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Hi Tim:
I will respond in maroon, and
if anything this thread is becoming colourful.
----- Original Message -----
Sent: Tuesday, May 03, 2005 6:29 AM
Subject: Re: [socialcredit] Social Credit
from First Principles &A+BandBankers...
Hi Jim,
I shall respond in green.
On 2/5/05 4:59 pm, "Jim" <jschroeder@shaw.ca>
wrote:
Hi Tim:
I will respond in
blue.
This example states that the
machinery has been built with retained earnings, not bank credit. We need to
explore further what would happen to that machinery and the costs. To say it
is a charge on further production is too nebulous and needs to be walked
through. I recognise that a gap exists when we are discussing financing via
retained earnings, but I want to walk this through as I have seen odd
expressions and handling of depreciation in the past which I as yet do not
agree with.
Say you depreciate the machinery. This is to truly
depreciate it by crediting depreciation and debiting the capital account so
the asset value of the company declines over time.
It is wise to
reflect depreciation amounts in your costs to build up sufficient retained
earnings so the machinery can be replaced without calling on additional
capital from further share issues (dilution). What happens in this case –
building up retained earnings - is that we repeat the same cycle but this
time the company is “saving up” to replace the machinery, not the thrifty
worker. Once the savings are complete and the machinery is replaced, the
money is spent on the machinery and yet again appears as wages. In this case
I believe it is still about retained earnings causing the gap.
In the
above walk through, as time marches on the assets of the company are steady
inasmuch as the capital equipment value decreases over time but cash
balances in retained earnings increase, so the share price holds steady.
Depreciation a/c does not get ‘cancelled’ by costs you recoup from sales AT
ALL, it is just a sink ledger to allow the books to balance as asset prices
drop.
But
the depreciation expense does show up in the price. It is added to the
cost of goods sold. It is a true cost that must be
recovered.
Depreciation is not a cost, it is about managing book value
i.e. how the resale value of the asset falls, not how long will the asset
last before replacement. A computer can last 5 years but will be worthless
for resale in 2. You depreciate it over 2 years. To remain competitive you
may wish to reflect the cost in production over 5 years. Depreciation is
already ‘expensed’ against the capital account – you cannot expense it
twice. Even if you reflect it over 2 years, you cease to reflect it for the
next 3...so lowering prices without this cost for those years, therefore not
absorbing any more purchasing power than was originally re-introduced during
the spending of the retained earnings.
Tim: I don't care the the
company actually purchased the asset at time 0 via retained earinings.
The fact is it does not show up in price until it is expensed. The
expense is meant to match the depreciation/wear of the asset with receipts
of revenue. However; the consumer pays that cost in price via a
depreciation expense.
In the first round of
production, the retained earnings are used to pay for capital equipment that
goes into the wages of the people who made the capital, so the "deficiency"
is gone, but shows up later as the capital is
depreciated.
Agreed in the first part, but not the second. The deficiency
that occurs later is because the company is retaining earnings, not
transferring monies to a depreciation account. That account is already
balanced by the fall in the capital asset
account.
I agree, so what are we arguing here. There is no doubt that
savings, or retained earnings are PART of the problem. I've just been
saying that the cost shows up in price via the depeciation expense. I
understand that the expense represents the fall in value of an asset, but
that fall in value is passed on to the consumer via price. And Social
Credit is concerned with the flow of incomes and
prices.
This is again about retained
earnings – people wanting a profit “we must have a profit, Mr Bumble”...
Profits are saved as retained earnings, or spent.
That is savings, or retained earnings, but the actual
deficiency doesn't show up until the physical capital is
depreciated.
Again, there is no
‘deficiency’ by the depreciation. No money disappears or is torn
up.
I never said there was money that disappears, or is torn up. The
money created two sets of costs, but disappeared in the first round of
production as it made its way back to the bank. Now there is another
set of costs lingering around for which there is no equivalent purchasing
power.
In the first cycle the retained earnings are spent on the asset
and so the deficiency caused by the retained earnings is undone. The people
who made it get the money and a lump of metal is now on the shop floor to
show for it. Over time the business will attempt to recoup the retained
earnings it spent on it. At the end of it all the company will again have
retained earnings to the value of the original machinery, there will be a
worthless worn out lump of metal on the shop floor and the economy will be
back where it was before they bought the machinery with a positive cash
balance that has drawn back into the company the money spent to buy the
machinery . No money has ‘disappeared’ into depreciation, it is sitting
there ONCE AGAIN in a tin in the company safe.
