"When debt is repaid it is extinguished, that is that the money ceases to exist..." post author
does this (debt or bank credit) ever take place in todays banking system???
I draw a circle which represents the sum total of money in circulation.
I draw a bunch of dots in the circle to represent every entity that spends and receives money.
If a dot profits it will grow larger because it receives more than it spends.
There is a direct mathematical relationship between dots that grow larger and dots that reduce in size.
Is it natural if people are required to be a dot in the circle in order to exist?
Well, certainly there is less money after a frb loan is repaid. But, of course, there's also less debt. The same thing happens in my scenario. In some sense, you can say that money is "destroyed" when we all pay back our debts in my scenario, but this does not cause the problems the OP points to.
Hello krazy kaju,
Hopefully this will clarify some of your questions:
I wrote: "In our debt based monetary system there is only one way to add money and that is through new debt."
krazy kaju wrote:
Not true at all. Most of the money that the Federal Reserve creates is through the purchase and monetization of government bonds. In other words, the Fed actually reduces the amount of debt when it expands the money supply.
There is no reason for the U.S. government to borrow money from private banks. Thomas Edison said "If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good also...If the currency issued by the Government was no good, then the bonds would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges "
Our total money supply (M3) is around $15 trillion while our national and private debt total around $55 trillion. How do we pay an existing $55 trillion in debt with a total of $15 trillion? We are short $40 trillion, where will that money come from?
When you pay back debt, the money you paid that debt with doesn't suddenly disappear. It simply goes to the creditor. The creditor then spends, saves, or invests that money. In other words, most of that money goes back into the economy and it probably enters the income stream of another debtor who then can use that money to pay back his debt. Thus, there can easily be more debt than money.
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I wrote: "We saw this in 1933 when the gold standard collapsed and we lost most of our gold."
Not at all. What happened in 1933 was that the money supply shrank when the Fed raised rates in order to stem the outflow of gold to other countries. At the time, the USA was the greatest creditor nation. That, according to your theory, is an impossibility.
The reason why the U.S. defaulted on the gold standard was because we didn't have enough gold to back our money, it was a lie, fractional reserve backing. If the U.S. had enough gold to back it's currency then we would not have defaulted. That's the problem with a debt based system that uses fiduciary money (money backed with a promise of PMs), in this case, there wasn't enough gold. The gold standard had already failed in GB and most of Europe two years earlier - for the same reason.
It had nothing to do with interest rates.
As a side note, when FDR closed domestic gold redemption there was no need to confiscate the people's gold since the money could no longer be redeemed. It was theft plain and simple - government paid well below market rate. We could lend all the money that we wanted as long as people thought we had enough gold.
The worst part about the depression was that while the non-Federal no-Reserve banks lent money that we alone backed. They loaned the money at profit (interest collected) but the U.S. Treasury backed it up. You will see this worded on FRNs of the time.
Larry
JonBostwick wrote:
What happens to money after it is spent towards a debt? Is it destoryed? Nope, its stil in circulation available to be spent towards a different debt.
My Response: Money is created by banking entries and when it is repaid, it is canceled. For example, if you pay off a car loan you have no more debt. The debt based money no longer exists. So it is accurate to say it is destroyed.
Lilburne wrote:
No. Let's say you borrow that money from me. Over the course of the year, you do work for me for which I offer you a $60 salary. On the last day of the year, I don't pay you the $60 in gold; I just deduct it from what you owe me. On that same last day of the year, you pay me the remaining $50 you owe me out of the $100 of gold you still have. That's it.
Agreed, if I borrowed the money from you then it was existing money. It was not created when I borrowed it and it is not extinguished when I repay it.
sthomper wrote
is the debt-money a creation of govt caprice that a market couldnt do? or this that the wonderfulness of having govt control the 'money'?
Yup, I agree, this "caprice" money may be equally created by government or a private monopoly. The difference is that we pay private banks interest.
Private banks earn collect interest on money they do not back up, guarantee or insure. Their product is essentially free.
