Re: We're for 'socialist-type' economic policy, says Prashant Bhushan
We disagree on a broad variety of questions and I would hold a different view here as well. The problem does not lie with the banks everywhere but the political institutions which survive on giving out doles and sometimes overdo themselves. I believe that there exists a market for financial innovations and also the fact there are various levels of risk associated with different projects. I see no other way to differentiate between them without using the interest differential. The choice again boils down to the trade-off between risk and innovation. And I would just not choose one over the other.
But I am very much interested in understanding the graph you presented in another thread and
@pmaitra produced above.
http://defenceforumindia.com/forum/...t-through-financial-systems-3.html#post616624
Is there any evidence for the convergence of two lines?
I do not doubt that there can be multiple financial products which can offer various ways to reduce risk.
The risk as defined by risk of loss.
The risk defined by risk of government will debase its currency to please the populace (eg Akhilesh Yadav waiving loans)
The risk has to be reduced but the whole game is rigged.
However, the concept is well explained by John Exters inverse pyramid
Everyone playing up in the top zone always has one eye on that single dollar bill. The perceived value of that single one dollar bill is imputed into every single contract in that upper pyramid. This is why everyone has their eye on it. Everyone knows it is not even worth the paper it is printed on, but they also know that as long as everyone else values it, it will hold its value which is the only thing holding up that entire top structure. This is called a network good that emerges from the network effect. Something has value only because a lot of people think it has value.
If you were to diminish the value of that single dollar by, say, 90%, then the whole top structure devalues 90% compared to the bottom pyramid instantly. No flow of funds is required. The reduced value is simply imputed to every quantum point in the pyramid. And no one would ride that devaluation out voluntarily when they could simply consolidate beforehand. So everyone is looking at that dollar thinking, believing, that they are quick enough to outrun everyone else at the first sign of trouble.
Now, in order to understand how this relates to the future financial system, we need to mentally picture something resembling this upper pyramid thousands of years ago when the money concept first emerged. Money was, is, and always has been that mental concept whereby we trade real goods in their relative value implicated by conceptual units of a network good. If you owed me a cow and the going price for a cow was three ounces of gold, I'd probably just say you owed me three ounces. But that doesn't mean you'd ever pay me three ounces of gold. You might just pay me back my cow. Or perhaps you'd pay me in milk over time. If I gave you credit to buy some of my chickens you might pay me back with eggs over time. But on the books it would be recorded in gold, even though neither of us ever had any actual gold.
Can you see it? This is the concept of money. This is what money actually is. And under that upper pyramid of 2,000 years ago you'd actually see a picture of a gram of gold sitting at the bottom.
Yes, it was still a network good just like the dollar is today, but people wouldn't have to keep such a close eye on it for a couple different reasons. First of all, the upper pyramid was not so big that it actually threatened to crush its foundation. And second, there was no one aside from a few gold miners that was able to threaten the foundation by multiplying it. (Note that the monetary base at the bottom of our modern pyramid has been multiplied 325%, that's 3.25x, in the last three years. The gold base usually multiplies only about 6% over that same timeframe.)
So now that we understand the different between a fragile foundation supporting a monstrosity versus a solid foundation supporting a much smaller, much more constrained credit structure, how would the future financial system make both better?
Well, I would argue that life in the physical plane is better under a healthy and vibrant (relatively large) credit system (upper pyramid). And don't let the word credit fool you into thinking I'm talking about yucky debt and evil usury. If Bill Gates showed up at my house and wanted my grand piano, he wouldn't have to carry a bag of cash with him. I'd accept his signature (maybe even just a hand shake) along with a nice agreed price. Think of Oprah Winfrey paying $52 million in 2001 for that Montecito house that was only worth half that at the time, but she really wanted it after filming there, and it wasn't for sale. At first the owner told her "sorry, not for sale." I imagine she then said "fifty million" and they said "fifty-two and it's yours." Now that's some credit (credibility)!
In both cases the deals were done with credit. A healthy credit (money concept) system lubricates a vibrant economy. But that doesn't mean that Bill Gates went into (bad) debt over my piano. Sure, you can have debt and even interest that is good and healthy for the economy. There is nothing intrinsically bad about borrowing capital for productive purposes. Just like the guy that borrowed a cow and paid with milk, or paid for the chickens with eggs. Same principle. We simply structure the agreement around conceptual units (credits) of the network good.
So how can we have a network good that is easy enough that it doesn't stifle the credit structure below its healthy potential, yet hard enough that it doesn't grow into an unhealthy monstrosity capable of bringing the whole thing down? This is exactly what the future financial system will do. It opens a free-flowing two-way trading valve between money and physical gold. And the flow through this open valve between the pyramids becomes the public indicium of the health of the upper credit system. Without such a valve, you either have strangling constraint or no indicia (indicator) of unhealthy growth.
Without such a pairing as fiat + unconstrained price of physical gold at the center of the hourglass, you will lurch back and forth between depressions and hyperinflations, century after century, with a few really nasty episodes like the French Revolution thrown in. Imagine coming up with this Thought out of thin air. Luckily we had
the Gold Trail to lead us here. But this is how a grand induction works. Musta been quite the Aha moment for those guys when they finally worked it out!
These graphs are self explanatory.
Hope this helps.