Darius Guppy favours us with his thoughts on economics. Again

Lordy be, praise the Lord and pass the ammunition.

I demonstrated how the banks have usurped the state as the principal creators of money, despite this fact being either unknown to or deliberately obscured by the financial and political communities and I argued that the banks’ money-creation process constituted in effect a hidden fraud upon the general population – a worldwide swindle that leads to a de-coupling of money and reality and the emergence of a parallel, virtual economy based on debt which, as it mushrooms exponentially, is bound eventually to implode.

Yes, this is so unknown and hidden that it\’s actually taught as part of the A Level economics syllabus. Those Rosicrucians, Bilderbergers, Illuminati, hiding something in plain sight!

Sources of money supply in an open economy (commercial
banks / credit creation, central bank, deficit financing, total
currency flow)

What clever bastards, eh?

Finally, I identified this general phenomenon by its ancient name – usury – the cancerous process of self-replication by which virtual wealth supplants real wealth and in the process enslaves human beings.

No, it\’s not usury, it\’s credit creation, fractional reserve banking even. But usury is, dependent upon which religious tradition (sooo useful in economics, eh?) you\’re following, either the charging of excessive interest or the charging of any interest at all. The flip side of usury is what the economist would call \”recognising the time value of money\”. A £ today is worth more than a £ in a year. The difference between the two prices is the interest.

Not a terribly tough concept to get. In fact all human beings instinctively get it: every language has the equivalent of the proverb that a bird in the hand is worth two in the bush (although it is only the more coarse modern ones that go on to point out that a hand in the bird…..).

Moreover, this contention, that stresses the extent to which the real economy becomes subservient to the virtual one, is given credence it seems to me by one obvious fact to which the commentators seem oblivious – that we should not be facing a crisis in the real economy at all.

After all what therein has actually changed in the past two or three years? There are still just about as many minerals in the ground and as many crops in our fields; it is not as if an economic collapse has been occasioned by anything tangible – the salinization and waterlogging of agricultural lands as occurred in ancient Mesopotamia for example, or a catastrophic decline in population levels brought about by the Black Death; nor has the store of human intellectual ability been depleted.

Quite true of course: but the economy does not depend upon those natural resources. Rather, it depends upon peoples\’ views. What Keynes called those animal spirits. It\’s those spirits which have changed, not the natural resources.

The crux of my argument in the Sunday Telegraph occurred where I showed how the banks have been bestowed what amounts to a license to print money owing to their ability to lend out many times more than they have on deposit. (‘Fractional reserve banking’).

In this way, the average reserve requirement for the majority of the world’s commercial banks is under 10% which means that for every dollar (or equivalent) which a bank has on deposit it can lend out at least ten times this amount – dollars which it invents and on which it charges interest.

Err, no. If I deposit £100 in a bank this does not mean that the bank can now lend out £1,000. That is nonsense.

If I deposit £100 and there\’s a 10% reserve requirement then the bank can lend out £90. Which will then be redeposited in a bank somewhere (allow us to assume the same bank in a different account) out of which £81 can be lent (£90 – 10% reserve) and so on. This sort of detail is important, yes.

This interest accumulates as newly-created money in the system at a compounded rate that can never be matched by economic growth in the real world and creates inflationary pressures for the very reason Monetarists point out – namely an over-supply of money, or credit.

Err, no, for if this were true there would be no point in being a monetarist, would there? If fractional reserve banking *inevitably* produces inflation then monetarists would be damning fractional reserve banking. As it happens, they don\’t. Rather, they say that this process of credit creation must not be allowed to get out of hand. Too little is bad (deflation! depression!) too much is bad (inflation!) and the right amount (umm, usually thought of as equal to nominal GDP growth isn\’t it? Or real?) is just perfect.

Such an inflationary pressure is bound in turn to produce an expansionary imperative on the global economy itself – hence the mantra of ‘growth, growth at all costs.’

