A very simple fact about Economics, too basic, but trying to understand "money=debt"

Great thread. It is the same argument many have all over the world. Our current system is one of continual debt. The only way to keep it afloat is to pump money into it or have growth. There is one poster here that is always arguing for more stimulus. He is correct, if our GDP is not growing we need to stimulate while crossing our fingers that we don't end up with high inflation.

The power to create money was given to congress and they delegated it to a central bank, and the people are held accountable for the debt. We give them our credit and beg for some of it back.

This 12 year old girl sums it up...

http://www.youtube.com/watch?v=Bx5Sc3vWefE&feature=relmfu

This is one of the reasons I support Ron Paul. Not that I agree with his solution, but the fact he identifies the problem and brings it into the discussion.

Look at the Bank of North Dakota, how and why it was started.

 

As money used to be gold or silver, governments could only issue as many coins as they had gold and silver to make them with. English kings for example, used to issue coins, and receive them back in taxes, but they would also need to borrow additional money to fund wars etc. The first banknotes were receipts for gold or silver, promising to pay the bearer on demand.

That was reported by the media just a few months after the ''rebellion'' began. It certainly shows there was more to the ''rebels'' than their description suggests.

Or perhaps the newly created bank borrows from western banks. As our governments were supporting the ''rebels,'' I would think that whatever deal they struck would be favourable to our countries, or rather, our countries' banks.

Greedy goldsmiths lending their customers' gold, instead of just their own gold, would mean they only had a fraction of their customers' gold in reserve. Proponents of fractional reserve banking claim that the system frees up money that would otherwise be sitting in a bank, which it does. But if banks didn't pay interest, people wouldn't leave large sums of money in them, and would invest their money somewhere else instead. Under the system proposed on the IMF working paper, it wouldn't make any difference to the money supply if banks had to keep all their customers money in reserve, as any shortage of money in the economy could be immediately addressed by the government simply printing more and spending it into the economy.

It doesn't cost the bank anything to ''buy'' the house, as the money they ''bought'' it with didn't exist beforehand.

The whole point is to change what banks do, as well as what money is. As soon as a bank lends a customer's money, someone can borrow it and deposit it in another bank, and that bank can then lend it to somebody else, and so on.

Bank's could still make a profit by receiving fees for arranging successful loans, of government created money. In any case, if you read the IMF report, you'll know that it proposes that banks should continue to lend to businesses, because that's the one thing they do reasonably well, but the money they lend would come from a special fund of government created money, set aside for this specific purpose.

When King William III of England couldn't borrow the money he needed to rebuild the Royal Navy after it was defeated by the French, he granted a Royal Charter to a group of bankers who set up the Bank of England, effectively privatising the UK's money supply, in return for the loan he wanted.

Dusty

 

Indeed, but in a modern banking system such as in the US or UK, there are two types of money, central bank money. and commercial bank money,and most of the money that exists is commercial bank money. The only difference is that central bank money is created by the central bank, and commercial bank money is created by commercial banks. Commercial bank money is created when a bank makes a loan, and destroyed when the loan is repaid. The idea is that the money supply should be reasonably constant as banks do constantly make loans, and old loans are constantly repaid. But this is what causes the boom and bust fluctuation in our money supplies, as we have recession when banks refuse to lend, and booms when they lend too much.

It's interesting to note that North Dakota is the only US state with a state owned bank, and it also has the lowest unemployment rate of any US state.

Dusty

 

11 trillion dollar of the debt was loaned to the us by social security through the federal reserVe..this has to be paid back someday..but how? this is the main reason why social security is broke..they dont want to pay it back..China only holds 8% of that debt for a little bit more than one trillion dollars

 

For who? The debt will not be reduced, just transferred to the public.

Chinas major banks are in deep trouble with as much as 30% of their loan book deliquent, late, or entirely uncollectable. They may not have put their money into speculative bond and equity markets but they loaned heavily into speculative real estate and manufacturing ventures, mostly at the urging of party hacks. The influence of government in the Chinese banking sector and the subesquent trouble these banks are in, and the problems they have wrought across the economy cannot be discounted.

