Re: economics
- From: "Phil Scott" <philscott@xxxxxxxxxxxxx>
- Date: Sat, 14 Jan 2006 21:59:33 -0800
"Andersen" <andersen_800@xxxxxxxxxxx> wrote in message
news:43c99c69$0$76075$892e7fe2@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
>
> What is the relationship between inflation and the exchange
> rate of a country's currency?
>
> If inflation goes up, should not the currency loose value
> immediately?
>
> Inflation leads to currency depreciation(less currency
> demand because of high prices)
> Currency depreciation value leads to inflation.
>
> This is confusing, because they say that if exporting
> companies are doing well, prices will go up (inflation) and
> that the currency goes up as well (the company buying
> domestic currency to "convert" foreign revenue to domestic
> currency)? Does this not contradict the above?
>
> I am so confused.
You are very fortunate. the following brilliant analysis of
the entire mess was posted a few weeks ago to the NG... dont
undervalue it... its the best you will find by a wide margin
in years of looking. take the time to read this a few times
and understand it, you will be a very well informed person on
the issues and no longer confused and vulnerable.
click on the blue hyper link.. it has great charts etc.
****
"We pay about 40% interest in all the prices of our goods and
services" -
Margrit Kennedy
Date: Tue, 20 Dec 2005 23:07:51 +0800 From: "Max"
<Max@xxxxxxxxxxxx>
The Economy of Ecology
Margrit Kennedy with illustrations by Helmut Creutz
http://www.converge.org.nz/evcnz/resources/money.pdf
What is money? Let s take the good news first. Money is one of
the most
ingenious inventions of mankind. It helps the exchange of
goods and services
and
overcomes the limits of the barter system, thereby, creating
the possibility
for
specialization, which is the basis of civilization.
Why then do we have a money problem ? Here is the bad news:
Throughout most
of
history, the circulation of money has been based on the
payment of interest.
Interest leads to compound interest. Compound interest leads
to exponential
growth. And exponential growth in turn wherever it cannot be
transformed is
unsustainable. Therefore, in order to understand why our
monetary system
works,
as the invisible wrecking machine since its inception, we must
first
understand
three generically different growth patterns and how they
relate to different
types of growth (Figure 1).
Curve a in Figure 1 represents an idealized form of the normal
physical
growth
pattern in nature, which our bodies as well as those of plants
and animals
follow. We grow fairly quickly during the early stages of our
lives, then
begin
to slow down in our teens, and usually stop growing physically
when we are
about
twenty-one. This, however, does not preclude us from growing
further
qualitatively instead of quantitatively.
Curve b represents a mechanical or linear growth pattern, e.g.
more machines
produce more goods, more coal produces more energy, etc. It is
not so
important
for our analysis. It should be clear, however, that in a
finite universe
even
this growth pattern will eventually create problems.
Curve c represents exponential growth the most important and
generally least
understood growth pattern which may be described as the exact
opposite to
curve
a in that it grows very slowly in the beginning, then
accelerates
continually
faster and finally grows in an almost vertical fashion. In the
physical
realm,
this growth pattern usually occurs where things are out of
order, where
there is
sickness, often leading to death. Cancer, for instance,
follows an
exponential
growth pattern, and, using this analogy, interest may be seen
as the cancer
on
our social and economic system.
Based on interest and compound interest, our money doubles at
regular
intervals,
i.e. follows an exponential growth pattern. Figure 2 shows the
time needed
for
our money to double: at 3% compound interest it takes 24
years; at 6% it
takes
12 years; at 12%, 6 years. Even at 1% compound interest, we
eventually end
up
with an exponential growth curve.
Since through our bodies we have only experienced the physical
growth
pattern of
nature, which stops at an optimal size (curve a), it is
difficult for human
beings to understand the full impact of the exponential growth
pattern in
the
material realm.
This phenomenon can best be demonstrated by the famous story
of Josephs
penny:
If Joseph the father of Jesus would have invested one penny at
his birth at
5%
interest, and Jesus would have returned to the same bank in
1990 - at the
time
of the German unification - he would have been able to buy
with the money
accrued in the meantime 134 billion balls of gold of the
weight of the earth
based on the official price of gold at this time. This shows
mathematically
that
the continual payment of interest and compound interest over a
longer period
of
time is practically impossible and explains why - in regular
intervals we
have
economic and social breakdowns.
