Wage decreases are not necessary though

Why? There is a global oversupply of low skilled labour. There is no rational reason for wages levels to rise for these classes of workers. No amount of fiddling with the economic system will change the law of supply and demand. All you can do his delay the adjustments. Edited July 21, 2014 by TimG

[dre]

What? There is a global oversupply of low skilled labour. There is no rational reason for wages levels to rise for these classes of workers. No amount of fiddling with the economic system will change the law of supply and demand. All you can do his delay the adjustments.

Problem with this line of thinking is besides exporting raw materials to the US exports are tiny piece of our economy. The vast majority of our economy is based on domestic consumption, and if we take steps to reduce the ammount of money Canadian consumers have to spend our economy will take a battering, or worse. The reports I linked you to showed you that workers are using debt to offset their falling wages which puts our economy in a very bad position.

And the money being saved by labor is not making our exports cheaper its just making our upper class richer. Its doing nothing at all to make our economy more sustainable. Its not high wages that is making our economy unsustainable its overly easy credit, and wealth concentration.

[TimG]

The vast majority of our economy is based on domestic consumption, and if we take steps to reduce the ammount of money Canadian consumers have to spend our economy will take a battering, or worse.

Economies cannot be built on secondary industries - primary industries are the base that keeps the economy going - even though they only make up a small percentage of the economy. Looking at the percentage of economy directly connected to primary industry is like looking at the volume occupied by the engines of an aircraft because without the engines an aircraft is useless.

And the money being saved by labor is not making our exports cheaper its just making our upper class richer.

Not sure what this is supposed to mean. There is a global oversupply of low and semi skilled labour. That means wages rates must go down or productivity must go up. Increasing productivity requires capital and favours people with it. It also means fewer jobs for low and semi skilled labour. No amount of fiddling with the economic system will change these fundamental facts. Edited July 21, 2014 by TimG

[dre]

Economies cannot be built on secondary industries - primary industries are the base that keeps the economy going - even though they only make up a small percentage of the economy. Looking at the percentage of economy directly connected to primary industry is like looking at the volume occupied by the engines of an aircraft because without the engines an aircraft is useless.

Not sure what this is supposed to mean. There is a global oversupply of low and semi skilled labour. That means wages rates must go down or productivity must go up. Increasing productivity requires capital and favours people with it. It also means fewer jobs for low and semi skilled labour. No amount of fiddling with the economic system will change these fundamental facts.

Consumption IS the engine that drives our economy and provides almost all the jobs in it.

And there isnt an oversupply of labor in Canada theres a shortage, and by our standards we have almost full unemployment. Its not supply and demand thats keeping wages down, its a conscious decision to reconfigure our economy and change the way that capital is allocated. If you read the reports I linked to you thats explained. The rules of the game have been changed to the detriment of labor and to the advantage of investors. The result is rapidly concentrating wealth which is the worst thing that can happen in an economy based on consumption.

And in order to keep people consuming in the face of receding or stagnant wages, the central bank has had to ease credit. This has resulted in massive consumer debt and the lowest savings rate in modern history. Its a vicious cycle because it has also caused more inflation, which in turn will cause even less wage growth and less consumption, and more debt all over again.

But you cant keep easing credit forever... Consumers are going to run out of credit, and starting trying to use their falling wages to rebuild their non existant savings, and when that happens theres going to be a massive recession or worse.

Edited July 21, 2014 by dre

[TimG]

Consumption IS the engine that drives our economy and provides almost all the jobs in it.

And what exactly do people consume? How many of those "consumed" products are made in Canada? You cannot have a consumer economy without primary industry generating the exports that can be used to pay for the imports.

And there isnt an oversupply of labor in Canada theres a shortage, and by our standards we have almost full unemployment.

There is a shortage of skilled trades people willing to re-locate to Alberta. This has created a shortage in some sectors that goes after workers in the same demographic but cannot compete with the oil sands wages. Other than that there is a labour surplus. Try getting a part time job at MacDonalds in a big city today. It is not easy.

Its not supply and demand thats keeping wages down, its a conscious decision to reconfigure our economy and change the way that capital is allocated.

