Banking Reform

Thomas Piketty’s book Capital in the Twenty-First Century has been getting a lot of attention lately. I can easily to add it to the stack of books that I want to read. Actually reading it: maybe someday! Somehow a serious book like that takes me a month. There are just more books to read than months to read them in!

From the various reviews and discussion I have seen, the basic points of the book seem to be: when the rate of return on investments is larger than the rate of growth of the economy, wealth disparity grows, eventually to problematic levels; an effective method to address this problem is by taxing wealth.

I think the diagnosis is reasonably accurate. While there are also other mechanisms by which wealth and power amplify themselves, this financial one is surely very important. But I am not enthusiastic about his proposed therapy. It treats the symptoms without getting to the cause of the malfunction. On top of that, such tax revenue too easily becomes another concentration of wealth and a target for further corruption.

The cause of the problem is that returns are not tied to growth. This is due to the way financing is structured. The way to fix the problem is then obvious: restructure financing! Of course this is not so easy. First, one needs to design some alternative structure. Then there needs to be some sort of transition to take us from today’s structures to tomorrow's. And finally all this needs to be presented in a way that the various parties involved can agree to enact the plan. These are all daunting challenges. Into the fray!

Don’t start punishing the rich; instead, stop punishing the poor! This is my proposal in a nutshell. Perhaps this medicine will bitter for the wealthy, but not as bitter as the alternatives that might otherwise be forced on them! To some degree the pain can be lessened by a gradual introduction of new structures. New structures can be introduced alongside the existing old structures. Whatever kinks appear can be worked out over time. New financial contracts can start shifting over to the new structure. Most contracts that use the old structures can just expire in their normal time frame. Some long term contracts may need to be translated into new structures, but by then the new structures should be well established and well understood so the cost should not be prohibitive.

The best way to build new structures is to adapt existing structures. We already have many different financial structures: means by which one person can use resources owned by another and share the benefits yielded by that usage. Fred can borrow $100 from Joe, enjoy the use of that money, and then pay Joe back $110 a year later, rewarding Joe with a share of that enjoyment. Alice can grow vegetables in Mary’s plot, and at harvest time share the bounty with Mary. Bill can fund an expansion of Sam’s workshop, taking part ownership in the business, and with that a share in the profits and in the decision-making process.

Two classical financial structures are stocks and bonds. They are both ways that someone with some money to spare can make that money available for someone else to use, in exchange for a share of the benefits gained by that use. The return on a stock investment is often quite uncertain. It can come in the form of dividends or by the capital gains accrued when the stock is later sold at a higher price. Either way, there is quite a bit of administrative overhead involved, in establishing dividends or a market for stock trading. A bond is much simpler. It is basically a loan but without a bank playing an intermediary role. A bond contract generally specifies a definite repayment plan, like a loan. Bonds can be traded too. They differ from stocks in several ways: they have a fixed time span, the dividend rate is fixed, and they don’t include decision-making power.

A typical bank loan is very much like a bond. My proposal is that bank loans should look more like stocks. The dividend rate should not be fixed, but coupled to the actual performance of the borrower. What is needed is some standardized structure in banking laws and regulations to cut the administrative overhead to a bare minimum, so this can be managed effectively in the banker-borrower relationship.

Similarly, the relationship between the bank and the depositor needs some adjustment. The notion of risk-free returns is an illusion that is too expensive to maintain. A bank’s business should look like a collection of mutual bond funds. Depositors become instead purchasers of shares in these funds.

The core principle I am proposing here is that loans be tied to increased income. In other words, loans for consumption would not have a place in the laws and regulations for banking. If you need a car to get to work, then it makes good sense for a bank to lend that money. If you want a bigger car because it is fun to drive, you’ll have to save your money up first!

Loan repayment should be tied to income. Just like corporations with publicly traded stock must publish financial statements, so must bank borrowers. Since most people file income tax returns already, perhaps the easiest way to minimize administrative costs is to integrate income tax accounting with bank loan accounting. These systems are already closely coupled, so it shouldn’t be too impractical.

