Debt Based Money: Can Money Exist Without Debt?

[Jim Kata]

Can money exist without debt? Or is the whole point of money to put people into debt? For example, to my naive understanding when the government wants to create money they have to sell debt, interest bearing treasury bonds. How can the government get out of debt if they have to create more debt everytime they need more capital?

 

[Ryan_m_b]

I haven't read it yet (it's on my reading list though) but this book might interest you
http://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

 

[chiro]

Hey Jim Kata.

It certainly doesn't have to exist this way, but the way things are structured it essentially is.

When money is created, it is created with the condition that interest be paid back. Where does that interest actually come from you might ask? Well that's a tricky one isn't it.

Because of this model, every time credit is created (i.e. a loan is made) basically debt is created. Like a normal loan, when it is paid off the debt has been repayed and the obligations of the debt contract (loan) are thus terminated if the termination clauses have been met.

The book referenced above is a fantastic book and I recommend reading it.

Some great things that the author covers is the notion of barter and some counter-arguments to the standardized currency argument (basically currencies alleviate the situation of having a standardized unit that facilitates easy exchange) as well as that of situations involving cultural characteristics of not using money (such situations include those of gift based systems where people lend things to friends and family as well as doing deeds without the expectation of ever being paid back). These are just some of the issues explored and the arguments are pretty detailed and the book is well researched.

You need to be clearer about your question though, because you need to ask yourself where the government actually gets their credit from and what the terms are.

As you know, nowadays, we live in an international world and credit arrangements are international in many respects so the game has changed a bit with the situation of new economies and other new situations, so the answer to your question with regard to understanding how the credit system works is the first thing you need to research for this topic.

Once you understand that, you'll know the answer.

 

[BWV]

I would question what appears to be the underlying assumption that debt is somehow an inherently bad thing

 

[Jim Kata]

You need to be clearer about your question though, because you need to ask yourself where the government actually gets their credit from and what the terms are.

As you know, nowadays, we live in an international world and credit arrangements are international in many respects so the game has changed a bit with the situation of new economies and other new situations, so the answer to your question with regard to understanding how the credit system works is the first thing you need to research for this topic.

Once you understand that, you'll know the answer.

Without doing all the research myself I'll just ask a simple follow up question. Why do they have to sell treasury bonds to print more money? Why don't they just print the money? I know the standard argument is that it would cause inflation, but isn't inflation caused anytime money is printed? It seems if they government just printed the money themselves they might have inflation, but wouldn't have debt.

 

[chiro]

Without doing all the research myself I'll just ask a simple follow up question. Why do they have to sell treasury bonds to print more money? Why don't they just print the money? I know the standard argument is that it would cause inflation, but isn't inflation caused anytime money is printed? It seems if they government just printed the money themselves they might have inflation, but wouldn't have debt.

The US government has made attempts to use their own money instead of borrowing it from a central bank, and the presidents involved in this like Lincoln and Kennedy were assassinated.

I'm not going to get into the whole theory of who killed them and why: I don't know for one and two, it is not relevant to our discussion. The relevant thing is that both of these men wanted to introduce money that the government printed themselves without the need to borrow from an external source.

Inflation is caused by printing more money and deflation is created when the supply shrinks, but the value of money can and does change based on other factors like trading activity as well as other things like where people invest and store their wealth. When you have wealth flowing into your country, your economy benefits and this also affects currency prices as well.

If a country really is a sovereign entity, it does have no problem in creating its own money without any obligation to another party at least for internal use and not for international trade or barter through the context of maritime law (law of the sea), but this is not how it currently works at the present time.

 

[chiro]

I would question what appears to be the underlying assumption that debt is somehow an inherently bad thing

Then why don't you go to places like Greece or some of the other countries plagued with debt. Go and speak to the places that had their economies collapse, or where they had to default, and ask how smooth the ride was.

Ask the people that are enslaved by the massive debts how they feel about spending the rest of their life just trying to pay it off, and ask the ones where the governments sold them out about how they feel about the process.

Debt is the most powerful weapon that has ever been created.

It is not like a bomb, or a gun, or some biological or chemical agent. Debt is a lot more subtle and a lot more dangerous.

People will overtly condemn overt oppression like guns, bombs, and other such weapons but they will not overt debt because psychologically people think that debt is 'fair' even if the terms for the debt, how it was created, and who created are far from fair.

If I came to your house and robbed your possessions, you would be angry. But if I got you to sign a contract whereby I knew you would not have a chance to pay me back and I collected your possessions, you would blame yourself and I could use that signed contract to really make this point of building up the guilt.

This is what happens not only on the small scales, but on the large ones as well.

 

[BWV]

Well I like guns too, own a couple myself

Also like that I was able to get a mortgage and a car note rather than save up cash. Also glad that the guy who started the company I work for was able to borrow funds to get the necessary working capital to start the business and that I was able to get a loan to finance my education so I could get the skills to be able to support myself and my family. Glad my local school district was able to float a bond issue so it could build a school for my kids and not have to save up the construction costs (and forget about the absurdity of the concept of saving without a borrower on the other end if the transaction). Also glad the US was able to borrow enough funds to fight WW2 so we could live in a world where any of this was possible. And funny thing is don't have a shred of guilt about any of it.

 

[Jim Kata]

Well I like guns too, own a couple myself

Also like that I was able to get a mortgage and a car note rather than save up cash. Also glad that the guy who started the company I work for was able to borrow funds to get the necessary working capital to start the business and that I was able to get a loan to finance my education so I could get the skills to be able to support myself and my family. Also glad the US was able to borrow enough funds to fight WW2 so we could live in a world where any of this was possible. And funny thing is don't have a shred of guilt about any of it.

