The Financial System and Money Supply

crimsonfalcon10, could you walk me through how money velocity actually speeds up by, say, ten times using a household budget as an example? I’m assuming you get the idea that the amount of cash you're holding onto is inversely proportional to how fast it circulates. Like, if the velocity were infinite, you’d effectively have almost zero money left in your pocket.

And just to reiterate: you can't fix someone's poverty by handing them a loan. It just leaves them even more broke. It's the same deal with any nation under this kind of system—you can't bail out a country because the only way to actually pay off debt is to be hyper-focused on exports and basically dump the entire debt burden onto the countries you're selling to.

Best,

Maria Thomas48 said:crimsonfalcon10, could you walk me through how money velocity actually speeds up by, say, ten times using a household budget as an example? I’m assuming you get the idea that the amount of cash you're holding onto is inversely proportional to how fast it circulates. Like, if the velocity were infinite, you’d effectively have almost zero money left in your pocket.

And just to reiterate: you can't fix someone's poverty by handing them a loan. It just leaves them even more broke. It's the same deal with any nation under this kind of system—you can't bail out a country because the only way to actually pay off debt is to be hyper-focused on exports and basically dump the entire debt burden onto the countries you're selling to.

Best,

Why do you keep basing everything on a closed system? Why don't you try applying your mathematical model to something like Germany, China, and the USA... using three different currencies like USD, EUR, and CNY...

You mentioned that example once about a father and son where the father gives the son brooms to use as tools... but what happens when the son learns how to make the brooms himself and doesn't need them anymore... and the father hasn't learned how to make the actual tools...

It's the exact same thing with velocity... today the father produces one broom and the son produces one tool...

The father buys the tool from the son for a dollar, and then the son uses that same dollar to buy a broom from the father... the next day, the father produces 10 brooms and the son produces 10 tools... they can repeat that same transaction 10 times in a single day... which means we've increased the velocity of circulation tenfold using just one single dollar in the system... The entire economy runs on this principle, except instead of one dollar, there are 1.7 trillion dollars in the system...

Besides, just look at the M1 money supply on the Federal Reserve website and it’s easy to see why the crisis happened... The Federal Reserve saw stagnation in the M1 money supply from 2001 to 2007... the economy was growing solely based on the velocity of money... and once the housing bubble—which was microeconomically inflated—burst, people panicked and the velocity of money in the system slowed down abruptly, leading to the crisis... Saving people is the easy part... but now we have to restore confidence, which requires a much longer period of time and a larger amount of money injected into the system to compensate for the shortage caused by the drop in velocity...

John Doe, look, I’m no economic analyst. Even the top-tier pros get their forecasts wrong all the time.

I’m looking at this through the lens of a closed system—you know, a nation with its own budget and private entities. The whole point is that a system has to be able to function in isolation, just like any country does on a global scale. If you deny that, you're basically arguing that the entire planet can't function.

You have to realize that China, which is pulling in record surpluses, has to put that money somewhere. And they put it into the USA. That’s how Americans profited from those investments. There’s actually a recent article showing that China has its own risk assessment house for credit ratings, and they’ve flagged the USA as a really poor place to invest right now. Plus, the USA and the European Union handle public debt financing differently—though you could argue the Federal Reserve's interventions during the crisis in Greece were essentially illegal exceptions to the rule.

The global economy doesn't interest me that much. I only see it as a collection of examples where certain actions just fail to reduce debt in the long run.

You still haven't really answered my question about what happens to rent payments when the velocity of money speeds up. You explained how increased circulation comes from higher production and a rising GDP. But I want to know what happens when production stays the same but everything just gets more expensive. Here is the real question: how are you supposed to pay an ever-increasing rent if the velocity of money increases tenfold while the actual amount of cash decreases? How does that work in the real world?

Best,

Maria Thomas48 said:John Doe, look, I’m no economic analyst. Even the top-tier pros get their forecasts wrong all the time.

I’m looking at this through the lens of a closed system—you know, a nation with its own budget and private entities. The whole point is that a system has to be able to function in isolation, just like any country does on a global scale. If you deny that, you're basically arguing that the entire planet can't function.

