Can every debt be paid off?

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liveboy21
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Can every debt be paid off?

Postby liveboy21 » Mon Jan 19, 2015 2:22 am UTC

People borrow money for various reasons. Houses, cars, schools, businesses, continued survival and a few other reasons. People then attempt to earn enough money to pay their lenders for the privilege of having had access to money.

Is it possible for there to be a situation where every debt in the world is paid off at the same time? Would anything significant happen if the world were to reach such a state?

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Re: Can every debt be paid off?

Postby Izawwlgood » Mon Jan 19, 2015 2:23 am UTC

Why would that be a goal? Debt and credit are good things.
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Re: Can every debt be paid off?

Postby Thesh » Mon Jan 19, 2015 2:30 am UTC

Hypothetically, yes, but then you wouldn't have any money in circulation and your economy would collapse since the way money enters the economy is that it is deposited in the central bank by the Treasury (a deposit is a loan) so that the banks can lend it out in turn.
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Re: Can every debt be paid off?

Postby BattleMoose » Mon Jan 19, 2015 3:27 am UTC

New and growing businesses are very dependent on being able to borrow money, have debt. Without debt, the economy would really struggle.

It is better if capital is being used by someone to grow the economy, than alternatively, sitting under their bed. This can be done by lending capital to businesses who can use it to well, grow their business and produce more goods and services. It is very much in the lenders interests to lend to successful businesses than to lose their capital funding bad ones. So its a fairly good method of enabling capital to be used by those who can make the most of it and then the debtor and creditor both win. And consequently anyone else who sells them good or services.

Not all businesses depend on debt, Ben and Jerries is the classic example but its rare.

Hypothetically imagine an individual who has a 100% way to start a successful business that will employ 200 people and all he/she needs is to borrow some capital to make it happen. In such a situation being able to borrow some capital would positively effect very many people directly. Its a good thing.

Borrowing money to fund luxury lifestyles is however, an entirely different issue.

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Re: Can every debt be paid off?

Postby ucim » Mon Jan 19, 2015 3:50 am UTC

Irrespective of the desirability of doing so, the question is whether or not it is possible. My take:

1: Imagine starting with a society that had no debt. Everyone owned whatever they owned outright. Mark doesn't own much but Sarah does. Mark borrows a lot of money from Sarah to start a business, but the business fails. The money is all spent on salaries and consumables. Mark does not have enough money to pay the debt, and even if he works all his life will not be able to. I guess that wasn't a very good decision on Mark's part, but there you have it. Game over.

2: It is certainly possible to envision a society in which all debt is backed by valuable goods or useful labor (and none of the laborers dies in the process of the transaction). In such a case, all debt could be unwound. The question is whether or not present society matches this. My suspicion is that it is not. We borrow against what we don't have, hoping the future works out and we each win, but sometimes the future does not work out and we go bankrupt. Those debts are never repaid; they are forgiven one way or another, which doesn't count (lest the question be trivial).

Now, a similar question. Much is made of the "national debt". Who do we (as a nation) owe the money to? I'm thinking of the US, but the question applies to any country. I suspect the answer is the bond holders (i.e. US series EE etc.). If so, how much of this debt is held by nationals of that country? How would one figure this out?

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Re: Can every debt be paid off?

Postby Zcorp » Mon Jan 19, 2015 6:13 am UTC

It is possible, although incredibly unlikely, and nothing significant would happen simply by having all dept be paid. It is incredibly unlikely because there is not really any benefit to everyone for removing all dept. Debt allows us to purchase and do things that we couldn't otherwise do and often those are good things for the individual taking on dept. Car loans, house loans, student loans for example.

However, the events that would lead to a situation where all dept was paid are likely to be significant.

If we lived in a world where everyone could afford things that generally take years or decades to save for, things would certainly have been very interesting in the decades previous. This would mean at least a generation of people living very poor (relative to the average standard of living of their country now) and saving a lot to pass on to their children, which would have very significant effect on the economy or reaching near post scarcity on many things that are quite scarce now.


ucim wrote:Now, a similar question. Much is made of the "national debt". Who do we (as a nation) owe the money to? I'm thinking of the US, but the question applies to any country. I suspect the answer is the bond holders (i.e. US series EE etc.). If so, how much of this debt is held by nationals of that country? How would one figure this out?

Americans have a part of the legislative branch whose job it is to track this information, the Government Accountability Office.
Here is a 2013 graphic displaying our debt at that time.

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Re: Can every debt be paid off?

Postby Izawwlgood » Mon Jan 19, 2015 5:27 pm UTC

approximately how much money is the us government owed?

accurate? http://www.firstpost.com/world/get-this ... 74314.html
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Re: Can every debt be paid off?

Postby duckshirt » Mon Jan 19, 2015 9:07 pm UTC

If everybody somehow, for some reason paid off all their debts... they would immediately start lending and borrowing again. Investment makes the world go around, it's a mutually beneficial practice that could have occurred before money or governments. Not sure what the US National Debt diversion has to do with the topic?

PS. All large companies use some forms of debt, even Ben and Jerry's
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Re: Can every debt be paid off?

Postby Ormurinn » Mon Jan 19, 2015 11:02 pm UTC

Not in a fiat-currency economy in which every dollar you have in savings is a dollar of someone else's debt.

You could conceivably have a hard money economy with no debts denominated in currency.

Advanced economies have existed without usury and did until the 1500s, but debt still existed.
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Re: Can every debt be paid off?

Postby Autolykos » Tue Jan 20, 2015 10:52 am UTC

I Am Not An Economist, but don't central banks take interests that essentially go nowhere when they are paid back? In that case, it shouldn't even be theoretically possible to pay all debt off. Which is still fine as long as the economy grows, but may lead to a game of musical chairs when it doesn't...

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Re: Can every debt be paid off?

Postby quantropy » Tue Jan 20, 2015 12:56 pm UTC

If the central bank printed lots of money then it could pay off the national debt. With all that money in the economy there would be plenty of opportunity for private individuals to pay off their debt as well, and people would be reluctant to lend money, because of what inflation (highly likely with all that money) would do to its value.

If there is no central bank, and all money is created by normal banks lending out money, then paying off this debt will mess things up: see http://memesonmemes.blogspot.com/2013/0 ... d-how.html

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Re: Can every debt be paid off?

Postby Zamfir » Tue Jan 20, 2015 1:29 pm UTC

I Am Not An Economist, but don't central banks take interests that essentially go nowhere when they are paid back?

I am not sure what you are referring to here? There are a lot of myths surrounding central banks.

In general, a central bank loans out new currency (or buys bonds, which is the same thing).This proces brings currency into the world. When those loans are paid back, the central bank makes new loans. They want to keep the currency out in the world.

If all loans in the world were paid back, that would include these loans. And then there would be no more currency as we know it.

That's absolutely possible, in theory. It would only happen if the central banks cooperate: they have to stop making new loans when the old ones come due. That would be silly, since the whole point of the exercise is to make currency available to the people. But it's not theoretically impossible.

EDIT: note that the central bank does not have to buy bonds to get currency out in the world. The bank could buy teddy bears instead. And sell the teddy bears again if it wanted to reduce the amount of currency on in the world.

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Re: Can every debt be paid off?

Postby Autolykos » Tue Jan 20, 2015 2:28 pm UTC

The way I understood it (but I may be mistaken) is that central banks loan out money to other banks at the base interest rate*. This money is created out of thin air and will vanish again when the loan is paid back, together with the interests. If the banks need more money, they have to take a new loan at the current base interest rate. This can supply unlimited amounts of money, but at the end of the day there's more new debt than new money created. In an economy that's working as designed (i.e. growing exponentially) this is still okay because inflation will keep that debt from exploding.

*Buying government bonds (or teddy bears) is not what they normally do; they're just doing it in the current crisis to keep the American economy (and government) from collapsing.

quantropy wrote:If there is no central bank, and all money is created by normal banks lending out money, then paying off this debt will mess things up: see http://memesonmemes.blogspot.com/2013/0 ... d-how.html
It is true that regular banks are allowed to lend out (limited amounts of) money they don't have. But they get to keep the interests on this as profit and can spend it. So in this case there's always exactly as much money as debt to go around.

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Re: Can every debt be paid off?

Postby Zamfir » Tue Jan 20, 2015 5:38 pm UTC

Well, it's at the same time more complicated, and less complicated.

More complicated, because central banks do more than just loan to banks. They buy long term assets, short term assets, government bonds or private assets, they demand collateral or make repurchase agreements, they but foreign currency, etc.

The details of that are not unimportant, but the basic principle is always the same: the central bank gets stuff/makes a loan, the rest of the world gets currency. And the central bank chooses every day if they need to buy more stuff (so there is more currency in the world), or sell stuff/let loans expire, so there is less currency around.

Now, the bank happens to make a profit on those loans and assets. But that's a side effect. It's not a key aspect of the system. I don't know where you got those ideas about 'more debt than currency, expontial growth, inflation, etc', but they're needless complications. Interest, repayment of the principal, selling an assets, they're all the same in that they draw currency from the world. Interest is not special there.

Also, the base interest rate is not the rate that the central bank charges for every loan! The central banks charges different rate for different leople and different situatiins. It's the observed market interest rate on very short term, very safe bonds. It currently fashionable that central banks look at that number to decide if they want to put out more or less currency. So, instead of saying ' we want 2.3 trillion dollars out there', they say ' we will put so many dollars out there, that the base rate is 1.9%’ . If the base rate goes up a little (so it's harder to borrow money), they will out our a little more currency to bring the rate down, and vice versa.

Think of it like driving a car: your foot controls how much gas is pumped into the engine. But you don't explicitly target the amount of gas, you say 'I'll try to keep the speed at 120 km/hr'.

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Re: Can every debt be paid off?

Postby Tyndmyr » Tue Jan 20, 2015 6:20 pm UTC

liveboy21 wrote:People borrow money for various reasons. Houses, cars, schools, businesses, continued survival and a few other reasons. People then attempt to earn enough money to pay their lenders for the privilege of having had access to money.

