Mutual Credit and Inflation
One of the key issues that is still under debate in the Mutual Credit community is the management of the money supply. Are rising prices a threat with Mutual Credit?
In the discussion on the JAK Bank an interesting point was made by John Turmel and Larry:
“John Turmel: Yes, how stupid to limit your chips in your game to old chips saved when you could have brand-new interest-free zero-reserve poker chips. How stupid to run a piggy bank dependent on finding scarce funds for the loans when you could run a casino-style bank dependent on only the collateral for the loans. How stupid an interest-free model is a piggy bank model compared to a casino bank model? Really stupid those JAK people.”
What Turmel is saying is that in a Mutual Credit environment all the credit required could be generated without having a need for savers. Larry reacts to this with the key reason why this is a popular notion with the MC community:
“I agree, there is no need to limit the creation of new money as long as the creator (borrower) backs the new money with collateral and adequate credit-ability.
In this scenario, we are simply “changing the state” of wealth like fluids change from a solid state (ice) to a liquid state (money). A person’s equity (assets) can be converted to chips (money) just like in a casino.”
So this is the basic idea: because MC will be backed by assets, there is never a problem with value of money.
The question is: is this really true?
In an MC environment we would have interest free mortgages. When buying a house the situation could be that the borrower has absolutely zero assets.
This is actually the case today also. It is the house to be acquired that will function as the asset backing the newly created money.
Yet it is true without a shadow of a doubt that we have real estate and other asset bubbles. How come? Because if both the banks and the people believe that prices will continue to rise, they will fuel these price rises by going ever deeper into debt when buying a house, creating an (price) inflationary spiral.
This would happen in a MC environment also. Prices would start to rise because people would have vastly increasing purchasing power (no interest!) and they would fuel these price rises because they can afford it: they can simply say: this house is going to cost this or that and use that as collateral for ever bigger loans.
Asset bubbles are a real risk under these conditions.
The point is that value is not static. It is not absolute, but a function of the volume of money. Stable prices can be expected with a stable money supply, but if the money supply would be allowed to grow indefinitely value would erode.
So how should the volume be managed?
It should be both stable and flexible. Credit based units provide that: loans being payed off deflate and new credit inflates, providing flexibility that, well managed, more or less evens out.
This means there is a limit to the amount of credit that can be offered by MC facilities. They can lend out no more than the required money supply.
This also creates the question: who gets the credit. Credit-ability can hardly be the only criterium: it would favor the affluent.
So it would have to be shared evenly. For instance: every American has the right to 100k interest free credit every so many years. Something like that.
Stable does not imply the money supply must remain the same for ever. It should grow as fast as the volume of transactions in the economy. Otherwise the net effect would be deflationary, with all the negatives that that entails.
In this way the money supply would provide stable prices while allowing full economic growth related to population growth and technological advances.
This scenario, however, means that there probably will be a greater demand for credit than can be provided with new money. This is the case in the current system also: every dollar in circulation has been borrowed not only when it was created, but a few times more after that. Of course, in the current system a large part of this process is fueled by usury and the fact that there is never enough money to finance both all necessary trades AND interest payments. Meaning every dollar has to be borrowed ever more often, combined with an ever growing money supply.
However, even in a non-usurious monetary system, there is probably more need for credit than there is for money.
It is for this reason that I believe that the JAK system is important: it can provide a non-usurious way of relending already existing ‘chips’.
Mutual Credit implies management of volume. It cannot be left to the market’s devices: it would lead to ever growing volume, with rising prices as a result.
Asset bubbles would be difficult to avoid.
A modern monetary system probably needs to be a hybrid: several tools are at our disposal, none of them are complete or comprehensive and thus we should discard none of them, but look for ways of combining them in the search for a Grand Unified Theory of Money.