You have to realize that China, which is pulling in record surpluses, has to put that money somewhere. And they put it into the USA. That’s how Americans profited from those investments. There’s actually a recent article showing that China has its own risk assessment house for credit ratings, and they’ve flagged the USA as a really poor place to invest right now. Plus, the USA and the European Union handle public debt financing differently—though you could argue the Federal Reserve's interventions during the crisis in Greece were essentially illegal exceptions to the rule.

The global economy doesn't interest me that much. I only see it as a collection of examples where certain actions just fail to reduce debt in the long run.

You still haven't really answered my question about what happens to rent payments when the velocity of money speeds up. You explained how increased circulation comes from higher production and a rising GDP. But I want to know what happens when production stays the same but everything just gets more expensive. Here is the real question: how are you supposed to pay an ever-increasing rent if the velocity of money increases tenfold while the actual amount of cash decreases? How does that work in the real world?

Best,

You’re making a mistake here... A country might be viewed as a closed system, but it's actually composed of countless open systems! Truly closed systems barely exist. For a nation to function as a closed system, it would need to produce absolutely everything internally, eliminating any need for imports—it would have to be a perfect substitute for every single product on Earth just to work. Furthermore, even if such a state existed, it would still be made up of multiple open systems. If I had a truly closed system within a country, it would essentially be an isolated entity with zero communication with the rest of the nation; you’d have to view that system and the country as two entirely separate things. The moment you introduce any exchange of goods, services, or money between them, the system isn't closed anymore—it's open!

So, let's talk about paying rent... I see people are getting all worked up over open versus closed systems. Let's just say the government is a closed system while my household is an open one. Because if my house were actually a closed system, I wouldn't have to pay rent at all—there would be no money flowing in or out!

So, the government tracks GDP, does it? $33333There's money on the horizon! $333The recovery rate is sitting at 100... now, someone from that collection of open systems just needs to tuck it away! $33 So, there are only 900 units left in circulation... Are the other players in the system ramping up their pace because of the recent economic boom and higher spending? Is the GDP still holding steady at 111.11? $33333So I can just keep paying my rent since my income stays steady... Sure, there's less cash sitting in my bank account at any given moment, but because money flows through my system more frequently, I’ve always got enough on hand to cover the bills!

Does reducing the money supply always lead to a drop in GDP? Does increasing it necessarily trigger inflation or an economic surge? Not necessarily!

Maria Thomas48 and crimsonfalcon10, you are debating the velocity of money without grasping its fundamental mechanics. Irving Fisher once posited that the velocity of money accelerates in tandem with human progress, yet Milton Friedman effectively debunked this notion. By analyzing statistical data from various nations—and specifically examining the USA over the course of a century—he demonstrated that the velocity of money is actually in a state of constant deceleration. He established a rule where every percentage point increase in GDP, or total production, results in an equal percentage decrease in velocity. This phenomenon is easily explained by the shifting structure of consumption as wealth accumulates; as people move toward luxury, they alter their spending patterns, which slows down velocity and dampens demand. In our current era, we deal only with nominal money supply and nominal prices, which forces us to ask how much real money is actually in circulation. Bourgeois theorists define the real money supply as the reciprocal value of the velocity of money. Consequently, if velocity decreases, the real money supply increases. If you maintain the belief that the real money supply must rise alongside GDP growth, then you are logically compelled to accept that velocity must decline. Therefore, your assumption that velocity is increasing simply does not align with reality. Maria Thomas48 may be correct in principle, but when she attempts to issue non-credit money, she will find herself facing a deficit. Money has essentially vanished because its velocity slowed down. The missing liquidity must be compensated for through non-credit money. This explains why non-credit money can be allocated even to those whom Maria Thomas48 initially deemed ineligible for such funds. The coverage for non-credit money is found in the balance of total supply and total demand. Supply must exceed demand, whether that occurs due to increased production or diminished demand. This is why my formula remains the most comprehensive and simplest model available. Perhaps Friedman’s formula doesn't apply to China right now because they are still in a rapid development phase where supply holds the advantage, but soon China will experience a contraction in demand as a direct result of slowing velocity. If the same rules governing the USA apply to China, then a 12% growth in Chinese GDP would necessitate a 24% increase in non-credit money. Even under Mr. Nostradamus's own theory, a 12% increase is mandatory, yet there isn't enough credit money to satisfy that requirement. Credit money played a significant role back when interest rates were low, but now that rates have climbed, it is impossible to function without sufficient non-credit money.