Is it possible for there to be a situation where every debt in the world is paid off at the same time? Would anything significant happen if the world were to reach such a state?


It is, I suppose, technically possible. But it isn't magic or anything(and in fact, would likely require a great deal of inconvenience to organize this all at the same time). Thus, it is practically quite impossible.

Debt is merely a financial tool. Like many, it can be used poorly, but it's not intrinsicly bad or anything. Trying to get rid of it altogether would definitely be throwing the baby out with the bathwater.

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Re: Can every debt be paid off?

Postby moiraemachy » Wed Jan 21, 2015 3:30 am UTC

Zamfir wrote:In general, a central bank loans out new currency (or buys bonds, which is the same thing).This proces brings currency into the world. When those loans are paid back, the central bank makes new loans. They want to keep the currency out in the world.

If all loans in the world were paid back, that would include these loans. And then there would be no more currency as we know it.
Disclaimer: not an economist. I disagree with your conclusion because there are ways to insert currency into the economy, no bonds attached. Say the FED prints money, gives it to the US treasury in exchange for treasury bonds, and then sells the bonds to some banker. FED uses the banker's money to pay it's employees, the government uses tax money to pay the banker, and boom: now there are dollar bills in circulation that cannot be recovered by the FED.

I am under the impression that most central banks are forbidden to produce "bondless" money directly, but they do it in roundabout ways. I'd like to hear from someone with more knowledge though.

Also, while we're at it... googling "amount of FED US bonds" gives me 3.46 trillion, while "dollars in circulation" gives me 1.29 trillion. So it seems there is no money to pay the FED if they for some reason decide to annihilate all circulating money. Am I looking at the correct numbers?

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Re: Can every debt be paid off?

Postby Derek » Wed Jan 21, 2015 4:40 am UTC

It is true that regular banks are allowed to lend out (limited amounts of) money they don't have.

Regular banks can only loan out money that have, usually by borrowing from depositors or another bank. For deposits they're also required to keep a certain fraction (usually around 10%) on hand, not loaning it out. But they can't simply loan money out of thin air.

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Re: Can every debt be paid off?

Postby Zamfir » Wed Jan 21, 2015 7:56 am UTC

Disclaimer: not an economist. I disagree with your conclusion because there are ways to insert currency into the economy, no bonds attached

Sure, that's why I said they could buy and sell teddy bears instead of bonds or loans. Or just give new currency directly to the government to be spent, as a shortcut to your example.
All I meant was that for the OP's scenario to come true, the presently existing system would have to be cancelled entirely.

There is a technicality though, for the scenario in the OP: suppose the government gives out new currency directly to pay for some of its supplies, no intermediate steps involving a central bank. This is still a lot like a loan. The supplier delivers 1000 cauliflowers to the army barracks, and receives a piece of paper saying 'the government owes you'. And come tax day, the supplier can give the IOU back. Or they can use that IOU to pay for their supplies in turn. If you want, you can call the IOU a 'dollar'.

In the end, that's what currency is, a peculiar kind of loan to the government. The modern central bank system just helps to separate the roles. The treasury decides how much they want to borrow in total, the central bank decides how much of those loans get replaced by currency and how much stay out as normal bonds.

You can still see this in the word 'bills' to refer to banknotes. Historically, people literally used signed invoices, bills, as currency. You delivered goods to a well-known and reputable person or institution, and you got them to sign your invoice. Now you had a bill, a piece of paper that said that the reputable person still owed the bearer for services rendered. And you could use this paper to buy stuff from strangers, because the strangers recognise the reputable source of the bill.

In that sense, the OP's world would not have currency, central bank or not. Because currency itself is a loan.


Also, while we're at it... googling "amount of FED US bonds" gives me 3.46 trillion, while "dollars in circulation" gives me 1.29 trillion. So it seems there is no money to pay the FED if they for some reason decide to annihilate all circulating money. Am I looking at the correct numbers?

Yes and no. Yes, in the sense that there are not enough physical bank notes and coins for that. But look here:http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1

Besides the 1.3 trillion in circulation, there is also 2.7 trillion 'reserve balances'. That's the (non physical) currency owned by ordinary banks, which they hold at an account at the central bank. That basically the '10%' that Derek talks about, the part of our bank accounts that the banks are not allowed to loan out again but have to keep as reserve. It's not necessarily 10%, though.

Look at the total sheet: the fed owns 2.4 trillion worth of government bonds, plus 2 trillion other stuff.

There is 1.3 trillion dollar 'out there', plus 2.7 trillion in the bank reserves, plus about 0.2 in the treasury's account (that's simply the petty cash of the government itself, using the fed directly as bank instead of a normal bank). The remainder are 'reverse repos', effectively temporary loans from other institutions to the fed.

The numbers cancel, since it's a balance sheet. In theory, it could be 'unwound'. With all the dollars going back and the repos rebought, in return for the assets owned by the fed. There would be 63 billion worth of assets left over, that's the 'capital' of the central bank. If I am not mistaken, if that number is growing too high the Fed pays out the excess to the government.

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Re: Can every debt be paid off?

Postby Autolykos » Wed Jan 21, 2015 1:08 pm UTC

Derek wrote:Regular banks can only loan out money that have, usually by borrowing from depositors or another bank. For deposits they're also required to keep a certain fraction (usually around 10%) on hand, not loaning it out. But they can't simply loan money out of thin air.

Wikipedia seems to be of a different opinion. They can, and do, loan out a multiple of the deposits they have. The reserve rate you quote defines how much more they may loan out. This does not happen at any individual bank, but when you start considering the whole system, the same unit of money is used as a deposit multiple times.

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Re: Can every debt be paid off?

Postby Zamfir » Wed Jan 21, 2015 1:33 pm UTC

@Autolykos, you might be misreading that article. There are 2 kinds of deposits here.The multiplier is the ratio between the deposits that the public has at the bank, and the deposits that the bank has at the central bank. The balance sheet of the central bank only counts those last deposits, but the first kind is also currency.

Ordinary banks do not loan out more money than they got in! Only the central bank does that.

Suppose people have 100 million in deposits at the bank. And the bank has 10 million in its reserve deposit at the central bank, or as paper banknotes in its vaults. The multiplier is 10. Then the bank can invest the remaining 90 million. So they can loan out 0.9 times the deposits they got in. A multiplier of 100 means they can loan out 0.99 times their deposits.

Suppose the multiplier is 1. For every dollar the public deposits at the bank, the bank has to deposit 1 dollar at the central bank or keep as banknote. Then the bank cannot loan out any money.

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Re: Can every debt be paid off?

Postby ucim » Wed Jan 21, 2015 3:46 pm UTC

The way I understand it, Joe gets paid $1000 by his employer and deposits it in his bank - Fleece National Trust (FNT). FNT now has $1000 in deposts. It puts $100 in reserve that it cannot lend out, but then lends $900 to Fred so he can buy a car. Fred gives the money to Alice in exchange for the car, and Alice deposits the money in her bank (FNT, as it turns out). FNT now has $1900 in deposits (obligations to its customers), $900 of which is on loan, $100 of which is on reserve. It puts another $90 on reserve and lends the remainder ($810) to Lucy to start a psychiatric practice. She hires Linus to paint a sign and pays him $810 (isn't nepotism wonderful!); Linus takes it to the bank to deposit. He also banks at FNT.

FNT now has $2710 in deposits... rinse and repeat.

That is where the idea of "lending money you don't have" comes from, but it's not really "money you don't have". What FNT is doing is creating obligations for itself, and if all goes well (all the loans get paid back per contract) everyone is happy.

If all of a sudden everyone decides they want their money out of the bank NOW, the bank can't do that. The bank is hoping this doesn't happen; the 10% is (in part) to allow the bank to meet the withdrawal needs of its customers. Now, the bank has arrangements with other banks (such as the Federal Reserve) so that, in the case that there is a run on the bank, the bank can borrow cash to pay its depositers. This is transparent to the depositers, and the presence of these arrangements tends to reduce the stampede effect of a bank run. FDIC insurance also plays into this; it's one of the "arrangements" the bank has with the fed.

Money is not a "thing". It's half of a thing, the other half being the obligation it's tied to. Like particle/antiparticle, money can only be created when its antiparticle (obligation) is also created. But money is easier to track and move around, so that's where the attention is.

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Re: Can every debt be paid off?

Postby Autolykos » Thu Jan 22, 2015 2:34 pm UTC

@ucim: Yep, that's exactly the concept I was going at in the second part of my post. I know that there's an ongoing dispute whether the money created this way is "real" money or if it is created at all - but it passes the duck test.

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Re: Can every debt be paid off?

Postby Yakk » Fri Jan 30, 2015 3:57 pm UTC

Money can be created without its antiparticle. There is nothing physically stopping the fed from printing money, or doing the same electronically.

We choose to make our money particles be created (usually) paired with an anti-money particle.

So long as those anti-money particles are "good", this means that there is demand for that money.

Anti-money particles are obligations, or debts, that need to be serviced (or cleared) with money, or the bearer of the anti-money particle (the debtor) gets in trouble somehow (maybe they lose goods (their assets, secured or not), maybe they lose creditworthiness -- in some sense, this detail doesn't matter, other than the fact that usually the owner of the debt gets the goods if the debtor defaults, which makes the debt "safer").

Bad anti-money particles are debts that the bearer has no intention of repaying. As they have no intention of repaying it, they don't fuel the demand for the paired money that was created with the anti-money particle. This means the ratio of money to demand for money is less than 1, which reduces its backing value.

So banks are forced to constantly check that their debts are good, and if they are bad are forced to foreclose/write the debts off. This forces the bank to wipe out the anti-money with money particles. This prevents bad anti-money from accumulating and messing with the economies balance sheet. (It is easy to fake bad anti-money as good anti-money as a bank: give someone who owes you money exponentially more (money+anti-money), then use the money to 'service' the old debt, and at first glance it looks like you have a growing business with someone borrowing money from you, when actually you are just generating an exponential bubble of bad anti-money).

