The Simple Mathematical Flaw in Modern Economics
WATCH THE IMPROVED VERSION AT https://www.youtube.com/watch?v=HIHCAi1MBBA Most people believe that interest is natural to money. However, the way in which mo…
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For more information about the event and to listen to the podcast go to the RSA event page: http://bit.ly/ShHjII What is economics? In the second of our exci…
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“Thou shall not lend upon usury to thy brother.” Deuteronomy 23:19
#usury
At first this video seemed a bit sweeping and wooly but actually turned out
to be very informative.
7. To have no credit risk costs from the start as per MPE is not
theoretically correct and could lead to problems if value of assets are
inflated for some reason and could cause asset bubbles.
6. Remember that the credit money system, as per our explanation, that
keeps credit risk costs for default recovery, manages the credit risk costs
based on past data so will drop credit risk costs as credit risk (defaults)
drops and if ceded asset reduces credit risk so will future credit risk
costs. It is a self-correcting system as such.
5. So in summary I still feel that MPE is flawed and has contradictions as
a result. The repayment term linked to asset value which infers that paper
money is backed by ceded asset but then also saying that paper money is
backed by future earnings (contradiction); saying that ceded asset results
in no need for credit risk cost (technically incorrect).
4. But it technically is never zero. There is always a risk and we should
be technically correct about it. The credit risk or credit risk costs do
not disappear for having a ceded asset – only reduces
3. If you are saying that the future earnings of debtor backs the paper
money with ceded asset only backing credit risk provisions then we agree on
what backs credit money. But still having ceded asset does not make credit
risk cost zero as the future value of asset is unknown and effected by
market forces. Yes, the credit risk costs is reduced by having ceded asset
and could – if the outstanding loan amount is much smaller than current
market value of ceded asset – be virtually zero.
2. So if you say that future earnings back the paper money then this
contradicts saying that the repayment term is linked to asset as the asset
backs the paper money.
1. Thanks for clarifying Rick. I do think there are contradictions in MPE
(or at least my interpretation of MPE) which I’m trying to point out and
which are resulting in the seeming confusion. The first contradiction
relates to what backs the piece of paper in MPE. Repayment term is said to
be linked to depreciation of asset that “backs” the paper money. This as I
pointed out results in most people being retired or dead by time asset is
depreciated to zero and loan thereby never repaid.
Certainly potential Obligor’s need to be credit worthy. No one is
suggesting otherwise!
I believe you misunderstood me. My understanding of MPE is this: First and
foremost, what *backs* a financed transaction *is* the future earnings of
the Obligor. So let’s get that straighten out (and we agree on that point).
Also, we need to concern ourselves with potential defaults upon that
obligation, which common sense tells us that that asset *must be*
re-possessed and liquidated to mitigate financial damages incurred. This
then is *the fall back scenario* in cases of default.
e. MPE also flawed in saying repayment term should be linked to
depreciation rate of asset bought. But some assets e.g. houses have
depreciation rate of 80 years or so which is longer than productive
lifespan of debtor so most debtors would retire/die before paying off their
home loans. The productive lifespan of debtor determines the repayment
term.
d. Future value of asset depends on future demand for asset by others and
earnings of others. So credit risk on credit money or MPE system not
removed. You cannot get away from charging credit risk costs. If you don’t
provide for it you’ll have inflation which recovers credit risk costs from
everyone.
c. If no one in an economy worked/produced, MPE would give them all loans
to buy homes as MPE says that the asset bought (i.e. seller’s asset) backs
credit money and there’s no credit risk. So everyone in production-less
community would buy houses and would not be able to pay off. MPE says fine
because can sell asset to recover. But who will buy it if no one is
producing/earning.
b. A buyer could use value of its own current asset, i.e. another house
that is paid-off, to back debt obligation to purchase a new house but even
then the future value of current house/collateral is dependent on future
demand for asset and earnings of other people. Again, collateral only
reduces credit risk. Future earnings is what is traded for new house.
a. Credit money is promise to pay back in future. It is backed by future
earnings of debtor and credit risk provisions collected and kept by bank to
cover any missjudgements in future earnings. Credit money is not as MPE
says backed by asset. Would a seller accept what is effectively a
securities contract that uses value of SELLER’S asset to back value of
security? No, that would be absurd.
1. MPE is great in many regards BUT is it flawed as pointed out in other
replies to your comments:
10. By giving loans based on collateral rather than creditworthiness/future
income creates asset bubbles, bankruptcies and inflation. Example above
illustrates the flaw of asset-backed view of MPE and its repercussions. The
fact that a home loan is used to buy asset does not mean that credit risk
disappears – it might reduce the credit risk. The future value of the house
depends on the demand by and creditworthiness of other people, not the
value of asset.