Banks need to be where the action is. New York and London are extremely expensive places to do business but are still the centers of world finance. This should not be according to you.

Which is why naked credit default swaps should be outlawed and CDR underwriters should maintain liability for their defaults. It really is that simple.

In the 70s the law was different.

The value of the GDP relies on wide economic participation. If monetary velocity is high, but that velocity is entirely due to trading in speculative markets, it becomes entirely misleading as a measure of GDP.

No, pockets of inflationary and deflationary pressures are caused by the natural friction of markets. They will never go away in a market economy.

Not necessarily. Replacing local bankers with distant bureaucrats is a recipe for trouble. Instead, a set of broad lending guidelines would be more useful, with bankers who choose to step outside these guides having to explain themselves.

Perhaps not explicitly, but the implicit threat of not meeting economic growth goals will hang over the politicians heads forever and is exactly how the EU came to so much trouble. The PIIGs borrowing frantically to maintain impossible economic growth.

What role then, is left for banks????

The boom and bust cycle is caused by a misallocation of avialable wealth into speculation rather than production. It is an innate part of capitalism, where capital is accumulated and reallocated as market opportunities arise. While the misallocation of capital can be controlled by government regulation, it cannot be made ti disappear without replacing capitalism.

Debt free government issued money has been for the most part commodity based. This is problematic for any economy expecting growth, and impossible for any economy expecting that growth to maintain a steady state.
Re-capitalizing nationalized banks with the repayment of government debt is not something a government should ever consider. For one thing, failing banks must be recapitalized immediately, usually by nationalization, the repudiation of debt and an infusion of cash from the government. The idea that government can recapitalize banks through revenues released by the repayment of debt, most likely taken on to rescue the banks in the first place, just transfers even more of the public revenue stream to the banks, which will be sold off to private interests without the debt of the government bonds sold to recapitalize them.

 

For who? The debt will not be reduced, just transferred to the public.

Chinas major banks are in deep trouble with as much as 30% of their loan book deliquent, late, or entirely uncollectable. They may not have put their money into speculative bond and equity markets but they loaned heavily into speculative real estate and manufacturing ventures, mostly at the urging of party hacks. The influence of government in the Chinese banking sector and the subesquent trouble these banks are in, and the problems they have wrought across the economy cannot be discounted.

Banks need to be where the action is. New York and London are extremely expensive places to do business but are still the centers of world finance. This should not be according to you.

Which is why naked credit default swaps should be outlawed and CDR underwriters should maintain liability for their defaults. It really is that simple.

In the 70s the law was different.

The value of the GDP relies on wide economic participation. If monetary velocity is high, but that velocity is entirely due to trading in speculative markets, it becomes entirely misleading as a measure of GDP.

No, pockets of inflationary and deflationary pressures are caused by the natural friction of markets. They will never go away in a market economy.

Not necessarily. Replacing local bankers with distant bureaucrats is a recipe for trouble. Instead, a set of broad lending guidelines would be more useful, with bankers who choose to step outside these guides having to explain themselves.

Perhaps not explicitly, but the implicit threat of not meeting economic growth goals will hang over the politicians heads forever and is exactly how the EU came to so much trouble. The PIIGs borrowing frantically to maintain impossible economic growth.

What role then, is left for banks????

The boom and bust cycle is caused by a misallocation of avialable wealth into speculation rather than production. It is an innate part of capitalism, where capital is accumulated and reallocated as market opportunities arise. While the misallocation of capital can be controlled by government regulation, it cannot be made ti disappear without replacing capitalism.

Debt free government issued money has been for the most part commodity based. This is problematic for any economy expecting growth, and impossible for any economy expecting that growth to maintain a steady state.
Re-capitalizing nationalized banks with the repayment of government debt is not something a government should ever consider. For one thing, failing banks must be recapitalized immediately, usually by nationalization, the repudiation of debt and an infusion of cash from the government. The idea that government can recapitalize banks through revenues released by the repayment of debt, most likely taken on to rescue the banks in the first place, just transfers even more of the public revenue stream to the banks, which will be sold off to private interests without the debt of the government bonds sold to recapitalize them.