If you cleared all the debts (through whatever reason) a problem occurs in that the money is now unbacked. People may accept it out of habit or intrinsic use (it is a good fire starter) (see gold), but they don't need it to keep the useful thing they own (like a house or a car). They might hope others will take their money for stuff, but with no debts, nobody has anything but a "a bigger idiot might offer me stuff for it" need for the money.

So the answer is "yes, you can destroy all debt" (well, all "living" debt). There is probably enough cash assets to do this, and if there isn't, we have institutions who are allowed to create more.

But the institutions that are allowed to create more have the job of making sure this doesn't happen. They want money in circulation, and they want that money to have backing. So as the money in circulation goes down (as it annihilates with anti-money), they will simply make it cheaper and cheaper to borrow (thus creating more pairs of money and anti-money) in order to keep the supply up.

Eventually the cost to borrow gets so low that you don't bother repaying your debts, because it isn't worth the bother, and instead do something with the money (hopefully worth more to you than a cleared debt).

Note that the state of no money and no debts is a bad one. Without backed money, it is hard to arrange for someone to do something for you that they are good at (say, pave your driveway) without directly exchanging your own physical goods or skills with them. And direct barter exchange is hard to line up right, and makes pricing even harder. Your best bet (to survive) would probably to form small, insular self sustaining communities that use a gift culture to exchange goods, or to try to boot up the money economy again.
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Re: Can every debt be paid off?

Postby ucim » Sat Jan 31, 2015 1:44 am UTC

Yakk wrote:Money can be created without its antiparticle. There is nothing physically stopping the fed from printing money, or doing the same electronically.
Currency that the Fed "prints" is an IOU. It is, actually, evidence of the antimony that is created. The debt is created by the printing of the bill.
Spoiler:
Currency, actually. I won't go into the "intrinsic value" issue (money vs currency), as "intrinsic value" is itself subjective, so I'll treat the two as equivalent. You can't eat gold.
Creating "evidence of a debt" that you do not have the right to create is counterfeiting, and creating "evidence of a debt" that you have no intention of fulfilling is fraud - pretty much the same thing. However, "government just printing money" is neither, in most cases. If done right, having more currency in circulation makes it easier for the government to service the debt it created (because it keeps the economy moving), and thus, without extra effort, it can service more debt - ideally equal to the amount of "money" it created.

Print too much and you get runaway inflation, too little and you get stagnation. Maintaining this balance (and thus helping maintain a healthy economy) is part of the job of the treasury department, which is why they can do it in the first place.

Not all obligatins are created equal. That's why foreign currencies float with respect to each other - it is based on the perception that the country in question can/will service the obligation it created.

Similarly, once created, money/Sb pairs do not remain quantum-entangled. Currency is fungible, and so is the debt it creates.

Spoiler:
Ok, I lied about the money/currency thing, because I thought of an analogy. Money (standardized pieces of intrinsic value such as gold coins) can be thought of as a combination of currency and antimony. The gold coin represents a debt, and is its own debt fulfillment, by virtue of the intrinsic value the gold has. When the two are separated (such as in a US gold certificate) the currency (standardized marker) goes one way, and the debt (I owe you some real gold) goes the other way. This is the particle/antiparticle creation. Modern currency's antiparticle is no longer explicitly evidenced in metal, but does represent services the government owes us, evidenced in its own acceptance of this currency for debts we owe the government.
It is possible to have a situation where debts cannot all be cleared (Simple case: Fred owes me a plowed field, but he broke his back yesterday). However, in a case where all debt could be cleared, and subsequently was, nothing stops people from going back into debt again to accomplish the things that debt lets them do. And clearing all debts should not be confused with a state of money (the concept) not existing, unless the government and the banks decide subsequently to not lend any more. But that's a different scenario.

edit to fix quote fail
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Zamfir
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Re: Can every debt be paid off?

Postby Zamfir » Sat Jan 31, 2015 9:02 am UTC

Currency that the Fed "prints" is an IOU. It is, actually, evidence of the antimony that is created. The debt is created by the printing of the bil

Perhaps, but not in a straightforward way. High-powered money looks a like formal debt. The central bank puts it in its books as a liability. Reserves are surrounded by the terminology of deposits. Banknotes are styled after bearer bonds.

But it's not a real obligation in the sense that Yakk describes:
Anti-money particles are obligations, or debts, that need to be serviced (or cleared) with money, or the bearer of the anti-money particle (the debtor) gets in trouble somehow

Central banks are not obliged to anything by their outstanding money. A dollar is indeed an IOU, but it's an IOU of a dollar. You present a dollar to the central bank, and it's only obligation is to give you a dollar in return. Can even be the same dollar. I think Yakk is correct that potential 'trouble' is part of an obligation, and there is no formal trouble involved with central bank money.

Lower powered money, like my bank account, is indeed a real obligation. An obligation to hand over higher powered money on demand. It's a historic quirk that we use that same style all the way up the money hierarchy, up to the money base that consist of 'obligations' to hand over itself on demand.

There is another, implicit deal involved with : the government promises that it won't debase the currency too much. You can pay your taxes in the future with those dollars, at a value not too different from the present value. In that sense even the money base is a real obligation from the government to the holders of the money.

But it's a very weak obligation. No hard promises, nothing on paper, no numeric limits, every room for emergency measures if deemed necessary.It's closer to a wedding vow than to a mortgage. It's a matter of semantics whether such a weak obligation still counts as a debt in the sense of the OP.

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Re: Can every debt be paid off?

Postby ucim » Sat Jan 31, 2015 1:26 pm UTC

Zamfir wrote:
Currency that the Fed "prints" is an IOU. It is, actually, evidence of the antimony that is created. The debt is created by the printing of the bill
Perhaps, but not in a straightforward way. High-powered money looks a like formal debt. The central bank puts it in its books as a liability. Reserves are surrounded by the terminology of deposits. Banknotes are styled after bearer bonds.

But it's not a real obligation in the sense that Yakk describes:
Anti-money particles are obligations, or debts, that need to be serviced (or cleared) with money, or the bearer of the anti-money particle (the debtor) gets in trouble somehow
[...]

Well, the government is "us" in a sense; one that applies here. If the debt I am talking about does not get serviced, the currency becomes less valuable, runaway inflation occurs, the economy crashes, and this is (one of) the "somehow" that the government gets in trouble. But government is "us", and a dead economy hurts "us", so it ends up being reflexive. With (e.g.) gold backed currency, the government would owe us a certain amount of gold per dollar. I can take it home and it's mine, and not yours. With fiat backed currency, the government owes us a functioning economy. But it's not "mine" - it's a more diffuse kind of debt.

I suppose it's more akin to a stock certificate than a bond. A dollar (or a ruble) represents a share in a functioning economy now, as opposed to a certain amount of gold or salt or bearskins. You might be able to trade your share (in ABC corp) to somebody else for a bearskin, but you can't take it to ABC corp itself and (reasonably) expect to walk away with a concrete "piece" of the company's assets.

It's debt in the same sense that an electron spins.

Jose
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Sat Feb 14, 2015 3:48 am UTC

Good topic! I hope I'm not too late.

I am of the camp that considers all money to be a form of debt, so the only truly debt-free transactions one can make are barter transactions, where you immediately settle up with your goods. So, if you want to have money, then you have to have debt. And the more debt you have, the better the economy is doing, generally.

I noticed a number of misconceptions about our banking system earlier in the thread. Banks do indeed create money out of thin air - when you take out a loan for $100,000, the bank simply marks up your account by $100K, and creates a matching $100K obligation where you repay the loan (forget interest for now). On the bank's books, the loan becomes a $100K asset (borrower's obligation to repay) and a $100K liability (the $100K in borrower's account). (I recently read a paper where a guy actually went through the trouble to prove this, by taking out a 200K loan from a small German bank, and (with the bank's help) monitoring the bank's ledger. I'll post the link if anybody is interested, but it's not as enlightening as one might hope. It just nails down that one point.) The credit dollars are extinguished as the loan is paid off. Reserves are not created with the new loan - with all the excess reserves banks are carrying now after QE, they probably have all the necessary reserves already on hand. But reserves are just a legal requirement anyway - some countries don't have a reserve requirement at all, and just make sure they have enough reserves to settle up at the end of the day - so reserves really aren't that important to the story. It is completely possible to have a debt-based banking system without reserves or capital requirements. Those things are only important if something goes wrong.

As for government-created money, it depends on how you look at it. In an accounting sense, the government also expands its balance sheet by creating assets (dollars) and matching liabilities, but they simply hold the liabilities themselves, while the assets enter the economy and are liability-free for the holder. (The "liabilities" are sort of illusory, because the government is under no further obligation on the dollars they set free into the economy.) The only way to extinguish a government liability is for the government to remove some net dollars from the economy by running a budget surplus. Bonds and dollars are both government liabilities, and really aren't all that different in an accounting sense.

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Re: Can every debt be paid off?

Postby Derek » Sat Feb 14, 2015 6:27 pm UTC

johnfrmcleveland wrote:Banks do indeed create money out of thin air - when you take out a loan for $100,000, the bank simply marks up your account by $100K, and creates a matching $100K obligation where you repay the loan (forget interest for now). On the bank's books, the loan becomes a $100K asset (borrower's obligation to repay) and a $100K liability (the $100K in borrower's account).

Nope. Unless it's a central bank with the authority to print money, there have to be actually assets to back up the loan.

Reserves are not created with the new loan

Of course not, the reserves already exist. When a new loan is issued, that money comes from the reserves.

- with all the excess reserves banks are carrying now after QE, they probably have all the necessary reserves already on hand. But reserves are just a legal requirement anyway - some countries don't have a reserve requirement at all, and just make sure they have enough reserves to settle up at the end of the day - so reserves really aren't that important to the story. It is completely possible to have a debt-based banking system without reserves or capital requirements. Those things are only important if something goes wrong.