No, the reason we want to have growth is because there are people out there who are absolutely poor. We\’d like them not to be poor. So we\’d like to have more stuff so that they can have some and thus not be poor. Even if we divvied up entirely equally the globe\’s production among all the people (however absurd this would be in reality) everyone would get $8,000 a year to live on. Here in the UK that would mean that we could have the NHS, the education system, local councils and nothing else. No food, no clothes, no houses, just government. Howver desirable the NHS, education and councils are we do tend to think that a good life well lived needs more than this. Thus we need to create more stuff, thus we desire growth.

In its simplest terms, therefore, there is little difference between the architecture of our global financial system and the Ponzi scheme put into place by Bernard Madoff.

Thus, the most basic exercise in false accounting, from which the other variants nearly all stem, is to treat a depletion of assets as the generation of revenue.

In this way, Madoff was able to utilise funds placed on deposit with him to pay out above average returns to investors who assumed, wrongly, that those returns had derived from profitable ventures when in fact they had been drawn from their own capital – (in itself an analogy for Britain during the Thatcher years and up to the present time).

Ah, I see where he\’s going here. The growth we\’re getting is simply the liqudation of natural (and other) capital and it will all end in tears. Except we\’re not. Liquidating natural capital that is. As Bob Solow pointed out, 80% of the growth in the market societies in the 20th century came from adding more value, not from consuming more resources. Resource use might be a problem with that 20%, yes, but that doesn\’t mean, as the 80% shows, that growth must stop if we are to reduce resource consumption.

For, in 1929 the world’s population was under a third its current level and de-forestation virtually non-existent;

Blimey, so history\’s another thing Mr. Guppy is ignorant about. The bottom, the lowest level of, forest cover in the USA was in the early 1920s. It has been rising since then: deforestation in the US was over by 1929. It\’s almost as if Darius has never heard of an environmental Kuznets Curve. Which surely cannot be the case, given that he\’s setting himself up here as an environmental prophet.

Consider a respectable but by no means startling growth rate in the world’s economy of 2% per annum – a figure with which the likes of Messrs Obama and Cameron would no doubt be pleased and a pittance – until one looks beyond one’s own nose, that is.

For, when 2% is compounded annually, then in 35 years – or one generation – a single incremental increase is equivalent to a doubling in today’s terms and in two generations’ time to a quadrupling.

This is true of course.

Increase the rate to 6% – only slightly more than what Ireland will have to pay on the loans recently required to bail out her economy – and the figure becomes almost 60 times.

It simply isn’t going to happen.

Err, you know, people can run primary budget surpluses? Even full surpluses? It is in fact possible to pay down debt?

Thus, the combined wealth of the world’s billionaires, (just shy of 500 at the time of writing), amounts to the net worth of the planet’s poorest 2.5 billion inhabitants. Moreover, for the reasons already outlined, the process of distribution from the poor to the rich can only accelerate. So that, (according to the United Nations Development Programme) while in 1960 the 20% of the world’s richest people had thirty times the income of the poorest 20%, by 1997 that figure had already reached seventy four times.

Given that the poor are getting richer there is no transfer from the poor to the rich. That the greater wealth being created is being unevenly distributed is true: but it is not that wealth is being taken from the poor and given to the rich.

the huge Trans National Corporations, some of which already constitute economies larger than those of certain countries?

Well, yes, it is true that the economy of Exxon is about the same size as the economy of Luxembourg. But why this should be a surprise I\’m not quite sure. The value added by 200,000 odd rich world workers is equivalent to hte value added by 200,000 odd rich world workers. This is why they\’re rich world workers of course: for their value added is high.

But I fear that\’s not quite what Darius means: he\’s confusing corporate turnover with GDP.

The sexualisation of society occurs not on account of our liberal values but simply because sex sells. The serenity of Sunday is sacrificed to the same idol.

Becoming quite the little prodnosed conservative, isn\’t he?

But how could it be that supposedly well-educated individuals, including politicians, financial journalists, accountants, economists and other ‘experts’, could be so blind to what the average ten year old student of elementary mathematics would grasp within seconds – that non-ending exponential growth in a limited world is simple Alice in Wonderland?