 

That is what IMF says, but ...why isn´t it carried out? , Is there someone not interested in that? Is it not so easy as it seems? Does it take a lot of time or willingness or both?

 

I still fail to understand the nature of money, but I wonder this:

Is not money simply a way to exchange things? I mean: Money doesn´t grow on trees, but it is a physical wealth, backed by fish, by gold, by ...by whatever the society considers. If I have money, (I am refering to my ancient small town) is because I happened to have a lot of fish, and fish was so valuable in that society, that people agree on fish being the exchange "currency". Those who have more fish, just had more wealth, and in the same way, any commodity: gold, silver, fish, bones, but I fail to understand money created not being backed by anything. That can´t bring any good to society, from my point of view.

How could I possible say to my central bank in the small ancient town?: Give me a certificate (that´s what ultimately a note is) that I have 2000 fish, but I can´t carry them those 2000 fish whenever I want to trade. So, the small government in the small island/city/country agreed on creating notes, as a measure of what I have , what I possess, a PHYSICAL THING, 2000 FISH, 2000 KILOS OF GOLD, ETC.

I think this all has something to do with "Fractional Reserve Banking" which essentially is: I lend what I don´t have, but when they pay me back, I will have in my vaults. But someone argued here (and that made me think): Bankers can not have the depositors money in the vault, they have to gamble with it, so to make profit, but can that be a good way to do banking? gambling with other´s money?. It made me think because I thought: Well, it´s true, if the depositors money doesn´t move, it is not of use, I guess. But on the other hand I thought: But gambling is sometimes risky, and then, who pay that if the bank gambles and fail, lose money, lose not their money but people´s money.

I REALLY DON´T UNDERSTAND OTHER WAY OF UNDERSTANDING MONEY BUT BEING BACKED BY SOMETHING PHYSICAL

I understand that any government can have unexpected expenses and then borrow from a bank for that, but not as a main idea but as something unexpected, because the money should come, from my understanding, from people in the town.

By the way, there is something I fail to understand too (for a change, hehe):

When people say: "Economy grows". As I am a newcomer on these matter, I don´t see it. In my opinion, Economic shouldn´t grow, the money should circulate through the small town so the baker could buy corn and the farmer could buy woods for the winter, and the drugstore owner could buy the goods to sell, so, money, ultimately, is only to exchange things, exchange, not create.

 

No, it will be reduced, and it will not be transferred to the public. Did you not read the IMF report?

Be that as it may, it does not refute the point I was making.

But we are already seeing French bankers moving to London. Do you think that means they are abandoning their business interests in France?

Which does nothing whatsoever to address the issue of money being created as debt, which is the whole point of this working paper.

Of course it was.

No, trading in financial markets does not add to monetary velocity as a measure of GDP, in any meaningful way. For example, the financial services sector in the UK makes up only a small fraction of GDP.

http://www.duncanwil.co.uk/q2q3_charts.htm

Yet UK banks assets and debts amount to several times the GDP of the entire UK economy.

http://www.guardian.co.uk/commentisfree/2009/dec/06/will-hutton-city-finance-budget



The UK financial sector has grown vastly in recent years, while monetary velocity for the actual economy has simultaneously slowed.

Consider the Wiemar Republic as an extreme example, and it should be obvious that the main factor behind inflation is an increase in the money supply, in the real economy.

So you are arguing that our money supplies should remain in the hands of bankers, but that the state should have more control over them? I am arguing that bankers should be free to arrange loans as they see fit, on a local basis, but that the money should belong to the nation.

How is that any different from the situation we currently have?

No, the problems the eurozone is having are mostly caused by the currency being overvalued in the weaker economies, leaving them unable to compete with the stronger economies, where the currency is undervalued.