Yes, but you got the capital to pay off your debts from an outside source, i.e. your job, and your company got capital to pay off their debts from an outside source, i.e. customers. How do governments get capital from an outside source to pay off their debts when, to my crude understanding of it, every time they need more capital they have to create more debt?

 

[BWV]

Governments have taxing authority - a claim on the overall productive capacity of the economy. In the aggregate there is no debt thus its not possible for an economy to either save or borrow Other than through the current account

 

[Jim Kata]

Governments have taxing authority - a claim on the overall productive capacity of the economy. In the aggregate their is no debt thus its not possible for an economy to either save or borrow Other than through the current account

I didn't really understand this. Government debt is when the government spends more than it collects in taxes, but the government is also the one that gives the power to the federal reserve to issue the money, and debt is created in very issuance of the money. So it seems like in this system the government could never pay off its debts.

The simple example I've been thinking about is if I owe someone 30 dollars, and I have to borrow 31 dollars to pay off the 30 dollars I owe, I now owe more than I did in the beginning. Where is the flaw in my logic? I know I'm not understanding something.

Maybe if I could understand what is meant by in aggregate their is no debt, I could understand how it works.

 

[Ryan_m_b]

I didn't really understand this. Government debt is when the government spends more than it collects in taxes, but the government is also the one that gives the power to the federal reserve to issue the money, and debt is created in very issuance of the money. So it seems like in this system the government could never pay off its debts.

The simple example I've been thinking about is if I owe someone 30 dollars, and I have to borrow 31 dollars to pay off the 30 dollars I owe, I now owe more than I did in the beginning. Where is the flaw in my logic? I know I'm not understanding something.

Maybe if I could understand what is meant by in aggregate their is no debt, I could understand how it works.

I am by no means an expert here but to add some comments; money can be created by banks due to fractional reserve practices (where a bank can lend on credit more money than it actually has) which is then backed up by fiat currency. Because of this practice and of interest it is impossible for debts to be paid without printing new money (inflation).

I'm remembering this badly from a documentary I watched a while ago, I'll see if I can find it on youtube later...

 

[256bits]

Without doing all the research myself I'll just ask a simple follow up question. Why do they have to sell treasury bonds to print more money? Why don't they just print the money? I know the standard argument is that it would cause inflation, but isn't inflation caused anytime money is printed? It seems if they government just printed the money themselves they might have inflation, but wouldn't have debt.

I think you have it backwards.
To increase the money supply the gouvernemnt/central bank wil BUY securities, thus giving the sellers which are almost always banks extra dollars to use to be used to give out loans. If the central bank SELLS government securities then they are removing dollars from the money supply, whith the added affect of lowering the value of a bond and increasing the interest rate.

 

[JonDE]

I didn't really understand this. Government debt is when the government spends more than it collects in taxes, but the government is also the one that gives the power to the federal reserve to issue the money, and debt is created in very issuance of the money. So it seems like in this system the government could never pay off its debts.

The simple example I've been thinking about is if I owe someone 30 dollars, and I have to borrow 31 dollars to pay off the 30 dollars I owe, I now owe more than I did in the beginning. Where is the flaw in my logic? I know I'm not understanding something.

Maybe if I could understand what is meant by in aggregate their is no debt, I could understand how it works.

You are a little confused. You seem to be mixing up the treasury with the federal reserve. Ryan pretty much nailed it exactly on how it works, but I will expand on what he said.

First think of the federal reserve as separate from the government, they are not exactly, but for this illustration they are close enough. Basically how new money is created is (warning overly simplified) a person or business goes to a bank for a loan. That bank then goes to the fed for a loan, the fed then prints money and gives it to the bank. All that money for that loan has just been created minus whatever is paid back long term to the fed in interest. That is how money is created.

The treasury is more or less just the bookeeper of the government. They are the ones that print securities, but this is not creating money. This is just a loan, the money they receive is taken out of the economy when people or businesses buy them. Further, not all of it is directly taken out of the economy, some of it is bought by foreign investors. In kind of an off hand way it still is, because these treasuries are still bought with $USD that has left the country through trade.

Edit: Part of the reason for the confusion is that lately the fed has been buying securities. This is not the norm. They have been doing it in part because they are trying to reach their inflation goals, and people just arent borrowing money, so they aren't being able to create very much money. By buying government securities, they are printing money and pushing the money that was already invested into the securities back into the economy.

 

[Alesak]

There is one thing I don't understand: why don't goverments don't borrow exclusively from central banks? Given sufficient independence and bargaining power of central banks, wouldn't this be much cheaper for society? (i.e. less money for the ultra rich)

 

[John Creighto]

I think we are getting bogged down by the details of the current economy. The first thing to remember is money is not a physical asset but a medium for exchange. Well a physical asset can be used to back money or a non-physical asset (such as debt) when I exchange a good (such as my labour) for money, I do so because I wish in the future to exchange it for another good. The money I receive represents a claim on the supply of goods (such as labour, land, CDs, etc..) sometime in the future. To this extent money is debt because it is a claim on future value.


Now, we likely won’t want to exchange a good for money (at least not for a long time frame) if we don’t expect it to maintain its value. For this reason the supply of money is backed by assets. In a modern economy we back money by asset though the process of the central bank buying and selling assets to keep inflation within a certain target range. Central banks prefer certain kinds of assets, such as gold and debt for economic or political reasons.

The following if Opinion:

Now what separates money from other types of assets is the price is more driven by the cost of production then supply and demand. Or said another way a large part of the demand is savings which is a type of artificial demand. For example, if gold is used for money then, the price of gold will not likely fall below the price to produce new gold (despite supply and demand effects) unless there is a significant changes in the savings rate. In the case of debt, the cost of producing new supply is the interest rate which is controlled by the central bank.