Three Misconceptions about Money
1. A further reason why it is difficult for us to understand
the full impact
of
the interest mechanism on our economic system is, that it
works in a
concealed
way.
Most of us assume that we only pay interest when we borrow
money. Therefore,
if
we want to avoid paying interest, we think all we have to do
is to avoid
borrowing money.
What most people do not understand is, that every price we pay
includes a
certain amount of interest. The exact proportion varies
according to the
labour
versus capital costs of the goods and services we buy. This
ranges from a
capital share of only 12% in garbage collection, (because here
the share of
capital costs is relatively low and the share of physical
labour is
particularly
high) to 38% in drinking water, and up to 77% in public
housing (Figure 3).
On
the average we pay about 40% interest in all the prices of our
goods and
services. In medieval times, people paid the tenth of their
income or
produce to
the feudal landlord. In this respect, they were better off
than we are
nowadays,
where almost one half of each Euro or Dollar goes to serve
people who own
capital.
2. Because another misconception concerning our monetary
system may be
formulated as follows: Since everyone has to pay interest when
borrowing
money,
we are all equally well off within our present monetary
system.
Not true again. There are indeed huge differences as to who
profits and who
pays
in this system. Comparing the interest payments and income
from interest in
ten
equal parts of 2.5 million households each in West Germany,
Figure 4 shows
that
80% of the population pay more than they receive, 10% receive
slightly more
than
they pay, and the remaining 10% receive about twice as much
interest as they
pay
(i.e. 34.200,- DM per house- hold and year in 1985), that is
the share which
the
first 80% have lost. This illustrates one important reason why
the rich get
richer and the poor get poorer. In absolute figures, this
amounts to a
transfer
of about 500 million DM every day from those who work to those
who own
capital
in West Germany (1985). The same holds true for any other
country. In fact,
In
most countries the percentage of those who profit from the
present system is
even smaller.
In other words, within our monetary system we allow the
operation of a
hidden
redistribution mechanism which constantly shuffles money from
those who have
less to those who have more money than they need: Thus, on the
one hand,
large
amounts of money concentrate in the hands of ever fewer
individuals and
multi-national corporations and, on the other, Third World
Countries will
never
be able to get out of debt in the current system, as by now
they have to pay
back several times the Figure 4 amount of what has been loaned
to them.
The interest and compound interest mechanism not only creates
an impetus for
pathological economic growth, but also works against the
constitutional
rights
of the individual in most democracies. If a constitution
guarantees equal
access
of every individual to governmental services - and the money
system may be
defined as such - then it is illegal to have a system in which
10% of the
people
continually receive more than they pay for that service and
80% of the
people
receive less than they pay.
Many of the great political and religious leaders like Moses,
Mohammed,
Luther,
Ghandi and most of the churches and spiritual groups
throughout history have
tried to reduce
social injustice by prohibiting interest payments. They
understood it as the
main cause of social injustice. However, they did not come up
with a
practical
solution to keep money in circulation. Thus, the archaic flaw
in the system
remained unchanged. The prohibition of interest payments among
the Christian
community by the Popes during the Middle Ages in Europe, for
instance, just
shifted the problem to the Jews. While the Jews were not
allowed to take
interest from each other, they could do so from the gentiles.
If they took
interest from each other they allowed a remission of debts
every seventh
year.
Islamic banks, which follow Muslim law, are not allowed to
take interest
from
their clients. Instead they become partners in the business to
which they
make a
loan. Whether or not this is a better solution depends on the
partners, but
it
certainly creates a more direct link between creditor and
debtor.
3. A last misconception relates to the role of inflation in
our economic
system.
For most people, inflation seems like an integral part of any
money system,
almost natural, since there is no country in the world without
inflation.
Few realize that this is just another form of taxation through
which
governments
manage to overcome the worst problems of an increasing
interest burden.
Between
1950 and 85 the GNP in Germany increased 18 times, interest
paid on debt,
however, 51 times (Figure 5). Since the largest borrower on
capital markets
is
the government, it pays the highest share of interest.