You are saying things that make no sense. You can't close off the country, give a tiny minority of workers wages that are disconnected from reality and expect conditions to improve. Global competition exists. It is not going away. Canadian workers cannot be paid more than what businesses can make selling products or services and these businesses cannot charge more than what foreign companies offering the same product or service charge because Canadians will buy from foreign companies if it saves them money. Edited July 21, 2014 by TimG

[dre]

. You can't close off the country, give a tiny minority of workers wages that are disconnected from reality and expect conditions to improve.

Disconnected from what reality exactly? The reality of a worker in china that works under an authoritarian regime and has absolutely no political participation into the system in which he works? We get nothing out of this at all. Cheap garbage and lower wages. We SHOULD close our economy to countries that dont have similar values and standards and countries that treat people like livestock.

This way of thinking has gotten us nothing but debt and stagnant wages for the benefit of a small handful of people at the very top.

[TimG]

Cheap garbage and lower wages.

iPhones and laptops are cheap garbage? That is news to me.

We SHOULD close our economy to countries that dont have similar values and standards and countries that treat people like livestock.

And how exactly do you expect to accomplish that? Origin labels on products are almost meaningless today since their components often come from elsewhere. And do you really think that Canadian companies trying to compete in foreign markets would limit themselves to "approved" goods? Do really think that Canadian exporters should simply ignore the huge and growing market in the developing world because it is not "approved" by you?

This way of thinking has gotten us nothing but debt and stagnant wages for the benefit of a small handful of people at the very top.

This way of thinking has moved billions of people out of poverty. Edited July 22, 2014 by TimG

[eyeball]

How vast is the majority of economists that subscribe to and prescribe what Tim is espousing? It certainly appears most governments must be listening to advice from the same.

What's the consensus?

[dre]

This way of thinking has moved billions of people out of poverty.

Theres no question that the west going deep into debt to fund our consumption of foreign products has spread some borrowed money around the world, and that it has made some peoples lives better. The question is, is it a smart thing for us... and if it eventually crashes the economy again is it really going to be good for anyone. And if lifting people out of poverty is the goal then is this really the smartest way to do it? Like the OECD report points out, almost the entire benefit of globalism has gone to a small subset of super wealthy people, leaving crumbs for everyone else.

[Michael Hardner]

Theres no question that the west going deep into debt to fund our consumption of foreign products has spread some borrowed money around the world, and that it has made some peoples lives better. The question is, is it a smart thing for us... and if it eventually crashes the economy again is it really going to be good for anyone. And if lifting people out of poverty is the goal then is this really the smartest way to do it? Like the OECD report points out, almost the entire benefit of globalism has gone to a small subset of super wealthy people, leaving crumbs for everyone else.

I don't know if it's the smartest way to do it, but it's the most effective. As for the west going deep into debt, I would say that that has happened because governments are more attuned to business and wealth interests than in the past, so they're reluctant to damper the gains they're making.

To attribute that directly to freer trade, though, misses something.

[cybercoma]

Why? There is a global oversupply of low skilled labour. There is no rational reason for wages levels to rise for these classes of workers. No amount of fiddling with the economic system will change the law of supply and demand. All you can do his delay the adjustments.

Of course there's a rational reason. You just don't care to acknowledge it. A multimillionaire was giving an interview to a magazine awhile ago and made the point that with all his money he only needs so many pairs of pants, he can only drive so many cars, and he only buys so many groceries. The rest of his money is put away. Distributing that wealth to others so more pairs of pants, more groceries, and more goods can be purchased helps the economy immensely. Money needs to move around the economy for it to remain healthy. It can't be accumulated. What our system encourages now is the accumulation of wealth and discourages the movement of wealth around the economy. So the rational reason for paying workers more is that it creates more demand for goods and services. The more people that have money, the more demand there is for business. The more demand that there is for business, the more they produce and buy goods from others and the more jobs they create. That's the rational reason for it. It would improve the economy and make even more money for the people at the top, but they're too paranoid and greedy to move wealth around the economy. They just want to hoard it and people like you support them in that endeavour.