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When Having the US Debt Paid Off Was a Problem
Hugh Pickens writes "NPR reports that not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system. As recently as 2000, the U.S. was running a budget surplus, taking in more than it was spending every year — and economists were projecting that the entire national debt could be paid off by 2012. So the government commissioned a secret report outlining the possible harmful consequences of retiring the debt completely. For one thing, paying off the national debt would mean the end of Treasury bonds, a pillar of the global economy. Treasury securities are crucially important to the world financial system in a number of ways: banks buy them as low-risk assets, the Fed uses them for executing monetary policy, and mortgage interest rates vary based on Treasury rates. 'It was a huge issue ... for not just the U.S. economy, but the global economy,' says Diane Lim Rogers, an economist in the Clinton administration. In the end, Jason Seligman, the economist who wrote most of the report titled 'Life After Debt (PDF),' concluded it was a good idea to pay down the debt — but not to pay it off entirely. 'There's such a thing as too much debt,' says Seligman. 'But also such a thing, perhaps, as too little.'"
because debt is yet another way to subsidize big money?
Yes, I'm left. You have a problem with that?
Dear /.
debt is a good thing, you can't have enough of it.
Yours sincerely
the IMF
-- no sig today
Oh wait....
If there is no US debt, implying no need for Treasury bonds, that means there's nothing for people to invest in?
Man, I've heard some absurd statements before, but this one takes the cake!
I do not fail; I succeed at finding out what does not work.
This makes a lot of assumptions. First, if we really had paid off all the debt and had a surplus, Congress would have found plenty of ways to spend the excess cash, in particular, infrastructure. Or they could have rebated back the difference to tax payers. More importantly, once the debt level got low, Congress has shown repeatedly that they are willing to increase spending on everything under the sun, good and stupid alike, so the actual chance of paying off the debt completely and running into problems with no treasury bonds being issued, is highly unlikely.
The govt. can still issue bonds even if they have no debt, to assist the global market, the question being what they do with the cash that is raised.
Tequila: It's not just for breakfast anymore!
The claims that we had erased the federal debt and had gone on to a surplus were based on long-range projections that were totally inaccurate, and had never been realized.
If the world moves oil deals into another currency and the US no longer sold treasury bonds there would be no hope for the dollar to remain a reserve currency. In that case I don't think that the global economy would blink, but how about the US economy.
Is it the job of the government to enter into deals that nets him a loss of money ?
I mean even if you don't currently don't have any debt you may want to have some for a couple of years because you want to make a big purchase like a house or a car. Actually on top of that even if you're in the black temporary credit is still useful and even I have that right now, it's called a credit card.(IE even if your finances are in the black loads of people still use credit cards since it helps with transactions.)
Did you know 80 to 90% of the moderators on slashdot wouldn't recognize a troll even if one dragged them under a bridge.
You can just take the money and buy bonds of another country for it, thus having a surplus and still using bonds.
They made a study. And they looked at their glass sphere and the remains in their coffee mug and came up that maybe, no debt is a problem. The result is _perhaps_ there is something like too little debt. But they do not need to worry. The surplus during the early 2000 was due to the New Economy bubble. Every one made some extra money by lending and borrowing until the whole mess blow up, the fed reduced the interest rates and the financial companies worked on the housing crisis, which triggered financial crisis of today, which triggered the state finance crisis. And all debt of all countries increased from the last dip after New Economy and the present crisis. And the same applies to crises from the past.
The Jews had a ruling once (if I remember correctly) after 49 years they divided all livestock among all families equally. As that was the representation of wealth, they collected all the money of the world and divided it equally among the people. Maybe we should do that. Or at least take all state debt of all countries and declare it gone. Ok the banks would most likely end to exist. But hey we could build new ones.
Unfortunately, debt *is* money. If you have never seen the video, do yourself a favor and watch it:. Trust me, it is worth your time:
http://www.moneyasdebt.net/
It is fascinating and scary.... and real. Our whole economy is now built on debt, and it really is not a good thing.
http://www.craigsteiner.us/articles/16
Money is borrowed into existence. Paying off debt causes the destruction of money.
Right now there is about 9.5 trillion in money, 50 trillion in debt, of which 14 is public.
If the government pays off it's debt it would cause a massive depression because all the money would disappear.
This is why you have exponentially growing debt.
http://media.chrismartenson.com/images/credit-market-doublings.jpg
Basically the monetary system is totally messed up and has been since 1971. What's required is monetary reform.
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Ireland,
Italy,
Portugal,
Spain?
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Using the US government as your debt-collection agency so you can park your capital somewhere while you golf with Obama or whatever it is you do, is EXACTLY the kind of thing that results in the deindustrialization of the economy.
When TFA says: "banks buy them as low-risk assets" it is betraying the truth of the "economics" profession reflected in Modern Portfolio Theory's so-called "risk free asset". The reality is that this "risk free asset" is the foundation of the centralization of wealth via what classical economists referred to as "economic rent": The portion of return on the economy which is, for all practical purposes, simply the result of there being an economy.
A rational political economy would distribute all economic rent evenly in a citizen's dividend thereby replacing all government transfer programs (with their attendant public sector rent seeking) with market demand for what the people (as opposed to the wealthy or the politically influential with their lobbyists) need..
Since it is clear that the US Federal government is now captured by the rentiers (rent seekers) of both the private and public sectors, it cannot admit rational political economic thought. So the responsibility devolves to the States. There is a proposal for State legislation to remediate some of the pathology created by a positive feedback loop of centralized power, but realistically, even the State governments are so depleted of resources by this vicious cycle that there is little hope for them to salvage the Republic.
Seastead this.
The terms are not interchangeable. The deficit became a surplus with projections on eventually paying off the debt more than a decade after Clinton would leave office. No one claims Clinton paid off the debt during his term.
It sounds like he fell for lies by the same people that say deflation would destroy the world. Deflation works exactly opposite from inflation. If someone has their money invested instead of in their pocket, inflation causes investments to be more valuable. If someone has their money in their pocket and none invested in the market, deflation causes the money in their pocket to be more valuable. Deflation and debt consolidation in the U.S. would negatively effect less than 20% of the U.S. population and less than 2% of the world population.