9. Let’s assume that there is no credit risk (as you suggest). This would
mean that a person could get a loan to buy an asset without earning an
income as there’d be no risk of default. This means a community of people
who do not produce/earn an income could get loans to buy houses with but
would not be able to earn an income to pay back the loans and the banks
would not be able to sell the assets to recover the loans either as no one
in the community would have the money to do so.
8. Credit money is a promise to pay back later; a debt obligation. If the
credit money that the buyer pays the seller with was backed by seller’s
asset, then transaction would not happen. Imagine this, buyer asks seller
to accept contract that is backed by the seller’s asset, not by future
earnings of buyer. Not logical.
7. We do not agree with the Mathematically Perfected Economics (MPE) view
that credit money is backed by the asset purchased. But rather by the
future income of the debtor, with provisions for bad debt kept by the bank
to cover any misjudgements in debtor’s future income.
6. So we just simply say on our website that “as the gold supply has no
relation to the amount of goods/services traded in the economy, gold-money
is inflationary and deflationary”.
5. The “gold-backed” money we’ve used has been 90% interest-bearing credit
money which is inflationary if credit is easy and collateral, as opposed to
income/creditworthiness, is allowed to back credit money loans, and it is
deflationary due to scarcity created through incorrectly charging
opportunity cost on credit money. It’s a complex combination of
inflationary and deflationary pressures.
4. It is also important to note that the so-called gold-backed money we
used from the 15th century up until the 1930’s was only 10% gold-backed and
the rest credit money. We used pure commodity money for very short period
before that. So one cannot deduce gold-money inflationary vs deflationary
behaviour purely based on our experience of “gold-backed” money used over
the industrial period.
3. Our point about commodity money being inflationary in the beginning of
gold-money system is to show that in a free market, humans would be
naturally deterred from commodity money due to the speculative effect of
inflation on wealth distribution. On our website we do mention that
commodity money is both inflationary and deflationary.
‘95% of economics is common sense’ Ha Joon Chang tells us what we need to
know about economics
To most people economics is tabooed just like sex. They can talk about it
but only superficially. Its too important, raw and life-impacting to be
discussed calmly, honestly and openly.
Economics, if it were a science, would be first, most complex and greatest
science of all. It would encompass all other sciences.
More Experts and good speakers are badly needed to explain the Non
monetary, resource based economic system being advocated by the Zeitgeist
movement and the Venus project.
The substitles and transcript are incomprehensible, especially for people
whose first language is not English. In order to understand accurate
issues, understandable language would be a plus!
this guy fights a valiant battle with a strawman and even then he loses by
choking on the straws…
minimum wage for everyone!
ha ha ha…he just called taxi owners in SA, gangsters.
why does he always say a silent faded you know at the end of every
sentences aahahaha ohh ha joon
The world needs more Ha Joon Chang’s. Excellent!
Academic departments often have a pop at each other in terms of the value
of their respective subject. Here is Ho-Joon Chang in defence of Economics.
(Copies of his book in the dept and the library for those who are
interested).
Resource based economy.
Very good talk! Im getting his book.
ha ha ha….he just ca
Academic departments often have a pop at each other in terms of the value
of their respective subject. Here is Ho-Joon Chang in defence of Economics.
(Copies of his book in the dept and the library for those who are
interested).
you’re very well-spoken, but please, please please, work on a more neutral
english accent. your knowledge gets lost in the translation when you’re
difficult to listen to.
Jesus christ chink learn to spik-a-da Engrish ploperry befolle comming to a
da Amellica to da a teach a
Audite et alteram partem > ceteris paribus
Is this the guy from that Star Trek TNG androgynous society episode who
falls in love with Riker?
I disagree with him only in the point that there are specialists that are
rooted in things whose findings or assertions or papers that can be
countered with other papers based on DATA and/or were capable of making
pinpoint predictions or good model of the past.
The most common sense place to begin is to simply define “The economy.”
It’s the means by which we get stuff people need and want to them. The word
“economic” implies a form of efficiency.
Instead of looking at economics through a limited lens or (as Mr. Change
suggests) multiple limited lenses, we should simply seek to understand the
most efficient ways of fairly distributing resources.
While I don’t agree with all its tenants, at least the Resource Based
Economy theory is attempting to do this.
‘95% of economics is common sense’ Ha Joon Chang tells us what we need to
know about economics