In general, a person will have several outstanding loans. So the core question is: given a particular level of income, how should dividend payments be computed? The idea is that each loan includes in its terms a formula for computing dividends, taking into account both income and pre-existing loans, taxes, etc. For example, a loan’s payment could be determined by a formula like: given the borrower’s total gross income, subtract all taxes due and payments from all earlier loans; subtract also a standard inflation-corrected minimum cost of living for the borrower and dependents; from what remains, the dividend due is 20%. The terms should also include some time limit.

Of course the dividend rate depends most fundamentally on the amount borrowed, obligations from earlier loans, and expected income. There are lots of tricky corners. A car loan might be negotiated on the basis of an existing house loan. Perhaps the borrower needs to move because of a job relocation. Paying off the existing house loan and negotiating a new house loan could change the order of loans and create havoc in the simple structure I have outlined. Perhaps the existing house loan can simply be shifted to a new house. Tying the surety of repayment to verifiable income, rather than the threat of foreclosure, should clear the way for this process. In any case, it is not fair to lenders if later loans can reduce the return that had been negotiated but also not fair to borrowers if repayment of earlier loans unduly increases dividend payments to later loans. To develop standardized structures that can navigate these passages is not trivial but surely possible, especially with an incremental approach.

Financial regulations are obviously vast and complex. My main point is that it is their structure that decouples returns from growth and that serves to amplify the wealth of the wealthy and the poverty of the poor. Rather than tacking on new structures to counteract this amplifying process, quite practical structures are possible that simply avoid this bias. Rather than stealing from the rich, stop stealing from the poor! The ruin of people’s lives due to snowballing debt is just as destructive to the healthy functioning of society as burdensome taxation that suffocates success. We can build financial structures that tie the success of lenders to the success of borrowers, so that free market capitalism promotes productive investment and discourages exploitation and abuse.

Traps

A fascinating puzzle came up yesterday in James Howard Kunstler’s talk at the Woodstock Writers Festival. Sometimes we can move ourselves from a comfortable situation to an uncomfortable situation but can’t manage to move back to the comfortable situation. Moving from situation A to situation B can be a lot easier than moving from situation B back to situation A. How does this directionality arise?

It ought to be possible to study this from a systems theory perspective, to look at various concrete examples and then abstract the general patterns involved. I propose calling the broad class of patterns traps. A trap is a system of states and actions where moving from happy state A to unhappy state B is much easier than moving from B back to A.

One general feature of traps must be that, to quote Mr. Kunstler, the move from A to B “seemed like a good idea at the time.” This is why a systems-theoretic analysis of traps is important. Falling into a trap is easy. To avoid falling into traps, we need to cultivate an awareness of what traps look like. The best way to escape a trap is not to fall into it in the first place.

The first step of this project is to compile a catalog of realistic traps, from which we might be able to abstract some general patterns.

Time Lock

A simple trap is where external conditions change so that the path you took simply disappears. For example, falling rock could seal off a mine passage.

Starvation

To cross a desert one must take care to pack enough supplies to make it across. There is a point of no return where you don’t have enough supplies to get back where you started from. If you don’t have the resources to get to a resupply point, you’re stuck.

Slippery Slope

Sometimes moving from point A to point B doesn’t require any effort at all, but moving in the other direction is impossible. By the time you realize you’re moving, it’s too late to do anything about it.

The Ratchet

Many doors have some kind of asymmetrical triangular latch. When the door closes, a gradual ramp on the latch pushes the latch into a free position where the door movement is unimpeded. Then when the door is fully shut, the latch snaps closed. The ramp on the other side of the latch is vertical or perhaps even has a negative slope. Trying to push the door open won’t move that latch. Shutting the door is easy, but opening the door is difficult.