crimsonfalcon10 said:You’re making a mistake here... A country might be viewed as a closed system, but it's actually composed of countless open systems! Truly closed systems barely exist. For a nation to function as a closed system, it would need to produce absolutely everything internally, eliminating any need for imports—it would have to be a perfect substitute for every single product on Earth just to work. Furthermore, even if such a state existed, it would still be made up of multiple open systems. If I had a truly closed system within a country, it would essentially be an isolated entity with zero communication with the rest of the nation; you’d have to view that system and the country as two entirely separate things. The moment you introduce any exchange of goods, services, or money between them, the system isn't closed anymore—it's open!

So, let's talk about paying rent... I see people are getting all worked up over open versus closed systems. Let's just say the government is a closed system while my household is an open one. Because if my house were actually a closed system, I wouldn't have to pay rent at all—there would be no money flowing in or out!

So, the government tracks GDP, does it? $33333There's money on the horizon! $333The recovery rate is sitting at 100... now, someone from that collection of open systems just needs to tuck it away! $33 So, there are only 900 units left in circulation... Are the other players in the system ramping up their pace because of the recent economic boom and higher spending? Is the GDP still holding steady at 111.11? $33333So I can just keep paying my rent since my income stays steady... Sure, there's less cash sitting in my bank account at any given moment, but because money flows through my system more frequently, I’ve always got enough on hand to cover the bills!

Does reducing the money supply always lead to a drop in GDP? Does increasing it necessarily trigger inflation or an economic surge? Not necessarily!

If what makes you happy is expanding equations to an open system—basically using the equality of three deficits. To be more precise, when a state balances imports with exports (total trade equals zero), it acts as a virtually money-isolated system.
If there’s a trade deficit with foreign nations, things get even worse regarding the monetary profit within the community.

Sum of monetary profits = budget deficit - trade deficit = - financing deficit

or the full equality of three deficits:

trade deficit = financing deficit + budget deficit

All of this is explained in the translated book Krueger "Macroeconomics" on page 39. You can download the PDF version from the University of California economics department website. It uses the symbols economists typically use, but the essence remains the same.

Well, you can clearly see the state's monetary balance in an open system. Without a positive monetary balance, the state loses money, the economy works at a loss in total, and everything heads 100% toward a crisis. Every economist knows this, but they don't realize that by balancing the trade account (exports=imports), a reduction occurs which shows that:

Sum of monetary profits = budget deficit = - financing deficit

Which implies the following. The money savings realized by entities (companies and individuals) are then actually financed by the government budget deficit. If the state took out credit for the deficit, then it means it has to pay back more than it borrowed. Or rather, it needs to pay back more than the economy actually generated in monetary profit.

Our economists fail to see that almost direct link between monetary profit and the budget deficit. In reality, it differs because of the trade balance. That's why I try to find a solution for all countries at once and I balance the trade accounts (through swapping). That way, no single country pays off the debts of others.

Is it clearer now?

It's even easier to prove that a money-isolated community suffers a monetary loss in circulation because one part of the entities keeps accumulating monetary profit, which is explained by the slowing down of circulation. This happens because the monetary profit accumulates and is then invested.

How will you solve the monetary loss in circulation? By speeding up the circulation of the remaining money. Genius. You're close to a Nobel Prize (big money is smiling at you). Just explain it to Šuker and we'll be set. You haven't managed to convince me how the household budget would function then, or where that acceleration comes from. I know practically how it could be done, but I'd like to hear from you how to make all payments at the same time with less money in the system.

Mr. Matthew Patel12, thanks for explaining the slowing of money circulation. I have nothing to add.

