Appendix A.
This example is drawn and expanded from Bernard Lietaer's book, "The Future of Money" and from Thomas Greco's book "Money".The model:
Put 21 persons in the room, and designate one of them as the "Bank". This leaves one banker and twenty would-be debtors. Now, have each 'debtor' post an asset in the form of collateral, such as a jacket, if they want to use money to overcome the main problem of barter - the double coincidence of wants. We issue each person $100 in currency, or $2,000 in total to conduct transactions. This amount is called "the cost of not bartering", which is the opportunity cost of pledging the title of one's coat. Furthermore, require that, in one year's time, each 'debtor' repay a sum of $105. This means that $2,000 is created, but $2,100 is required to repay the loans.
For analytical purposes, we need to make two assumptions: 1) no new loans are created during this period and 2) no persons enter or exit the room for the duration of the game.
Under these assumptions, there are three outcomes:
A. Each person is able to secure $100 and fails to repay the loan. They must borrow at least $5 in the next round.
B. 19 persons repay $105 each and 1 person goes fully bankrupt (a balance of 0 funds at the end).
C. Varying combinations of savers, repayments, new lenders and bankruptcies.
A. Savers have a positive balance at the end of the game after repaying their loans.
B. Repayments have a zero balance after repaying their loans.
C. New lenders are able to repay an amount less than, but not equal to the repayment Amount of $105. If they have assets left over to pledge for new funds, they escape bankruptcy.
D. Bankruptcies cannot repay an amount equal to $105 (like New Lenders), but, since they do not have assets to pledge, they cannot receive new loans for the next game. The cost of their bankruptcy is spread over to the next round in the form of a risk premium, or the expected loss the bank expects to incur. Their loss is spread to the players in the next period in the form of a higher interest rate. Savers are allowed to buy up collateral for whatever price they demand, which will usually be low.
What does this mean? This means that we have a game where there are winners at the expense of losers. Money created in this fashion induces structural competition, as it requires all the players to find a way to obtain money that does not exist. It has artificially introduced competition due to the fact that money is artificially scarce: the money to repay the loans does not exist. In this framework, players no longer 'produce' goods; instead, they arrange capital, labour and resources in a fashion that maximizes exchange value. They do this by cutting costs, offering lower prices to increase sales, securing monopolies to obtain profits, etc.
What happens if we relax the assumptions? In a multi-period game, new loans are issued: however, as loans are repaid, the means of repayment (the money supply) is shrinking. In order for loans to be continually repaid, new players must enter the game and obtain loans to participate (bypass bartering). If we apply this to international trade, nations, who cannot (usually) go bankrupt, fall roughly into the four categories above. This is the perspective of 'realist' analysts, who see international trade as a zero-sum game: where one country wins (export surplus) another loses (trade deficit). Neoliberal analysts choose to focus on expanding the market (allowing more people into the room and issuing more loans), which makes it difficult to correspond one nation's loss with another's gain. This is why neoliberals see the game as a positive sum game (everyone benefits), but this only works if the market is growing. If the capacity to repay the debt exceeds the interest charged, (if growth rates exceed interest rates, which is debateable) then the game can continue indefinitely. 43 However, it should be noted that as loans are repaid faster than debt is issued (production is expanding faster than debt) the dollars needed to repay the loans are shrinking also, bringing production to a halt.
Be Sure to Continue to Page 12 of "E Pluribus Unum: Dollar Hegemony and Money Creation in IPE".