Having to work for a living is the root of all evil.
One man's debt, is another man's pension fund.
So yes, sovereign debt is a necessity in the capitalist system, but too much of it is a problem.
"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending." - Larry Summers
Riiight. Lets not .... change anything then... Just more, more, more debt.
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The debt has grown at an exponential rate of around 9% per year for the last 4 decades. Republicans or democrats.
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President Clinton & Republican-controlled Congress ran PROJECTED surplus, not actual. Every year of the Clinton Presidency saw national debt rise, it never retreated during his presidency.
Every year when a new budget is proposed it includes a ten year projection that is non-binding and almost certainly pure fantasy - for the projections to be true spending policies proposed ten years in advance need to be adhered to and the economy needs to react EXACTLY as predicted up to ten years earlier.
Clinton's supporters still believe those projections...
Ken
That's what happens when you hit Reply All.
If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits. That is why banks LOVE it when you deposit money in your savings account because it gives them permission to loan out 9x more money. Not only can they collect interest on that money that they create out of thin air, but if you can't pay them back, they get to seize your assets!
The hand that giveth is above the hand that receiveth. Private banks are above the governments who borrow money from them. Bankers are the masters of deception and fraud. The only things they create are debt and inflation through fractional reserve lending (fraud). Both of those are bad. They create all kinds of problems (such as the "business cycle"), and force people to participate in speculative investing or else watch their savings get inflated away.
Fractional reserve lending was pioneered by Nathan Rothschild and stemmed from greed -- he wanted to lend out more gold than he actually had! Anytime a bank expands the money supply by loaning out more money than they actually have, they are stealing from you who have saved. I understand the need to expand the money supply in order to prevent deflation. However, the government, not a private central bank, should be the one to do that. If the government created money, then they could spend that money rather than having to tax it away from the citizens.
It is no coincidence that the IRS was created shortly after the Federal Reserve Bank was created. How else would the government get money to pay interest on the money it borrowed? If you are in debt, you are a slave to your creditors. In 1913, "our" government allowed itself to become enslaved by the private Fed. The power to issue currency should reside with a government who is accountable to the public. The government exists to serve We The People. We The People should never allow ourselves to becomes slaves to our government (via entitlements, welfare, government healthcare, etc) who is a slave to the central bankers. Woodrow Wilson, and the few members of Congress who were actually present in the capital building 2 days before Christmas in 1913, made the terrible decision to give the power to issue currency to a privately held central bank (that doesn't even need to pay taxes!). The Fed is not really accountable to the public. Yes, the Fed board members are appointed by the President, but that very important decision should not be left up to a single man who may be too easily corrupted.
Governments do not need to borrow money from a bank. They can create money debt free! They are supposed to be doing that according to the US constitution:
"Congress shall have the power to coin money and regulate the value thereof." Since the value of money is determined by the quantity, Congress should be controlling the quantity of money, not banks!
Read up on Bill Still's ideas for monetary reform in his book "No More National Debt". If you don't want to read, then watch these films:
The American Dream
Money as Debt
The Money Masters
The Secret of Oz
Inside Job
'There's such a thing as too much debt,' says Seligman. 'But also such a thing, perhaps, as too little.'"
Too little debt! What a bunch of knuckle-heads. Its this kind of thinking in government that leads to all of their stupid policies such as, "there is such a thing as too little war, so let's start one." "There's such a thing as too few prisoners in jail, so lets start a little drug war."
These people are warped and are scared that the people will one day realize that their is no such thing as too little government.
You completely misunderstand the fractional reserve banking system. Go read it again: https://secure.wikimedia.org/wikipedia/en/wiki/Fractional_reserve_banking
You'll read that banks can only loan out 90% of the money they take in. However, that 90% will at some point in the future be deposited, so the banks can loan 90% of that money out again. In the end, this results in a 9x money multiplier, but every dollar that the bank loaned out is covered by a deposit.
I don't think it can.
In fact it could probably be described as maximum acceleration.
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People who think the monetary system is "messed up" simply because debt creates inflation and "this is bad", simply do not understand economics.
Let me break it down simple. You work 9-5 lugging rock. At the end of the day, I should pay you for lugging that rock. Where does that money come from? Me. But where did I get it? Someone who paid me for my company's work today. etc etc. But, keep going, trace it back. At some point the money came from work done YESTERDAY. And the day before. Etc.
But here is the problem - THERE IS NOT AN INFINITE SUPPLY OF YESTERDAYS. It runs out.
At some point, somehow, there has to be a reconciliation whereby the work done by the global economy TODAY gets paid for my money that doesn't yet exist. This is why inflation happens.
In a nutshell - inflation has to happen because time == money, and the amount of time moves in one direction, therefore the money supply has to do the same thing.
Thank god we had George W. Bush to save us from that fate!
http://alternatives.rzero.com/
http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms
Let's look at one figure, the percentage change in the national debt. Take the two terms (Regan, Bush) before Clinton, and the two terms after him (Bush). Negative numbers are decreases, positive increases.
The last time a Republican president decreased the National debt was Richard Nixon in his first term in 1973, +3.0%. This was over 9 presidential terms ago, over 36 years.
So when Republicans try and trash Clinton's economic record, they always quote misleading figures. Also known as lying.
Why is Snark Required?
Well thank Jeebus that Dubya was "elected" in 2000 to save us from the hellish landscape of a non debt-addled America. Between that and sparing us the specter of a nation at peace without a torture center in the Caribbean. Truly we were blessed to have his leadership.
Tis a pity, though, that he could not accomplish his privatization of social security in time for the Wall Street and housing booms of 2008.
Seriously, this idea that all debt is automatically evil is silly. There's absolutely nothing intrinsically wrong with it. It's a tool. We have tools like live CDs, antivirus, screwdrivers and such; the economy has tools like loans, bonds and such.
Where you run into trouble is if you can't service the debt. So really you want to avoid getting into so much debt that this is likely to be a problem. How much is too much? Depends how much you can service.