It seems that this pattern is based on inelastic collisions. The smooth ramp allows energy to be put into the latch, moving it to the free state. Then when the latch snaps shut, that energy is dissipated. The sharp reverse side of the ratchet doesn’t provide a way for energy to be put back into the latch.

Burning Bridges

It is possible to move forward in a way that actually destroys the path backwards. For example, one might be driving across a desert. Starvation, the previous pattern, is just running out of gas. But if one is somehow actively destroying the vehicle along the way, that adds an extra feature. Jettisoning supplies or equipment would be an example. Stepping on a mine would be another example. The damage done makes getting back impossible.

Getting Lost

Sometimes the path back to a comfortable state is easy enough but there are very many paths available and most of them don’t lead back. The problem is to figure out which is the right path to take and there just aren’t any clues.

Sunk Costs

An inability to find the path back to a comfortable state can arise because of perceptual distortions that arose as the path out of comfort was traversed. So, for example, each step along a path might strengthen one’s commitment to the correctness of the path. To turn around would be to admit one’s error, which could be too painfully shameful or embarrassing.

Rise and Fall

The varying prosperity of a nation or a civilization is a matter of endless speculation. Every culture seems to have myths about origins and surely many provide a picture of their destiny. One particular class of modern prediction came into prominence in the early nineteenth century with the writings of Thomas Malthus, who foresaw that an ever growing population could not be supported with finite resources. Two hundred years later the human population of our planet continues to rise, so one does find some space for questioning the wisdom of Malthus. More recently, books like The Limits to Growth, by Meadows et al., have tried to sketch the most likely trajectories of our present world using more quantitative methods. Certainly they don’t offer much precision with their wide range of scenarios.

Probably the most notably success in forecasting the end of a period of growth was that of M. King Hubbert, who predicted the 1972 peak in U.S. petroleum production some ten years beforehand. Of course petroleum is not the nation and the nation is not the world, but the U.S.A. was the leading petroleum producer in the world for decades and petroleum is a key resource. The present situation with global petroleum production is a bit difficult to read. Part of the problem is the definition of petroleum. For example, the tar sands being mined in Alberta are surely quite a different sort of material than the classic gushers of the early Texas days, but all the same the end product is automotive fuel etc. so it is not so clear that the distinction makes a difference.

This problem with definitions is hardly limited to fossil fuel resources. A similar problem comes up in economics, when trying to establish a consumer price index. It is easy enough to assemble a shopping basket of typical consumer goods and to tally its price. But the typical shopping basket of one decade is not the same as that of the prior decade, and once a hundred years have passed the baskets have drifted into mutual unrecognizability. If passage on a sailing ship from Boston to Philadelphia cost 10 dollars 100 years ago (I am just guessing here) and today airfare from New York to London is $1200, then how can we compare the purchasing power of a dollar 100 years ago to that of today?

It is not utterly unreasonable to invent some scheme for answering such questions, but it will necessarily be an invention rather than a discovery. We might be able to gather enough data to measure with reasonable accuracy the median income of families 100 years ago and families today. Does the median family of today live better than the median family of 100 years ago? No amount of data gathering can answer that question!

The immediate impetus to my thoughts here was an essay by James Howard Kunstler, “Are You Crazy To Continue Believing In Collapse? That it hasn't happened yet doesn't mean you're wrong.” My reaction to that title is perplexity, because, from my perspective, the collapse is well underway. When did it start is hard to pinpoint. World War 1? The peak of per capita petroleum production in the late 1970s? The peak of conventional petroleum production in 2005?

My perspective is hardly unique to me, of course. For example, long ago Sun Ra taught us, “It’s After the End of the World, Don’t You Know That Yet?”

