DrKrbyLuv: 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.
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.
Your conflating all types of money into one category. Money in the narrow sense, or money proper, exists alongside other forms of money (including fiduciary media, and other forms of money in the broader sense). There is still the monetary base which can be continuously recycled. Now, our monetary system does indeed make the repayment of this debt quite impossible due to the nature of our credit superstructure (inverted debt pyramid); but a 100% gold reserve system would have no problem paying off debt whatsoever. Fiat international systems merely have the relative purchasing power of the money alter in accordance to the changes in the supply and demand for money, meaning that money does not actually flow from one country to the next. When credit expands at such a rapid pace, as is the case for the U.S, the inevitable result is a collapse in the purchasing power of that currency.
But this does not hold true for all monetary systems (already mentioned 100% gold standards). Gold, actual money, was represented by money substitutes (federal reserve notes, or what people generally call "dollars"). What happened was that the banks, through fractional reserve banking, created notes not backed by the actual supply of gold, thus causing an increase in the price of domestic goods and services (price inflation). In the face of increased prices, domestic consumers began buying abroad, leading to a mass exodus of dollars into foreign hands. But foreigners, uninterested in FED notes, would go to American banks seeking redemption for their notes (they wanted actual money--gold). This lead to a continuous transfer of gold out of the U.S into foreign nations, perpetually increasing bank leverage, compromising their liquidity positions. When the banks were too leveraged, they call back debts and stop lending. This inevitably causes a credit contraction or a crunch, and ultimately a deflationary recession as the credit superstructure collapses. Now, this doesn't necessarily mean a trade deficit, but it could.
What we're trying to tell you, is that if you're ever going to find a sympathetic crowd, it's going to be here. But there are some problems with your analysis.
DrKrbyLuv: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.
In magical elf land, also known as America, they have crazy rules and regs on money. This means money behaves in strange ways. It may be that they've rigged the system so that debt is impossible to pay off. This does not mean Austrian theory is wrong. This does not even mean that Keynesian theory is wrong. It simply means that free market laws no longer apply once you get rid of the free market.
I don't know how to say this more clearly.
"It has always been the prerogative of children and half-wits to point out that the emperor has no clothes. But the half-wit remains a half-wit and the emperor remains an emperor." ~Dream
"Both Austrian and Keynesian economic theories hold fundamental beliefs that do not square up with math. The exponential growth of debt in our debt based money system is ignored and refuted by both theories."
i read (or understanded what i read) that so-called austrian claim that exponential money-credit growth (or is it just governmental money-credit growth) lead to malinvestments?
what specific math (economic measure??) does austrian theory not square up with?
sthomper: i read (or understanded what i read) that so-called austrian claim that exponential money-credit growth (or is it just governmental money-credit growth) lead to malinvestments? what specific math (economic measure??) does austrian theory not square up with?
Well, it isn't all exponential money-credit growth, nor is it only governmental money-credit growth. Rather, malinvestments occur (more than they normally would through accidents) when the interest rate is lower than the market interest rate, so loans are taken out that would not be taken out on the market. That is, any market manipulation that lowers the interest rate has this effect. Certainly, at present, we see it with the fed, which is quasi-governmental, quasi-private. Really, what it is is a government-backed banking cartel that has the power to compel people to use the medium it offers.
Yes, that's just just it. Interest is not the problem (without interest there would have been no industrial revolution nor would retirement savings be possible). The problem is that the banks have a monopoly on money creation, which is only possible because the government has a monopoly on force. You're still under the illusion that the Federal Reserve is something separate from the government monopoly. Practically speaking, they are all part of the same monopoly. The Fed benefits both the bankers and the politicians, which is why it won't be ended by Washington, but only expanded. Watch and see.
Think outside the monopoly paradigm. Net-based microsecession | Why anarchy hasn't worked
I was an award winning mathematician in school. All I see here are people who don't know what they are talking about... at all (the MPE's). Reading these MPE threads is like watching some kid call himself better than Ronaldinho and then swing and miss the ball.
I fail to see how it can be argued dollars are not liability based currency as done earlier in the thread. A quote form the US Treasury web site:
"Federal Reserve Banks obtain the notes from our Bureau of Engraving and Printing (BEP). It pays the BEP for the cost of producing the notes, which then become liabilities of the Federal Reserve Banks, and obligations of the United States Government."
http://www.ustreas.gov/education/faq/currency/legal-tender.shtml
A debt is one type of liability. What are dollars then if not debt based, a credit based currency?
They are also labeled Federal Reserve Notes. A note is a legal instrument payable on demand to bearer. It is not a store of value. A representative store of value at best.
I think you're confusing check book money with federal reserve notes. FRN's are not the true money in our system.
tomozope: I think you're confusing check book money with federal reserve notes. FRN's are not the true money in our system.
Reserve requirements are defined by vault cash. Vault cash FRN's are required to create check book money.
Live_Free_Or_Die: tomozope: I think you're confusing check book money with federal reserve notes. FRN's are not the true money in our system. Reserve requirements are defined by vault cash. Vault cash FRN's are required to create check book money.