The world is a messed up place where having debt is considered a good thing and being debt-free is harmful and bad.
That's what this report demonstrates. Rather than offering bonds that the government would pay interest on, the government could insure AAA bonds for face value and collect payment for that insurance. That would be highly manageable risk and would not make taxpayers beholden to anyone. If investors want to take more risk for more reward with CDAs or whatever then they should go for it but they are on the hook for it. This idea in the report that tax-payer money is the plaything for the rich and the world economy would collapse unless we allowed it is ridiculous.
Averaged out. If you look at the line, it is pretty clear that it increased more under Republican administrations.
point. It's a what-if scenario.
I need to see some proof that there ever was an actual surplus, counting both kinds of debt that are recorded separately in DC.
There was a lot of ballyhoo about a projected surplus, but that counted only one kind of gov't debt, and never materialized anyway.
Show me some proof of your assertion (and please, not a chart you got from somewhere--instead some data).
I advice against that. It's like throwing your money into a big black hole.
The Tao of math: The numbers you can count are not the real numbers.
Inflation moves wealth towards asset holders and away from cash holders.
To benefit from the system you have to be in early at the bottom.
It requires infinite growth to function and if/when growth stops, it all collapses with the latecomers holding worthless/devalued assets.
Classic pyramid scheme. I don't think you need any conspiracy, just a lack of conscience, and greed.
What I find amusing is that the OWS crowd know they are being taken for a ride, know they are losing out but have no idea how the system works or what exactly they are protesting against, their complaints are all very vague, when in fact it is money itself. It pretty much guarantees they'll get shafted again.
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In fact it could probably be described as maximum acceleration.
I assume you mean exponential growth? Constant and exponential decay functions are also exponential.There is no such thing as maximum acceleration. And superexponential (growth) functions would include stuff that accelerates faster than exponential functions do.
Yes, it is!
-- no sig today
You are are over estimating fractional reserve banking by an order of magnitude. They can lend out ~ 90% of what they take in, not 900%.
Also, the Fed absolutely DOES pay taxes. ALL their net profits go back to the US Treasury.
So practically speaking, it is true that even if the States were able to salvage the Republic, this issue of State sovereignty (indeed, Individual sovereignty) would still need to be addressed in a way as radical as that which addressed the original admission of the slave states to the US.
Seastead this.
That would be a problem - if the money in question weren't a) backed by collateral, and b) replaced as the loan is paid off. The amount of money circulating is thus a constant. (Even though it doesn't seem so to people who are bad at any other math than counting the change when they buy tinfoil for their new hat.)
Since banks can only loan a fixed multiple of their deposits (and this multiple is set by Congress) and since the amount of money in the economy is set by an agency whose authority derives from Congress... Guess who controls the quantity of money? It may not be as directly as you can comprehend, but it's there none the less.
Yeah, it pretty much *is* a coincidence. Those actually familiar with history know that the Government has been borrowing (and repaying) money since the days of the Revolutionary War. (I leave it as an exercise for the student to look up and compare the dates of the Revolutionary War and the creation of the IRS and compare them.)
I'll get on that as soon as I finish the The Protocols of the Elders of Zion.
Any single bank can only lend out 90%, but the amount of money supply expansion ends up being roughly 900% after many deposit/lend cycles occur. As I was saying, the value of money is determined by the quantity. According to the Constitution, the value (and hence quantity) should be determined by Congress, who is supposed to be accountable to the public, but in reality is mostly bought off by corporations through lobbyists.
Federal Reserve Act : Section 7 "Federal reserve banks, including the capital stock and surplus therein and the income derived therefrom shall be exempt from federal state, and local taxation, except taxes upon real estate."
Money is the medium of exchange. That's it.
It is the most liquid commodity. Sometimes that is cigarettes. Sometimes it is bits of printed paper. Sometimes it is debt. Sometimes gold.
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Alexander Hamilton argued vehemently against Jefferson (and won that argument) on whether a national bank should be created so as to use debt as mechanism in precisely the way that you claim the Fed now uses it. Where did Hamilton get that idea? He studied the Bank of England which had been doing the same thing for quite some time before those upstart colonists even thought of rebelling against the crown.
Moreover, the eastern Roman empire (the so-called Byzantine empire) funded its military and civil projects the same way. Except, instead of paper money and bonds, they used debased coins as currency and letters of credit.
And your last paragraph is just plain nonsense. The value of the dollar isn't determined by the issuer. It's determined by the people who use it for exchange. If the Fed blinked out of existence today, most buying and selling that uses US dollars would simply go on as it had before. There might be a bit of a panic. Some people might think that the US dollar is now worthless. But that's a value judgment of those who use dollars for exchange, not the fiat of the Fed.
Don't worry, problem solved.
If it really appears the US government has too little debt, it's easy for it to borrow more. Even if the government couldn't find enough to spend on (ha!), there's always the option of lowering taxes on the 53% of us who are paying them. Anyway, if the US could consistently run a budget surplus for a while and pay the debt off slowly, the world financial system would have plenty of time to adapt.
For one thing, paying off the national debt would mean the end of Treasury bonds, a pillar of the global economy. Treasury securities are crucially important to the world financial system in a number of ways: banks buy them as low-risk assets
Lets be really honest here banks have been using these not as low risk but really as more like NO-risk assets, hell even Fanny/Freddie bonds which were not supposed to be backed proved to be backed. So for some reason we are offering banks a place to store wealth securely where the security is financed by the tax payer and generate returns paid in interest by the tax payer.
So what the government has really done is create a special class of people (bank owners) who get free money. In different times government borrowing made sense in not just the economic sense but in the basic justice sense as well. Today with a purely fiat currency, and zero change of government and even certain not government securities being defaulted upon (no risk) without it meaning an all bets are off and US currency is worthless anyway situation, we have what is basically institutionalized THEFT and nothing more.
Repeal the 17th Amendment TODAY! Also Please Read http://www.gnu.org/philosophy/right-to-read.html
Fractional reserve lending was pioneered by Nathan Rothschild and stemmed from greed -- he wanted to lend out more gold than he actually had!