In this way money is a social relationship were the liquidity of a certain token (which is used as money) is maintained by social/regulatory conventions which helps protect its value (to an extent in the face of excess supply). This type of supply I will call the stock of money (or total savings). There is another type of supply which is what is spent. The stock of money can be high without having significant effects on the value of money but if a large part of this is spent then this excess demand will have a very real effect on prices.

 

[russ_watters]

There is one thing I don't understand: why don't goverments don't borrow exclusively from central banks? Given sufficient independence and bargaining power of central banks, wouldn't this be much cheaper for society? (i.e. less money for the ultra rich)

Why would that result in less money for the ultra rich?

 

[JonDE]

There is one thing I don't understand: why don't goverments don't borrow exclusively from central banks? Given sufficient independence and bargaining power of central banks, wouldn't this be much cheaper for society? (i.e. less money for the ultra rich)

Its all about inflation. Central banks normally have a target inflation goal, usually around 2-6%, although this isn't universal, and depends on the situation. Whenever a central bank prints money, it increases inflation (or decreases deflation). The central bank is in charge of printing money in order to give loans out to banks, who in return loan this moneyto businesses, other banks, or normal people, like you and me. In a normal (healthy) economy, the central bank will be able to meet its inflation goal, just by lending to other banks. Often if banks begin to borrow too much and inflation starts to get out of control, they will raise rates, making it more expensive to borrow, increasing borrowing costs, and (hopefully) making less people/businesses borrow.

The point being, that in a normal healthy economy, they can't really afford to print more money for the government to borrow, without increasing inflation, or without increasing borrowing rates (which should slow down the economy).

 

[chiro]

There is one thing I don't understand: why don't goverments don't borrow exclusively from central banks? Given sufficient independence and bargaining power of central banks, wouldn't this be much cheaper for society? (i.e. less money for the ultra rich)

Governments are meant to be sovereign entities that can create their own credit at will for whatever purposes they choose yet they still borrow debt-based monetary instruments from private entities.

The major point is that these debt-based instruments are based on debt (i.e. interest needs to be paid), and eventually the burden is always transferred to society (it's never cheaper, it's actually more expensive).

 

[ImaLooser]

Governments are meant to be sovereign entities that can create their own credit at will for whatever purposes they choose yet they still borrow debt-based monetary instruments from private entities.

The major point is that these debt-based instruments are based on debt (i.e. interest needs to be paid), and eventually the burden is always transferred to society (it's never cheaper, it's actually more expensive).

The USA started out with a public bank, the bank of the USA, but gave up on it because it was so corrupt. I think that this would happen whenever the gov't has too much control of the bank. Then they tried borrowing from private banks, but this gave the bankers too much power over the government. That was the JP Morgan era. Today the govn't has the power to hire and fire the head of the Federal Reserve. This seems about the right amount of control.

North Korea has 20 million dollars US in national debt. So there is a nation in this world that is trying that model, with no private banks whatsoever. I assume that Soviet Russia was the same way.

 

[chiro]

A sovereign nation does not need to create credit with interest, but this is the standard policy currently done now.

This is one of the cleverest and absolutely despicable frauds that has ever been seen in the history of man-kind: it is a mathematical certainty that this debt will never ever be paid off ever and it is a systemic and calculated form of monopolostic wealth confiscation period.

If you want such an entity to create credit then fine, but why the interest when it's meant to be from a level such as this (i.e. a level close to the treasury of all places)?

 

[BWV]

Why would anyone loan money to the government if it paid no interest?

 

[chiro]

So you tell me this: if you borrow money at interest and you use the same medium to pay back the interest (plus the principal), how the hell is it possible to pay off?

Also foreign creditors have every reason to use interest, but the point of a sovereign entity is the ability to allocate its own resources in whatever way it wants and it has the option of creating interest-free money if it chooses.

 

[John Creighto]

So you tell me this: if you borrow money at interest and you use the same medium to pay back the interest (plus the principal), how the hell is it possible to pay off?

This is an old argument (See the chapter “Property is Impossible” from Proudhon's work, "The philosophy of Poverty”). However, as long as the money which is earned from interest is recirculated then in theory it could be used to pay off debts. What you are concerned about could be called excess capital accumulation; this can happen in a bubble and the correction is euphemistically described as, “creative Destruction”, which is a concept borrowed from Karl Marx’s work, “Theories of Surplus Value”

Basically the excess savings need to eventually be spent or devalued (by either credit write-offs or market corrections) because no matter what something is worth on paper -- if either there is nobody with the money to buy it or if the underlying asset does not produce the revenue to justify the value -- then it will not be possible to dump any sufficient quantity of the asset on the market and get back in value an equivalent to what the asset is supposedly worth on paper.

If the government creates money without exchanging it for an asset of equivalent value this will reduce the buying power of money (that is cause inflation) and make people want more interest in order to hold on to cash valued assets (or cash period). This may help the government but the crowding out effect will make borrowing more expensive for everyone else. The advantage of using bonds is that if all the bonds are bought by the private sector then the base money supply does not change

However, in order to keep the rate which the government borrows at low, it is necessary for the Federal Reserve to buy up all excess government bonds which won’t sell for a low enough rate. This does inject money into the economy and does cause inflation. The type of inflation scene depends on where the excess money is spent. A certain percentage of this new money is collected in taxes to help pay on government debts. Currently this new money has little effect on the CPI because most of that money just gets stuck at banks in form of excess reserves.

These excess reserves can be used by instructional investors to trade assets (often for speculative reasons). This drives up assets and commodity prices but does not give the common person the money they need to pay off their debt.

Since most of the new money goes to financial instructions the effect is drive up the nominal value of wealth relative to labour. This will mean more spending will be due to wealth effects and less spending will be due to wages. However, people spend a certain percentage of their wealth and this new money will slowly trickle down to the real economy and impact the CPI (perhaps over a time period of five years).

 

[HallsofIvy]

The US government has made attempts to use their own money instead of borrowing it from a central bank, and the presidents involved in this like Lincoln and Kennedy were assassinated.