Ahh.........you're missing the
point. No money "disappears" from depreciation. I never said it
did. What happened is that the money created to clear the first set of
costs in the Douglas example was used to create a SECOND set of costs, which
show up as depreciation. The money needed to clear those costs
"disappeared" in the first round of production when all the money was
received back in price, and the bank loan was paid off. Now there is a
second cost that the physical asset is creating via depreciation, for which
there is no equivalent purchasing power. The firm will just borrow
enough money to pay the wages, salaries, and dividends in the second round
of production. It does not borrow the money necessary to cover the
cost of depreciation.
This is the problem in a
nutshell:
"The essential point is that when a given sum of money leaves the
consumer on its jouney back to the bank to the point of origin in the bank
it is on its way to extinction. If that extinction takes place before
the extinction of the price value created during its journey from the bank,
then each such operation produces a corresponding disequilibrium between
money and prices." (The Monopoly of Credit)
In the Douglas example, there are TWO sets of costs created from
savings, but the money can only cancel ONE. Therefore, there is a
second set of costs lingering around for which there is no equivalent
purchasing power to cancel that set of costs.
The issue here is “if they carry on
the business on orthodox lines”. If they do, the company would have to
handle somehow the concept of the $1000 house it has as an asset
all-of-a-sudden. Note that no loan or share issue exists in this example. If
the money has gone to another planet, then this house as appeared as if from
outer space!
Read the example again.
The loan appeared when the man purchased the house (with money from a
loan) from the people who built it. Now they are in possession of the
$1000, and he is possession of the house (and he has $1000 debt). He
now sells them back the house for $1000, so they are in possession of the
house, and he is possession of the $1000 (and the $1000 debt). He then
takes his money to mars, which is equivalent to paying back the debt with
his $1000. Now the workers depreciate the house in the cost of the
shoes without adding any equivalent purchasing power to cover that
depreciation expense. I will not comment on the other comments you
made about this example because it appears you missed the
loan.
I certainly did not miss the loan,
and I cannot see a) how you think I did, and b) why it matters one jot as
the loan no longer exists even before the first stitch is sewn.
Just
to confirm:
The loan appears when the man wants to buy the house.
Man $1000
Bank of Mars ($1000)
Man builds house,
spending the $1000 on builders wages.
Man $0 + House
Bank of Mars
($1000)
Builders $1000
Builders buy House
Man
$1000
Bank of Mars ($1000)
Builders $0 + House
Man pays off
loan
Man $0
Bank of Mars $0
Builders $0 + House.
What we
have now is a house with no loan or debt against it on earth OR
mars.
Now, the sleight of hand by Douglas appears to occur right
here, if only unwittingly.
The builders have a house. The company can
either
- rent it from the builders
- the builders can have the
company buy it from them using a bank loan
- the builders can gift it to
the company, which is what Douglas is actually suggesting in his
example.
The
builders are the company in this example. They begin to manufacture
shoes. The only money necessary to loan is that for their wages, which
also goes in to labour expense, and hence, the price of the shoes.
So lets
say they borrow $1000 for labour on the shoes, which goes to the workers for
their income. The cost of the shoes is $1000 + depreciation. The
discrepancy should be obvious?
Income =
$1000
Price =
$1000 + depreciation
price>income by the amount of
depreciation
If the builders do the latter, you still maintain that costs must
be reflected? This is the flaw.
Let us see...
House cost to
company $0
Depreciaiton $100pa over 10 years which YOU SAY is
reflected in prices by $100pa,
...meaning the company accumulates
$1000 in retained earnings.
If the house is bought with a
loan...
House cost to the company $1000
$1000 back in the economy
as builders spend it immediately.
Depreciation...$100pa over 10
years
Loan repayment costs reflected in price $100pa over 10
years
or are you suggesting $200pa costs to be reflected over 10
years?
I do not think you are suggesting $200, so why are you happy
with $100pa for a gifted house?
If you ARE suggesting $200, we
already have $1000 in the economy beforehand as the builders got it from the
sale of the house. The other $1000 still exists in the infamous tin in the
safe at the company, being retained earnings. This is where the gap exists,
NOT “depreciation”.
