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Promissory obligations to each other (b)

30 June 2013.

Introduction

Continued from previous article. Still listening to video no. 98. Mike Montagne on TNS Radio, 27 November 2010. Continuing from 3m54s.

Laundering principal into their possession

Quote:

How their first monumental crime against us, is that they launder all the principal ever created, into their possession.

The word ‘principal’ according to Merriam-Webster means “a capital sum earning interest, due as a debt”. So after the twofold accounting transaction in the bank’s books, for granting credit, the principal is at the debit side, the amount of the loan, what the borrower owes the bank, the claim that the bank has on the borrower, part of the bank’s assets.

By definition, by nature of what double bookkeeping entails, this principal is already in the possession of the bank, from the very first millisecond the credit existed. There is no need, or even a possibility, for a bank to “launder” that principal “into their possession”.

This is basic accounting. Again, how is it possible that Mike Montagne doesn’t know this, if he was always so good at accounting?

Also, the principal isn’t created. Money creation refers not to the debit side of the bank’s balance sheet, but to the credit side. What is recorded there is either the cash going out of the bank’s vault into the hands of the borrower, or the availability of the loan sum to the borrower, in a transaction account. Money (as a medium of exchange) by definition consists of coins, plus what banks owe the public. That is increased, so money is created.

Vital circulation – terminal debt

Quoting from 4m04s:

And how their second, even more monumental crime against us, is that by an implicit obligation to maintain a vital circulation subject to interest, interest multiplies initial artificial indebtedness into terminal artificial indebtedness, as we are forced to maintain a vital circulation, only so long as we can, by perpetually reborrowing principal and interest, as ever greater sums of debt, perpetually increased even at an inherently ever escalating rate, of ever greater sums of periodic interest, on an ever greater sums of debt, until we succumb to the present terminal sums of artificial indebtedness.

There are several things wrong with this.

  1. There is no “implicit obligation to maintain a vital circulation” and we (as members of the public) are not “forced to maintain a vital circulation”.

    It is not the task of the public, but of the central bank to monitor the money supply, i.e. how much money is in circulation, in various aggregates, M1, M2, M3.

    There should be enough money to serve as a medium of exchange, temporarily bridging the gap between selling goods and services, and buying dissimilar other goods and services. I explained that before.

    It is important to distinguish money as a medium of exchange, from money as a unit of account. Not all of the goods of value in the economy need to be represented as money, only those that are currently traded.

    There should also be enough money to serve as a store of value – households and companies saving money they do not need for some time, perhaps to be used again later).

    Central banks have various instruments to influence the money supply and various reasons for doing that. More info in MMM, How Monetary Policy Works by the Bank of England and Sterling Operations – Implementation of Monetary Policy.

  2. Indebtedness” is not “artificial”. A bank recording the borrower’s debt, in exchange supplies money – which is a debt of the bank. Fair deal.

  3. Mike Montagne stated that “interest multiplies initial artificial indebtedness into terminal artificial indebtedness”.

    But it does not. That’s because banks do not only receive interest, but also pay interest, and use interest income to cover expenses. Interest circulates through the economy, it flows. Interest doesn’t cause a shortage of money in circulation. So “perpetually reborrowing principal and interest” isn’t necessary.

    Earlier explanations here and here.

  4. Mark Montagne wrote:

    [...] ever greater sums of debt, perpetually increased even at an inherently ever escalating rate, of ever greater sums of periodic interest, on an ever greater sums of debt [...]

    That is his way of describing exponential growth.

    And yes, on an individual basis that does happen, if and only if not all of the interest due is paid, and if that unpaid interest would be added to the principal, i.e. supplied by the lender as an extra loan component.

    That isn’t the normal case, loans should only be granted after a risk assessment indicates that the borrower can afford the loan. Then the interest will be paid and the principal does not grow.

    And though if arrears do occasionally occur, for the economy as a whole this doesn’t cause a shortage of money, as explained here.

  5. [...] until we succumb to the present terminal sums of artificial indebtedness.”. Many governments and some companies and households did indeed borrow too much. But that isn’t the result of interest. Over-indebtedness is simply the result of overspending and borrowing too much.



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