I'm not going to get into the whole theory of who killed them and why: I don't know for one and two, it is not relevant to our discussion.

Then why mention it? Surely, you knew when you wrote this that you were implying that it was because they "attempted to use their own money" that they were assasinated.

The relevant thing is that both of these men wanted to introduce money that the government printed themselves without the need to borrow from an external source.

Inflation is caused by printing more money and deflation is created when the supply shrinks, but the value of money can and does change based on other factors like trading activity as well as other things like where people invest and store their wealth. When you have wealth flowing into your country, your economy benefits and this also affects currency prices as well.

What, exactly, do you mean by "printing money"? If I own a store in a small town and allow people to "run up tabs", that is, owe me money, to be repayed at some future time, I am causing inflation (on a local scale) as surely as a national government printing currency. The phrase "Inflation is caused by" implies that this is the only cause of inflation. While printing too much currency is one of the causes of inflation, it is not the only one. "this is caused by that" is NOT the same as "that causes this".

If a country really is a sovereign entity, it does have no problem in creating its own money without any obligation to another party at least for internal use and not for international trade or barter through the context of maritime law (law of the sea), but this is not how it currently works at the present time.

 

[Antiphon]

Actually you are not causing inflation by allowing tabs. The number of goods and services is essentially unchanged as is the amount of currency in circulation. If the IOUs could themselves be circulated *as currency* then yes, you'd have inflation.

But they can't. There are special markets where these IOUs could be traded, but they become an asset in themselves with new value so they don't create inflation.

 

[chiro]

Then why mention it? Surely, you knew when you wrote this that you were implying that it was because they "attempted to use their own money" that they were assasinated.

Its important because it shows where the power is and when someone has power they don't want to lose it.

Countries like Iraq and Libya wanted to bring in gold backed currencies, and Libya wanted to use their own new currency for oil transactions.

A lot of trade is done in US dollars and you have enjoyed that to keep your standard of living. When you lose this, you will lose a lot of your own purchasing power and start to see what it's like.

Similarly the people that have the power to issue currency and have other consequential powers and influence don't want to see this "taken away".

This is not hard to understand.

What, exactly, do you mean by "printing money"? If I own a store in a small town and allow people to "run up tabs", that is, owe me money, to be repayed at some future time, I am causing inflation (on a local scale) as surely as a national government printing currency. The phrase "Inflation is caused by" implies that this is the only cause of inflation. While printing too much currency is one of the causes of inflation, it is not the only one. "this is caused by that" is NOT the same as "that causes this".

There is a big difference between some small store and a central bank.

Everyone is required to use what is called legal tender and most people use that for both that reason and also for convenience.

You are really kidding yourself if you are comparing a small store with a central bank and I just don't know what to think of that comment.

The central point of inflation happens with a central bank. This affects everyone equally.

 

[chiro]

This is an old argument (See the chapter “Property is Impossible” from Proudhon's work, "The philosophy of Poverty”). However, as long as the money which is earned from interest is recirculated then in theory it could be used to pay off debts. What you are concerned about could be called excess capital accumulation; this can happen in a bubble and the correction is euphemistically described as, “creative Destruction”, which is a concept borrowed from Karl Marx’s work, “Theories of Surplus Value”

Basically the excess savings need to eventually be spent or devalued (by either credit write-offs or market corrections) because no matter what something is worth on paper -- if either there is nobody with the money to buy it or if the underlying asset does not produce the revenue to justify the value -- then it will not be possible to dump any sufficient quantity of the asset on the market and get back in value an equivalent to what the asset is supposedly worth on paper.

If the government creates money without exchanging it for an asset of equivalent value this will reduce the buying power of money (that is cause inflation) and make people want more interest in order to hold on to cash valued assets (or cash period). This may help the government but the crowding out effect will make borrowing more expensive for everyone else. The advantage of using bonds is that if all the bonds are bought by the private sector then the base money supply does not change

However, in order to keep the rate which the government borrows at low, it is necessary for the Federal Reserve to buy up all excess government bonds which won’t sell for a low enough rate. This does inject money into the economy and does cause inflation. The type of inflation scene depends on where the excess money is spent. A certain percentage of this new money is collected in taxes to help pay on government debts. Currently this new money has little effect on the CPI because most of that money just gets stuck at banks in form of excess reserves.

These excess reserves can be used by instructional investors to trade assets (often for speculative reasons). This drives up assets and commodity prices but does not give the common person the money they need to pay off their debt.

Since most of the new money goes to financial instructions the effect is drive up the nominal value of wealth relative to labour. This will mean more spending will be due to wealth effects and less spending will be due to wages. However, people spend a certain percentage of their wealth and this new money will slowly trickle down to the real economy and impact the CPI (perhaps over a time period of five years).

One real problem with people that spout inflation from official sources is that these figures do not include food and energy.

I mean cmon, how the hell can anyone take that figure seriously? Of all things you don't include food and energy?

You need food to live and you need energy for any kind of economic activity period.

 

[Antiphon]

The supply of food and demand for energy varies a lot with the climate. Leaving these out gives a steadier indication of the ratio of goods and services to currency in circulation. The weather is just a big noise signal if you leave these in.

 

[chiro]

That's absolutely ridiculous.

People need food to live and real inflation can be seen when you look at how much income is allocated purely to food. Typically when it becomes too high, then you get higher chances of revolt and riots.

As for energy, I just can't believe you said that.

Energy is the lifeblood of a real economy: everything depends on energy and it's not just gas you put in your car either. You can't even have an economy without energy nowadays, it's just impossible.

Leaving energy out of important economic indicators alone means you aren't even talking about the economy anymore.

You might also want to consider what happens when you add these two factors in and what it does to these indices.