Regards
sites.google.com/site/financijskisustav/home

Maria Thomas48 said:If what makes you happy is expanding equations to an open system—basically using the equality of three deficits. To be more precise, when a state balances imports with exports (total trade equals zero), it acts as a virtually money-isolated system.
If there’s a trade deficit with foreign nations, things get even worse regarding the monetary profit within the community.

Sum of monetary profits = budget deficit - trade deficit = - financing deficit

or the full equality of three deficits:

trade deficit = financing deficit + budget deficit

All of this is explained in the translated book Krueger "Macroeconomics" on page 39. You can download the PDF version from the University of California economics department website. It uses the symbols economists typically use, but the essence remains the same.

Well, you can clearly see the state's monetary balance in an open system. Without a positive monetary balance, the state loses money, the economy works at a loss in total, and everything heads 100% toward a crisis. Every economist knows this, but they don't realize that by balancing the trade account (exports=imports), a reduction occurs which shows that:

Sum of monetary profits = budget deficit = - financing deficit

Which implies the following. The money savings realized by entities (companies and individuals) are then actually financed by the government budget deficit. If the state took out credit for the deficit, then it means it has to pay back more than it borrowed. Or rather, it needs to pay back more than the economy actually generated in monetary profit.

Our economists fail to see that almost direct link between monetary profit and the budget deficit. In reality, it differs because of the trade balance. That's why I try to find a solution for all countries at once and I balance the trade accounts (through swapping). That way, no single country pays off the debts of others.

Is it clearer now?

It's even easier to prove that a money-isolated community suffers a monetary loss in circulation because one part of the entities keeps accumulating monetary profit, which is explained by the slowing down of circulation. This happens because the monetary profit accumulates and is then invested.

How will you solve the monetary loss in circulation? By speeding up the circulation of the remaining money. Genius. You're close to a Nobel Prize (big money is smiling at you). Just explain it to Šuker and we'll be set. You haven't managed to convince me how the household budget would function then, or where that acceleration comes from. I know practically how it could be done, but I'd like to hear from you how to make all payments at the same time with less money in the system.

Mr. Matthew Patel12, thanks for explaining the slowing of money circulation. I have nothing to add.

Regards
sites.google.com/site/financijskisustav/home

There are several ways to handle this... money intended for circulation is never actually 100% in motion... which means its velocity is realistically lower than what is truly possible... we need to hunt down that frozen cash and force it back into circulation... another way is to shorten payment cycles... if people get paid every single week instead of once a month, you can significantly speed up the flow of money...

crimsonfalcon10 said:There are several ways to handle this... money intended for circulation is never actually 100% in motion... which means its velocity is realistically lower than what is truly possible... we need to hunt down that frozen cash and force it back into circulation... another way is to shorten payment cycles... if people get paid every single week instead of once a month, you can significantly speed up the flow of money...

So this is where I was waiting for you. It is obvious that you can make circulation work with less money on average, but there is a limit there. You can't just split payments into an infinite number of parts over endless intervals because then you run into massive transaction costs. And for that to actually work, you would have to synchronize every single company and the government onto the exact same payment cycle.

As for speeding up circulation by spending off profits and savings, that is a double-edged sword regarding the ultimate impact on the economy.

I think everything in that direction is just a waste of time since there isn't a permanent solution. That only benefits the big bankers so they can keep mindlessly extracting profit from supplying liquidity.

Regards

crimsonfalcon10, you could devise whatever money supply mechanism you find most convenient, yet once implemented, the velocity of money will inevitably begin its deceleration. This is a reality uncovered by Friedman. While Maria Thomas48 expressed appreciation for the clarification I provided, I am more interested in your perspective on the matter. If the velocity of money slows down, then a replenishment of liquidity via non-credit money becomes an absolute necessity.

Matthew Patel12 said:crimsonfalcon10, you could devise whatever money supply mechanism you find most convenient, yet once implemented, the velocity of money will inevitably begin its deceleration. This is a reality uncovered by Friedman. While Maria Thomas48 expressed appreciation for the clarification I provided, I am more interested in your perspective on the matter. If the velocity of money slows down, then a replenishment of liquidity via non-credit money becomes an absolute necessity.