Because, dunderhead, GDP is \”the value of goods and services\”. It is not necessary to have more goods and services, nor to consume more resources to create them, when we can increase the value being added as a way of increasing GDP. As, above, Bob Solow has pointed out we largely do anyway.

Concepts such as self-sufficiency, tariff barriers, the ending of fractional reserve banking, local currencies, restrictions on the movement of capital, national economics and indeed any proposal that aims at our re-acquiring control of our economies cannot even be discussed.

Ah, my apologies. Not a conservative, a fascist.

I\’m sorry, but the rest is just too boring.

15 comments on “Darius Guppy favours us with his thoughts on economics. Again

  1. Timotei said
    “but it is not that wealth is being taken from the poor and given to the rich.”

    Yeah it is Tim. Get a grip. The relative wealth gap is increasing, meaning that the rich are getting richer faster than the poor. That means of course that money has to move from the poor to the rich.

    Otherwise the rich wouldn’t get richer.

    Tim adds: Get a grip Arnald.

    1) Some math. At point A, global GDP is £100. At point B, £200. At point 1, the poor’s share of global GDP is £10. At point B, £15.

    So, the poor are getting richer, the global wealth gap is still increasing and yet still no wealth has passed from poor to rich. What we have is an inequitable distribution of the newly created wealth, not a movement of wealth from poor to rich.

    2) Global inequality is falling. So it absolutely cannot be true that wealth is moving from poor to trich.

  2. There is something fascinating about how so many critics of economics are entirely ignorant of the subject.

    Arnald – is your comment a parody?

  3. The lefties claim austerity kicked in over the last two quarters. Let’s check the numbers:

    Nominal GDP growth, 6 months to 11Q1: 2.8%
    Previous two quarters: 1.8%

    pre-crisis trend rate approx 2.8%. OK. So austerity
    is working – great!

  4. Strange, for someone so concerned with the arbitrary creation of money, he has nothing to say about the quantitative easing that has occurred around the world. Perhaps that would prove that the institutions of the state have more ability to create money than they ever have, especially more than when on the gold standard.

    I find this paragraph on the euphemistically named “Operation Tidy Up” particularly revealing, “But above all, so long as economic shrinkage is accompanied by a corresponding decrease in population levels then it offers the best prospect for a re-normalisation of wealth discrepancies and for a catch-up on the part of the disadvantaged – as well of course as releasing the pressure on the natural environment”. Practically, kill/sterilize most of the productive white and yellow people and give their stuff to the global poor, thereby ushering in an eternal utopia? This new breed of totalitarian is stupider than ever; let’s just hope few take him seriously.

  5. Spare us this self regarding affectation of ennui.
    Ordinary people using banks are brainwashed into thinking they are borrowing when they are receiving entirely new sums of money created by the banks.If Guppy’s main point were generally known people would refuse to pay any interest to private sector credit creators.
    Guppy is more right than wrong.

  6. Tracy, yup. Got any good arguments why a larger fiscal deficit is needed to shrink the GDP deflator?

  7. DBC, do you know what the expression ‘a distinction without a difference’ means? Or indeed, the expression, ‘That’s so stupid it’s not even wrong’? What you are doing is akin to saying that because Darius Guppy’s name is Guppy, he must be a fish (rather than, he’s as intelligent as a fish.)

  8. Justanother – no, I vaguely recall the opposite – a large fiscal deficit increases inflation, thus increasing the deflator. But it’s been a while since my macro classes.

  9. Those above who share Guppy’s strange views on fractional reserve banking need to explain a tiny, trivial point.
    Those bank deposits are only a temporary phenomenon. Banks are only a place where money is put until a better use can be found for it. So if banks are creating £9 for every one deposited they’d have to be destroying nine for every one withdrawn or the fractional reserve would tend towards zero.
    And the mechanism for this is?