But I don’t claim that my perspective is accurate. I don’t really think any sort of real accuracy is possible. Is the median family prosperity greater today than it was 50 years ago, is it greater today than it will be 50 years in the future? The easy challenge is the quantitative one. But how all the numbers should be interpreted as quality of life or standard of living or prosperity, that is not a question with a meaningful answer. It’s not just that the ways of living 50 years ago are not available to us today, they don’t even make sense. Of course 50 years is not really over the horizon. Extend the range to 200 or 300 years and the impossibility of comparison is plain. Here by comparison I mean e.g. to determine in some absolute objective fashion that one way of living is superior or inferior to the other. Comparison is certainly possible in terms of a thousand details. It’s the summarization of these that necessarily involves value-based judgments that can hardly take any stand outside the situations being judged. Most likely few modern people would choose to live back in the eighteenth century, if they understood what that choice really meant. But likely, too, that few people of the eighteenth century would choose to live in the twenty first.

Even though we are presented with a steady stream of advances in every facet of life, still it can be that in fact we are already well into the process of collapse. To illustrate the real possibility of such a paradoxical combination, I offer this audio analogy.

The Mind in Science

The last ten years or so have seen a variety of efforts by scientists to forge at least a preliminary survey of a realm both intimate and elusive, the mind. Of course the study of the mind is hardly a new thing, but results haven’t seemed so very solid. Perhaps now, though, with the convergence of sophisticated computational models, non-invasive dynamic physiological measurements, etc., perhaps finally now we have built up a critical mass of tools and can make substantial headway.

At the outset though there is a semantic difficulty. For each of us, there is one mind that we have a special relationship with, viz. our own mind. That I have a mind is axiomatic, or even more fundamental than axiomatic. Without a mind I could not assert any axioms. The minds of others, those are much more problematic. It seems natural enough to assert that other people have minds too. That seems exactly axiomatic, as basic as 1+1=2. But what other people have minds exactly? Does a person in a coma have a mind? Do dolphins have minds? It is a bit difficult to be too confident about the exact scope of this axiom when looking back in history one can see quite dramatic shifts.

No doubt the studies of the neurophysiology of feline retinas etc. will continue ever more fruitfully. Is the study of neurophysiology the same as the study of the mind? Is the study of logic the same as the study of the mind? Perhaps it is a bit like gravity. Neurophysiology could be like the study of various masses, the sources of gravitational fields, while logic is like the study of the gravitational fields themselves, the effects produced by the masses. The curious thing, though, is that none of these touch the primary fact of mind, the mind that we know beyond all hypothesizing, our own mind.

A different approach to this study would be to recognize that mind is in fact the subject that experiences the world, rather than any particular object of experience. It seems rather absurd to imagine some scientist in a laboratory poring over megabytes of measurements and computations and analyses and then exclaiming, “Aha! There it is! The object we have been searching for! The mind!” Certainly it can and does happen that new understandings arise of the way perceptions and actions are linked in animals, including humans. But somehow… each of us knows without question that… perhaps everyone else in the world is a very sophisticated robot, but I myself am not! I cannot prove it to you any more than you can prove it to me, but I know it for myself just as you know it for yourself. And this fact, not a fact of experience but the very fact of experiencing itself, this is the mind both intimate and elusive, that remains untouched as an object of research. It is, instead, always the subject that performs research!

But this perspective, while it does close down one avenue of investigation, actually opens up a new avenue. And, just as the development of new sophisticated computational and neurophysiological instruments held out great promise, perhaps this alternate avenue is also timely in a sort of critical accumulation way.

Start by noticing that the scientific mind is a special sort of mind. A scientific engagement with the world has special characteristics, those that make it scientific. Perhaps these can be symbolized by the scientist’s notebook. Scientifically: what was not recorded, did not happen. And a scientist’s notebook is not a private diary. Quite the opposite: a scientific notebook is a public document. This is quite remarkable! It turns out that the scientific mind is in fact a mind which is most amenable to study!

One way to work with this characteristic is from a social science perspective. A scientist’s notebook is like recording of phone conversations between politicians or like the hunting rituals of hunter-gatherer tribesmen. But this again loses the quality of mind as the subject that experiences. It just turns scientists into objects. That may be a fertile line of research, but not the one being pursued here.