Look at all the commodities and how they are getting higher and higher: are you honestly telling me that there is no indirect (or direct) inflation as a result of this whether its to do with real supply and demand or fake supply and demand (yes this exists and is a great profit machine for certain institutions)?

 

[JonDE]

That's absolutely ridiculous.

People need food to live and real inflation can be seen when you look at how much income is allocated purely to food. Typically when it becomes too high, then you get higher chances of revolt and riots.

As for energy, I just can't believe you said that.

Energy is the lifeblood of a real economy: everything depends on energy and it's not just gas you put in your car either. You can't even have an economy without energy nowadays, it's just impossible.

Leaving energy out of important economic indicators alone means you aren't even talking about the economy anymore.

You might also want to consider what happens when you add these two factors in and what it does to these indices.

Look at all the commodities and how they are getting higher and higher: are you honestly telling me that there is no indirect (or direct) inflation as a result of this whether its to do with real supply and demand or fake supply and demand (yes this exists and is a great profit machine for certain institutions)?

Yet, like you said, energy is the lifeblood of an economy, so it is already counted in everything. If the cost of electricity and gas goes up, the cost of everything goes up because of it. So it already gets counted once, why do you feel the need to count it again?

 

[chiro]

Oil and gas not being counted is ridiculous.

You have the energy that goes into all the lower level processes from the raw materials to the finished goods and that's one thing, but not including oil and gas is another.

People need this stuff to get around: you need a car to get around or you take public transport. Lots of people need cars to do everything from get to work to pick up the groceries.

Having a car in some ways is like having a bank account: sure you can do without but in reality you really can't.

Again consider what I said above with food: when food gets to a certain level as to be a significant proportion of your income, then this situation has a direct impact on people's ability to even keep going.

It's exactly the same with oil and gas: if it becomes a significant factor in how most people's incomes are spent then it is a massive issue.

The volatility in oil and gas is noted, but not including in inflation characteristics is not only stupid but its criminal and intentionally misleading of how good purchasing power really is.

Being able to buy cheap crap at Walmart and computers at a cheap price doesn't mean inflation is OK if it is taking more and more of the average persons income to stay alive with food as well as to be able to get one from one place to another through oil and gas.

If people are working the same or harder, and the amount devoted to food and gas is increasing substantially, then that's inflation period. What else can you possibly call it?

Even if you want to use this so called volatility argument, the other thing is that for food, technology and increased understanding has made it easier to grow food even under harsher conditions.

The other thing is that you have these idiot green people that support biofuels where you take perfectly good corn and turn it into biofuels. These fuels are high net negative expenditures (it takes more energy to develop the fuel than the fuel actually provides) and it makes the price of perfectly good food sky-rocket.

It's the same actually with phracking where this is also a net energy loser and it destroys valuable things like the water tables that have drinking water that is also needed to survive.

Another thing to look out for is which particular thing is being subsidized: when governments give preferential subsidies it can make things look a lot cheaper than they really are.

The energy is not counted on everything contradictory to what you wrote and the whole thing doesn't even come close to giving accurate information on inflation: it's a completely artificially engineered number to hide stuff that is unpalettable to a lot of people and that main thing is that a lot of people are getting screwed.

 

[John Creighto]

Actually you are not causing inflation by allowing tabs. The number of goods and services is essentially unchanged as is the amount of currency in circulation. If the IOUs could themselves be circulated *as currency* then yes, you'd have inflation.

But they can't. There are special markets where these IOUs could be traded, but they become an asset in themselves with new value so they don't create inflation.

What matters is whether it causes money to circulate faster. If the person at the store considers the IOUs as good as cash, he may then spend more money. Alternatively if the IOUs could be traded (say they were backed by a check, credit card, or sold to a collection agency) the people who accept this as equivalent to cash may spend more because of this new wealth. Each time the money is spent someone makes a profit, of which they could spend a certain percentage. There may be a multiplier even if it is small. It is this multiplier which will drive inflation.

Spending is driven by wages and wealth (as wealth forms an equivalent to cash), the more wealth that can be created the more that people could potentially spend. However, if people spend too much of their wealth it could drive down the value of such wealth for all.

 

[Ryan_m_b]

So you tell me this: if you borrow money at interest and you use the same medium to pay back the interest (plus the principal), how the hell is it possible to pay off?

If money circulates perfectly it's possible. For example: Alice borrows 1 dollar from Bob on the understanding that she will pay him back 1 dollar a week for a year. Problem is there is only 1 dollar in existence. After the first week she's stuck right? Unless Bob pays her 1 dollar for a task which she can then immediately give back. So week 2 she mows the lawn, get's paid, and immediately gives it back. Week 3 she paints the lounge, get's paid...etc.

Essentially any amount of money can be paid back in a finite economy so long as the time it takes for the instalment money to circulate back to the debtor is less than the instalment.

 

[ImaLooser]

If money circulates perfectly it's possible. For example: Alice borrows 1 dollar from Bob on the understanding that she will pay him back 1 dollar a week for a year. Problem is there is only 1 dollar in existence. After the first week she's stuck right? Unless Bob pays her 1 dollar for a task which she can then immediately give back. So week 2 she mows the lawn, get's paid, and immediately gives it back. Week 3 she paints the lounge, get's paid...etc.

Essentially any amount of money can be paid back in a finite economy so long as the time it takes for the instalment money to circulate back to the debtor is less than the instalment.

Yeah. What I have always read about fiat currencies is that it works like this. The government charges a tax in the fiat currency, and everyone has to do something to get the money to stay out of jail. But I don't see why it has to be this way. Money is useful as the medium of exchange. If somehow miraculously there was no tax then money would be used anyway. The coercion thing is far in the past, and I don't see how it is necessary any more.