  10. Anyone want to lay money on how long it is before Guppy lets the mask slip and blames it all on the Jews?

  11. You’re clearly way out of your depth, Tim.
    There just isn’t space to go through all your errors but here are simply a few examples of your typical bad faith and intellectual dishonesty – first, where you write about the fractional reserve requirement.
    If you seriously imagine that the ‘details’ which you refer to would be unknown to DG then you are simply telling yourself stories.
    For illustrative purposes: assume a single, or monopoly, bank scenario in which the legally required fraction of deposits as reserves (which we call ‘R’) is set at 10%. The actual reserves above requirement, or excess reserves, will be 1 – R, or 90% in this instance.
    An additional cash deposit of $100 means that the bank now has $90 in excess reserves and can lend out up to $900 by creating demand deposits for its depositors. This $900, together with the $100 original cash deposit, means that there are now total additional demand deposits of $1000, or 1/R = 1/10% = 10 times new reserves.
    In a multiple bank scenario the process simply becomes iterative. Each bank assumes that checks written on its new deposits will be deposited at another bank. As you explain, Bank 1 receives an additional cash deposit of $100 against which it can lend out its excess reserves of $90. That $90 is re-deposited at Bank 2 which, in turn, must keep 10% in reserve, so that it now has excess reserves of 90% of the $90 deposited with it, or $81. This $81 is deposited at Bank 3 which can now lend out 90% of $81, or $72.90 and so on and so forth.
    But the point is that the net effect is identical because in either the single or multiple bank scenario the reserves-to-deposit multiplier is the same: 1/R.
    You know this of course which is why you try to sweep it under the carpet with a disingenuous: “this sort of detail is important, yes” but if we really wanted to get down to the nitty gritty, bringing in for example the process of demand deposit contraction as reserves are lost and re-expansion as new loans are created, then the result would be to turn what is already a long essay in to one many times the size.
    As DG explains briefly though, the money created by the above process is indeed destroyed when loans are repaid but he is very specific: it is the INTEREST that remains un-destroyed and which accumulates at a compounded rate, hence the fact that indebtedness has undeniably mushroomed exponentially.
    It is by means of this process that, as DG argues, money is conjured up from nothing, repeating an argument made in the early days by Frederick Soddy and reiterated more recently by the economist and Nobel laureate James Tobin when he writes, for example, how: “The community’s wealth now has two components: the real goods accumulated through past investment” and the “paper goods” that are “manufactured from THIN AIR” (DG writes about the ‘real’ and ‘virtual’ economies in his own essay and if you had conducted even a modicum of research you would have discovered that this process of manufacturing money from ‘thin air’ which you refer to as ‘nonsense’ is in fact widely known, although rarely discussed in mainstream circles).
    It is also by means of this process that the rich become richer and the poor poorer, since money breeds upon itself: the more you have the more you get. And, finally, it is by this process that the little guys, who have traditionally formed the backbone of the entrepreneurial class, are stuffed – a classic example of neo-liberal theory being scuppered by neo-liberal practice.
    So read things in a spirit of good faith next time and try to understand them properly before you make a fool of yourself, Tim.
    More bad faith: your claim regarding DG’s arguments about resource depletion, where you write: “the economy does not depend upon those natural resources.”
    If you believe this then you’re not just dim, you’re certifiable. One of the biggest, (if not THE single biggest) economic problems which faces the planet – as recognised even by staunchly neo-liberal Western Governments – is a looming energy crisis brought about by a depletion of natural resources in which energy is stored.
    The new game in town is energy self-reliance. Those countries that are most energy self-sufficient will fare best, full stop.
    Another example of classic bad faith: your remark concerning de-forestation. Read in context DG is quite clearly talking about de-forestation on a global level. You dishonestly slip in a remark about forest cover in the USA on its own. Of course there are many areas of the world, and not just in the USA, where a single area might now have greater tree cover. Your garden may have more trees in it now than in the 1920s! But, again, if you think that forest cover since that time and taken on a global level has not depleted significantly then please tell us what brand of glue it is that you are sniffing.