Sure, you could try to run a system in which there was no reserve requirements and bank were allowed to loan out money that they didn't have. But it would fail pretty quickly. A bank would give out a loan with imaginary assets, the money would be spent on a house or something, get deposited in a new bank, and then that bank would ask the originating bank for the assets it's owed. When the originating bank can't produce the assets, it has failed.

In the modern world, I think banks usually keep their reserves with the fed. So when a bank asks another bank for the assets it's owed, in practice the fed just has to shuffle some numbers around to represent the transaction while all the assets stay in one physical location, instead of transferring large stacks of cash or gold, but the requirement for the assets to be real is still there.

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Re: Can every debt be paid off?

Postby johnfrmcleveland » Sat Feb 14, 2015 8:27 pm UTC

Derek wrote:
johnfrmcleveland wrote:Banks do indeed create money out of thin air - when you take out a loan for $100,000, the bank simply marks up your account by $100K, and creates a matching $100K obligation where you repay the loan (forget interest for now). On the bank's books, the loan becomes a $100K asset (borrower's obligation to repay) and a $100K liability (the $100K in borrower's account).

Nope. Unless it's a central bank with the authority to print money, there have to be actually assets to back up the loan.


The loan is the asset. If banks only loaned out already-existing money, how could they grow the money supply? I mean, that doesn't even work with the old fractional reserve theory (which is also incorrect).

http://www.sciencedirect.com/science/ar ... 1914001070

Derek wrote:
Reserves are not created with the new loan

Of course not, the reserves already exist. When a new loan is issued, that money comes from the reserves.


No, it doesn't. Common sense tells you that it can't, because there are a bunch more bank loans than there are reserves. Here's a good paper on the subject, by the Chief Global Economist at S&P: Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves https://www.kreditopferhilfe.net/docs/S ... _14_13.pdf

Derek wrote:
- with all the excess reserves banks are carrying now after QE, they probably have all the necessary reserves already on hand. But reserves are just a legal requirement anyway - some countries don't have a reserve requirement at all, and just make sure they have enough reserves to settle up at the end of the day - so reserves really aren't that important to the story. It is completely possible to have a debt-based banking system without reserves or capital requirements. Those things are only important if something goes wrong.


Sure, you could try to run a system in which there was no reserve requirements and bank were allowed to loan out money that they didn't have. But it would fail pretty quickly. A bank would give out a loan with imaginary assets, the money would be spent on a house or something, get deposited in a new bank, and then that bank would ask the originating bank for the assets it's owed. When the originating bank can't produce the assets, it has failed.


Banks don't exchange assets like that. Banks exchange the credit they have created. With reserve banking, banks settle up by moving dollars from one reserve account to another, but only for the net difference, which is small in comparison to the total amount of credit that moves back and forth. If Bank A makes a $1 million loan that gets deposited in an account in Bank B, and Bank B makes a $1 million loan that is deposited in Bank A, no reserves are moved at all, no assets exchanged, nothing at all moves between the two banks. But now, each one has $1 million more in assets and $1 million more in liabilities, and M1 has gone up by $2 million.

Besides, the banks don't owe each other anything. The liability on the loans are with the borrowers. If they fail to repay the bank, then the bank will seize the borrower's collateral to become whole again. Failing that, the bank will eat the loss itself.

Failed loans are the only reason banks need assets - because we want to make sure that the bank can survive some bad loans.

Derek wrote:In the modern world, I think banks usually keep their reserves with the fed. So when a bank asks another bank for the assets it's owed, in practice the fed just has to shuffle some numbers around to represent the transaction while all the assets stay in one physical location, instead of transferring large stacks of cash or gold, but the requirement for the assets to be real is still there.


Yes, reserves move when banks settle up. But if the Fed did not exist, banks could easily settle up directly with credit, or simply some of their profits, and achieve the same result. But assets don't move just because loans have been made. The movement of reserves only account for the net difference. The loans themselves are created from thin air.

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Re: Can every debt be paid off?

Postby ucim » Sat Feb 14, 2015 9:37 pm UTC

johnfrmcleveland wrote:The loan is the asset.
Uh... if I want to buy a car and don't have the money, I go to a bank and promise to give them money later, in exchange for... what? To make this work, the bank has to give me something that I can take to the car dealership, or to my cousin's friend Albert, in exchange for an actual car. In essence, the bank has to give me money, which means it has to have it first. Somebody has to walk in with a deposit, which the bank will then turn around and hand to me. The bank promises the depositor to pay them back at some point in some manner, and I promise to pay the bank back at some point in some manner. These banks are not creating money, they are just moving it around (which is a good thing, but not quite the same thing).

Now, money itself is nothing more than a promise by a government - an IOU. It used to be (in the US) that it was a promise of shiny metal. Now it's not. Instead it's a promise of "a share in a functioning economy".

Government (through its top tier banks) makes money out of thin air, but every time the governmnet prints money, it's actually making the promise above while it oils the economy by doing so. Do it right and real wealth (dirt turned into goods) increases. Do it wrong and you get a puddle of used oil, killing the economy and worthlessizing the promises it had made.

Jose
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Sat Feb 14, 2015 10:21 pm UTC

ucim wrote:
johnfrmcleveland wrote:The loan is the asset.
Uh... if I want to buy a car and don't have the money, I go to a bank and promise to give them money later, in exchange for... what? To make this work, the bank has to give me something that I can take to the car dealership, or to my cousin's friend Albert, in exchange for an actual car.


Right. In most circumstances, you will pay with a check, and the check will be sufficient. When you get paid, you get a check to deposit into your account - that is the payment. The markup of your account is "something." It allows you to transfer those dollars to other accounts in exchange for goods or services.

If you want cash, cash comes out of a bank's vault cash, which counts as reserves. Seller will then deposit the cash into his account, the bank marks up his account and adds the cash to their vault cash, and the transfer of reserves has already happened. The net result is exactly the same.

If you don't have a bank account, you might make the transfer with a prepaid card instead of a check. The cash isn't really necessary as long as we have some other means of keeping score.

ucim wrote:...In essence, the bank has to give me money, which means it has to have it first. Somebody has to walk in with a deposit, which the bank will then turn around and hand to me. The bank promises the depositor to pay them back at some point in some manner, and I promise to pay the bank back at some point in some manner. These banks are not creating money, they are just moving it around (which is a good thing, but not quite the same thing).


Banks don't lend out of deposits. Nor do they really need them. (There are lots of papers that explain this.) Most deposits are merely checks, anyway. These all result in the same thing - a transfer of credit, or I.O.U.s, if you prefer, from one account to another. At the heart of it, everybody is merely exchanging I.O.U.s, and the underlying assets are the labor you do to get paid, and the goods and services you buy.

You aren't bartering, so each transaction includes a debt. You earned your paycheck last week, but you spend your earnings later. The store sells you groceries now, but they will spend their earnings later. When you hold a dollar (or simply have a dollar in your bank account), that is a debt owed to you. You have already worked to earn that dollar, but you have not yet exchanged it for anything.

ucim wrote:Now, money itself is nothing more than a promise by a government - an IOU. It used to be (in the US) that it was a promise of shiny metal. Now it's not. Instead it's a promise of "a share in a functioning economy".

Government (through its top tier banks) makes money out of thin air, but every time the governmnet prints money, it's actually making the promise above while it oils the economy by doing so. Do it right and real wealth (dirt turned into goods) increases. Do it wrong and you get a puddle of used oil, killing the economy and worthlessizing the promises it had made.


When government money enters the economy, it enters through spending. People and businesses work to earn those dollars, so they induce production that would not otherwise have happened. And the money they just transfer to people - SS checks and welfare checks, etc. - that money gets spent by the recipients in short order. So money does not just get sprinkled over the economy, it enters through spending. And that leads to more production.

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Re: Can every debt be paid off?

Postby ucim » Sun Feb 15, 2015 3:33 am UTC

johnfrmcleveland wrote:Right. In most circumstances, you will pay with a check
A check isn't money. If it were, you and I could create money out of thin air. A check is a request that some entity that holds your money transfer it to some other bank. It's a needless complication to consider checks. Stick to dollar bills.
Spoiler:
...which are currency, not money, as they have no "intrinsic value" either - they are just promises from the government. But for these purposes we can treat them the same.
johnfrmcleveland wrote:If you want cash, cash comes out of a bank's vault cash
The bank has to have that cash in its vault for this to work. The bank can't print any by itself.

Don't confuse the methods of keeping score with what the score is made of in the first place.

johnfrmcleveland wrote:Banks don't lend out of deposits.
That's news to me. There may be accounting systems that shuffle numbers around, but no deposits, no bank.

johnfrmcleveland wrote:At the heart of it, everybody is merely exchanging I.O.U.s
Yes, that's what currency is - an IOU from the government that prints it.

Go back to the gold standard. I give you gold, you paint my house. Nobody owes anything.

Next step. I give my gold to the US government, they give me a piece of paper that says they will give me that amound of gold back on demand. It's lighter than carrying around real metal. Government owes me gold. I give you this gold certificate, you paint my house. Now the government owes you gold. I'm out of the loop.

Next step. I take that gold certificate and give it to my bank. Now the bank owes me a gold certificate, and the government owes the bank gold. Fred wants a car but has no money. Assuming he can convince the bank he's a good risk, he promises to give the bank two gold certificates next year, the bank gives him one gold certificate, he gives that certificate to the dealer, and drives away with a car. The government owes the dealership one unit of gold, the bank owes me one gold certificate, and Fred owes the bank two gold certificates payable next year. The government doesn't owe the bank anything. Over the course of the year, Fred has to come up with more gold, which he digs up and refines in his own back yard.

Fred has created money (money being a proxy for goods).

Banks are nothing more than a way to keep track of all these underlying promises, but they all boil down to who it is that has a claim on the government's gold.