Well, Matthew Patel12, I’ve touched on this before. We are talking about retained earnings or just personal savings. In a purely credit-based system, the Federal Reserve usually tries to push that money back into circulation by cutting interest rates. It's hard to say much more by just reading textbooks, though, because most economic theories don't really distinguish between a strictly credit-driven system and one that includes non-credit inflows. The issue with saving is that it leads to a shrinking money supply and lower spending, which hurts the economy. So, logically, that gap has to be filled with non-credit money.

Still, there is the issue of maintaining the value of money—something you haven't commented on yet—which brings up the whole problem of earning without actually working. Things like overpaying for jobs, rigged contracts, and stuff like that. This is especially critical when dealing with government spending. Most people here probably think I'm pushing socialist ideas, but I honestly believe it's necessary to maintain currency stability. Without some level of oversight, you risk the currency devaluing or seeing a massive spike in bankruptcies because monetary profits ended up in the wrong hands through unfair means.

Best,

Maria Thomas48 said:Well, Matthew Patel12, I’ve touched on this before. We are talking about retained earnings or just personal savings. In a purely credit-based system, the Federal Reserve usually tries to push that money back into circulation by cutting interest rates. It's hard to say much more by just reading textbooks, though, because most economic theories don't really distinguish between a strictly credit-driven system and one that includes non-credit inflows. The issue with saving is that it leads to a shrinking money supply and lower spending, which hurts the economy. So, logically, that gap has to be filled with non-credit money.

Still, there is the issue of maintaining the value of money—something you haven't commented on yet—which brings up the whole problem of earning without actually working. Things like overpaying for jobs, rigged contracts, and stuff like that. This is especially critical when dealing with government spending. Most people here probably think I'm pushing socialist ideas, but I honestly believe it's necessary to maintain currency stability. Without some level of oversight, you risk the currency devaluing or seeing a massive spike in bankruptcies because monetary profits ended up in the wrong hands through unfair means.

Best,

🙏 🙏 🙏

Nicole Collins13 said:🙏 🙏 🙏

The issue is already here, it's just that nobody is really paying attention to it. The Federal Reserve keeps the exchange rate steady pretty easily because they issue dollars by depositing foreign currency from international loans. Since some of that money flow ends up as domestic profit while the rest goes toward imports, the Federal Reserve always has enough reserves to hold the line. It’s all going to fall apart when we actually have to start paying down the debt. Once that happens, the demand for dollars will skyrocket and the exchange rate is definitely going to spike.

Best,

I am in agreement with crimsonfalcon10.

I would simply add that the exchange of goods between nations—where no single country produces everything its citizens desire—is a vital component of this entire dynamic. If I possess an abundance of raw materials for brooms and manufacture those brooms, while you possess the resources for iPods and manufacture those iPods, the sheer volume of units produced is what matters. Eventually, one could trade 1,000 iPods for 1,000 brooms, even if that seems inconceivable to you right now due to the disparity in their perceived value.

Is it the money used in trade that creates the problem?

Suppose we trade 1,000 iPods for 1,000 brooms using money as the medium.
The 1,000 iPods hold the same value as the 1,000 brooms.
However, for the money we utilized, we must pay interest to the entity that issued it to us.

From where does that interest come?

Once we pay that interest, we are left with enough money for only 990 brooms in the next round. In every subsequent round of trade, we find ourselves with less money.

Is that the point you are trying to make, Maria Thomas48?

The entity that issues our currency and charges interest on it also provides that very same money to the government at no cost. The state then wields that capital however it sees fit—contracting projects, funding pensions, or supporting students.

One could view this mechanism as a form of taxation.
The more complex a system becomes, the more opportunities arise for corruption. A small-scale operation run by a few dozen people naturally leaves less room for malpractice, which makes it inherently more efficient.

The total amount of money isn't the issue; what matters is how that money is utilized.

