Debt based money

JonDE

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

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

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

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

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.

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".

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

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.

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

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

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

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

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.