JAlanKatz wrote:
No, government control of the money supply can increase the amount of debt (and of money, and of lots of other things) but does not alter the underlying fact. I don't know what you mean by the money going to something other than someone being owed. It's just a simple mathematical relationship that, independent of the amount of debt, the "overlap" is always enough that all the debt can be paid back. If you loan me a dollar, and I loan it back to you, and you loan it back to me, and we repeat the process a thousand times, then on the books we'll each have debts of a thousand dollars, and since there's only one dollar in circulation, the OP will say the debt can never be repaid.
I agree that common sense would support what you say. That's the problem.
But I contend that banks do not lend their or their depositors money. It is created on the spot for free.
DrKrbyLuv:But I contend that banks do not lend their or their depositors money. It is created on the spot for free.
You contend that banks don't loan out depositors money?
'It is difficult to imagine any normal person wishing to meet Marx for a third time.' - Alexander Gray, The Socialist Tradition
If you repay me the money stays in circulation. But if a bank creates it through their monopoly; it is an entry on a computer - with no backing. When that bank receives payment, that amount of money attributed to the principal does cease to exist as the ledger liability cancels out the asset.
well, they do and they dont. that is the essential fraud of the FractionReserveBanking system. banks do lend out their depositors money, whilst paradoxically,they also do not lend out their depositors money and therefore have it presently there available for their depositors to claim at any time.
this contradiction is one of the state run banking system, and not one of banking in general (banking under free market conditions etc)
the problems of the present economy, are the problems of state-run FRB. If that is all you are critiquing then I am in agreement with you.
If however you falsely believe that there is some general problem of 'interest' then you are sorely mistaken. in a free market there is no such 'interest' problem. Others in recent days, using overbearing language have jumped up and down about 'interest' problems, whilst failing to see that there are no 'interest' problems, there are only government problem. I dont know if you are or arent one of these......
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
I'm getting the feeling that you don't really know what the Austrian theory on the matter is...
To darkness I condemn you...
Laughing Man wrote:
Yes, that's accurate though the implication is otherwise. Most people think they are borrowing depositors money but if that were true, the depositors would not be able to withdraw the portion of their money that was loaned out. For example, if total deposits were $1,000 and $500 dollars were loaned out, then the depositors would only be able to withdraw a total of $500. The bank clerk would need to inform people that some of their money was loaned to others.
So far all I see is a rant on fractional reserve banking and an attack on Austrian Theory without stating which part of Austrian Theory and how it's wrong.
Saying the math is wrong with Austrian Theory is kind of missing the point, isn't it?
DrKrbyLuv:There is no reason for the U.S. government to borrow money from private banks.
But they do.
DrKrbyLuv:homas Edison said "If our nation can issue a dollar bond, it can issue a dollar bill.
The FED creates money, not the treasury. It increases the money supply though open market operations, funneled through the banks. Either way, the government isn't going to sit there and print 10 trillion dollars, and then dump it directly into the economy, it would be too obvious. It's far more efficient a to inflate through the banking system, and conceal the sinister plan.
DrKrbyLuv:Our total money supply (M3) is around $15 trillion while our national and private debt total around $55 trillion. How do we pay an existing $55 trillion in debt with a total of $15 trillion? We are short $40 trillion, where will that money come from?
From taxation. 15 trillion dollars could pay off 10000000000 trillion dollars of debt (mainstream economists call this "velocity").
DrKrbyLuv: All money is created through debt (debt based system). The money is created by private banks through loans - if we had no loans, we'd have no money. There is no permanent money in our system. It is created as debt and the principal is extinguished as the bank entry is canceled out. It ceases to exist. Banks do not lend their or existing money. If they loaned depositors money, people wouldn't be able to write a check for their total balance since some would be lent to others. Virtually all of borrowed money is created on the spot. Money can only be used only once to repay principal debt owed to a bank. But you're right in that the collected interest is almost entirely spent back into circulation.
DrKrbyLuv:The reason why the U.S. defaulted on the gold standard was because we didn't have enough gold to back our money, it was a lie, fractional reserve backing. If the U.S. had enough gold to back it's currency then we would not have defaulted. That's the problem with a debt based system that uses fiduciary money (money backed with a promise of PMs), in this case, there wasn't enough gold. The gold standard had already failed in GB and most of Europe two years earlier - for the same reason.
It's called the price species flow mechanism. Look it up.
DrKrbyLuv: I agree that common sense would support what you say. That's the problem. But I contend that banks do not lend their or their depositors money. It is created on the spot for free.