That isn't the whole truth. Reserve requirements is either deposits at the bank, FED, or cash, and 100% of all reserves (which we don't use for money) only consist of more promises to pay.
but FRN's are denomiated in check book money (check book money has to exsist before any other type of money can move into circulation).
This couldn't be made more clear by exactly how the treasury said it works.
http://www.youtube.com/watch?v=ZQWK2SPMdGo
Esuric wrote:
Now, our monetary system does indeed make the repayment of this debt quite impossible due to the nature of our credit superstructure (inverted debt pyramid); but a 100% gold reserve system would have no problem paying off debt whatsoever.
Hello Esuric,
I agree with the first part, that we can't repay the debt, at least not under the current system. But I don't see how a gold backed "debt based system" would be any different. If it is a debt based system, there will always be more debt than money, regardless of specie. I'm a big proponent of owning gold and silver but I do so on a personal level.
What happened was that the banks, through fractional reserve banking, created notes not backed by the actual supply of gold, thus causing an increase in the price of domestic goods and services (price inflation). In the face of increased prices, domestic consumers began buying abroad, leading to a mass exodus of dollars into foreign hands. But foreigners, uninterested in FED notes, would go to American banks seeking redemption for their notes (they wanted actual money--gold). This lead to a continuous transfer of gold out of the U.S into foreign nations, perpetually increasing bank leverage, compromising their liquidity positions. When the banks were too leveraged, they call back debts and stop lending. This inevitably causes a credit contraction or a crunch, and ultimately a deflationary recession as the credit superstructure collapses. Now, this doesn't necessarily mean a trade deficit, but it could.
This is really getting interesting and I agree with some but not all that you have said. The gold standard failed in GB and most of Europe before it failed in the U.S. (I think it was 1930 for them and 1933 for us). The reason was the same in each case, as I understand it, there simply wasn't enough gold.
You hit on this when you mentioned fractional reserve lending. And this brings up an interesting point, who was backing the money? For example, if the banks were creating money, shouldn't they have been responsible to supply the gold for backing?
If you look closely (sorry it's not bigger) this 1928 FRN states: "REDEEMABLE IN GOLD ON DEMAND AT THE UNITED STATES TREASURY OR IN GOLD OR LAWFUL MONEY AT ANY FEDERAL RESERVE BANK"
So, if you took this note to a Federal reserve Bank, they could redeem it with another FRN. If you took it to the U.S. Treasury, you could redeem it in gold.
This means that the U.S. was backing money loaned out by private banks on a fractional basis. This would only be possible if the banks reported every dollar borrowed and the U.S. Treasury would have to buy an equivalent amount of gold to back it up. To my knowledge, there was never communication to assure that along with new money, new gold was purchased. If this is true, we had to eventually default.
Maybe a bigger issue is this...if the banks were loaning money at profit, why would the U.S. back it up? If the U.S. had the gold, why wouldn't the U.S. LEND money to the banks?
And if the U.S. had the gold, why did we borrow money from banks intead of issuing it ourselves without any interest charges?
Cheers,
Larry
check book money can not exist without satisfying reserve requirements.The institution must satisfy its reserve requirement in the form of vault cash or, if vault cash isinsufficient to satisfy the requirement, in the form of a balance maintained either directly with aReserve Bank or in a pass-through arrangementReserve Maintenance Manualhttp://www.frbservices.org/files/regulations/pdf/rmm.pdfInstructions for Federal Reserve Reporting Form (FR2900)Pages 15, 16, & 17F. Liabilities That Are Reservable under Regulation DG. Deposits as Defined under Regulation DRegulation D compliance guide:http://www.federalreserve.gov/bankinforeg/regdcg.htm
DrKrbyLuv:The reason was the same in each case, as I understand it, there simply wasn't enough gold.
Partly correct. There wasn't enough gold compared to the of amount paper bills redeemable in gold; what we call a bubble.
The amount of gold never changed. It was paper bills that had grown fraudulently numerous.
DrKrbyLuv:But I don't see how a gold backed "debt based system" would be any different. If it is a debt based system, there will always be more debt than money, regardless of specie. I'm a big proponent of owning gold and silver but I do so on a personal level.
The debt we have at the moment is not real debt. Credit transactions are transactions where time is exchanged, that is, an exchange of a current good for a future good; the difference is interest (or your time preference). Let's say, for purely demonstrative purposes, I demand $100 today (for whatever reason), but I have already spent my income. I go to the bank and agree to borrow $100 today insofar as I'm willing to pay the bank $105 dollars at time "x." If I'm willing to borrow at this rate (namely 5%) but not at a higher rate, then my time preference is 5% (the rate at which I prefer current goods vs future goods). In a 100% gold reserve system, that $100 lent to me is fully covered by gold, it is not fiduciary media, and the $105 I return to the bank, also, is 100% covered by gold. The extra $5 simply came from out of my income from T2 (or M2). Gold standards are not debt standards. All money in a 100% reserve rate is fully covered. The money they receive (really just gold) is not deleted, just recycled.