As I previously mentioned:

''Bank's could still make a profit by receiving fees for arranging successful loans, of government created money. In any case, if you read the IMF report, you'll know that it proposes that banks should continue to lend to businesses, because that's the one thing they do reasonably well, but the money they lend would come from a special fund of government created money, set aside for this specific purpose.''

But banks do not lend ''available wealth,'' they lend money they manufacture out of thin air. Why should they not do as they wish, with their own money? Again, you are arguing for state control of private enterprise. Whereas if our money supplies were not privately owned, they would not belong to the banks to do with as they wish.

Most of the examples in the IMF report were not commodity based money, and the IMF report does not advocate that money should be commodity based, so it's pointless arguing against this strawman position.

But none of this is advocated in the IMF report. Did you read it?

Dusty

 

Well it certainly isn't in the interests of the banks. In the sense that the borrower is servant to the lender, we and governments are servants to the banks. If the money supply belonged to us and our governments, then the current situation would be turned on it's head.

Dusty

 

FIAT money is of value because of the law of supply and demand. Because we demand it, and it's supply is limited, it therefore has value.

Economies grow as the number of, and value of, transactions increases.

Dusty

 

Here's a google translation of part of a German media article:

http://www.zeit.de/wirtschaft/2012-08/vollgeld-banken-geldschoepfung/seite-2

 

No, fiat money derives it's value because of taxation. All taxes have to be paid in fiat currency, and so taxpayers have to find a way of obtaining it.

To a lesser extent, notes issued by central banks derive some of their value from the fact that member banks need to get back the notes if they are to redeem their reserve assets. Since these reserve assets are usually mortgages, this can be seen as just another way that money is based on debt.

We should also be looking at the big interplay between money, taxation, and government debt.
Much of the reserve assets backing money is government debt, and that government debt implies future taxation that forces an added value onto money in the present.

Here's a thought: what if everyone (including the government) tried to get out of debt at the same time? As everyone reduced their debts at the same time, the money supply would shrink accordingly, and people would find they couldn't obtain enough money to pay off all their debts. It would result in huge deflationary pressure.

 

money is capital, idea is you borrow capital, produce value, sell value to csutomers, and have mroe left off, pay off loan, pay workers, and keep profit, repeat scoiety get massive value and you keep driving down costs and get beter at bringing more value for les sinputs

exact opposite of government

this is what amde usa and hong kong and hek japan and korea great
china is catching on

usa needs to re internalize and not let loters n cronies ruin it

just stop them

no fed
no overspending
no pay for sit on behind pensions
simple
privatize school too
replace laweyrs with software

 

No, because it is also of value for non-taxation payment purposes. For example, if you want to buy something from your local store, and you live in the US, then dollars are what you need.

So, do you support the concept of having our children pay taxes in the future so we can enjoy a better life now, or not?

Exactly. This is an inherent problem with money being issued as debt.

Dusty

 

Borrowing capital implies that it must exist, prior to being borrowed. As you may have gathered by now, had you read the thread, this is simply not the case with our current banking systems. It is the bankers who get massive value, from having a monopoly over creating ''capital.''

Not really, except in the sense that money is not an elected body of people. But then the same could be said for many other things besides money.

Dusty

 

I came into this idea:

How did people trade things before money was created?. It seems to me, it could go this way:

Every Tuesday and Friday, people gather, the guy who produced the milk, the one having beans, the other who has cows, and so on, so to exchange goods. WHAT I HAVE, FOR WHAT I NEED.

I offer my cows, and I need eggs and beans and bread. The other guy has eggs, lots , and need beans, tomatoes and bread . So, all of them OFFERED some goods, all of them NEED other goods.

But my question is: How did the manage this? I mean, who or how could the price of those goods be set? , I mean: a cow = 20 eggs?. 1 egg = 10 beans? . This is not a minor issue I think, and yet, they managed perfectly because the concept of money didn´t exist.