No, it is not "created on the spot." They have a fractional reserve system - the amount of loans is still tied to deposits. Let's do this: take a dollar bill, and pretend that's all the specie there is (and pretend it's specie.) We'll use a reserve fraction of 0 - you loan the dollar to me, and I say "hey, I have a dollar, I'll loan it to you." Now, on the books, I owe you a dollar, and you owe me a dollar. Now, you take that dollar, and loan it to me - now there's three dollars on the books. Repeat the process 100 times, producing $200 of book value with only one dollar of money. Certainly, we can't pay the debts off with so little money, right? But, in fact, we can, by unravelling the same process. But this is the same as your argument for what happens in the real economy, which has the same flaw. The money paid to pay the first round of debts is used to pay the second round - and it is simple accounting to see that it will have to paid to the right places, enough of the time, to make it work, otherwise you never could have created the debt structure in the first place. If you want to talk about banks simply increasing numbers on computers, then you should realize that, by that logic, we also don't need money to pay the debt, we can do that with computer numbers too.
Now, you want to say that actually, the real situation is that I have a dollar, and I loan you a dollar without handing it to you, just by saying "I loan you a dollar," and that process is repeated 200 times. First, that's not how banks work, and second, even then we could use a single dollar bill to pay the debts off.
nirgrahamUK wrote:
Hello nirgraham, I agree that fractional reserve lending is essentially fraud. The old rule of thumb was that for every dollar held in deposit, ninety cents could be created and lent. Then if the ninety cents were loaned out and deposited in that or another bank, another 81 cents could be lent out...and on and on. Listed below is a money multiplier graph showing various reserve requirements.
Last year, we had many big banks that were heavily leveraged, for example I think JPM was at over 40:1 which means that for every dollar on deposit they had lent out $40. The Federal Reserve may also lend money to banks to build up their reserves. This is called "high powered money" and it may be expanded by a factor of 10. Last year over $700 billion was given to the banks which means that that seed money could be multiplied to $7 trillion.
BTW, only banks can create money so it was odd when the banks asked for a government bail-out. The U.S. doesn't create any money so we had to borrow the bail-out money from the banks...with interest added, to give it back to the banks.
If however you falsely believe that there is some general problem of 'interest' then you are sorely mistaken.
We may have to disagree here, but only in part. Interest on all new money will cause problems as I discussed in my original post. I think you can see this in the charts below (Data from the Federal Reserve) :
The dotted line in the chart is an idealized exponential curve, while the solid line is actual monetary data.
So, yes, I think interest is a problem. Many might disagree with me and say that all interest charges must be stopped to prevent the above from occurring. But I think there are many other things that can be done. For example, debt free money could be "spent" into circulation to offset the gap between money and debt.
Cheers,
DrKrbyLuv:For example, debt free money could be "spent" into circulation to offset the gap between money and debt.
Why not just have market money?
DrKrbyLuv:So, yes, I think interest is a problem.
Interest isn't the problem. Interest is the discount on money over time. To remove interest, is to have an irrational economy which doesn't have the appropriate signals to allocate resources across time.
I suggest before you carry on with your current direction, you at least learn Austrian positions on time, capital and value.
If you find something evil that wobbles, push it. - Gary North
Esuric wrote:
15 trillion dollars could pay off 10000000000 trillion dollars of debt (mainstream economists call this "velocity").
The velocity of money enables a given amount of money to be spent more times in a year. But if is spent in repaying debt to a bank, it ceases to exist. New money is created by the banks and loaned to customers that furnish an IOU (and collateral). The money is created as a journal entry, it becomes an asset to the bank and a liability to the borrower. The liability is removed through repayment and equally, the asset is removed from the bank.
$1 trillion dollars can only repay $1 trillion dollars, and only once.
I'm not sure what you meant by using that term. Are you saying that the gold left our shores in the late 1920's and early 1930's through trade deficits?
Thanks,
liberty student wrote:
Thanks for the interesting response. I think we agree and disagree. First, I think you are correct in that if someone lends their money, they are entitled to a return, especially if it's a stranger or a business arrangement. But my contention is that:
Banks could profitably be compensated by transaction fees and service charges. I don't see how they are entitled to interest charges. Of course, this would change if they were actually lending their own money.
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