Obviously the larger
the
gap between increases in government income and government debt
the higher
the
inflation needed. Printing money enables the government to
reduce its debts.
This is another way of making those 80% of the people who pay
more interest
than
they gain, pay even more, since they cannot withdraw their
assets into
inflation- resistant investments like those who are in the
last 10% income
bracket.
Two Further Effects: Arms Race and Ecological Exploitation
Besides the social injustice of a constantly widening gap
between the rich
and
the poor in industrially developing and industrialized nations
alike, two
further problems associated with the interest system need to
be identified:
the
arms Figure 5 race and ecological exploitation of the earth.
1. The present concentration of money in the hands of ever
fewer people or
large
multi- national corporations creates a constant pressure for
large-scale
investments, e.g. atomic power plants, huge dams for
hydroelectric power,
and
arms. Seen from a purely economical angle, the politically
contradictory
behaviour of the U.S. and Europe installing bigger and better
weapons
against
Russia on the one hand, and sending butter, wheat and
technological know-how
to
Russia on the other, made perfect economic sense: military
production was
one
area where the saturation point could be postponed
indefinitely as long as
the
enemy was equally able to develop faster and better weapons.
And profits in
the
military sector were far beyond any profits made in the civil
sectors of our
economy. While capital investments in the latter often have
returns around
2-5%,
the military sector often averages returns around 50%.
2. A further problem may be seen in the vast field of
ecological investment.
Let
us take an investment in solar collectors as an example. If
they only allow
a 2%
return on our money, it would be economically unwise to invest
in this
sensible,
ecological technology for preparing hot water, since in a bank
it returns at
least 6%.The bank in turn usually has to invest it in less
ecological
projects.
Therefore, as long as every investment must compete with the
money making
power
of money on the money market, most ecological investments,
aimed at creating
sustainable systems (i.e. stopping quantitative growth at an
optimal level,
see
curve a Figure 1), don t have a chance.
The Solution
At the beginning of this century, a practical solution was
formulated by a
German merchant, called Silvio Gesell, which would eliminate
the problems
caused
by interest. Instead of paying people a reward (= interest) in
order to
bring
surplus money back into circulation he suggested that they
would have to pay
a
small penalty if they did not. He proposed to use money as a
public service
instead as a private good.
An Example
Between 1932 and 1933, the small Austrian town of W rgl
started one of the
first
model experiments, which has been an inspiration to all who
have been
concerned
with the issue of monetary reform, up to this day. Within one
year, the 12
..600,- Free Schillings (i.e. interest- free Shillings)
circulated 463 times,
thus creating goods and services worth (12. 600x 463) over
2.547.360,-
Schillings.(valued in 1995 at approx. 63.684.000,- Schillings)
At a time
when
most countries in Europe had severe problems with decreasing
numbers of
jobs, W
rgl reduced its unemployment rate by 25% within this one year.
Income from
taxes
increased by 35% and investments in public works by 220%. The
fee collected
by
the town government which caused the money to change hands so
quickly
amounted
to a total of 12% of the 12.600,- Free Schillings, which is
1.512,-
Schillings.
This was used for public purposes and thus no single
individual gained by
it,
but the community as a whole. In addition, the need for
exchanging goods and
services determined the pace of circulation and not the fee.
If the town
would
had borrowed the 12.600,-Schillings on the money market they
would have paid
back three to four times the same amount over 10 to 20 years.
When, however, over 300 communities in Austria began to be
interested in
adopting this model, the Austrian National Bank saw its own
monopoly
endangered.
It clamped down on the town and prohibited the printing of its
own money.
Practical Possibilities Today
As 90% of all monetary transactions are just numbers in a
computer, the
payment
modalities of today would make a use-fee on money technically
a much simpler
issue. Everyone would have two accounts: one current account
and one savings
account. The money on the current account which is at the
disposal of the
owner
continually would be treated like cash and lose as little as
1/2% per month
or
6% per year. Anyone with more money in his current account
than needed for
the
payment of all expenses in a particular month would be
prompted by this
small
circulation fee or demurrage to transfer the amount not needed
for some time
to
a savings account. From there, the bank would be under the
obligation to
pass
this money on to those who needed it for a certain amount of
time and,
therefore, on the savings account it would not be debited with
a fee.