So suppose there was no federal debt and no tax, but only the federal government can issue money. The banks and individuals would have to borrow money from government and pay interest, this interest taking the place of tax. Needless to say there is a dearth of detail, but I see nothing fundamentally wrong about this. Interest rates would be higher, possibly much higher, but there would be no tax so it could cancel out.

During the Jackson presidency the national debt was paid off and there was indeed a shortage of federal money. The states issued their own money irresponsibly and it was a fiasco.

 

[chiro]

If money circulates perfectly it's possible. For example: Alice borrows 1 dollar from Bob on the understanding that she will pay him back 1 dollar a week for a year. Problem is there is only 1 dollar in existence. After the first week she's stuck right? Unless Bob pays her 1 dollar for a task which she can then immediately give back. So week 2 she mows the lawn, get's paid, and immediately gives it back. Week 3 she paints the lounge, get's paid...etc.

Essentially any amount of money can be paid back in a finite economy so long as the time it takes for the instalment money to circulate back to the debtor is less than the instalment.

All the money is created from interest bearing debt: how can you pay debt off with debt?

 

[Ryan_m_b]

All the money is created from interest bearing debt: how can you pay debt off with debt?

In the manner I described; in our two person economy the debtor ends up working directly for the creditor to pay off the interest by doing an equivalent amount of work. In a real economy there are more actors but the principle is the same, to eliminate debt and interest work must be done and taken in payment.

 

[Jim Kata]

The basic question is why must interest be charged in the issuance of money? I understand why it can be charged in the loaning of money as a kind of convenience charge, being charged interest for the right to get the loan, but not at the point of issuance. If the first dollar was borrowed into existence and the second dollar was borrowed into existence to pay off the first dollar you do not have the situation where money = debt as in if all debts were paid there would be no money because of the interest charged at the point of creation. Simply put, to pay off debt you need more debt. The argument that John has made for interest at issuance, if I understood him correctly, is that the interest serves as kind of a manufacturing cost. Gold required labour to produce and so it has some kind of intrinsic value but i think this misses the point. The point is not the intrinsic value of gold or the cost of its manufacturing it, the point is that gold is finite. Fiat currency doesn't have a finite constraint, and as such it seems that inflation is inevitable. There are only two outcomes I can see to inevitable inflation one is destruction of the currency or two is the writing off of debts at some point, a jubilee.

 

[chiro]

In the manner I described; in our two person economy the debtor ends up working directly for the creditor to pay off the interest by doing an equivalent amount of work. In a real economy there are more actors but the principle is the same, to eliminate debt and interest work must be done and taken in payment.

Doesn't work that way in the real world with the real central banks.

The system is set up so that debt is payed back through debt based instruments just like someone trying to pay a credit card with another credit card.

You really should try and understand these instruments and how money is created and what it represents which is debt and all that exists is an endless cycle where debt only compounds and never decreases or ever gets paid off: in fact if there were no debt there would be not one dollar in existence.

How can one pay debt off if they the only thing they have is debt themselves? The simple answer is that they can't.

This is how the world works and this is what modern slavery is all about: it's not shackles and chains, it's debt.

It's done to everyone from entire countries to the simple citizens: you get economic hitmen to go into countries like Mr. Perkins did (see confessions of an economic hitman) and what they do is they sign people on to debt that they know can never ever be paid off.

The only difference between this form of slavery and the ones of shackles and chains is that this form of debt is often backed by the stroke of pen and is in a way, based on a form of consent even though that consent is mostly based on deceptive means.

Banks don't want people or countries out of debt and they certainly don't want them independent enough.

Your utopian idea of the world is nice, but it isn't that way: the world has adopted a system where everyone is becoming a debt slave in every single possible way.

You think you own that house after you have paid off your mortgage, then stop paying your property taxes and see what happens. Look at the wonderful state of the student loan and home loan systems you have? Want to start a business? Finding a way to get some interest on your deposits lately?

The whole thing is structured so that none of you will ever get out of it unless the system as it is right now is abolished.

 

[Czcibor]

Somehow I consider it as quite interesting how bizarre views Americans can have on monetary policy...

The basic question is why must interest be charged in the issuance of money? I understand why it can be charged in the loaning of money as a kind of convenience charge, being charged interest for the right to get the loan, but not at the point of issuance.

In a simplification you can have as source of money a gov which took a loan from the central bank. Any interest rates that are paid to the bank would return to the gov as income of the central bank. If only gov was entitled to take such loans (and there was some mechanism to keep that amount in check) then indeed no interest rate were needed.

In real world (still in great simplification) we have banks which buy bonds from the gov, and later use them (when needed) as collateral for a loan from central bank. However, if private agents are allowed to take these loans too, then there should be some kind of price to limit the demand for money... which is the interest rate.

Fiat currency doesn't have a finite constraint, and as such it seems that inflation is inevitable. There are only two outcomes I can see to inevitable inflation one is destruction of the currency or two is the writing off of debts at some point, a jubilee.

Couldn't just the amount of money in the economy be controlled by changes in the interest rates? (Yes, a bit rhetorical question)

 

[Czcibor]

How can one pay debt off if they the only thing they have is debt themselves? The simple answer is that they can't.

Maybe you ask a wrong question. Do you ask about an individual agent? He can pay his debt.

Or do you ask about whole system? Does everyone within the system want to pay his debt immediately? No one would like to take a loan for ex. a house or an investment? No one?

We can face, however when there is a clear surplus of people wanting to pay off their debts to face a paradox of thrift. However, it can be solved by gov taking active role - either by issuing gov debt or by central bank reducing interest rates.

http://en.wikipedia.org/wiki/Paradox_of_thrift

 

[Jim Kata]

Somehow I consider it as quite interesting how bizarre views Americans can have on monetary policy...

Well, Americans are uncomfortable with the idea of a private institution having the power to issue their currency, and even more uncomfortable with the idea that they might be profiting from doing so.

