You raise interesting points. Your conclusion is wrong, but the points yor bring up are questions about whether or not societies should use government-created fiat money as such an arrangement is prone to inflation. That would lead us back to a system based on a hard material such as gold. The answer to your criticism is a return to the gold system, not some new fandangled monetary system you are proposing as it does not alleviate the problem. The effect of what you are proposing is to take the inflationary fiat mechanism which is controlled by the central banks through the banking system and placed in the hands of a government-nationalized banking system, which is the only way your scheme could work. However, as has been shown time and again throughout the world - China, Mexico - government-owned banks are less responsive to the market system and more responsive to the politcal system, which is inherently inflationary because people propogate policies such as this 50/50 nonsense. Your solution not only does not solve the problem of inflation, it exacerbates inflation by keeping interest rates low. There is a truism in economics that I will repeat again, and put it in big, giant letters;
You can control the price of something. You can control the supply of something. But you cannot control both.
If you control the price of money, i.e. you keep it low, then the supply will explode, which is inflationary.
Scape said:
The current monetary system is fundamentally flawed. Consider this proposition: If nearly all of the new money created each year is created by private banks, which it is: and if all of that bank created money is created as debt, on interest that has to be paid, which is the case: and if no one creates any money with which to pay the interest, which is the current situation; what do you have to do? You have to borrow the money with which to pay the interest on what you already owe, and go deeper and deeper in debt in the process.
Look at all the debt of the 1st world nations. This debt is not because of some huge scandal of propagated spending, although there are many instances of corruption it does not come anywhere on par with the massive debt load on our society of the compound interest charged on our debt, worldwide, that is a direct result where most of the money is created as debt.
Furthermore, there is no way under the current system for the debt to be repaid. There is reshuffling of debt. Instead of government making the roads, schools, bridges, sewers, waterworks etc, etc that government needs to keep society working for now and the future it is outsourced to private companies who again borrow money to construct them. The amount of money require is now far more that what was originally intended for the same task and your in debt to the company store for life as it were. This is just generating huge waste.
This is a giant flaw in your reasoning. You only look at one side of a bank's balance sheet. You only look at the asset side. You do not look at the liability side. You seem to think that banks have this endless stream of credit. This is not true. A bank's ledger must balance. A bank can only loan out what is has as liabilities. What are the liabilities? The liabilities are the deposits you and I deposit at the bank. It is GICs. It is bonds issued by banks. Banks then use the capital they raise to make loans. If a bank is losing deposits, it must call in loans. If a bank is gaining deposits, it can expand loans. The loans are based on the liabilities of the bank, which is an asset of the depositer, i.e. you. The debt of the banks is based on assets elsewhere. The questions about money being created out of nothing, this miraculous build-up in debt, can only occur if banks increase their leverage, which means lower required capital ratios. Now this is occuring in other areas of the market, such as consumer installment debt. But we do not know if such companies are over or underleveraged.
Scape said:
The average interest rate on the debt is far higher than our countries GDP. We will never do anything but slowly drown... AT BEST!
Again, you fail to understand basic economics. In a closed economy, i.e. the world economy, the cost of capital
must equal the return on capital. The return on capital
must equal the growth rate of capital. The growth rate of capital equals the growth of the economy, subject to changes in technology and other factors of production. Thus, the interest rate
must equal the the growth of the GDP. In a closed economy, this is the
only outcome. In an open economy, because we have capital flows, if there is an excess of capital in one economy, and capital can be earned at a higher rate elsewhere, capital will flow out of the economy. If this is what bothers you, then you should think about how to increase economic growth in the country and how to put that excess capital to use.
Scape said:
Eventually we will have a meltdown that is called a recession and we write off some debt, the byproduct of this instability is even more waste. This system is only geared to work when someone, be that a business or government, is prepared to go in to even more debt. It is this was, and only this way, that the economy can expand and grow.
Again this is false. What happens in a recession is a
contraction in credit. Balance sheets of corporations become stronger as a recession shakes out the weak hands. Also, the total amount of debt is not what matters. What matters is the ability to service the debt, which is a function of cash flow and equity within a corporation.
Scape said:
The only reason Canada did so well in the post WWII era was BONDS! The money creation system was shared with the government. The BoC provided the fed with large sums of near 0% interest money which gave it fiscal flexibility. In addition, interest rates were low in the 50' and 60's on par with the growth rate of the economy. Thus total debt grew in proportion to the economy but the debt to GDP ratio held steady.
Wait a second. You just told me the problem was too much debt, yet you're saying the reason Canada did so well was debt. What is it?