I certainly agree that problems arise when interest rates are excessive, or when the volume of money supplied to the government far outpaces the interest charged.
However, there is a much higher probability that equilibrium will be maintained here than in a system where someone issues "fiat money" based solely on what they believe the system requires, 🙂 such as, say, 4%.😁

Matthew Patel12 said:crimsonfalcon10, you could devise whatever money supply mechanism you find most convenient, yet once implemented, the velocity of money will inevitably begin its deceleration. This is a reality uncovered by Friedman. While Maria Thomas48 expressed appreciation for the clarification I provided, I am more interested in your perspective on the matter. If the velocity of money slows down, then a replenishment of liquidity via non-credit money becomes an absolute necessity.

It’s obvious! If you can't fix things by increasing the velocity of money, then you have to make up for it by printing cash... I feel like we are all circling the same core idea here, though it seems we are looking at different timeframes... When I discussed accelerating the velocity of money, it is actually possible... if, say, only 80% of the total money in circulation is being used, that remaining 20% could potentially jumpstart the velocity since we measure circulation against the full 100%... Those shifts in circulation value should be enough to pull the system out of a crisis... But... we are dealing with pure consumer psychology here, which is totally unpredictable, so one shouldn't rely on it... During this crisis, Ben first tried cutting interest rates to force that 20% back into circulation, but it didn't work... So he moved on to QE or just printing money... Since even that hasn't yielded the results he wanted, he's preparing to print even more... And he'll keep doing it until Americans emerge from the crisis...

Let's talk about the American Dream for a second... Back in the 70s, someone made a deal to ensure oil is only bought with dollars... and man, did they make a good deal... Now, Americans can print money without a second thought because they know everyone else needs those dollars to buy oil... As oil prices and demand rise, the US can print more and more dollars without fearing hyperinflation... The whole world essentially works to ensure Americans get to enjoy themselves... They buy up everything in sight with basically worthless paper just because everyone else needs that specific paper to purchase oil... If you try to rebel against that setup, the US sends in a military intervention immediately to bring you back in line... 🤣

Maria Thomas48 said:The data on non-credit money demand basically shows one thing. It just can't act as a substitute for taxation.

Real backing for non-credit money comes from active production, not just sitting around doing nothing. You have to actually earn non-credit money; it only represents a small slice of a product's total price. Basically, it’s the profit that isn't immediately reinvested—it's how you turn surplus value into new capital. If you let that accumulate, you can use it for future investments, which means you won't need to inject as much non-credit money into the system later on. This is exactly what Mr. Stole was getting at. It’s the cycle everyone talks about: working, saving, and then investing. But that only works if the amount of non-credit money being issued is exactly what is actually needed.

Because of that whole idea that you shouldn't get something for nothing, social assistance shouldn't just be handed out for free. It really should require some kind of community service in return. I know there are already some small towns over in the States where they actually implement this kind of thing.

Funding a war—or even just defense—is an exceptional circumstance in any stable nation, provided all the other laws actually hold up. To be honest, I couldn't care less about what happens to the economy during wartime.

It’s pretty obvious that you need actual work backing up your cash flow. If someone is pulling in massive profits without doing much real labor, they’re essentially just inflating the currency—especially when they’re dealing directly with the government. My take is that any company wanting to land federal contracts in the future should have to agree to profit caps based on their total revenue. This shouldn't just apply to the big corporations either; it needs to extend to their suppliers and employees too. The government simply can't afford to be reckless with spending. When they are, it just ends up siphoning wealth away from the entire community and concentrating it into the hands of a tiny few.

I’m not saying all this because I'm some kind of dreamer or because I wish things worked this way. It isn't about idealism. These are just logical conclusions drawn from the equations. Money only actually holds value if it is literally earned through work. That is what gives it any real standing against another currency.

I’ve already mentioned my thoughts on using the velocity of money as a fix for liquidity shortages. But what I really need is some clarity here. If we assume the velocity of money increases by 4% every single year—and stays that way indefinitely—then the math gets interesting. At that rate, the velocity should double every 17 years or so. Following that logic, over an 85-year span, you’re looking at a 32-fold increase in speed.

