Debt based money

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

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

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

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

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

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 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

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

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 seperate 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 recieve 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

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