Again, this is wrong. Dude, I wrote a long paper on Canada's economic performance after WWII in an undergrad economic history class. This 50/50 split you talk about did not exist. It is true, however, that interest rates were low and were deliberately kept low - which, BTW, monetarists agree with - to absorb the excess capacity in labour as the troops came home. Canada and the other western nations made a big mistake after WWI in being too restrictive in monetary policy. The authorities were not going to allow that to happen again. But this is standard economic theory. When you have an excess of labour, interest rates should be low. When there is a run on labour, rates should be high. The authorities were very worried about a big recession in the late 1940s, which did not happen. So they took their foot off the monetary pedal and there was a light recession in the early 1950s. After that, interest rates rose to a more "normal" level. You say that low interest rates in the 1950s and 1960s was due to this 50/50 split. That is flat out wrong. Low interest rates were because of low inflation. Real interest rates were higher in the 1950s and 1960s than they are today. It is real interest rates which matters, not nominal rates, as it is the real economy which matters.
Scape said:
It was the system of public/private money creation that got Canada out of the great depression, financed WWII, paid for the St Lawrence seaway, the trans-Canada highway, our airports and social security. TRY THAT NOW ON A LOAN FROM RBC!
The other lever government used after WWII is fiscal policy. With the exception of social security - which is an income-transferance policy - the other examples absorb excess labour and build what turned out to be good infrastructure policy. But borrowings were done by the Government of Canada through the normal borrowing mechanisms that are no different than today.
Scape said:
If you need a modern day example then explain the
Isle of Guernsey. No unemployment, modern infrastructure, low taxes and NO DEBT. All based on the 50/50 principal.
No, no, no, no. This is laughable to use Guernsey as an example. Guernsey is a part of the UK. Guernsey has no control over its currency. Its currency is pegged to the pound.
http://www.cia.gov/cia/publications/factbook/geos/gk.html#Econ
Plus Guernsey is a tax haven, which means capital is flowing into the isle, which will keep interest rates down. Does the CAP plan on cutting income taxes to 0%?
Scape said:
Lastly, on the 8% reserve. The reserve requirement is
0%. The Bank act of 1991 allowed the banks to spend the 8% (worth billions) on T-bills and bonds. In lieu of cash reserves, Canadian banks are not allowed to hold assists in excess of 20 times their paid up capital. At least that is what the law says but you of all people should know they have found means of stretching that limit. This new system called, "capitol adequacy", is quite inferior to the needs of a cash reserve. It is a system which the Bank of International settlements (BIS), with the HQ in Basle, Switzerland, used to switch the world banking system to 0% reserves in accord with the teachings of one Milton Friedman and his chums at the University of Chicago.
Friedman ideas support the deregulation of financial institutions and to get government out of the money creating business as much as possible. Accepting 0% cash reserve for deposit-taking institutions gives back to private banks a virtual monopoly on money creation.
In addition to putting the money creation function almost entirely in the hands of private sector, which history has shown time after time to be an unworkable system, "capitol adequacy" has the additional disadvantage of being a "risk-weighted" system. Under the BIS formula, adopted by our parliament, it can be more advantageous for banks to buy government bonds than to make commercial loans. This is because business loans are considered, "risky", and must be backed by 8% of the banks capitol compared to 5% for government bonds which are considered risk free. It is this bias against wealth creation that is the crucial flaw.
Our Dysfunctional Central Bank by William Krehm
Subsection (4) of Section 457 of Chapter 46 of the Statutes of Canada 1991 in its decennial revision of the Bank Act, phased out the requirement for our chartered banks to maintain reserves with the Bank of Canada [as a percentage of the deposits the banks held from the public]. “On the first day of the first month following the month this section comes into force, the primary reserve referred to in subsection (2) shall be reduced to 3%, and thereafter on the first day of the first month of each of the next three succeeding three-month periods, the primary reserve as modified by this subsection shall be reduced by 3%, and on the first day of the twenty-fifth month following the month in which this section comes into force, the primary reserve referred to in subsection (1) shall be nil.”
I am sorry but this is just flat out wrong. You are choosing to read what you want to read and believe what you want to believe. You cannot be taken seriously if you actually believe there is no reserve rquirement. I have posted the links above us. I would suggest you go back and read all the statutes and not just this one you have selectively quoted. I would also suggest you go back and click on the links I posted and read up a little instead of all this CAP silliness you keep linking. I have no doubt the members of the CAP are well-intentioned people, but what they are proposing is flat out bizarre. The CAP will continue to be a fringe party if it can't even get its facts straight.