 

Before money, people relied on social systems (such as the tribe or family), reciprocity, and vague unrecorded social obligations.
You might find this interesting: http://anthropologyman.com/files/12_Too_Many_Bananas.pdf

 

It was sort of like you described. It might take a day or two to trade your chicken for some yarn though and the eventual tansaction might involve 6 or 7 people to get the person with the yarn what they wanted for the chicken you have. Needless to say, barter trading can be a very cumbersome and time consuming endeavour and it was not all perfect and manageable. Say the person with the yarn wanted butter but the person with the butter wanted three brown buttons and the person with the buttons wanted a thimble and the person with a thimble wanted a duck, not a chicken, but the person with the duck would trade it for a chicken. So, easy enough, just get all these people together at once, but the button seller has to wait for his wife to get back to watch their place, and then the person with the thimble has to go check on their horse, and then the person with the butter goes off to lunch, and then the person with the duck goes home but will be back tomorrow. The next morning you finally get all the people together but the person with the yarn thinks the butter smells funny, the brown buttons are not the right shade of brown, the thimble is too big for the button sellers thumb and the duck is not the same one you saw yesterday. After some minutes of all this hemming and hawing you give everyone a few jellybeans as a marker of good faith and the transaction happens bing bang boom and you finally have your yarn.

I have been to some barter fairs, this sort of thing is very common. See, not so easy and perfect, and certainly not very quick. It is essentially a leisure time activity and people these days do not have near enough leisure time to barter for all their needs.
That's why many people prefer the semi- barter type fairs, where a lot of the barter is good for good but good for cash is OK too, or actual stores, where time spent bargaining is cut out completely.

There are reasons why people prefer money and convenience is right up there near the top.

 

No, banks do not all need to be regulated and not all of them are. The banks that are regulated by the federal government are "national" banks. They get two major benefits from the government. They get their depositors' deposits insured by the FDIC and they get the privilege of borrowing from the FED in order to lend that money for a profit. The government, by providing these benefits, set the rules - the regulations if you prefer. Prospective customers like the concept of insured deposits so national banks have flourished over the years.

Most investment companies engage in banking, some internet money transfer companies engage in banking, credit unions engage in banking and none of these are subject to federal banking regulations, although most credit unions are also regulated in other ways for similar reasons as national banks. If you wanted to open a bank, you could do so without federal regulation. That's what Paypal did. They accept deposits, they loan money, they serve as a credit processor, they transfer funds and do it all with no banking regulations. Technically, they aren't a bank, but they certainly engage in banking activities.

 

Banks are chartered by the states not the federal government. Depending on what type of business they chose to engage in and where they engage in it they can become subject to various state and federal regulations and have a choice to voluntarily join various banking groups that set their own rules. For example, the FDIC is a semi-voluntary organization since most, but not all states require banks they charter to be members and the Federal government requires all banks that take retail deposits and engage in interstate commerce to become members. The Fed is a voluntary organization. Banks who qualify can become members of the Fed by purchasing shares in their regional federal reserve bank. This allows them to deposit their reserves there, trade those reserves with other member banks, and borrow from the reserve bank by putting up collateral among other priveleges. Credit Unions are regulated by the states and the federal government but by different laws and authorities. Some investment banks are not bound by most banking regulations since they do not meet regulatory thresholds. They are privately owned. They do not engage in retail, i.e. public banking. They answer to the SEC and CFTC and others.

I believe that Paypal is now chartered as a bank since it would be illegal for them to do retail banking in the US without at the least, a state charter. While there were some questions about that in their early years when they were just a transaction processor, as their business grew so did their need to become a chartered bank so they could accept deposits from the public, make loans etc, i.e. operate legally. if it talks like a duck and walks like a duck.......regulators put the pressure on.

At minimum, if you want to be a bank in the US you need a charter from a state. If you operate entirely out of public view you are not a bank, which is how many investment companies get away with banking without being banks, everything is private and personal and those with grievances are left with little recourse because they chose to put their money in an unregulated sector.