The scientific mind is not merely one that records actions and observations. The scientific mind investigates some phenomena, organizing observations into hypothetical patterns and then acting to extend the range of experience to test the validity of those hypotheses. Surely this sort of learning by trial and error is common to every sort of mind, but the scientific mind is particularly self-conscious about methodology, about possible sources of error and strategies to uncover and correct those errors.

Nowadays science has become extremely powerful in our world. More and more of our basic way of living is structured by scientific hypotheses that have become institutionalized and industrialized. With the stakes so high, we have begun to see ever more clearly one of the central features of the mind, the connection between desire and delusion. We see what we want to see. Exactly how the deliberate methodology of scientific investigation falls prey to this ancient pattern…. right there is the golden opportunity of our time! The scientific mind, being deliberate and public, is peculiarly amenable to observation and analysis. The crucial role of science exposes the potential for bias and makes it urgent that we understand that bias. This is the critical accumulation that makes the investigation of the mind in science possible and necessary at the same time.

The usual approach to doing science is to assume that the world works in a particular way and the purpose of a scientific investigation is to discover what that way is. This study of mind takes a different perspective. A scientific investigation of some facet of the world will use some deliberate methodology to engage with the world and produce results. The results are a joint function of the world and the methodology, i.e. the world and the scientific mind. To study the mind is to see how the results of an investigation depend on both the world and the method of investigation. Perhaps we could call this “Covariant Science”, since both the world and the mind are in play.

Covariant science opens up multiple frontiers. When we are only interesting in discovering how the world works, it makes sense to use the most powerful instruments and exhaustive methodology possible. This approach should give the most accurate and precise results. But if we are interested in how results vary across different methodologies, then we need to explore a wide range of approaches. When doing science requires powerful instruments, only institutions with large budgets can engage in science. Covariant science, in contrast, makes room for even the most economical science. How does budget affect results? That is a covariant investigation!

Science has become restricted to a professional elite, supported by powerful institutions. This has not only introduced a powerful source of bias, it has also seeded a widening distrust of scientific results. It just won’t work for this elite to insist with ever greater vehemence, “Trust us!” Concentrations of power bring corruption, a pattern that science is not immune from. The solution to corruption is always the diffusion of power. Science, if it is to retain its original courage and vitality, speaking truth without regard to established dogma, must work to diffuse its power, must work constantly to fight that self-reinforcing cycle of power and corruption, desire and delusion.

Covariant science has the potential to be one powerful method to dissipating the forces that escalate elitism. If the quest shifts from discovering the ultimate structure of reality at any cost, to exploring the mutual relationship between appearances and the mind that perceives them, the exploration becomes fruitful at any scale, on any budget. The question is not so much, “How many stars does the globular cluster of the Pleiades hold?” but instead, “How many stars can I see in the Pleiades, as a function of my viewing protocol?” Look directly at the cluster with the naked eye, then look again but indirectly, off a bit to the side! Look in town, then look again from a meadow away from town lights. Look when the moon is out, look when the moon is hidden! What a vast world we live in!

Science and Reliability

Often enough, individuals and groups face decisions with grave consequences. An individual might be suffering from some challenging physical symptoms where drastic medical procedures are called for, and needs to decide which procedure is most likely to have the best outcome. The residents of a large region might be weighing the option of keeping a dam in placing or tearing it down. The decision might still be difficult even with perfect foreknowledge of the consequences of each option, but in ignorance of the consequences the decision is blind and the worst option becomes all too likely.

Typically each option will come with advocates who predict excellent outcomes for the option they espouse, while the advocates of other options will disagree with those predictions. Such disagreement is quite common. We need ways to evaluate predictions, to evaluate the arguments used to justify such predictions. We might want to compare the strengths of two opposing arguments. But if we can find ways to evaluate the strength of a single argument, then those can be used as grounds for comparisons.