Check your history. Fractional reserve lending was practiced in classical Athens of the fifth and fourth centuries BC, as it was during the Roman empire and during the life of pretty much any civilization with basic financial literacy. It's a good practice for the depositors: it allows those with surplus capital (i.e. anything more than what's necessary to feed one's family) to put that money somewhere fairly safe (no less so than a mayonnaise jar under the mattress, since thieves can always break in and look for jars), and in many cultures to earn some interest on it. It's a good practice for honest borrowers: it gives them access to capital they need for entrepreneurship or private use such as home building. It's good for the bankers, because they make a profit off the top. Win-win all around.
The only problem is when you get dishonest borrowers who take out loans they can't repay. Because we, as a culture, don't like blaming individual people who aren't rich and who are like us (even though they may have falsified loan applications to buy houses far beyond their means with no hope of paying off the mortgage), we blame "corporations" and banks, because they're easier to blame. So, we get a backlash against banking practices, with the attendant hullaballo about Rothschilds other rich, Jewish names recycled from the last round of economic scapegoating back in the 1930's. In the end, this doesn't have anything to do with inflation or deflation, but with the common desire to find someone easy to blame for problems that people more like us than the scapegoats actually caused.
the world can survive on its own, the U.S. is not the center of the universe or the world. The idea that debt is a good thing can only be a stupid idea. I must have missed those news reports around the country where they thank the U.S. for their debt so they can survive another day
This allowed them to print money with nothing backing it.
Money is always backed by human labor, if you go back far enough. Money-backed-by-stuff doesn't work anymore, because stuff no longer needs (very much) human labor to create. I wrote a letter to the editor back when the crazies in Congress were fighting over their lines-in-the-sand (debt ceiling), so I'll just quote myself here:
The folks at Monetary.org and those who advocate Publicly-owned Banks are on the right track, methinks. There are some more important articles at the bottom of my blog post about fixing the governments finances - "bailout for the people", "money and the crisis of civilization", and "I want the earth plus 5%". .
Learn the rules so you know how to break them properly.
www.teslabox.com
That's because they already have to pay it ALL to the Treasury.
> Fractional reserve lending was pioneered by Nathan Rothschild
Or in other words, TEH JOOZ.
Sorry bud, it was invented about four hundred years before he was born. Alex Jones is a fucking moron.
The amount of money circulating is thus a constant.
False. Constants don't change -- that is why they are called constants. Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times. Money_created_from_thin_air = 0.9 + (0.9^2) + ... + (0.9^100) = 9*deposit_X.
The ideal currency is one whose purchasing power remains constant over time. That could easily be done using a feedback control loop, such as a PID controller. Whenever there is inflation, the government could tax. Whenever there is deflation, the government could print debt free money. Either way, the government gets money, but under this system it can get some of the money without needing to tax it away from citizens. There is no need for a middle man (Federal Reserve Bank) to take its cut and give it to its private shareholders.
since the amount of money in the economy is set by an agency whose authority derives from Congress
You mean "derived", not "derives". The Fed was created by a very few members of Congress who were paid off by private bankers back in 1913. Desribe it however you want, but control of the Fed by the public is way too indirect. Period.
Yeah, it pretty much *is* a coincidence. Those actually familiar with history know that the Government has been borrowing (and repaying) money since the days of the Revolutionary War.
If you are implying that the Government has always been borrowing money since the days of the Revolutionary War, you are wrong. Lincoln's greenbacks issued during the Civil War were debt free currency. Coins created at the US mint even today are also debt free currency.
I'll get on that as soon as I finish the The Protocols of the Elders of Zion.
I've never heard of that book. Did you read it?
You said "This is because they are allowed to loan out 9x more money than they take in from people making deposits." They don't get to loan out 9x. All they get is the 0.9x and the hope that some of it will come back. The money supply is not what the bank "gets", it is just a picture of what happens.
They're assuming that debt is like arsenic, which in low doses can be somewhat tolerated, and sudden withdrawal causes death.
Debt is more like alcohol, which defeats good judgement and gradually destroys the liver, leading to death.
Contribute to civilization: ari.aynrand.org/donate
If the bank business is so lucrative, why not become a shareholder in one or more banks? From what you wrote, there's no way to lose.
You know, I was always under the impression that the Republicans were the party of personal responsibility and financial discipline, and that the Democrats were the "Nanny State" party who believed that the people could not be trusted in any way to make good choices in their lives. Imagine my surprise when I find a Republican president spending like a drunken sailor and the rest of the party questioning the patriotism of any person who dared to question what he was doing.
So now I'm an independent voter and I don't like any of my choices. Maybe I'll just make my own damn party. With hookers. And blackjack...
I'm trying to teach myself to set people on fire with my mind... Is it hot in here?
Debt paid off. Come on. There is always a 'cause' that some liberal wants to spend money on.
And so what if debt was paid off, it would be lower taxes. And if you want more debt, just lower the tax rate even lower.
This is just plain stupid, as in Obama stupid.
1) That the budget surplus meant the national debt wasn't going up. In fact, the actual debt still went up. Social Security footed the bill for what appeared to be a budget surplus, because it is required by law to buy debt instruments when it runs a surplus.
2) That the government was due all the credit for this supposed "Budget Surplus". Clinton and the Congressional Republicans deserve some credit for not going on a spending binge when the coffers were filling up with Internet Bubble tax revenues, but the massive economic expansion was done on the back of a massive paradigm shift in American culture.
3) That Bush could have continued the "Budget Surplus". Even before Bush was elected, the budget surplus was doomed. The Internet Bubble popped and started recession during that election year. Bush massively compounded the problem by continuing the stimulus tax cuts longer than they were needed and dumping loads of money into the Afghanistan/Iraq wars and creating massive government programs like TSA, Medicare drug benefit, and financial policies that devalued the dollar. However, he was never going to have a budget surplus.
4) That Republicans are responsible for the financial mess. Nope, that was bipartisan. Clinton signed a bipartisan bill that deregulated the financial markets and set the wheels in motion for banks to act like the monsters that created the Great Depression, while forcing them to give loans to people that were enormous credit risks.