By the same token, the money owner would not receive any
interest on his or
her
savings account - but the money would retain its value. (As
soon as interest
is
abolished, inflation becomes unnecessary - see above.)
Equally, the person
receiving credit would not pay interest, but a risk premium
and bank charges
quite comparable to those contained in every bank loan today.
It amounts to
about 2.5% of normal credit costs.
Thus, very little would change in practice. Banks would
operate as usual,
except
that they would be more interested in giving loans, because
they too would
be
subject to the same use fee that everyone else would have to
pay, were they
to
sit on their money.
In order to prevent the hoarding of cash, one additional
technical aspect of
the
implementation of such a monetary reform would be to recall
one particular
series of banknotes once a year, or all bank notes every
second year without
prior announcement.
The basis of this reform would be a fairly accurate adaptation
of the amount
of
money created to the amount of money needed to handle all
transactions in
the
exchange of goods and services within and without a given
geographical area,
region or nation. Money would now follow a natural physical
growth pattern
(curve a, Fig. 1 ) and no longer an exponential one. When
enough money has
been
created to serve all transactions, no more would have to be
produced.
Prospective Results
Within the larger context of a global transformation of values
and
behavioural
patterns as well as other changes such as land and tax reforms
the change in
our
monetary system will hopefully assist the switch from
quantitative growth to
qualitative growth. As people would have the choice of leaving
their money
in a
savings account where it would keep its value, or to invest it
in a
beautiful
piece of furniture, an art work or a solidly-built house which
equally would
keep their respective values, they might well opt for those
investments
which
would enrich their daily lives. Moreover, the more that
lasting quality is
asked
for, the more it would be produced.
Thus we may expect a total revolution of values, which would
almost
certainly
affect environmental issues. Investments in ecological
technologies would be
able to compete within the context of a sustainable way of
life and stable
money, which just pays without making unnecessarily large
profits. Thus,
planting a forest would soon be economically feasible - rather
than cutting
the
forest and putting the money in the bank - which is the most
economical
solution
today.
While interest nowadays is a private gain, the fee on the use
of money would
be
a relatively small (see the example of W rgl) public gain,
which would
enable to
reduce the amount of taxes needed to carry out public tasks.
Even the volume of economic activities would be more easily
adjusted to real
needs. Since high capital returns in order to pay off interest
would not be
needed any more, the pressure for over-production and
over-consumption would
be
considerably reduced. Prices could be reduced by an average of
40% which now
cover capital costs. In theory, 80% of the people would only
need to work
half
the time in order to keep the same standard of living. The
last 10% of the
people who now are able to live off their interest would not
lose their
money.
They would, however, stop earning money through money and
start to live off
their capital unless they work or invest it in business
ventures.
The two critical questions are: will those who profit from the
system now
understand that the branch on which they are sitting grows on
a sick tree
and
help to plant a healthy one before the old one collapses? Or,
will those who
pay
too much understand soon enough that there is an alternative
for change and
that
they must work together to implement it? At this point in
time, the
introduction
of a new cooperative monetary system could create a win-win
situation for
everyone. It could help to develop, finally, a sustainable
world economy and
civilization.
References: * Silvio Gesell, The Natural Economic Order,
Berlin, Neo-Verlag,
1929 * Silvio Gesell, Gesammelte Werke, Band 1-6, Gauke
Verlag, 1988-90 *
Margrit Kennedy, Interest and Inflation Free Money: Creating
an Exchange
Medium
that Works for Everybody and * Protects the Earth, SEVA
International,
Okemos,
Michigan, USA, ISBN: 0-9643025-0-0
* Bernard Lietaer, The Future of Money, Random House, London,
2000
* Dieter Suhr, The Capitalistic Cost-Benefit Structure of
Money - An
Analysis of
Moneys Structural Nonneutrality and its Effects on the
Economy, Springer
Verlag,
Heidelberg, 1989, ISBN 3540-51138-5
.
- References:
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