In general an argument that action A will have consequence B should be based on prior experience with similar situations and similar actions. So the strength of the argument is based on the extent of such prior experience and how one builds the bridge from those past situations to the situation at hand.

Nowadays we have a marvelous systematic and institutionalized way of finding patterns that let us predict the consequences of actions: science. Science effectively addresses both these requirements of strong predictions. Science deliberately works to extend the range of experience, constantly exploring new realms. Science also constantly refines the theoretical connections that organize this mass of experience into a coherent framework. Science is a process that constantly improves the reliability of our knowledge of the world.

A particular prediction about the consequences of some action might well be characterized as scientific, but this does not imply that the prediction is particularly reliable, or any more reliable than some less scientific prediction.

Suppose, for example, that I would like to prepare dinner for a friend. Perhaps I have cooked a particular recipe for my friend on several prior occasions, with uniformly positive results. If I decide to cook this recipe again, it’s reasonable to expect similar positive results. Such a strategy could hardly be called scientific, given that it has probably been applied successfully for millennia, long before folks like Galileo and Newton who ushered in the Scientific Revolution.

On the other hand, suppose I find a scientific journal at the library and read a report that a common chemical constituent of many positively received meals is X. Supposing I have access to a bottle of X, I decide to reproduce the experimental procedures followed in the report and perhaps add chemical X to some plain biscuits and then serve these to my friend. I think it is not too unreasonable to claim that, however scientific this might seem, it is not a very reliable way to prepare a pleasing meal.

While science is, indeed, a process that improves the reliability of our knowledge of the world, for a prediction to be scientific is not the same as for it to be reliable. Even when a scientific prediction is the most reliable one we have, it still might not be very reliable. Because science is always extending the frontiers of our experience, there are regions in which we have very little experience. In those regions, scientific predictions may be the best ones we have, but they may still be very unreliable, i.e. the probability may be very high that the predictive framework will soon be revised as more experience is gathered.

One the other hand, most human experience is a natural evolution of the very complex interwoven network of human society, our local ecology, climate, etc. Doing science requires some level of repeatability, regularity, control, and precision. Much of our experience does not lend itself well at all to scientific analysis. Humans survived quite successfully for a hundred thousand years or more without any science to guide their actions, and other animals continue to live without science. Our ways of deciding how to act have evolved along with all the other facets of our being, and through that evolution have become well enough adapted to our environment that they are reasonably reliable much of the time. When we are acting in situations that are very much like those we and our forebearers have commonly experienced, our common sense pre-scientific predictions will generally be quite reliable.

Learning to Fly

Buddhist practice is like a three legged stool. Three legs support the transformation of our minds, from their entrapment in craving and delusion, to the wisdom and compassion of perfect freedom. These supports are our practices of view, meditation, and action.

Similar systems of cultivation underlie many programs that enhance our abilities to engage effectively with the world. Science consists of theory, experiment, and application. Science, though, is generally more of a collective enterprise.

Consider the training of the pilot of a sophisticated modern aircraft. Certainly a prospective pilot must study the operating instructions for the aircraft, to understand the functions of the various controls and to understand how the aircraft is likely to respond under various conditions. This theoretical understanding is far from sufficient, of course, for becoming a qualified pilot. Nowadays no pilot goes in one step from book knowledge to actual flight. Flight simulation has become an essential training tool. A novice pilot can gain considerable experience in the simulator, tuning their responses to situations and their understanding of how those responses will affect the direction in which the situation will evolve. Not only does the simulator avoid the enormous costs in lives and equipment that can result from pilot errors, but the simulator can also bring up situations that are gradually more challenging. A pilot can practice the difficult maneuvers required to respond to very rare situations that they will likely never encounter. Hundreds of lives can be saved, though, when such challenges are skillfully met.

These three modes of practice do not simply follow a sequence that starts with view, then moves to meditation, and finally blossoms in action. Experienced pilots regularly return to the simulator to tune their effectiveness. Situations come up that take them back to the operating instructions, to look for better ways to work with the aircraft controls.