Your explanation for the needing of interest at the point of issuance as a means of controlling how much can be borrowed I believe is the right one, where the interest acts like the finite constraint in the place of some finite commodity such as gold.

The whole point of giving capital to a government is to spur GDP growth, but giving too much is inflationary, but i don't know if interest is needed to maintain this balance if government's could stay within an allotted budget.

My follow up questions are what does the Federal Reserve do with the interest they earn on the loans give out? If the Federal Reserve were nationalized like the Bank of England and Bank of France were after WWII how would this make the situation different?

 

[Jim Kata]

One real problem with people that spout inflation from official sources is that these figures do not include food and energy.

I mean cmon, how the hell can anyone take that figure seriously? Of all things you don't include food and energy?

You need food to live and you need energy for any kind of economic activity period.

One reason for this I heard is that social security payment adjustments are adjusted to inflation , and if they were adjusted to real inflation, including energy and food, which is closer to 10 -15% rather than 2% the social security trust would go bust quicker than it already is.

 

[Czcibor]

Your explanation for the needing of interest at the point of issuance as a means of controlling how much can be borrowed I believe is the right one, where the interest acts like the finite constraint in the place of some finite commodity such as gold.

Actually interests are a bit more flexible and you can adjust them to smoother the economic cycle. With fixed amount of money economics tend to fluctuate intensively.

The whole point of giving capital to a government is to spur GDP growth, but giving too much is inflationary, but i don't know if interest is needed to maintain this balance if government's could stay within an allotted budget.

From theoretical perspective - not needed. However, actually quite a few countries learned that gov tend to overspent such easy money, thus for example in my country constitution there is a partial ban for central bank to even buy gov debt directly. (Yes, interest rates in this case serve more as psychological safeguard)

My follow up questions are what does the Federal Reserve do with the interest they earn on the loans give out? If the Federal Reserve were nationalized like the Bank of England and Bank of France were after WWII how would this make the situation different?

"In 2009, the Federal Reserve Banks distributed $1.4 billion in dividends to member banks and returned $47 billion to the U.S. Treasury."
http://en.wikipedia.org/wiki/Federal_Reserve_System#Board_of_Governors

Except that you would have to pay some kind of compensative for your banks, but no longer pay them fixed dividend? The move would be practically neutral, but system would be easier to understand.

EDIT: If FED is anyway trying to flood markets with cash maybe such buyback of shares might be a thing worth doing.

 

[Czcibor]

One reason for this I heard is that social security payment adjustments are adjusted to inflation , and if they were adjusted to real inflation, including energy and food, which is closer to 10 -15% rather than 2% the social security trust would go bust quicker than it already is.

Are you sure about those numbers for the US? I mean in my country CPI is 3,8%,(August 2012 in comparison to August 2011) while CPI after excluding energy and food is 2,1%. The gap that you mentioned sounds somewhat high.

 

[ImaLooser]

Somehow I consider it as quite interesting how bizarre views Americans can have on monetary policy...

It is a strange country. The media is owned by the rich and is basically propaganda. Many people realize this and through the Internet have a created an alternative communal view which has a rather oblique relation to reality. Everything outside of this communal view is rejected, so there is no point in discussing anything with these people.

Economics is simple but counterintuitive so very few people understand it. Alan Greenspan wrote that it was quite difficult to communicate even the most basic concepts to US senators and congressmen.

The US economic systems is the product of a history of trial and error. Very few people know this history. Almost all of the recommendations for reform that I have read are for return to systems of the past that were worse than what we have now. It is very unlikely that such a return will ever occur unless there is a complete change in the basic goals of the system to a low or no growth model.

 

[chiro]

The US economic systems is the product of a history of trial and error. Very few people know this history. Almost all of the recommendations for reform that I have read are for return to systems of the past that were worse than what we have now. It is very unlikely that such a return will ever occur unless there is a complete change in the basic goals of the system to a low or no growth model.

That is a great point about the growth attribute.

All these people are obsessed with growth and it's actually worse because people are expecting continual growth on shorter and shorter time intervals.

These idiots that want this have become so obsessed that it's almost like a video game where people become obsessed with getting the highest rank they can, only in this situation this is not a game and this affects everybody, often most people in a detrimental manner.

The sooner we abandon the growth paradigm as you have suggested, the better off we will all be.

 

[John Creighto]

The basic question is why must interest be charged in the issuance of money? I understand why it can be charged in the loaning of money as a kind of convenience charge, being charged interest for the right to get the loan, but not at the point of issuance.

What do you mean by "but not at the point of issuance"?

If the first dollar was borrowed into existence and the second dollar was borrowed into existence to pay off the first dollar you do not have the situation where money = debt as in if all debts were paid there would be no money because of the interest charged at the point of creation.

If the person charging the interest spends the money they earn then that money is circulated back into the economy and can be used to pay off the interest. Of course if people hoard their wealth, then it is true that either new money must enter the economy as it does through borrowing money or the debt must be written off as people won't be able to pay which will lead to a default. The stock of money (stagnant supply) is much less relevant to the real economy then the dynamic supply of money [supply of money times velocity (my phraseology)] because if money was traded fast enough one could imagine one single dollar sufficing for all transactions -- yet because there is a delay between when a given dollar is spent and a given dollar is received it is necessary that there be a greater stock of money in-order to make up for all the delays in transactions.
The fact that the money supply is a debt is unavoidable as the whole concept of money is that it can be redeemed for something of equal value at a later date. If you are yet unconvinced that money, is by its essence a debt, then ask your self the following question: "What is a debt but an obligation to repay, the value given, with something of approximately equivalent value?". Or an even better question would be "What is debt but an obligation to repay?" -- for a debt is one side of a contract while the amount given is only part of the basis which is used for any expectations for the quantity of value expected in return. Usually one measures the return expected or negotiated in proportion to the value which was given and the rate of proportionality is called the rate of return or is called specifically in cases of monetary transactions the interest rate.

