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The Forum > Article Comments > Contingent loans to reduce taxation and greenhouse gas emissions > Comments

Contingent loans to reduce taxation and greenhouse gas emissions : Comments

By Kevin Cox, published 2/2/2009

'Contingent Loans' (similar to HECS loans) is an idea whose time has come and should be broadened to more sectors of the economy.

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This looks suspiciously like a proposal to make something from nothing, to create real wealth from thin air, using only deception and force.

When you say 'zero interest loan', the loan can only be zero interest to the person borrowing. But we need to understand that interest on capital is a reflection of man's universal time-preference for satisfaction now, rather than the same satisfaction in the future. Interest cannot be made to go away. Government is not magic, and we should not attribute to it magic powers to change something that is embedded in the structure of reality.

The loans are not really zero interest. All it means is that the government is going to force *someone else* to pay the interest. The borrower won't need to care about it. Neither will government. The victims will be anonymous: they won't even know it themselves.

There are two basic problems with this proposal: ethical and practical.

The fundamental ethical problem is that this proposes using force or threats of force to take property from A without his consent to give it to B. If A doesn't agree, ultimately, a group of guys armed with weapons will come and if he resists, they will beat him into submission, and either way, he will be locked up in a cage where he is at risk of being further violated.

Obviously if you disregard A's property right, which you do, the proposal is ethically meaningless, or rather unethical. Even if a majority voted for it, that would make it *possible*, but it wouldn't and couldn't make it *ethical*.

I could make better use of your property, than you could, if I just take it by force. That's the level of your ethical argument.

As to the practical issue, the proposal assumes that the property taken from A to give to B, whether as interest or capital, will in practice be more productive of good when used in this way. But how could you possibly know that? You won't know whom it was taken from, nor what they could have done with it
Posted by Peter Hume, Monday, 2 February 2009 3:22:03 PM
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Even if it were a justification to steal from one who has more, to give to one who has less, which it is not (otherwise theft would be legal), still, there is nothing in the system of governmental appropriation of money by taxation or inflation that would enable one to assume even that the person expropriated would be worse off than the one benefitted. For example, the governemnt taxes the homeless through the GST to fund bailouts for corporations, and taxes the kids who work at McDonalds to fund satellite internet for millionaire graziers.

There is neither reason nor evidence to think that the money expopriated would be more productive or more beneficial in the hands of the person who receives the handout, than in the hands of its proper, but forgotten owner.

The proposal is nothing but a superstition of omnipotent, all-knowing government doing magic tricks with smoke and mirrors. It assumes government can make something out of nothing. But in fact, the cost of what is destroyed is greater than the benefit, otherwise there would be no need to use force to compel the arrangement in the first place.
Posted by Peter Hume, Monday, 2 February 2009 3:22:57 PM
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The current method of creating new money is that banks lend money they do not have and interest is charged immediately on the money lent.

That is a fact and that is how fractional reserve banking works.

This new money has no assets backing it so why should it incur interest? The fact that banks require an asset as security against the loan is irrelevant. The asset is not backing the new money - it is backing the loan. The new money itself has no asset backing it. It is hoped that the money that is lent will create new assets but that is no forgone conclusion and often does not happen. We must break this link between debt and money being the same. Debt is different to money. Debt is a promise. Money is a representation of an asset. It is the mixing of the two that has lead to our problems.

As you rightly point out if you lend money that represents an asset you should charge interest because it is the asset that is being loaned and someone should pay for it. Paying no interest on "old money" is theft. I am not saying that we should not pay interest on money that represents assets - of course we should. What I do say is that we should not pay interest on money until represents an asset. You make the assumption that new money is already backed by an asset that is used as security against the loan. That is the case with "old money" but it is not the case with newly printed money.

We do not have to use fractional reserve banking. The linking of money to debt leads to the positive feedback mechanism between the creation of debt creating money which then allows the creation of more debt. Positive feedback leads inevitable to dysfunctional markets. Please read "The Origin of Financial Crises" by George Cooper to get a good description of how this occurs.

Our contribution is show a way to create new money AFTER it represents a productive asset.
Posted by Fickle Pickle, Monday, 2 February 2009 6:28:40 PM
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Fickle Pickle

It might help if we adopt Mises' terminology:
'money' - money in specie - ie gold where gold is money, and government paper under a fiat regime
money substitutes, which comprise:
'money certificates' - claims redeemable in money eg cheques
'fiduciary media' - claims not redeemable in money - ie the amount which, under a fractional reserve regime, is not backed by money in specie.