Advocating for the way things are right now is just plain crazy. There’s no way for the current system to actually offset inflation, other than through exponential borrowing—which we already know is impossible to pay back. Every time they hike up wages, it just speeds up our slide toward a total collapse. At the end of the day, inflation is just what happens when credit expands, and that expansion only happens because people can't settle their debts without taking out even bigger loans. It's basically the Davor Šuker method. That's just how it works.

Without credit, the whole system would just grind to a halt within a few years, sliding straight into deflation and recession. It’s inevitable. It happens the moment lenders decide to tighten the tap. But here is the thing. That move would basically be suicide for them too, because once that starts happening, people will finally start looking for actual alternatives. That is exactly why Greece was handed those loans—it was just a way to buy more time. It is the same reason they come up with these bank taxes. They keep inventing new things just to stall for time. Reducing the budget deficit is just another one of those fabrications used to keep the clock ticking.

When you realize that a community's entire profit engine relies on exports, outside investments, and running a budget deficit, then everything becomes clear. It's just how the math works out. When we cut back on the deficit, the community ends up walking away with less profit. It's just how it works. You tighten the belt, you lose that extra cushion. Simple as that.It’s just going to drag more companies straight into bankruptcy. You’d have to offset that somehow—maybe through massive exports, new investments, or just piling on even larger amounts of debt. But honestly, the only way for the community to actually see a steady stream of cash profit is through a budget deficit. Of course, that has to be non-credit based. These are just facts. Even the famous economists don't really grasp this, and they spend half their time arguing for a balanced budget instead.

It’s kind of strange, isn't it? You can only really find information about non-credit money online. Not a single mainstream news outlet seems to care about it. All these claims about how unsustainable the system is... they aren't backed up by any actual math. If people actually laid out the mathematics—just like I have done here—solutions would show up immediately.

Here is that derivation again, which holds true for a closed community without credit:



Best,
sites.google.com/site/financijskisustav/home

Some pretty interesting diagrams and formulas here. Did you put this together yourself?

Production scales up relentlessly, driving supply higher and higher. Meanwhile, the velocity of money is in a steady decline, which naturally drags demand down with it. To fund this mounting production and clear out unsold inventory, we require non-credit money. Half a century ago, we only needed about 2% of such capital; then it crept up to 3%, and eventually hit 5%. Today, China requires at least 12% just to keep the gears turning. Supply and demand don't simply find an equilibrium on their own; that balance has to be manufactured through the infusion of non-credit money. I am too old to wade through every single argument posted here; what I know is more than sufficient. Increasing production efficiency boosts output while cutting costs. On the flip side, increasing consumption efficiency raises utility but slows down the velocity of money and suppresses demand. To compensate for that falling demand, companies resort to aggressive advertising and planned obsolescence—making cheap products that break quickly just to force a repurchase. It all leads to a total collapse of economic rationality. The system dismantles rational economics, while the impoverished consumer inadvertently fuels its expansion. I have a certain respect for those struggling consumers.

Gregory Williams7 said:I am in agreement with crimsonfalcon10.

I would simply add that the exchange of goods between nations—where no single country produces everything its citizens desire—is a vital component of this entire dynamic. If I possess an abundance of raw materials for brooms and manufacture those brooms, while you possess the resources for iPods and manufacture those iPods, the sheer volume of units produced is what matters. Eventually, one could trade 1,000 iPods for 1,000 brooms, even if that seems inconceivable to you right now due to the disparity in their perceived value.

Is it the money used in trade that creates the problem?

Suppose we trade 1,000 iPods for 1,000 brooms using money as the medium.
The 1,000 iPods hold the same value as the 1,000 brooms.
However, for the money we utilized, we must pay interest to the entity that issued it to us.

From where does that interest come?

Once we pay that interest, we are left with enough money for only 990 brooms in the next round. In every subsequent round of trade, we find ourselves with less money.

Is that the point you are trying to make, Maria Thomas48?

Not quite. If you took out an external loan, then sure, that's how it works. You have a deficit because you're paying interest. But if you take a loan from a domestic bank, all that interest isn't pure profit for them. A chunk goes toward overhead—salaries, electricity, all that stuff—and it gets cycled back into the economy.