As Einstein was once (mis?)quoted as saying: "The telegraph is like a very long cat. You pull its tail in New York and it's meowing in California. Wireless is the same thing, except there's no cat." Once you have a working economy, you can take the gold away and it will still work. The government that printed the certificates (that were once gold certificates) now makes a different promise - that the economy will continue nicely and people will be confident enough in the economy to keep pretending currency is worth something. This makes it worth something. But if the economy falters, there's no gold for people to rush to. So, it had better not falter!

johnfrmcleveland wrote:When you hold a dollar (or simply have a dollar in your bank account), that is a debt owed to you.
Correct. But by whom? And of what? That's where money is "created out of thin air". Not at the banks (that we get to use).

johnfrmcleveland wrote:When government money enters the economy, it enters through spending.
Correct. Government spending, to be specific. People create real goods and get a government promise in exchange. Money is created at that point. It is not created further down the chain, just shuffled around.

johnfrmcleveland wrote:And that leads to more production.
That's the idea. But if what is produced in exchange is valueless, it will not grow the economy - it's like paying people to move rocks back and forth. Dollars will be worth less, and ultimately, dollars will be worthless. OTOH, if what is produced is useful (like a virus that will eat spam) then the economy will grow, and dollars will be worth more.

Jose
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Sun Feb 15, 2015 5:25 am UTC

ucim wrote:
johnfrmcleveland wrote:Right. In most circumstances, you will pay with a check
A check isn't money. If it were, you and I could create money out of thin air. A check is a request that some entity that holds your money transfer it to some other bank. It's a needless complication to consider checks. Stick to dollar bills.
Spoiler:
...which are currency, not money, as they have no "intrinsic value" either - they are just promises from the government. But for these purposes we can treat them the same.


We can create credit. If you own a store, you can extend credit to a customer. You could even count this debt as an asset on your books.

The only difference between a dollar created by the government and a dollar created by a bank loan is that the matching liability of the bank loan remains in our economy (somebody owes the bank a dollar), while the government holds the liability on their own dollars. But there is no difference to the holder. If you hold dollars from a bank loan, you can do all of the same stuff you could do with government dollars, including converting them to cash, paying taxes, etc.

If you get a check from the government - tax refund, SS check, paycheck, etc. - it all goes through private banks. The government (the Fed) marks up the reserve account at your bank, and your bank marks up your account. All the dollars in your account are the same, no matter where they came from.

ucim wrote:
johnfrmcleveland wrote:If you want cash, cash comes out of a bank's vault cash
The bank has to have that cash in its vault for this to work. The bank can't print any by itself.


They only need cash if you want cash. But most transactions these days don't involve cash at all. And a century ago, banks used to print their own banknotes. It's only a legal restriction, not an operational one, that prevents them from doing so today.

Earlier in the thread somebody brought up the fact that the dollars (and the debts) created by banks are fungible - they are indistinguishable from the dollars created by the government. Printing of banknotes is only done by the government, but it is done at the request of banks. The Fed just enters numbers into computers to create dollars, they don't bother with banknotes. Banknotes enter circulation when banks buy them (from the Fed) with reserves - when there is a demand for more ATM/vault cash, banks transfer some of their (electronic) reserves at the Fed for physical banknotes.

ucim wrote:Don't confuse the methods of keeping score with what the score is made of in the first place.


I'm not confused at all. What do you think the score is made of?

ucim wrote:
johnfrmcleveland wrote:Banks don't lend out of deposits.
That's news to me. There may be accounting systems that shuffle numbers around, but no deposits, no bank.


It's news to a lot of people. But it's the truth. It's very possible to run a bank with no deposits at all. Banks just take deposits because it's a bit cheaper than borrowing reserves (which are also not lent out).

ucim wrote:
johnfrmcleveland wrote:At the heart of it, everybody is merely exchanging I.O.U.s
Yes, that's what currency is - an IOU from the government that prints it.


In your hands, a dollar is more of a general I.O.U. from the economy - you will later cash it in for some goods or services. The government doesn't owe you anything, does it?

ucim wrote:Go back to the gold standard. I give you gold, you paint my house. Nobody owes anything.


There are lots of reasons why we are better off with fiat currency than with gold. Mostly, we have the flexibility to expand and contract our money supply as needed.

ucim wrote:Next step. I give my gold to the US government, they give me a piece of paper that says they will give me that amound of gold back on demand. It's lighter than carrying around real metal. Government owes me gold. I give you this gold certificate, you paint my house. Now the government owes you gold. I'm out of the loop.


Your obligations are over once you pay me either way. Your house is painted, and I now hold a dollar, or a gold certificate. What's the difference? Few people ever bothered to trade in their convertible currency for gold, anyway - they were more useful as paper that we could buy stuff with.

ucim wrote:Next step. I take that gold certificate and give it to my bank. Now the bank owes me a gold certificate, and the government owes the bank gold. Fred wants a car but has no money. Assuming he can convince the bank he's a good risk, he promises to give the bank two gold certificates next year, the bank gives him one gold certificate, he gives that certificate to the dealer, and drives away with a car. The government owes the dealership one unit of gold, the bank owes me one gold certificate, and Fred owes the bank two gold certificates payable next year. The government doesn't owe the bank anything. Over the course of the year, Fred has to come up with more gold, which he digs up and refines in his own back yard.

Fred has created money (money being a proxy for goods).


What if you can't dig up any more gold? Then, as your economy grows, you are eventually faced with a shortage of money. That was our problem before. Our economy needed more money than we could squeeze out of our gold.

ucim wrote:Banks are nothing more than a way to keep track of all these underlying promises, but they all boil down to who it is that has a claim on the government's gold.


I think it's more of a claim on the economy's production, because that's what you are going to be buying, ultimately.

ucim wrote:As Einstein was once (mis?)quoted as saying: "The telegraph is like a very long cat. You pull its tail in New York and it's meowing in California. Wireless is the same thing, except there's no cat." Once you have a working economy, you can take the gold away and it will still work. The government that printed the certificates (that were once gold certificates) now makes a different promise - that the economy will continue nicely and people will be confident enough in the economy to keep pretending currency is worth something. This makes it worth something. But if the economy falters, there's no gold for people to rush to. So, it had better not falter!


But it's not nothing! That dollar is backed by our economy's production. As long as our economy can meet demand, those dollars will hold their value.

If you instead had gold, and our economy was no longer producing enough, the gold wouldn't help you much. You could buy stuff from other countries, but once your gold and your production was gone, you would be out of luck.

ucim wrote:
johnfrmcleveland wrote:When you hold a dollar (or simply have a dollar in your bank account), that is a debt owed to you.
Correct. But by whom? And of what? That's where money is "created out of thin air". Not at the banks (that we get to use).


By the economy as a whole. You have done your work, and you got paid. If this were a barter economy, you would have taken home your chickens and pigs right when you were finished with your job. But you hold a unit of debt, and because it's fungible and denominated in a common unit, you can redeem it later, and it transfers to the guy who just sold you something; now, the economy owes him something. And it doesn't matter if that dollar came from the government or a bank - it's all the same to the holder.

ucim wrote:
johnfrmcleveland wrote:When government money enters the economy, it enters through spending.
Correct. Government spending, to be specific. People create real goods and get a government promise in exchange. Money is created at that point. It is not created further down the chain, just shuffled around.


When a business gets a bank loan, they put that money to work. Part of it is used to buy supplies, part of it is used to pay salaries, etc. If you get paid by the company for your work, you now hold some dollars, and they work just fine. The only difference is that the business has to repay it's loan, while the government does not. So, no, these are not just government-created dollars that are being shuffled around - they are new. (They are also temporary, because as bank loans get paid off, those new dollars get extinguished. But only in an overall, net sense. New bank loans are always being created, too.)

ucim wrote:
johnfrmcleveland wrote:And that leads to more production.
That's the idea. But if what is produced in exchange is valueless, it will not grow the economy - it's like paying people to move rocks back and forth. Dollars will be worth less, and ultimately, dollars will be worthless. OTOH, if what is produced is useful (like a virus that will eat spam) then the economy will grow, and dollars will be worth more.


Whether it's government spending or bank loans, chances are that the new dollars are going to productive uses. Nobody takes out a loan just to pay interest.

But lots of "useless" things get produced. As long as our economy produces the necessary stuff, like food, shelter, and energy, the rest is, to some degree or another, just fluff. But as long as it keeps everybody buzzing, it serves to distribute production around enough so that everybody (hopefully) can eat. If you have enough extra money, you will buy some wasteful stuff - expensive meals, manicures, art, a lawn service, etc. - but your dollars will be used by others to buy food and shelter.

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Re: Can every debt be paid off?

Postby ucim » Sun Feb 15, 2015 5:53 pm UTC

johnfrmcleveland wrote:We can create credit. If you own a store, you can extend credit to a customer. You could even count this debt as an asset on your books.
But that's not the same as creating money, because this credit cannot be freely transferred. And in this case, it's the customer that "created" the credit, in the form of an IOU, which I accepted. I can't take that IOU to the restaurant next door and get a hamburger, and while there are limited markets for IOUs, that doesn't make it money. Nobody is obligated to accept it in the satisfaction of a debt.

johnfrmcleveland wrote:The only difference between a dollar created by the government and a dollar created by a bank loan...
A dollar is an obligation from the government. Dollars are not created by bank loans. They are moved around, but not created.

johnfrmcleveland wrote:They only need cash if you want cash. But most transactions these days don't involve cash at all.
That's just mechanics. Scorekeeping without cash behind it is fraud.

johnfrmcleveland wrote:I'm not confused at all. What do you think the score is made of?
Obligations of the government to the cashholders.

johnfrmcleveland wrote:It's very possible to run a bank with no deposits at all. Banks just take deposits because it's a bit cheaper than borrowing reserves (which are also not lent out).
If the bank borrows reserves, then it has the money. It is obligated to pay that money back, but the money is in the vault (or in the computer system).

johnfrmcleveland wrote:In your hands, a dollar is more of a general I.O.U. from the economy - you will later cash it in for some goods or services. The government doesn't owe you anything, does it?
It owes me a functioning economy. In the past, it would owe me gold. Yes, it's different, but it's still an obligation. And whether it is "better" or not is not the point. (I was not advocating a return to the gold standard, just using it as the canonical simple example)

Much of the rest of your comments are by way of agreeing with me. But it's not true that "Nobody takes out a loan just to pay interest.". That's actually a pretty common scenario. It usually leads to bankruptcy. Which is also not uncommon.

johnfrmcleveland wrote:And it doesn't matter if that dollar came from the government or a bank - it's all the same to the holder.
If in fact it's an actual dollar, then the place I got it from does not matter. But if you are postulating that a (consumer) bank "creates" a dollar - creates new obligations from the government, then I still differ here.