Simply put, to pay off debt you need more debt.

A basic observation popular in modern monetary theory is one person's debt is another persons asset. This is basic double entry accounting. If a group of entities in the economy accumulate indefinitely then yes -- either new money must be created or some of it must be written off. However, unlimited accumulation is impossible because there are finite resources. People cannot become arbitrarily indebted to the extent where their debt vastly exceeds their ability to repay -- without the contradiction eventually causing a correction. I know there must be a better way than the boom bust cycle. My solution to these contradictions would be to propose a wealth tax as they have in such places as France and the Netherlands. However, if such a concept was proposed it would unfortunately be difficult to implement effectively -- as people will both constantly bring up the boogieman of capital flight and also, established interests will fight aggressively to protect themselves from the tax by using whatever influence they have in-order to manipulate the legislation to their advantage.

The argument that John has made for interest at issuance, if I understood him correctly, is that the interest serves as kind of a manufacturing cost.

Yes. The discount window is the interest rates banks must pay to borrow from the central bank. This is the cost which banks face to add new base money (M0) into the economy. Banks would prefer not to do this because they usually can borrow cheaper from other banks at a lower rate. Banks set they rates they lend to other banks based on their equity which is determined by the difference between the value of their assets and liabilities. There is a particular regulatory formula for measuring their relative quantity and quality of equity based on the perceived risk of various types of assets. This is called capital adequacy. Adequate capital adequacy is important in determining the credit risk of a bank because a bank must have adequate capital adequacy to have access to the discount window. Access to the discount window is important as it guarantees the banks liquidity which significantly reduces the short term risk of lending to such banks and consequently guarantees them a lower rate.

The quantity and quality of equity is not only important to banks but is strongly tied to the borrowing costs of any actor in the economy. Because of this relationship between both the quality and quantity of equity; it is the case that the supply of money is tied to wealth (real or perceived). Consequently the supply of money is to a degree constrained by value or is as a minimum a weak function thereof.

 

[alan2]

There is a widespread misconception that the government can create money by printing it, or that to repurchase bonds they just print money. This is not true. The only way that the money supply is increased is by fractional banking. Money is created when the government borrows money (or when anyone does), but in order to repurchase their debt they must have an existing balance. The currency is nothing more than a token representation of debt. There is also a common misconception that increasing the money supply always decreases the value of money and leads to inflation. That notion is based on the long dispelled assumption that the velocity of money is constant (thank you Milton Friedman). Data shows that this is not true. In fact, the velocity of money fluctuates and has slowed considerably since the beginning of the recession. The increase in money supply can actually serve to prevent deflation in that case.

 

[chiro]

A few points for you John Creighto.

The first thing is about debts and assets: this is not true in general.

Firstly value can get wiped out: this is what happened in the sub-prime crash and it also happens in many other value-wiping scenarios like stock-marketing crashes, government currency defaults, and other kinds of default scenarios.

The sub-prime one showed what happens when you have mass defaults, and a collective effect of these on a market: it's one thing to have a few defaults but its another thing to have a entire market based default at work.

The other thing that you need to look at is that the person with the debt is not necessarily in the worse position.

If you owe the bank a little bit, the bank has the iron grip: if you owe the bank a lot then you have the grip on the bank. If you owe the bank billions of dollars you are the one that can have some say at the table.

The other thing is that with your comment, if all debt based instruments have the same creditor, then what does that imply about who is the creditor and the debtor? How can any debtor in this situation become a creditor?

In the real world, so called "value" gets wiped out all the time and the reason relates to the situations you find in this stock market crashes, various bubbles, defaults that have a tonne of other related catastrophes (all the "risks" you hear like systemic risk), and all the stuff where the so called valuation is out of proportion.

Another thing relates to what is known as leverage: nowadays financial institutions are leveraged up to ridiculous levels.

So if a bank says that they have so much in one accounting term, if they are leveraged then they don't and this is how they all operate nowadays.

It also means that if these morons make a bad bet to get a price move of 2% when they are leveraged around 50:1, they can become insolvent unless they get a "bailout" which is basically a euphismism for "lets take money from people who aren't stupid and give it people who are" or basically some kind of anti Robin-Hood kind of thing.

The other thing is this principle: people will waste what they do not value.

This principle is said in a lot of different ways in many parables including the "don't throw pearls before swine" and other similar phrases but the idea is the same as the above.

Governments don't value money: they can create it when they want and they do create it when they want. They don't have any valuation of how debt affects their citizens or anyone else for that matter because they don't have to feel the effects themselves since they can just get money whenever they want through their cozy relationship with the central banks.

When you give people everything, they don't value anything. Most people value the money they get because it requires time and energy on their own part to get it, hence why they value it in the first place.

If you give someone a power to do something where they don't have to directly feel the consequences of their actions, they won't have kind of real evaluation and valuation for what they do.

You let a murderer kill people and consistently walk, they won't have a deterrant and will probably just do it since they know they can get away with it. All people value their time and the point of jail (even though this whole thing doesn't work anyway) is to deprive people of their time to do other things and this creates an incentive (again, even though this system is largely useless since jails provide ways to bring "like minded" people together to hone their own skills, knowledge, and craft) to not do said things by a way that has been "socially" (if you can even call it that) agreed on.

You give people power where they are able to deflect consequences in any significant means and they will do whatever the hell they want even if it screws the rest of the country or most of the world.

Unfortunately when you put most people in a situation they don't stop and think that what they are doing may be stupid and most people unfortunately just do whatever the hell they are told as long as they think the other person has authority (yes there have been clinically controlled experiments validating this effect if you are interested) and when you shield them from the consequences, it is just a recipe for disaster that is waiting to happen.