There are others, but they're so absurd they don't merit comment.
You lied about the control by the republican controlled congress, giving Clinton credit?
Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits. That is why banks LOVE it when you deposit money in your savings account because it gives them permission to loan out 9x more money. Not only can they collect interest on that money that they create out of thin air, but if you can't pay them back, they get to seize your assets!
No they don't. Consider a town with only one bank (and nobody banks online or goes to any nearby towns to bank). When you make a deposit of $100 in Federal Reserve notes, the bank acquires an asset of $100 (your cash) and a liability of $100 (your deposit). They are then allowed to lend out about $90 of your deposit. They then have assets of $10 cash, $90 loans and liabilities of $100 (your deposit). However, the people who receive the loans will spend it and unless it ends up under a mattress eventually the $90 will be deposited back in the bank.
The bank then has $10+$90 in cash, $90 in loans and $190 in deposit liabilities. Their new lending limit is about 90% of $190 or $171 so they can now make another $81 in loans. If this cycle repeats endlessly, the maximum size of the balance sheet is 1/(1-90%) or ten times the original deposit - assuming that supply and demand for loans are maximized, that the bank goes right to the lending limit and that capital is not a problem (banks also have to have share capital of about 10% of loans to cover the risk of banks going bad - this is a completely separate issue that is often confused and is not covered here). They are paying interest on all of their deposit liabilities.
Have the banks ever printed money? Do they create money out of thin air? No. The key issue here is that deposit liabilities are not actually "money in the bank", they are "money that can be claimed from the bank". The fact that people treat Federal Reserve money and commercial bank claims as equivalent (because they are for practically every economic purpose) does not amount to banks committing fraud, any more than an insurer is committing fraud when it issues policies whose total possible claims far exceed the insurers assets (imagine what would happen if every driver in the US made a maximum policy claim at once - and then consider if that hypothetical case should guide the regulation of insurers).
The rest of the parent is wrong in various ways that would be tedious to point out - I find it particularly amusing that Rothschild is accused of inventing fractional reserve banking given that he was born several centuries too late for that and his business did not particularly rely on maturity transformation, unlike most London banks of his time...
Ron Paul 2012
the Fed uses them for executing monetary policy
A truly sad state of affairs if ever there was one. The Fed is a quasi public governing body answerable as much to its (private) member banks as it is to the people. Far too much of its policy is engineered to ensure the health of these banks before that of the economy as a whole. Alan Greenspan was particularly skilled at blowing smoke up the ass of the Administration and Congress while defending some of the most ill-conceived financial products (There was a damned good reason nobody could figure out what he was saying). This was in spite of the fact that he and other members of the board of governors being selected by US presidents.
Public policy should be set by people we elect. And can throw out should they get their duties to the people confused with those to the good old boys financial industry.
Have gnu, will travel.
Seriously, this idea that all debt is automatically evil is silly. There's absolutely nothing intrinsically wrong with it. It's a tool. We have tools like live CDs, antivirus, screwdrivers and such; the economy has tools like loans, bonds and such.
Where you run into trouble is if you can't service the debt. So really you want to avoid getting into so much debt that this is likely to be a problem. How much is too much? Depends how much you can service.
Not only how much debt you can service, but will Joe-Smoe Alabama Six-Pack have the fiscal and personal discipline to be able to service it.
Debt providers (Banks) used to assume prior-restraint on their own part, in the form of credit checks and approval boards for loans and debts. When the government decided that banks could purchase insurance against the debts they loaned, the banks no longer had to exercise any restraint, and were free to push as much debt as they wished... without having the silly drawback of having to vette every debtor. The government and insurance-banks assumed the risk for them, and they pushed more than the populace could service.
Once the debt comes to the point of requiring 100% discipline, and no freedom of choice or thought (Slavery), in your daily routine, it is impossible to service the debt as an individual.
Once the debt-collectors (Banks) require 100% compliance with a plan of their choosing for the debtors (Slaves), they will need an enforcement arm (Government) to ensure 100% (or more) payback.
Once the government has to police 100% of the population (Slaves) to enforce compliance with paying the debt-collectors (Banks), it will have instituted monetary communism (You work for the banks because of government)
((As opposed to Soviet Russia communism, where because of banks, government works YOU! Oh, wait))
[b]Luckily, in America, we have not reached that 100% point. Why? Because WE are only the 99%, there is still 1% of the country still able to service their debt.[/b] And service it without the kind of discipline Joe-Smoe Six-pack would be required to.
Debt providers (Banks) used to assume prior-restraint on their own part, in the form of credit checks and approval boards for loans and debts. When the government decided that banks could purchase insurance against the debts they loaned, the banks no longer had to exercise any restraint, and were free to push as much debt as they wished... without having the silly drawback of having to vette every debtor. The government assumed the risk for them, and they pushed more than the populace could service.
Paging Alexander Hamilton, Alexander Hamilton to the Slashdot news desk.
Alexander Hamilton (the first Treasury secretary, the guy on the $10), thought some national debt was useful because the debt-holders would want the government to remain stable enough to pay them back. Have no idea what he'd think of the massive national debt today.
I listen to both RIAA and non-RIAA stuff if I like the music, tangential business/politics nonwithstanding.
Could do it one time, the get out of hock free card, payable to the Federal Reserve Bank.
Gently reply
Averaged out. If you look at the line, it is pretty clear that it increased more under Republican administrations.
Especially under Bush the Lesser. But more important than who is president is who controls congress. Remember that Tip O'Neil required a $2 increase in social welfare spending for every $1 in increased military spending.
None of you have any idea what "Debt" means as the reserve currency, nor do you understand monetary theory, so please don't post.
http://pragcap.com/resources/understanding-modern-monetary-system
quit whinning and be a good patrotic chrisitian american & render unto Casear,Your reward will come with the rapture.
If I were to print money in my basement, I would go to jail.
You're (seemingly intentionally) confusing physical money with wealth creation. Anyone other than the Treasury Department (not the Fed!) cannot print physical money. Wealth creation, on the other hand, through the creation of debt, is not illegal. Although it's easy to simplify and say this only happens at banks, it is not restricted to banks under the Federal Reserve. Securities firms like Morgan Stanley (before they converted to a bank holding company) were involved in significant wealth creation as well.