Jose
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Sun Feb 15, 2015 9:00 pm UTC

ucim wrote:
johnfrmcleveland wrote:We can create credit. If you own a store, you can extend credit to a customer. You could even count this debt as an asset on your books.
But that's not the same as creating money, because this credit cannot be freely transferred. And in this case, it's the customer that "created" the credit, in the form of an IOU, which I accepted. I can't take that IOU to the restaurant next door and get a hamburger, and while there are limited markets for IOUs, that doesn't make it money. Nobody is obligated to accept it in the satisfaction of a debt.


No, but it's an illustration of how credit is created. Banks just have a special relationship with the Fed that allows them access to formalize the creation of dollars.

ucim wrote:
johnfrmcleveland wrote:The only difference between a dollar created by the government and a dollar created by a bank loan...
A dollar is an obligation from the government. Dollars are not created by bank loans. They are moved around, but not created.


Did you read any of those links I posted earlier? I'm not just making this up.

If, as you say, deposits were just moved around, it would show up on the bank's books like that - total assets and liabilities wouldn't change when you took out a loan, because the money would be coming out of other people's deposit accounts. But that's not what happens. When you take out a loan for $100,000, the bank's assets and liabilities both go up by $100K, which is exactly what happens when you "expand your balance sheet." In other words, creating assets and liabilities out of thin air.

ucim wrote:
johnfrmcleveland wrote:They only need cash if you want cash. But most transactions these days don't involve cash at all.
That's just mechanics. Scorekeeping without cash behind it is fraud.


How so?

ucim wrote:
johnfrmcleveland wrote:I'm not confused at all. What do you think the score is made of?
Obligations of the government to the cashholders.


Again, ask yourself, what obligation is the government under?

The actual obligations are between the bank and the borrower. If you get a loan from the bank, it's the bank that gives you dollars, and it's you that must repay the bank. The government has nothing to do with that.

ucim wrote:
johnfrmcleveland wrote:It's very possible to run a bank with no deposits at all. Banks just take deposits because it's a bit cheaper than borrowing reserves (which are also not lent out).
If the bank borrows reserves, then it has the money. It is obligated to pay that money back, but the money is in the vault (or in the computer system).


Please read those links. Banks do not lend out of reserves. Reserves are not what "give the bank money." Remember, banks used to operate without a Fed, and without reserves.

It can be difficult to get a handle on this idea, because it's not intuitive, but banks really do create credit out of thin air. Once you see that it is possible for banks to operate this way, it becomes easier to see that central banks, reserves, capital requirements, and even banknotes are just optional accessories, and are not operationally necessary.

ucim wrote:
johnfrmcleveland wrote:In your hands, a dollar is more of a general I.O.U. from the economy - you will later cash it in for some goods or services. The government doesn't owe you anything, does it?
It owes me a functioning economy. In the past, it would owe me gold. Yes, it's different, but it's still an obligation. And whether it is "better" or not is not the point. (I was not advocating a return to the gold standard, just using it as the canonical simple example)


While a government should certainly foster a healthy economy, that's really not the obligation behind a dollar.

ucim wrote:
johnfrmcleveland wrote:And it doesn't matter if that dollar came from the government or a bank - it's all the same to the holder.
If in fact it's an actual dollar, then the place I got it from does not matter. But if you are postulating that a (consumer) bank "creates" a dollar - creates new obligations from the government, then I still differ here.


Well, since dollars really don't oblige the government to do anything, dollars created by a bank don't oblige the government to do anything, either. They only oblige the borrower to pay them back, with interest. And that's where the obligation should be. It keeps people producing in a continuous quest for more dollars.

Look at this in a more bank-centric way, as opposed to a government-centric way, and it becomes easier to understand. Dollars are little I.O.U.s. Banks create matching assets and liabilities by expanding their balance sheets - they create $100K of new dollars, and you have to pay them back with $100K. When that debt is repaid, the dollars cease to exist. This is the way that most of our (M1) dollars are created. There are lots of dollars out there from loans that are not yet fully paid back, and lots of new loans being made every day. That's plenty of dollars for the economy to operate with.

Now factor in the government. Because they make the laws, they (like most governments) have created a central bank, and given that central bank the power to create dollars. They have also given themselves the sole authority to print up banknotes. What does this all mean in practice? Well, when the government's central bank expands its balance sheet, it can just hold the liabilities and never have to pay itself back, because it can never go out of business. The Fed does not need to be "paid back" in order to stay in business. So when the government creates dollars and spends them, they enter the economy with no matching obligation to be repaid (unlike bank-created dollars). That's the only real difference. The printing of banknotes is just a service to the banks - the dollars printed by the govt. are just portable I.O.U.s. Like I mentioned before, the government itself doesn't bother with banknotes. They don't spend with cash. They don't even accept cash in payment for taxes.

:arrow: Great discussion, btw. Thanks for keeping it going.

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Re: Can every debt be paid off?

Postby ucim » Tue Feb 17, 2015 5:38 am UTC

johnfrmcleveland wrote:Did you read any of those links I posted earlier? I'm not just making this up.
I skimmed, but did not study, those links. The first one seemed to be a series of quotes from a bunch of other sources, followed by what seems to me to be a dumb "experiment" to find out how banks (or at least one bank that would show them) keep track of their business. I hardly consider this useful. The other talks about "lending out of reserves", which is not what (I think) I'm talking about.

Let me ask you this: If you buy a car from me for ten thousand dollars, and do so by writing a personal check, did you just create ten thousand dollars out of thin air? When I get the check, I write in my personal leger book (which keeps track of my "net worth" that I received ten thousand dollars. Then I take this check to Albert, who has a piano for sale. Interestingly, the piano also costs ten thousand dollars, so I sign the back of the check and give it to him in exchange for his piano. Now that the piano is out of the way, Albert signs the check over to Dolly's Floor Coverings in exchange for carpeting, coincidentally valued at ten thousand dollars, installed. This continues until the check comes back to you, in the form of Zelda wanting to buy your antique chandelier. You sell it for ten thousand dollars, take the check, and rip it up.

johnfrmcleveland wrote:
ucim wrote:That's just mechanics. Scorekeeping without cash behind it is fraud.
How so?
In the same way that hacking into a bank's computer system and fiddling a few bits to change my bank balance is fraud.

Now, I understand that there are different "kinds" of "money" (M1, M2, M3, etc). I'm not well versed on what each of them means, but I suspect that our argument is more about letting the word "money" mean several different things at different parts of the same sentence.

johnfrmcleveland wrote:Again, ask yourself, what obligation is the government under?
Ask yourself "what does the word 'obligation' mean?" One useful meaning is "do this or dire consequences happen to you". The government created the monetary system through its rulemaking, especially "this not is legal tender for all debts, public or private". It is obligated to ensure that the note retains its value. In the old days, it did so by being required to surrender metal. Nowadays, it is obligated to keep the financial engine running so people continue to want dollars. (That's the only reason yellow metal was effective - people wanted it and it was hard to get). If it fails in this obligation, dire (economic) consequences result.

You want money "created out of thin air", try bitcoin, or game cash (which is amazingly becoming a currency in the real world). Nobody has any obligation behind those.

johnfrmcleveland wrote:The actual obligations are between the bank and the borrower. If you get a loan from the bank, it's the bank that gives you dollars, and it's you that must repay the bank. The government has nothing to do with that.
That's not the obligation I'm talking about.

johnfrmcleveland wrote:...banks really do create credit out of thin air.
Yes, just like I do when I promise to wash your car if you promise to mow my lawn. Credit (as I understand it) is just the flip side of money. How are you using the term?

johnfrmcleveland wrote:Well, since dollars really don't oblige the government to do anything
... you and I could start a lucrative business. I have a color copier and some ten dollar bills test patterns.

johnfrmcleveland wrote:Look at this in a more bank-centric way, as opposed to a government-centric way, and it becomes easier to understand. Dollars are little I.O.U.s. Banks create matching assets and liabilities by expanding their balance sheets - they create $100K of new dollars, and you have to pay them back with $100K. When that debt is repaid, the dollars cease to exist.
I get that. But these dollars are not created "out of thin air". They are created from thin air and the antiparticle of their antiparticle. You can't create a dollar without creating its counterpart. That would be counterfeiting. See my lucrative business above.

Dollars have an obligation behind them. It's (now) a very diffuse obligation, but it is there nonetheless. If this were not the case, a dollar, a peso, a ruble, and a euro would never float.

eta: Even given that money is created by printing bills or moving bits, it's not "out of thin air", but rather "out of the value of the pool of existing dollars". One thing that makes dollars (and gold and salt) valuable is that these things are scarce. Salt is now a lot more common, and much less valuable. When new dollars are printed, existing dollars become less valuable.

The hope is that these new dollars will stimulate the economy, leading to more demand (and thus making those dollars as valuable as they used to be when there were fewer of them). But that only comes when dirt is turned into goods. It is the users of the dollars that create value.

Jose
Last edited by ucim on Thu Feb 19, 2015 1:13 am UTC, edited 1 time in total.
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Thu Feb 19, 2015 1:10 am UTC

ucim wrote:
johnfrmcleveland wrote:Did you read any of those links I posted earlier? I'm not just making this up.
I skimmed, but did not study, those links. The first one seemed to be a series of quotes from a bunch of other sources, followed by what seems to me to be a dumb "experiment" to find out how banks (or at least one bank that would show them) keep track of their business. I hardly consider this useful. The other talks about "lending out of reserves", which is not what (I think) I'm talking about.