Your question is good: why should fiduciary media attract interest?

It is the fiduciary media which are the source of all the mischief: inflation, massive systemic malinvestment, and recession.

However the solution is not more governmental intervention in money and credit.

Overwhelmingly the problem is caused by government manipulation of the money supply. Under a free market in money and banking, the tendency of banks to issue fiduciary media would be constrained within strict limits by the market disciplines of loss and bankruptcy. What enables it to grow to the stage of ruining entire economies is government, and government does it because it has an interest in endless inflation.

The solution to the problems caused by fractional reserve banking is to abolish governmental control of the money supply: no legal tender laws, no reserve bank, no governmental production or supply of money or credit, no cartelisation of the banking industry, no cozy deals by which government and the banks inflate the currency and take a cut for themselves at the expense of the entire population, no government backing of banks to shore up the whole fraudulent arrangement.

New ways for government to manipulate the supply of credit as a new way to try to manipulate people, to try to achieve more centrally-planned goals of government is contra-indicated. Once we add the cost of the intervention to the cost of the benefit, we are worse off than without any intervention in the first place
Posted by Wing Ah Ling, Monday, 2 February 2009 8:29:42 PM
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Wing Ah Ling

The proposal will remove the need for controls of the credit markets. The only thing the government will do is decide on the general areas where they want public investment to occur. It does not matter how many loans in any particular area are created because all that will happen will be that the loans will become devalued. That is, inflation caused by excessive production of loans will be restricted to the loans and will not flow through to the rest of the money supply.

The other critical thing is that the loan money is allocated via a free open market so that it will find the most efficient allocation. Provided the loan money on average is spent on assets that produce more wealth over some period of time than is loaned then society will be wealthier.

Another way of looking at the whole issue is that credit is an ownership issue while money is an asset issue and in principle should not be affected by ownership. It does not matter from an economic point of view to whom we issue the loans. The distribution of loans is a social equity issue.

We have put up with fractional reserve banking to create new money because it seems so reasonable. The movement of capital to areas where it is most needed through the use of a financial market works well for "old money".

Unfortunately it does not work for new money created as interest bearing debt. This creates a difficult (impossible) to control internal positive feedback mechanism that leads to instabilities. It is all explained very well in the literature on servo mechanisms, control and chaos theory.

Breaking the link between money and debt breaks the positive feedback loop and allows markets to work their magic.

We initially started with the idea of using restricted money in markets to spend government funds. Our contribution is to show a way to efficiently construct these markets which I am calling "Markets with a Purpose". The idea of using them to create money is a recent idea.
Posted by Fickle Pickle, Monday, 2 February 2009 9:35:41 PM
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Privileging fractional reserve banks from bankruptcy where they would otherwise be unable to redeem claims in money, *is* control of the credit markets. It is the control of the credit markets that has caused the entire bubble and economic crisis.

Your proposal is in effect that government can issue fake money on condition that it spends it to ‘benefit’ the public. However, we should ask, since this money is not backed by assets, what is the source of its value? The source of its value is the custom of society in using money certificates as money. Government gets to pass off fiduciary media - unbacked money certificates – to be spent as if backed by money. In essence it is a fraud: the original fraud underlying fractional reserve banking where the bank does not disclose to the depositor the fact that his deposit is not backed by money. The dollars of everyone in society who uses money – everyone – are diluted to pay for the privileges the government confers on its political favourites by pretending to create real wealth by redistribution. The desire to engage in social engineering projects does not excuse it – on the contrary, it is the root of the evil that we should be condemning.

Secondly, just because the loans are interest free, why will that mean inflation will be restricted to the loans? The critical factor is the increase in the money supply. The loans will increase the money supply and therefore will cause inflation. There will be no dividing wall between unbacked money substitutes at zero interest, and backed money substitutes at market rates, in their circulation and effect as money substitutes.

Thirdly, the loan money will not be allocated via a free open market. Government will decide what areas the investment will occur in. If the proposals could cover their costs, they could attract capital on the open market without government subsidising them in the first place. The only possible reason for government deciding to subsidise them is because they do not stack up on the basis of profit and loss.

Posted by Peter Hume, Tuesday, 3 February 2009 9:32:28 PM
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