It is a core principle of Buddhism that our enemies are like a treasure because they give us opportunities to practice patience. The highest goal in Buddhism is to dedicate ourselves to benefiting others. Is it not then contradictory to guide practitioners to meditation and retreat? In retreat we have removed ourselves from direct engagement with others. We turn inwards instead. Does that mean that we are to let go of our goal of benefiting others?

The analogy with an airline pilot should help clarify the superficial contradiction. If an airline pilot wishes to transport passengers, wouldn’t using a flight simulator contradict that intention? Of course not! Training in a flight simulator is what gives a pilot the ability to transport passengers! Then again, it is not sufficient simply to sit in the flight simulator and play around with the controls in an undisciplined fashion. Merely spending time in a flight simulator is not sufficient. Similarly, just spending time on one’s meditation cushion or in a cave up on the side of a mountain, these are no guarantee of an enhanced ability to benefit beings. But, properly applied, meditation and flight simulators can be invaluable training tools.

Interest, Growth, and Power

Compounding interest has the peculiar character of exponential growth that doesn’t fit well on a planet that has been steadily orbiting the same sun for billions of years. Since any sort of interest or return on investment should generally be capable of re-investment, which implies compounding, it seems logically that profit or return on investment or interest payments can only work in a world where unbounded growth is possible, i.e. some other world than the one we live in.

This understanding of interest and compounding, however, creates an illusory problem at the same time that it hides a real problem. Since finance and economics are such important mechanisms for structuring the way we live, it is worth looking carefully at these fundamentals.

A monetary system can be modeled quite simply. Each person has an account, a single number, their net monetary worth. Some people have positive net worth, other people have negative net worth. Perhaps Fred has a net worth of +10, Sally has +2, and Bill has -12. Adding up these three numbers, the total is zero. The net worth totaled across all people is always exactly zero.

Day to day transactions happen when people exchange goods or services for money. Bill might cut Sally’s hair, in exchange for which Sally pays Bill 3 monetary units. That payment moves from Sally’s account to Bill’s account. So now Sally’s net worth is -1, Bill’s is -9, and Fred’s remains at +10.

Interest payments occur at regular intervals. At the end of each interval, each person’s account is multiplied by some number. Let’s use an interest rate of 1% per time unit. Then when interest payments are made, Fred will have 10.1, Sally -1.01, and Bill -9.09. The sum of these three numbers remains zero.

If there are no other transactions, then interest will simply amplify the differences in net worth more and more over time. But people with negative net worth can also provide goods and services for those with positive net worth, in exchange for money. These exchanges reduce the differences in net worth. The combination of these two effects determines how account balances actually evolve.

It should be clear from this simple model that interest payments are entirely compatible with a steady state or even a shrinking economy. All that is required is that sufficient transactions occur that move money from those with large positive net worth to those with large negative net worth to counter the amplifying effect of interest payments.

This simple observation exposes the real problem with interest payments. What if these exchanges fail to occur? How might they fail to occur? To whose advantage would it be if they failed to occur? Could those who benefit by such failure influence affairs in a way to increase the likelihood of that failure? Could that chain, failure – benefit – influence – failure, then feed on itself to amplify the imbalances?

It is not the simple mathematics of interest payments that leads to accelerating imbalance. Putting the blame in the wrong place means that the blame is not being put in the right place!

It is important to see how money is power, and also how debt is powerlessness. Money gives a person options. Debt reduces a person’s options. The more options a person has, the more they can optimize their behavior and enhance their productivity, their profitability. The fewer options a person has, the less opportunity they have to find ways to be productive and to earn a profit. This connection between money and power is not a property of the simple monetary model presented above. What real monetary systems generally add are rules that restrict transactions for people with large negative balances.

The reality of the world is of course vastly more complex than any economic model. How are prices determined? If the power conferred by money gives a person influence over pricing, this can enable them to acquire more goods at lower prices, further concentrating wealth.