Both papers make the point that banks don't lend out of reserves OR deposits, but create credit out of thin air by expanding their balance sheets by the full amount of the loan. These bank-created credit dollars are indistinguishable from government-created dollars. The first paper's author actually went through the trouble of getting experimental data to back up his position (very rare in economics). The second paper is probably a better explanation of how money creation works in general.

ucim wrote:Let me ask you this: If you buy a car from me for ten thousand dollars, and do so by writing a personal check, did you just create ten thousand dollars out of thin air? When I get the check, I write in my personal leger book (which keeps track of my "net worth" that I received ten thousand dollars. Then I take this check to Albert, who has a piano for sale. Interestingly, the piano also costs ten thousand dollars, so I sign the back of the check and give it to him in exchange for his piano. Now that the piano is out of the way, Albert signs the check over to Dolly's Floor Coverings in exchange for carpeting, coincidentally valued at ten thousand dollars, installed. This continues until the check comes back to you, in the form of Zelda wanting to buy your antique chandelier. You sell it for ten thousand dollars, take the check, and rip it up.


No, you haven't created any new money by doing that. I already had the $10,000 to buy your car with. Apparently, I had already earned it.

But had I gone to the bank for a $10,000 loan to buy your car, the loan would have created $10,000 in new dollars, as well as $10,000 in new liabilities; M1 goes up by $10,000. So when I paid you for your car, you had $10,000 with which to start the chain of transactions. At the end, I sell my chandelier for $10,000 and repay the bank, at which time those new dollars are extinguished, and M1 goes down by $10,000. It all nets out the same, except that I have paid the bank some interest for their services.

ucim wrote:
johnfrmcleveland wrote:
ucim wrote:That's just mechanics. Scorekeeping without cash behind it is fraud.
How so?
In the same way that hacking into a bank's computer system and fiddling a few bits to change my bank balance is fraud.


There is something behind every dollar. If the bank creates a dollar by creating a loan, the bank has also created the corresponding debt. You get the dollar, but somebody else (the borrower) must repay the debt; and if they fail to do so, then the bank eats the loss and pays the debt themselves. That is what backs dollars. What makes a government-created dollar any better than that?

ucim wrote:Now, I understand that there are different "kinds" of "money" (M1, M2, M3, etc). I'm not well versed on what each of them means, but I suspect that our argument is more about letting the word "money" mean several different things at different parts of the same sentence.


M0 is banknotes and coins in circulation. MB is M0 plus bank reserves (including vault cash). M1 includes bank deposits, like your checking account, and is far larger than M0 or MB. Your deposits consist mostly of bank-created dollars, which constitute the great bulk of dollars in existence. I'm sure you would consider the dollars in your checking account to be real and substantial dollars, right? We have already earned those dollars; we can take them out of the bank, and the bank will convert them to banknotes for us if we want. Most of our deposited dollars have been created out of thin air by banks creating loans, and are matched by corresponding liabilities that borrowers still owe to the banks.

ucim wrote:
johnfrmcleveland wrote:Again, ask yourself, what obligation is the government under?
Ask yourself "what does the word 'obligation' mean?" One useful meaning is "do this or dire consequences happen to you". The government created the monetary system through its rulemaking, especially "this not is legal tender for all debts, public or private". It is obligated to ensure that the note retains its value. In the old days, it did so by being required to surrender metal. Nowadays, it is obligated to keep the financial engine running so people continue to want dollars. (That's the only reason yellow metal was effective - people wanted it and it was hard to get). If it fails in this obligation, dire (economic) consequences result.


Dollars also have value because the government requires taxes to be paid in dollars. Anyway, I really think you are missing the point here. Sure, any government should do what it can to foster a healthy economy, and managing its currency through both fiscal and monetary policy is possibly the most important domestic responsibility a country has. But don't confuse that with the actual obligation, or liability, behind a dollar. That liability is simply debt - but it is not the government that owes the holder of a dollar anything tangible, it's the economy as a whole. When you hold dollars, and you want to redeem the I.O.U.s that you have acquired through working, you go to the store, or pay your rent. You don't go to the government, except at tax time. If you find that your dollar has become worthless, it's because the economy hasn't produced enough stuff to sell. That may be partially due to bad governance, but it is still the economy's problem. The government won't give you anything for your dollars.

ucim wrote:You want money "created out of thin air", try bitcoin, or game cash (which is amazingly becoming a currency in the real world). Nobody has any obligation behind those.


I'm not really sure how to look at bitcoin and game cash. Bitcoin jumps around in value like a commodity. And it isn't created out of thin air by expanding a balance sheet, like dollars are (even government-created dollars) - it is earned (sort of), by mining it. You do some work (even if we can't see any sense in that work), and the bitcoin guys pay you, in bitcoins, for your efforts. Those bitcoins have no corresponding liability - there is nobody to repay. I guess I'd have to call bitcoins a commodity.

ucim wrote:
johnfrmcleveland wrote:The actual obligations are between the bank and the borrower. If you get a loan from the bank, it's the bank that gives you dollars, and it's you that must repay the bank. The government has nothing to do with that.
That's not the obligation I'm talking about.

johnfrmcleveland wrote:...banks really do create credit out of thin air.
Yes, just like I do when I promise to wash your car if you promise to mow my lawn. Credit (as I understand it) is just the flip side of money. How are you using the term?



I use the term "credit" when I'm talking about bank-created dollars. When banks create credit, the holder of those assets can get them converted to banknotes, or pay bills with their new bank deposit (the loan proceeds). That's really the only difference between bank credit and the debt you create when you do a job in return for a promise of later payment, but that difference is still significant.

ucim wrote:
johnfrmcleveland wrote:Well, since dollars really don't oblige the government to do anything
... you and I could start a lucrative business. I have a color copier and some ten dollar bills test patterns.


Yeah, but that's getting off the subject of what dollars are, and whether or not it is possible to eliminate all debt.

ucim wrote:
johnfrmcleveland wrote:Look at this in a more bank-centric way, as opposed to a government-centric way, and it becomes easier to understand. Dollars are little I.O.U.s. Banks create matching assets and liabilities by expanding their balance sheets - they create $100K of new dollars, and you have to pay them back with $100K. When that debt is repaid, the dollars cease to exist.
I get that. But these dollars are not created "out of thin air". They are created from thin air and the antiparticle of their antiparticle. You can't create a dollar without creating its counterpart. That would be counterfeiting. See my lucrative business above.


But they have created the counterparticle - debt. Banks expand their balance sheet by creating an asset (dollars (electronic blips, really)) and a matching liability (the debt). That is creating a dollar out of thin air. And when the loan gets repaid, particle + antiparticle = nothing. The dollar ceases to exist, as does the debt.

It's similar when the government creates a dollar. The govt. spends the asset into the economy, and it holds the antiparticle (the liability). If and when the govt. runs a budget surplus, the surplus tax dollars extinguish their corresponding liability, and that dollar ceases to exist, as does the government's liability on that dollar. The big difference being that the government is able to hold those liabilities indefinitely, as they are liabilities in name only.

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Re: Can every debt be paid off?

Postby ucim » Thu Feb 19, 2015 2:46 am UTC

johnfrmcleveland wrote:M0 is banknotes and coins in circulation. MB is M0 plus bank reserves (including vault cash). M1 includes bank deposits, like your checking account, and is far larger than M0 or MB. Your deposits consist mostly of bank-created dollars, which constitute the great bulk of dollars in existence. I'm sure you would consider the dollars in your checking account to be real and substantial dollars, right? We have already earned those dollars; we can take them out of the bank, and the bank will convert them to banknotes for us if we want.
Aha! Just as I thought!

Although I think of my checking account dollars as "my money", it really ain't so. [translation: it's not part of M0]. My bank will give me "my money" back whenever I want, as long as I don't want to very often, and as long as nobody else wants to at the same time. If every depositer tried to withdraw their money, the bank could not do it. [translation: M1>>M0] The "money" I have in my account is fake money. The bank has made a promise it cannot keep. It did this by lending out "my" money to somebody else. We are all counting on every one else not calling the bluff.

Nonetheless, the stuff circulates, and oils the economy. It's "money", but in another (valid) sense of the word.

M1 money is created "out of thin air", but M0 money is not. And the two kinds of money are different, despite appearances. The dollar I have in my pocket is mine - a direct promise by the United States Government. (A promise to do what is arguable, but it's still fundamentally a promise by the government). The dollar I have in my checking account is a promise by the bank to give me a dollar another promise by the federal government, if they are able to, upon demand, subject to their withdrawal rules. And while I can use this M1 money to buy stuff directly (via various internal computer transfers), it remains M1 money, and the recipient is accepting not a direct promise by the government, but an indirect promise by the bank to give them a promise by the government, if it's convenient. So long as the economy keeps on going, this is "good enough". If the economy (or the bank) fails, it won't be. M1 money is different from M0 money.

johnfrmcleveland wrote:No, you haven't created any new money by doing that. I already had the $10,000 to buy your car with. Apparently, I had already earned it.
Maybe yes, maybe no. This was never tested. It could have been a rubber check, but so long as everyone in the chain had faith in it, it circulated. When it finally got back to you, you tore it up, and it was never presented to the bank for payment. You could have had less than three cents in your bank account and this could still have happened.

johnfrmcleveland wrote:But had I gone to the bank for a $10,000 loan to buy your car, the loan would have created $10,000 in new dollars
I'm saying that that's exactly what happened in my scenario, with no bank at all. To all intents and purposes, I created money out of thin air, all by myself.

johnfrmcleveland wrote:When you hold dollars, and you want to redeem the I.O.U.s that you have acquired through working, you go to the store, or pay your rent.
That does not redeem anything, any more than signing over a third-party check to a fourth party redeems it.

johnfrmcleveland wrote:I guess I'd have to call bitcoins a commodity.
Ditto for gold coins. What is it that makes something "money"?

johnfrmcleveland wrote:I use the term "credit" when I'm talking about bank-created dollars.
Fair enough. I'm not talking about M1, but about M0. Banks don't create that.

johnfrmcleveland wrote:Yeah, but [the counterfeiting "business" is] getting off the subject of what dollars are, and whether or not it is possible to eliminate all debt.
But it's on topic for what "debt" is, which is important to figuring out if all debt can be paid.