    Regarding economic growth and distribution: if the average income throughout the world is $8,000 as you write, then a growth of 25% say to $10,000, on the assumption that it was not harmful for the planet, would increase average living standards (assuming equitable distribution) and this would be a good thing. But think it through: NOT if population levels grew by the same amount and offset that economic growth (bringing about a double-wammy by adding pressure on the environment in the process). However, as DG argues, if population levels fell or even stabilised and the same amount of resources could be shared by fewer people, with technology taking up the slack in a reduced labour force, (a role it was originally hoped it would fulfil), then the average living standard would indeed increase.
    He makes the point which most people seem to have grasped except for you: we cannot keep growing our population levels and our production and consumption ad infinitum in a limited world.
    Now do you get it, Einstein?
    In fact it is this last point where your arguments are weakest, Tim, for you fail to address the principal argument of DG’s essay which the majority of people seem to understood with ease: for nowhere do you show how we can continue to grow forever in a limited world in order to pay off exponentially increasing debts – the key and utterly erroneous assumption behind our politicians’ suggested remedies. Rather like the student who imagines that he is cleverer than he actually is, therefore, you emerge from the exam patting yourself on the back for having answered every single question under the sun – except for the one actually asked! Such a candidate is invariably marked down.
    (When writing above about how most people seem to understand the argument, Tim, there is of course a very dim, notable exception so please ignore the comment made by ‘Flatcap Army’ – who is in fact Peter Risdon. He’s made the same, painfully bad joke, on numerous occasions in different contexts. See, for example: http://www.peterrisdon.com/blog/2010/04/28/volcano-explained .Or the comment by Risdon using the pseudonym ‘Bojo’ – again a poor joke which he has made several times before and which gets no funnier with each repetition. Remember, this is the man who has rabbitted on ad nauseam about “sock puppets” but who has been caught out again and again and again as the biggest sock puppet of them all through sheer stupidity. See, for example: timworstall.com/2010/12/11/well-actually-it-was-peter-risdon)
    The truth is Tim that you have attempted to carve out a niche for yourself as an economist and that like all your ventures it hasn’t worked. Your ideas are unoriginal, plodding, typical neo-liberal fare as taught at GCSE level. People like you and your friend Risdon identify with the neo-liberal ideal because, being fantasists, you project yourselves into the role of “winners” in such a system (Risdon for example used to claim much to the amusement of his work colleagues that he was a “Merchant Prince!”) But the irony is that in the neo-liberal paradise you envisage it is precisely losers like the pair of you who are the FIRST to go to the wall – as your two illustrious entrepreneurial careers illustrate so perfectly.
    In short, you are not taken seriously as an economist, Tim, for one simple reason:
    You’re just not good enough.
    Perhaps more worrying though is the psychology behind your post.
    You just can’t stop writing about DG, can you?
    It’s a Sunday morning, Tim. Sunday 12th June 2011 to be exact, and the Independent have just published DG’s essay on economic growth. It’s a time when most people would be cooking breakfast for the kids, walking the dogs, going to church, watching the sport on TV or simply having a lie-in. But you have been up since God-knows-when, fretting. You have read a 10,000 word essay and have dedicated an entire post to DG (this one). You have added a comment to one of your existing posts relating to DG and have also dedicated ANOTHER full post to him! (timworstall.com/2011/06/12/darius-guppy-writes-to-us-again).
    What is more this has happened before, in fact when the Sunday Telegraph published an essay by DG and where you devoted yet one more post to him! (http:// timworstall.com/2010/02/21/well-yes-darius ). Add to this your comments on Twitter about him and on the newspapers’ websites themselves using pseudonyms and all of this begins to have an air of Glenn Close about it.
    But it’s time for you to recognise the painful truth – he just isn’t interested in you, Tim!
    So, one more time for the benefit of slow learners and beta males:
    – Number of blogs, tweets, postings, comments on websites using pseudonyms etc made by you and dedicated to DG: We’ve lost count.
    – Number of blogs, tweets, postings, comments on websites using pseudonyms etc made by DG and dedicated to you: ZERO.
    – Conclusion: The fascination is un-reciprocated.
    Now face it. And get over it.
    (And if you can’t get over it, get help)
    ((And if you can’t get help, get Hormone Replacement Treatment))

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