Banks and corporations aren't actually that different. Both want to make money and hit a profit margin where revenue exceeds expenses. The only real distinction is that banks can basically conjure money through the fractional reserve system. Honestly, if banks just operated using real banking with their own capital, I wouldn't have any issues with it.

The way it looks is $33 when a deposit is made, the bank issues an extra $167 and for $200 they collect 7% interest over a year, which is $42,000. At the same time, the saver who put that money down is getting 6% ($2.00). So, the bank's spread is 36% on the deposited cash. Now I have to ask: who wouldn't want to run a business with a 36% annual return on someone else's money?

Bank profits are clearly massive. Because of that, it's a total myth that a bank always has to offer a lower interest rate than what it charges. The rate offered to a depositor is just about attracting funds. And banks aren't trying to build a perpetual motion machine here. For example, if you take a loan at 7% and then put that money right back into the bank to earn a higher interest rate, you'd be winning. The "job" would essentially be taking loans just to park them in the bank for higher returns. It sounds like Eldorado. And it would work, provided there's eventually someone willing to actually take out a business loan and pay it back. Then everyone wins. Except for one thing. The person taking the loan has to dig up the cash to cover all those payouts . And some of those lenders will just want to hoard the cash instead of spending it.

It's the exact same thing, whether you look at how the fractional reserve system multiplies money or how businesses operate. They invest in costs and set higher prices with the goal of hitting a profit or building savings.

But generally speaking, all this profit that doesn't get spent creates a shortage of money in circulation. Generally, if the lender isn't a foreign bank, the money stays within the country, but it's effectively gone because someone is sitting on it as retained earnings.

So, it's pretty foolish to think that someone who profited and saved—and still has that money—is going to follow your advice and start spending their savings. There's no reason to. They continue creating profit through their actions without even thinking about it. That's how I'd think, anyway. Probably how you would too. It's just normal to work so you can save, not so you can create a loss.

If you look at the three types of deficits, you see that not everyone can profit simultaneously, and it's clear that new money needs to be introduced. It's proven that this shouldn't rely solely on credit. The other two options are foreign investment and non-credit government spending. Foreign investment implies that the invested capital eventually has to be paid back, which means an outflow of funds. Long-term, we either face being wiped out or we have to sabotage foreign investors so they can't turn a profit. That won't last long because word gets out, leaving non-credit issuance as our only escape from ruin. The third option is that foreign investment grows faster than it's repaid, indefinitely. I'd love to see that happen.

Take care.
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Robert Vaughn10, it’s obvious this system is backwards. Claiming that not everyone can turn a profit is simply false. How did my ancestors, who answered to no one, generate wealth? They earned an income and spent less than they made. Who is stopping people from living that way today? It becomes complicated once governments step in, spending money that isn't actually theirs. Then there is the banking factor—interest rates, which, as you rightly pointed out, allow them to profit by issuing non-existent money, collecting interest, and frequently gambling on speculation rather than actual production. Trying to fix all of this using your proposed long-term method isn't the answer. The solution isn't just printing more paper; that should be obvious. Progress will only happen when we prioritize labor and production over mere paperwork. That isn't happening now, which is why the whole system is heading toward self-destruction.
Nothing worth having comes easy, which is why I am proposing precious metals to accurately measure created value. Paper is a joke because it’s easily manipulated in any scenario, including yours. You need to account for that variable. While the math might hold up, the social component doesn't. Expecting people to ignore greed and forgo profit at the expense of others is, in my view, unrealistic. We need to eliminate that possibility, and precious metals are the only way to do it.

Mr. Mizuzul, tying our economy back to precious metals is nothing more than a regressive step backward. Who actually holds those reserves? The formula I provided is all that is required. Required money = dM.
dM = kM ; k = (supply - demand)/demand ; k = 5%, for instance.
The total volume of money is dictated by the interplay between aggregate supply and aggregate demand. Supply must exceed demand; if they sit at parity, then k equals zero, and no additional capital is necessary. One could even revert to a barter system. However, when supply outstrips demand, you derive k, and you act accordingly based on that value.
That is the entirety of it. Anything else is merely an unnecessary complication that ultimately reduces to this same principle.