If the house was
actually financed using a bank loan, then we can discuss it too, but it will
be just like the house replacement via bank loan in version 1 – the loan
injects earnings up-front into the economy by paying the builders, whose
earnings are reclaimed over time IN THE FUTURE to pay off the loan,
remembering that purchasing power already exists in this case to pay for it,
as the loan has created that power by paying the builders in advance of the
costs being reclaimed to repay the loan.
This
is correct, but Douglas addresses this issue in "The Monopoly of Credit" as
follows:
"Now the first objection which is
commonly raised to this statement is that the payments in wages which are
made to the public for intermediate products which the public does not want
to buy and could not use, when added together, make up the necessary sum to
balance the B payments, so that the population can buy all the consumable
products. ...........
Consider the nature
of these B payments. They are repayments collected from the public of
purchasing power in respect of production not yet delivered to the public.
If the wage-earners in process "I" use their current month's, i.e.
May's, wages to buy their share of one current month's production of
consumable goods, they are using money distribute in respect of production
which will not appear as consumable goods till October. They
are in fact involuntarily reinvesting their money in industry, with
the result previously explained.........
To say that at soe time or other the money has been
distributed is in the nature of a general assertion which does not bear upon
the specific fact. The mill will never grind with water that has
passed, and unless it can be shown, as it certainly cannot be shown, that
all these sums distributed in respect of production of intermediate products
are actually saved up, not in the form of securities, but in the form of
actual purchasing power, we are obliged to assume what I believe to be true,
that the rate of flow of purchasing power derived from the normal and
theoretical operation of the existing price system is always less than that
of the generation of prices within the same period of time." (The
Monopoly of Credit)
I do not consider the
above as addressing the issue, rather, confusing it.
It's
really quite simple. You are correct in saying that the initial loan
causes inflation, and then when the item sells it's deflation, so in your
mind it all balances.
The
problem is that the initial loan, which goes to the workers etc. of the
capital goods is paid well in advance of the cost of that capital showing up
in a consumer good. If that money was saved up as purchasing power,
then the problem would disappear. However; that money is mostly
reinvested back in industry with the exact problem as described
above.
The money
has created more than one set of costs, but it can only cancel
one.
The simple
fact is that there is all sorts of physical capital creating price values in
$ for which there is no equivalent purchasing power to liquidate those price
value in $.
Douglas
says that if it wasn't for other intervening factors, depreciation alone
would have ground the economy to a halt.
What are
those factors? New loans for capital investment which are used to
clear the set of costs today, but don't show up as a cost until later (this
only goes to exacerbate the problem).
Increasing
debt - mortgaging the future to pay for today.
Exports>Imports which give away goods and service, and
import financial capital.
Bankruptcies and underutilized capacity as firms cannot meet
their expenses. etc. etc.
Take
care,
Jim
It does not address the simple fact that workers paid in May FOR
NEW PRODUCTION do not have equivalent productive capacity to purchase yet.
So inflation occurs (more money than goods) until October, when the goods do
finally appear and we get deflation caused by oversupply below May levels of
liquidity to balance the previous inflation. This appears to some people as
insufficient purchasing power if you ignore the earlier inflation, too much
purchasing power, giving nice profits to the producers and retailers, but
not a bean for the production worker. That is where the money is – lurking
in the increased profits of company owners.
As bank credit appears in the example to only cause inflation
– people being paid before their work is sold – then defation, if the bank
credit is totally ‘cancelled’ somehow by price discount (not convinced this
is done anywhere near totally) , then you just have inflation, no deflation,
inflation, no deflation on and on
I think
you are confused of this process which Bill has also elaborated on.
The price discount would be at the point of retail. Consumers
only purchase consumer goods. It does not matter what "cost" the
intermediary goods are pushing through, because at the point of retail, the
cost is diminished by a price rebate. Costs actually decrease to the
consumer, and the firm is credited the difference, thus, not effecting their
profit margin.
What you say here
really does need walking through, as your statement is simplistic (no
offence, just that I mean it has moved beyond a simplification).
In
addition to the above, I do think it is better to first step through the
point about people being paid before their work is sold and causing
inflation BEFORE we discuss the
discount.
rgds
Tim
Take
care,
Jim
snipped
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