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Artie_Lees
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RonPaulConservative
Con (against)
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Why Interest Rates are Important but not for the Reasons Commonly Assumed

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Voting Style: Open Point System: 7 Point
Started: 11/27/2016 Category: Economics
Updated: 1 week ago Status: Post Voting Period
Viewed: 102 times Debate No: 97391
Debate Rounds (3)
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Artie_Lees

Pro

I am postulating a new theory that money supply is directly determined by retail interest rates. The mechanism relates to how loans are paid back in a fractional banking system. The nature of money creation under a fractional system is well documented and I will not elaborate further except to emphasise that a high proportion of any loan is 'bankers money' that in effect has been created out of thin air. The interesting point comes as the loan is paid off and this best illustrated by a focusing on a single loan. A loan repayment is made up of two elements, the capital and interest such that when the loan is completely paid off the 'bankers money' will have been cancelled out and one would reasonably assume that the total volume of money in the economy would return to the amount before the loan was made But this to forget the interest payments that have also been paid and added to the bank's balance sheets by the same slight of accounting hand that allowed fractional banking in the first place. So once the loan has been paid the total volume of money has increased by the interest payments and an analysis of official data shows this link.

This small tweak to money creation has profound consequences on current economic theory, especially the established idea of low interest rate leading to high growth with low inflation and higher interest rates curbing both growth and inflation. In fact the higher lending rate the more money is created. This goes to explain why most of the western economies have seen very low growth since the 2008 crisis and at the other extreme why the UK's 1980 experiment in monetarism ended in failure. I explore the full consequences of this in my own book An Interesting Theory -Why Interest Rates are Important but not for the Reasons Commonly Assumed which can be down loaded from the Smashwords web site- https://www.smashwords.com... . As with these things you do have to register but you will be able to get the book free before the 1st January 2017 by using the code TU92S.
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I would like to hear comment especially if is novel
RonPaulConservative

Con

I believe this is called advertising on a debate, but regardless money creation does not create economic growth. If our money supply increased, our farms would grow just as much food, our factories would produce just as much stuff, and our power plants would generate just as much electricity. Inflation and deflation neither create not destroy wealth, it is merely transformed, in deflation from those with the goods and services to those who have the currency, and in inflation from those who have the currency to those who are creating the currency.
Debate Round No. 1
Artie_Lees

Pro

The point being made was about the mechanism for money creation and this is regardless of whether it results in growth or inflation. Note I blamed it for the high inflation of the 1980s which affected the UK and the US economies as well as the low growth we are experiencing now. Why it should results in one or the other is a little more complex to answer but can essentially be put down to demand within an economy.

To address the point you want to make about growth and money supply, analysis of official data shows a link between the two. The mechanism I believe lies in that well-worn description of inflation where it is described as too much money chasing too few goods. Another way is to look at it as the balance between the volume of goods and the volume of money available. As already stated inflation may result when there is too much money but what happens if there are too many goods? Deflation. This may be beneficial if results from a new process or currency fluctuations but it allows little room for a new product or service. In the stable example you give the money circulates between the factories and farms would end up covering little more than replacing the worn out goods or the basics, as by the terms of inflation described above any significant surplus would lead to inflation. Of course there will be some savings but any factory producing new goods would service a very small part of the population leading to low linear growth. More akin to a soviet system rather than the exponential growth we have recently seen in either western or Asian economies. Put another way if deflation is the result of increasing supply where is the incentive to grow a business if it results in no significant increase in revenue.

The example given does not even take into account of the complexities of a modern economy. We may have a limit to the amount of stuff we want, although fashion mitigates this but when it comes to services which make up 70% of many western economies the sky is the limit. Given the chance who would not want more holidays, more nights out, more experiences and because of this the growth of the service sectors is very responsive to more money.
RonPaulConservative

Con

"If deflation is the result of increasing supply where is the incentive to grow a business if it results in no significant increase in revenue."

If the money supply stays the same but prices deflate, then there is plenty incentive to grow a business as your revenue does increase. Nominally it stays the same, but really that company would have earned more money. No one cares about their nominal worth in Yen, Yuan, Pesos, or Dollars, but the spending power.
Debate Round No. 2
Artie_Lees

Pro

So growth only comes from deflation? It doesn't seem to be working in Japan or Europe at the moment which by the way are experimenting with negative interest rates.
RonPaulConservative

Con

I don't know where you got that from, growth comes from savings and investment; deflation, when the money supply remains stable, indicates economic growth. Take Switzerland for example; their money deflated by 2% this year, and their economy grew by 2% also! This deflation was caused by economic growth.
Debate Round No. 3
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