And anyway, debt creation is a two-sided process. It's not just the bank, it's the borrower as well. When you take out a mortgage, you are creating wealth, too. When you get that mortgage, suddenly you have more money than you've earned!
I understand the need to expand the money supply in order to prevent deflation. However, the government, not a private central bank, should be the one to do that
As you know, the Fed is only semi-private. Its powers are granted through Congress and its goal (controlled inflation + employment) is specified by law. Basically, Congress has delegated its constitutional duty to regulate the currency to the Fed. (An awful lot of government organizations work this way, so it's not like the Fed is super special here.)
There is a good reason why the Fed was designed to operate mostly independently from the rest of the government. Otherwise you'd have politicians inflating the money supply every election year to give the appearance of economic growth. Of course the long-term result of that would be high inflation.
(Look it up, that's how it works!)
FRA: STFU GTFO
when you are in debt someone owns you.
This is very much like a centrally planned economy, where the government decides where to invest and what kind of production to grow. These kinds of economies don't have a very good track record.
If you want to allow private enterprise, you'll need a way to get money directly to the entrepreneur, without government approval. Bank loans are a fairly efficient way to achieve that.
If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan
Nope, this is not true at all. There is only one "bank" in USA which are allowed to create/print new money.
If a normal bank want to lend out 100$ to a customer, they NEED to have those 100$ before they can lend them out. They can't just create them. Banks primary get their money from 2 different sources. Either from deposits, or they lend them from other banks. Remember what happend when "Lehman Brothers" crashed. Suddenly banks did not want to lend money to other banks because they were unsure if they could get them back. This made it difficult for most banks to lend out money to their customers and the entire financial system did grind to a halt.
And you may ask: If a bank can't lend out money without having the money or lending them from someone else, why is there a limit to how much a bank can lend out? The reason is to ensure that the bank don't lose the money their customers have deposited.
btw: The banks are not allowed to lend out 9 times their total customer deposit. They are allowed to lend out 9 times* their CAPITAL. That is: 9 times the money the banks owner have invested as cash in to the bank. This rule exists so that if the bank loses money there should still be capital to pay all deposits back.
Because if the US Gov "printed" (It doesn't have to be on paper) money and used it to pay off the federal reserve, that money would disappear into thin air again the same way that money appeared out of thin air when the federal reserve bought bonds from the US Gov.
That would actually not change the amount of money in circulation, and would not cause hyperinflation. Coincidently, the last US president to try to do that was JFK.
FRA: STFU GTFO
In 2010, 865 billion was paid into social security and 701 billion was paid out. So ignoring social security and interest on the debt we have 4 major categories of spending, DoD, Medicare & Medicaid, Mandatory and Discretionary. About 150 billion of the discretionary spending is military so we end up with something like Defense: 839 billion, Medicare & Medicaid: 793 billion, Mandatory: 416 billion and Discretionary (non-defense): 510 billion. I don't think "pale in comparison" means what you think it means.
You've misunderstood how banks actually work. Banks do not lend out 9x the money they take in from depositors. In simple terms, here is how it works. Lets say I am a banker and you deposit $100 with me. I can then lend $90 to George. The effect of this is that I now only have $10 in my possession. So if you suddenly want your money back, I cannot give it to you right away. I can only give it to you after George returns the $90 he owes me.
This requirement on banks to retain 10% of deposits has another consequence. George can now pay $90 to Hu for say an ipod. Hu then goes and deposits $90 at his bank which in turn is allowed to lend out $81 of that. If you follows this through to its logical conclusion, you will see that there is effectively $900 in the system, which comes from your $100.
Your post suggests that I (in this case an individual bank) can take your $100 and lend out $900. That is not the case.
I assume this is Laurence H. Summers, one of Clinton's Treasury secretaries.
I listen to both RIAA and non-RIAA stuff if I like the music, tangential business/politics nonwithstanding.
Debt isn't required for a sovereign nations currency as a basis for its issue.
It is clear I think from most informed people reading this what the real reason is for a private central bank, to insist on usury.
You see, aristocracy has always been a tick feeding on the nations that are unfortunately ruled by it.
If you care to study your history of US Presidents, every president that has been assassinated, has introduced currency notes that are based on a nations sovereign right to issue its own currency without usury.
This isn't a coincidence.
-Hack
Got Geometrodynamics? Awe, too hard to figure out? Too bad.
Where does it say that the Fed must pay all income back to the Treasury? I read the text of the entire Act and missed that part.
I should have chosen a different word. Pioneered can imply invented. What I meant was, fractional reserve lending became more widely used because of Nathan's success with it. There were several Nathan Rothschilds. My statement was referring to Nathan Mayer Rothschild, who was born in 1777.
I would rather invest my money with people who actually do the work of creating valuable tangible goods. Namely entrepreneurs, scientists, engineers, technicians, machine operators, robots, people who make and program robots, etc. The only think banks create are debt and inflation.
I was so hardcore democratic for many years posting here, but these posts sicken me.
Ok maybe more libertarian than republican. This debt nightmare and corruption from financial institutions has GOT TO STOP. I wish more Wall Street Protestors would voice their opposition at the government and follow Peter Schiff's advice to them.
This is scandalous and I hope it hits the news. The right at least is getting serious about cutting funding to try to balance market conditions and historically democrats have done a better job but this non sense needs to stop before another crash making the 2008 one look like picnic starts.
Hear my words. The next crash there will be no bailouts. Retirees and widows will lose everything as it is too political to save them again like Obama did and we saw the result of angry Americans.
http://saveie6.com/
A constant positive debt/GDP is basically a heavily regressive transfer payment program: you take money from people based on income (i.e. "new money") and you give it to other people based on wealth (i.e. "old money").
A great scheme for the old money, if only they could have pulled it off. The trouble is keeping politicians on a short enough leash that they can maintain "constant", despite them having every incentive to trade short-term economic growth ("look what great stuff I bought on the credit card!") for long-term pain ("look what a horrible person that other guy is for suggesting we pay down our credit cards!").
Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times.
Ok. Bank A loans out 0.9*deposit_X, which then gets deposited into bank B. Bank A has 0.1*deposit_X. Bank B loans out 0.9^2*deposit, which then gets deposited into bank C. Bank B has 0.09*deposit_X. Bank C loans out 0.9^3*deposit...
... + (0.9^99 - 0.9^100) = 0.999973439
(1 - 0.9^1) + (0.9^1 - 0.9^2) +
404: sig not found.
The number of people that get the financial system is very small. Bonds have as function to take money out of circulation, thus preventing it to be spend willy nilly on fossil fuels, like all money is (unless it circulates in the cost of labour). The bonds allow the measured rerelease of money into circulation, while the banks and energy companies and the government remove it from circulation. Thus the energy use in society is allocated and controlled.
It is a simple step to understand that the financial crisis is not only a crisis of currency (wildly inflated by derivatives) but also an energy crisis, meaning the credit restrictions are aimed at cutting carbon use.
For more on this train of thought http://www.sunreign.com/info/roboeconomics
I still don't get it. Securities backed by the US Government means that the interest is paid by taxpayers, and if the government runs out of money the principal is too.
To put it another way, the arguments I've been reading over the last few days essentially say the US taxpayers should foot the bill for private companies. Directly or indirectly, whether for monetary policy or direct investments.
Banks buy them for low risk assets - so the taxpayer should pay the bank interest, when the alternative is to either loan it or hold on to the money.
Mortgage interest rates - Does no one think that we could find another way to figure out the risk of a loan, and attach a high enough rate of return (aka interest rate) to make the investment worthwhile?
Social security - we invest taxpayer money in accounts with interest paid by the taxpayers. While Social Security is widely known as "Robbing Peter to pay Paul", putting that money in T-bills is robbing Peter to pay Peter later.
None of these arguments make any sense to me. The response to every answer I've seen has been "but where does that money come from?" and then the argument unravels.
Second paragraph.
So, isn't this basically saying that the US taxpayer is propping up the world's economy?
Mod parent down for perpetuating the myth of the money multiplier. "When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero." Get it? You completely forgot that any money banks loan out are deposited at other banks. Deposits are a liability for the bank, and cancels out the lent out money exactly. Only government deficit spending creates a net amount of money (and taxation creates a net negative amount). http://pragcap.com/resources/understanding-modern-monetary-system
"Politicians and diapers must be changed often, and for the same reason."
Grandparent's is a common misconception. People need to learn MMT and stop spreading this myth that banks create a net increase in money in the system. Government is the monopoly issuer. The whole issue of reserves seems to be covered in misconception. Banks are capital constrained, not reserve constraned, since they lend out as much as they can and then borrow on the overnight market to make their reserves at the Fed correspond.
"Politicians and diapers must be changed often, and for the same reason."
You keep talking nonsense. Banks are not really limited in lending out by reserve ratios! This is because during the day they lend out AS MUCH AS POSSIBLE, and then if their reserve accounts at the Fed are insufficient, they borrow on the overnight market you hear mentioned frequently in such discussions. Banks are only constrained by their captial/asset ratio.
"Politicians and diapers must be changed often, and for the same reason."
3 swalve, thanks for bursting that idiot's bubble.
"Politicians and diapers must be changed often, and for the same reason."
Complete refutation of everything you wrote in your post: http://bilbo.economicoutlook.net/blog/?p=1623
"Politicians and diapers must be changed often, and for the same reason."
Banks are a government-private sector joint operation, due to banks' reserve accounts at the Fed, and capital ratio regulation. The efficiency does come exactly from banks' work in determining who are creditworthy borrowers to lend to. But grandparent isn't even at this point yet, he needs to get the basics right, such as that there is no really a money multiplier. http://bilbo.economicoutlook.net/blog/?p=1623
"Politicians and diapers must be changed often, and for the same reason."
<3 :)
"Politicians and diapers must be changed often, and for the same reason."
Hey! You stole my shtick dude! I was the first one that started posting these links around them here parts, pardner
"Politicians and diapers must be changed often, and for the same reason."
Bunch of countries under the Euro, who have given up their right to be monopoly issuers of their own currency? That's what makes all the difference; the US is not in this situation and it can always monetize its debt.
"Politicians and diapers must be changed often, and for the same reason."
U.S. Treasuries are a benchmark for the entire world for the value of, and interest rates on, other securities, mortgages and assets. That's a big reason why having no debt is a problem.
Duh, http://m.youtube.com/#/watch?desktop_uri=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DDc3sKwwAaCU&v=Dc3sKwwAaCU&gl=US
We are only worth what we owe.
Nope.
Italy and Spain have fairly low levels of government debt. Italy has fairly low private debt as well. Moreover, Italy, Ireland and Spain were actually running budget surpluses prior to the Great Recession.
Your understanding is incorrect. Banks CANNOT loan out more then their deposits. In fact, the government mandates a "reserve requirement" from banks. This means they are required to keep X% of their deposits on hand or be shut down by the governement. The name "fractional reserve" comes from the fact that banks keep a fraction of their deposits in reserve.
Fractional reserve banking does have a multiplying effect on the money supply. If I have $100 in the bank and someone else has $90 in loans, there are, in effect, $190 in the economy where there is only $100 in actual cash. That $90 loans eventually makes it back to the bank and they can loan out 90% of that (which means $281 on the original $100). That cycle converges to a constant multiplier of 10x in the case of a 10% reserve requirment. But the banks aren't printing money. They are only loaning out a fraction of the money that has been deposited.
Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times.
Ok. Bank A loans out 0.9*deposit_X, which then gets deposited into bank B. Bank A has 0.1*deposit_X. Bank B loans out 0.9^2*deposit, which then gets deposited into bank C. Bank B has 0.09*deposit_X. Bank C loans out 0.9^3*deposit... (1 - 0.9^1) + (0.9^1 - 0.9^2) + ... + (0.9^99 - 0.9^100) = 0.999973439
The increase in the money supply is is not .9, it is 9.99
.9 .9) = 1* .9 = .9 .9 * .9 = .81
... .9 = .0000215
... + 100th deposit = 9.99
I didn't use an equation, I used a spreadsheet to figure this out.