DrKrbyLuv:This is really getting interesting and I agree with some but not all that you have said. The gold standard failed in GB and most of Europe before it failed in the U.S. (I think it was 1930 for them and 1933 for us). The reason was the same in each case, as I understand it, there simply wasn't enough gold.
The international gold standard was removed during WW1 because the price specie flow mechanism (which I already described) does not allow for government deficits and a lot of inflation (which is needed to finance wars). England, before the war, was the financial and economic center of the world. After the war, the English economy was practically shattered (a peric victory), but the English, under Churchill, attempted to reinstate the prewar exchange rate (1 pound=4.88 dollars) in an entirely different international economic environment. England became a debtor nation, and the U.S a creditor nation; this lead to an immensely over-valued pound, and under-valued dollar (perpetuated by the artificial reduction in American interest rates below English interest rates, in order to maintain the pounds exchange rate), and all kinds of trade imbalances. The manipulation of the gold standard, and the rise of the inflationists (Irving Fisher), ultimately ended the gold standard.
With fractional reserve banking, a bank can create money substitutes in excess of the actual gold supply, and continuously pyramid debt on top of their diminishing reserves. America's attempt to keep the boom of the 20s going, and to keep the Pound the world currency (at an artificial valuation), pushed down interest and increased the demand for credit heavily (you could, for demonstrative purposes only, think of the interest rate as the price of credit). Today, if the debt superstructure completely collapses, only actual dollar bills would remain as money (money market mutual funds, coins, bills, travelers checks, checking account balances, NOW accounts, savings and small time deposits, overnight repos, eurodollars, ect, ect, are all forms of money). Only 100% gold reserve rates are entirely non-inflationary, but there are problems associated with this system as well. Austrians are currently debating whether the pros out-weigh the cons.
You can have a gold standard and fractional reserve banking, where gold is still the metallic base, and where your gold can be recycled to payoff the debt. But if it (expansion of credit) continues, ad infinitum, it will eventually cause a major systemic collapse in the banking system, and the credit superstructure will eventually shrink back to the metallic base.
The bankers and the politicians work together. The government does not know how to run a bank, and they wouldn't know how to inflate efficiently. The kings who debased their currency were usually thrown out or beheaded. Thus, they create a central bank in order to protect the bankers from the inflation they create. The government gets to inflate, borrow all the money it needs to finance its spending, and when the depression hits, they get to blame "the free market." Plus, the government and the central bank only bailout those banks in bed with them (eliminate the competition). It's a win-win.
Snowflake wrote:
In real life, a bank is just a money warehouse. There is no reason to treat them differently from other warehouses. You pay to put your car in storage... you pay to put your money in storage. Maybe you let the warehouse loan out your car/money before you come back for it to pay for the overhead, maybe you don't.
Hello Snowflake,
Agreed, when you deposit money in a bank, they are acting as a "money warehouse" and insuring your money through the FDIC. If this were the whole picture, you'd probably pay them rather than collecting interest. They use your money to fractionally lend, in creating new money as a multiplier, so they want your money and will pay you interest.
This means money behaves in strange ways. It may be that they've rigged the system so that debt is impossible to pay off. This does not mean Austrian theory is wrong. This does not even mean that Keynesian theory is wrong. It simply means that free market laws no longer apply once you get rid of the free market.
Guilty as charged...I think I was wrong to invalidate Austrian Economics by the way it is being applied. On a similar theme, it is wrong to judge capitalism based on how it is being applied. I still have a gripe with Austrian economics as I cannot find where they take into account the exponential growth of debt in a debt based money system like ours. To me, this is an extremely important point.
sthomper wrote:
I may be over-simplifying, but here is some math to back up my point. First, assume that we are on an island with 1,000 people, and we have no debt or money - we are starting off with a clean slate and we will mimic our debt based money system in establishing a monetary system.
More specifically, all money is debt with interest applied. Since only the principal is created through IOUs and collateral, there will always be more debt than money. We can calculate the percentage of loan failures that must result unless new money is added to the system.
We can calculate the success/failure percentages: (Note: P = Principal and I = Interest collected through the life of the loan)
So, if $100 million were borrowed (P = $100 million) and $10 million in interest was charged (I = $10 million), then we may calculate that 91% can be paid back and 9% will fail.
The alternative is to borrow more money to reduce/eliminate the defaults. But, this will set up a perpetual loop, the gap between money and debt will increase as we borrow more.
We can also use Laplace transformations and algorithms to model more dynamically but that would require more variables.
Now then: the money-as-debt crowd is seriously deluded.
DrKrbyLuv:I still have a gripe with Austrian economics as I cannot find where they take into account the exponential growth of debt in a debt based money system like ours.
DrKrbyLuv:To me, this is an extremely important point.
AJ wrote:
Yup, I think you're right that the Fed benefits politicians. The implicit agreement is that the government can borrow all they want without paying the principal. Politicians can give lots to their constituents without increasing taxes - free money.
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