So, our debate is really about using the word "money" to refer to M0 and to M1 at the same time.

n.b. - my edit (previous post) and your reply (above) crossed.

Jose
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Thu Feb 19, 2015 4:26 am UTC

ucim wrote:Although I think of my checking account dollars as "my money", it really ain't so. [translation: it's not part of M0]. My bank will give me "my money" back whenever I want, as long as I don't want to very often, and as long as nobody else wants to at the same time. If every depositer tried to withdraw their money, the bank could not do it. [translation: M1>>M0] The "money" I have in my account is fake money. The bank has made a promise it cannot keep. It did this by lending out "my" money to somebody else. We are all counting on every one else not calling the bluff.


The bank didn't loan out your money, in any form. That was what the first paper proved, and the second paper explained. Neither your deposits nor govt.-supplied reserves are (operationally) necessary for a bank to create loans.

You have something real in the bank. It buys stuff. And chances are, you didn't deposit coins or banknotes into your account to start with. What you want to hold in your hand is banknotes, and banknotes are just a portable form of reserves. When (electronic) money moves between accounts, reserves are transferred with them. If you take cash out of your bank, your account goes down, and the bank's vault cash (part of reserves) goes down as well. Take your cash to a different bank to deposit it, and they add it to vault cash - the cash is now reserves. MB (M0 + reserves) never changes unless the Fed changes it. That's govt.-created money. On the other hand, the only MB that you will ever see is that portion of reserves that is in banknote/coin form. Reserves stay deposited at the Fed, in electronic form.

The amount of money circulating as cash has always been a small fraction of total money, but that doesn't mean that the dollars that exist on ledgers or in electronic form are any less "moneylike" than banknotes. The government insures most depositors against bank failures anyway.

ucim wrote:Nonetheless, the stuff circulates, and oils the economy. It's "money", but in another (valid) sense of the word.


ucim wrote:M1 money is created "out of thin air", but M0 money is not. And the two kinds of money are different, despite appearances. The dollar I have in my pocket is mine - a direct promise by the United States Government. (A promise to do what is arguable, but it's still fundamentally a promise by the government). The dollar I have in my checking account is a promise by the bank to give me a dollar another promise by the federal government, if they are able to, upon demand, subject to their withdrawal rules. And while I can use this M1 money to buy stuff directly (via various internal computer transfers), it remains M1 money, and the recipient is accepting not a direct promise by the government, but an indirect promise by the bank to give them a promise by the government, if it's convenient. So long as the economy keeps on going, this is "good enough". If the economy (or the bank) fails, it won't be. M1 money is different from M0 money.


What does the government do to create money that is so different than what banks do? They expand their balance sheet, just like banks. There is no previously-existing money or assets that are needed for the government to create and spend dollars. Those are thin-air dollars, too.

If the economy fails and the value of a dollar tanks, it won't matter what you are holding. Your govt.-printed banknote isn't going to be any more valuable than an electronic dollar at that point. There is nothing that the government would, or could, do for you.

ucim wrote:
johnfrmcleveland wrote:But had I gone to the bank for a $10,000 loan to buy your car, the loan would have created $10,000 in new dollars
I'm saying that that's exactly what happened in my scenario, with no bank at all. To all intents and purposes, I created money out of thin air, all by myself.


No, I had the dollars in my account in your scenario. Previously-existing dollars, dollars that already counted as part of M1. No new dollars are created when I transferred some dollars to your account via the check.

ucim wrote:
johnfrmcleveland wrote:When you hold dollars, and you want to redeem the I.O.U.s that you have acquired through working, you go to the store, or pay your rent.
That does not redeem anything, any more than signing over a third-party check to a fourth party redeems it.


Sure they do. When I hold a dollar, I basically hold some paper (that I previously earned) that will buy me a loaf of bread. When I redeem the dollar for the bread, I have the bread, but no more dollar. The economy owed me some production, I bought some production, and now the economy no longer owes me a thing.

ucim wrote:
johnfrmcleveland wrote:I guess I'd have to call bitcoins a commodity.
Ditto for gold coins. What is it that makes something "money"?


A medium of exchange is the simple definition. To me, the purest form of money has no commodity-like features that affect the value independently of the relative cost of goods and services. If you have a gold coin, you not only have to think about how much a product is worth in relation to your labor, but how much gold itself is worth, too.

ucim wrote:
johnfrmcleveland wrote:I use the term "credit" when I'm talking about bank-created dollars.
Fair enough. I'm not talking about M1, but about M0. Banks don't create that.


No, they don't. But I'm not sure what you think the big advantage of M0 money is over M1. My credit card or check buys the same stuff as your currency does.

ucim wrote:
johnfrmcleveland wrote:Yeah, but [the counterfeiting "business" is] getting off the subject of what dollars are, and whether or not it is possible to eliminate all debt.
But it's on topic for what "debt" is, which is important to figuring out if all debt can be paid.


The difficulty of paying off all debt is that you would need to somehow take dollars from people who are legitimately ahead of the game, holding more dollars than debt. The bank-created dollars exist to pay off the bank-created debt, but some people are in debt while others are in the black.

The government can create liability-free (to us) dollars, which would allow us to deleverage and eliminate bank debt, but then the government is still holding all of those liabilities. If you count that as "debt," then the govt. would have to tax away every dollar (and bond, which are dollar obligations) in order to extinguish all of their liabilities. And then, there would be no money left.

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ucim
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Re: Can every debt be paid off?

Postby ucim » Thu Feb 19, 2015 10:44 pm UTC

johnfrmcleveland wrote:The bank didn't loan out your money, in any form. That was what the first paper proved
The first paper proved no such thing. At least not to me. And I'm purposefully taking a simple case so that the components are easily visible.

johnfrmcleveland wrote:The amount of money circulating as cash has always been a small fraction of total money, but that doesn't mean that the dollars that exist on ledgers or in electronic form are any less "moneylike" than banknotes.
Yes it does. That's exactly what it means. If I hold a million dollars in paper cash and my bank goes belly up, I still have a million dollars. But if I hold a million dollars in my bank account, and my bank goes belly up, I have nothing. (The United States government may insure my losses up to $250K, but this is not necessary to a banking system, does not apply outside the US, and in any case I'm still out $750K.) The powers that be might arrange for my dead bank to be bought out, but that is not necessary for a banking system either, and I will not consider that scenario, as it's an unnecessary and obfuscatory complication, as well as an act of faith.

johnfrmcleveland wrote:No, I had the dollars in my account in your scenario. Previously-existing dollars, dollars that already counted as part of M1. No new dollars are created when I transferred some dollars to your account via the check.
No, I never said what your bank balance was. You could have had no more than three cents in your account; nothing prevents you from writing a ten thousand dollar check and convincing me to take it. The check was never presented to the bank for payment. The bank didn't even know the check was written.

But you convinced me to trade you my car for it. I then did not take the check to the bank for payment. I gave it to Albert, directly, in exchange for a piano. This continued with no bank being involved at all. Eventually you got back the very same physical check in payment for your antique chandelier. You then tore up that piece of paper without it ever being presented it to your bank.

Now, the whole house of cards might have come down had anybody in the chain actually tried to deposit the check in their account. But that didn't happen. So, the piece of paper circulated just like money. For all intents and purposes, it was money.

You created money out of thin air.

johnfrmcleveland wrote:What does the government do to create money that is so different than what banks do?
It makes and enforces laws. Ultimately it comes down to that. And among the laws are one that says "this note is legal tender for all debts, public and private." My checkbook does not say that, neither does my debit card or the scrip I get when I return something to a store.

johnfrmcleveland wrote: When I redeem the dollar for the bread...
That never happens. You trade the dollar for bread. You can only "redeem" a dollar (or any note) at the issuer, which in the case of a dollar bill is the US government. The grocery store did not issue the dollar, the government did.

The grocery store issues coupons; you can redeem them at the grocery store. You can even trade them if you like, but trading a coupon to your neighbor is not the same as redeeming it.

johnfrmcleveland wrote:No, they don't. But I'm not sure what you think the big advantage of M0 money is over M1. My credit card or check buys the same stuff as your currency does.
This is only true so long as your bank is in business. If your bank folds, your check will buy nothing, but your currency will. Of course, if the entire economy folds, no currency will be worth anything, whether M0, MB, M1, or Mn

johnfrmcleveland wrote:The difficulty of paying off all debt is that you would need to somehow take dollars from people who are legitimately ahead of the game, holding more dollars than debt. The bank-created dollars exist to pay off the bank-created debt, but some people are in debt while others are in the black.
Yes, those people will be indentured, and will have to work to pay off their debt.

Again, take the simple case. I have nothing, you have $50. I borrow $20 from you and buy a pizza. I am now fed, I owe you $20, and you have $30. The pizza parlor has $20, but is not part of the scenario. The debt exists between you and me, nobody else.

This debt cannot be erased just by moving money around.

However, I can wash dishes for a few hours at the pizza parlor in exchange for $20, and give that money to you.

I will now be fed, tired, and out of debt. All debt in this system will have been erased.

Real world? The same thing. Some people will have to work to pay back what they owe.

Run the scenario again, except that I break my back on the way to wash dishes at the pizza parlor. I now cannot work to pay my debt back. This scenario cannot be unwound, at least not without some debt being forgiven.

Real world? The same thing. There are almost certainly people who are in debt beyond their ability to pay. Those debts could be forgiven, but that's not the same as paying them off.

So, in theory, yes every debt could be paid off. But in practice, there are almost certainly debts that cannot.

Jose
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