Initial deposit = 1 -> bank loans out 90% =
Second deposit = (initial deposit *
Third deposition = prior deposit (.9) * 90% =
100th deposit = prior deposit *
Net increase in money supply = Sum of Initial depost + second deposition + third deposit +
This of course assumes all money is deposited. With that assumption, the above is true. If you assume only 80% of the loaned money is deposited, you get a 3.6X multiplier.
I guess the point is that fractional reserve banking increases the money supply by some multiple, it does not decrease it by some fraction.
True, because no money is created out of thing air - in the end, no more money exists than has been created by the Fed. Period.
Well, since we live in a decidedly less than ideal world - your point is what?
In some universe where the Fed distributes money to private shareholders, you've have a point. However, we don't live in such a universe.
Had I meant "derived", I would have said "derived". (Actually, I would have said "is derived" which is the properly phraseology.) I find it interesting that you originally claimed that the amount of money was set by the banks, but now you agree it's set by the Fed - only it's too indirect. You not only can't speak proper English, you can't keep your story straight.
The mind boggles at the amount of either hallucinogenic drugs or utter self delusion it takes to make such a statement - one utterly at odds with history. You're not only a clueless loon, you've worked very hard to attain that state.
Google it, it's right up your delusional alley.
Pop Quiz: 1 Generic Monetary Unit is deposited into Bank A. Bank A loans 0.9GMU. How much money does Bank A have?
404: sig not found.
In other news, there is no spoon...
Yet another moron. I don't have the stomach for a thorough response, but the short and sweet response is, loans are repaid from a fraction of the newly created wealth enabled by the loan. In essence, a loan results in the transfer of land, machinery, and labor to the borrower. As the borrower creates wealth in excess of what he borrowed, land, machinery, and labor get moved elsewhere so someone else can use them to create more wealth.
There is no inflation unless money gets "printed". Naturally, there is deflation as the supply of money plus credit remains roughly static but wealth compounds, but since the perception is that one is repaying loans with more valuable money than he borrowed, governments "print" vast amounts of money to maintain inflation. The sick thing is, unless more than half your income is spent repaying debt, deflation still benefits you, so as usual, the socialist vermin in the government trick people into clamoring for their own demise.
It must be embarrassing to have posted a link to your source that proves YOU to be the liar.
The numbers you posted ARE NOT "the percentage change in the national debt," as you assert. They are the change in the debt AS A PERCENTAGE OF THE GDP.
If you read the table correctly, you'll see that during both of Clinton's terms, the debt still increased. It did, to your further embarrassment, increase by the smallest amount in most of our lives while the Republicans held both houses of congress.
Just remember: if you have to LIE about your political opponents in order to try to badmouth them, it actually says very, very good things about them. Always remember that when you feel like posting without fact-checking first.
My understanding is very different, namely that there are two broad classes of money, that backed by government and that backed by commercial banks (see http://en.wikipedia.org/wiki/Money_supply).
Imagine a depositor A who places 1 unit of money in their bank B. The bank B then loans this money to C, who uses it to buy some goods from A. A duly banks this money with their bank, now having a total of 2 units of money. If A now decides to withdraw their money from the bank, they will find that the bank may well decline to honour their obligation. This is precisely a result of the fractional reserve banking system. The assumption is that the collateral (which may not even exist, in the case of personal loans) is of enough value to cover the loan - this may well not be the case, depending on market conditions.
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There was no reason the US couldn't continue to sell bonds and notes with all debt paid off and actually make money.
As to the national debt...Obama has run up more national deb than any other president in history. More than most combined and in less than one full term.
Paying off the debut is harmful. Gee, it could mean that taxes were too high. And that means poor fiscal management.
Leslie Satenstein Montreal Quebec Canada
What a load of bullshit. The US claiming it could have paid off its debts by 2012 but didn't do so to help out the whole world. What a bunch of fucking altruists the Seppos are.
The new right fascists are bilingual. They speak English and Bullshit.
http://en.wikipedia.org/wiki/First_National_Bank_of_Montgomery_vs_Jerome_Daly
The new right fascists are bilingual. They speak English and Bullshit.
"The bank B then loans this money to C"
Thus B now has 0 units of money. When A deposits the new dollar back at bank B, B now has 1 unit of money, not 2.
Stories like this make for great conspiracy theories:
http://apt46.net/2011/10/21/get-ready-for-a-new-conspiracy-theory/
Exactly the point. There is still only one 'government backed' unit of money, safely deposited in the bank, but there is now one extra 'bank backed' unit of money (one of the two that are in A's account). If A wants to withdraw all their money, the bank B will have to try to force C to pay back their loan, and if C defaults then the money just disappears, and the bank can't afford to pay out.
Monetary reform is step one, but you should read up on the social philosophy that should follow - it's in my sig.
Social Credit would solve everything...
I've never seen that one before. I can't believe a justice of the peace fell for that (although it sounds like they were in cahoots). The dude DID get something, he got a check that he used to buy the house. It doesn't matter where the money came from, he got the money.
Actually, this is finance, not (pure) economics. What happens is the following: In the Capital Asset pricing model (CAPM) model, which is the most simple (and therefore widely used) method to value assets that have volatility, the risk-free asset is one of the key pillars. This asset is represented as a sure bet, and is the minimum return an investor is willing to have for a given amount invested. Then any other asset is simply a function of the risk free asset, the expected return, and the risk premium of the volatility.
If there were no US treasury bonds, this risk free asset would "disappear", so the whole method of valuation of assets would be impacted. Actually, this is a real problem right now in finance, since after the discussion of the US debt the question of whether the risk free asset should be the US treasury bond or other asset (for example, the German treasury bond was an option, or a "pool" of different treasury bonds) was starting to be discussed. Google it, there are several papers about it. So, yeah, actually eliminating the treasury bond would have a much deeper impact than it would appear at first glance.