Fiat money = endless debt circle? I disagree.

[AceNZ]

Experiment #1 (endless self generating debt):

Imagine a small economy with several people who can create goods and services that you need: a cobbler, a baker, a butcher, a computer programmer, a dentist, a barber...etc. etc. They are all currently bartering their stuff with one another, and it is very inefficient.

Enter the banker. The banker will issue promissory notes and lend them out to each business in the economy, and set the initial value of the promissory note so each person knows how much they will need to borrow to trade at current barter exchange rates. Set it to the value of a haircut, perhaps. Now each business can exchange those promissory notes with one another, making trade more efficient. In order for the banker to fund his own operations however, he will have to charge interest on the loans. But wait a minute---where the heck is the extra money going to come from?

enter the debt monster.

The banker will have to loan out additional promissory notes, also at interest, while collecting interest on the previous loans. Obviously, this would lead to the frightening conclusions that all those videos on youtube seem to share. In this experiment, the only thing the banks can be paid off with is the money they loaned out. Clearly this cannot work.

This is not correct.

The mistake in this logic is in assuming that the bank doesn't participate in the rest of the economy. It is perfectly possible for a bank to charge interest on loans without creating a "debt monster". Think of it this way: imagine that the banks are selling a product. They collect a fee for their product, just like the baker or the butcher. They can then spend that fee into the economy, to buy other goods and services, just like the baker. The difference is that the banker's product isn't tangible; it's the use (and creation) of money.

 

[spudea]

You might argue that ever improving technology moves us forward in society and this progression is only possible with banks supplimenting investment.

However, fiat money is backed by the created value of citizen labor and assets. Yet as new technology enters the economy. OLD technology, and thus old labor that no longer contributes to the new technology, the value TANKS! Thus the value backing the fiat money tanks as well. Until, new workers are educated, and the new technology can take off and thrive in the economy, thus adding new value to the fiat money.

This however is a revolving circle of unemployment etc. of the business cycle. Until new workers are educated to produce the new technology, all the production is enhanced by debt, attaching a value to the estimated value of the future production of that new technology. This is not real wealth. And what happens when actual doesn't meet the estimated value? An entire industry tanks.

RE: dot com bubble

 

[spudea]

You go buy a car with a loan. You are attaching a future value to your own production of value. You now have to combat anyone else who has a car loan, because they are searching to enhance their future value as well. You're not gonna find that future value in your car. It lost half its value when you drove it off the dealers lot. So you are now in competition for expanding your production value. But competition is good no?? However this competition is a revolving circle in a centralized fiat system, because all the risk is obsorbed by a single entity. So when 1 person with a car loan, passes away, or becomes disabled, or anything that severly damages his future production value (decisions that could come from his own free will, I might decide to change my major to Painting), this loss trickles down to everyone else. So it is now harder for everyone else to obtain their future production value necessary to pay off their car loan.

And thus emerges the monster... it makes enemies out of all of us. Increasingly we would gladly deny the freedoms of our neighbors if that means we don't have to work harder.

When people die, value is lost in the economy. GIVE EM FREE HEALTHCARE! Ban alcohol. Ban smoking in restaurants.

Ban freedom of choice of the individual because we can't take the risk of hurting the economy.

Guns kill people. Ban guns.

Emotions compromise economic output (Re: The movie "Equilibrium") Ban emotions.

etc. etc.

It is the perfect path to tyranny because the people willfully choose tyranny if it means they don't have to work as hard, as we scratch at fleeting leisure time.

 

[gutteck]

You go buy a car with a loan. You are attaching a future value to your own production of value. You now have to combat anyone else who has a car loan, because they are searching to enhance their future value as well. You're not gonna find that future value in your car. It lost half its value when you drove it off the dealers lot. So you are now in competition for expanding your production value. But competition is good no?? However this competition is a revolving circle in a centralized fiat system, because all the risk is obsorbed by a single entity. So when 1 person with a car loan, passes away, or becomes disabled, or anything that severly damages his future production value (decisions that could come from his own free will, I might decide to change my major to Painting), this loss trickles down to everyone else. So it is now harder for everyone else to obtain their future production value necessary to pay off their car loan.

If you don’t pay your car loan because you die or you just don’t want to pay for it the only thing that happened is that YOU created debt free money. Sure you inflated the money supply and thus depreciated the currency but at least the money is in the system already and because it is debt free money – for those that advocate for the bank he died ok, banks can’t call it back and therefore it is for the people to keep.

 

[jon_perez]

When I find dozens of videos by nazi anti jewish nut jobs on youtube screaming about how evil fiat money is, I start to wonder whether they are thinking clearly.

Obviously they're not.

Since Ron Paul claims to take his economics lessons from Hayek and Mises, it would be great to hear more technical economic explanations from that camp as opposed to the mere parroting of the "worthless paper" meme over and over again.

 

[jon_perez]

I agree with this. I'm not opposed to having paper money; I just want the paper money to be controlled by the government and interest free.

Paper money controlled "by the government" is likely even worse than that controlled by an independent central bank. What makes you think that a president will not ask the treasury to print even more of it to temporary stimulate the economy and enjoy higher approval ratings?

The Fed earns interest on the bonds it purchases from the Treasury, but it remits the interest back again, so the accusation that it earns interest on money it conjures out of thin air is incorrect. (However, I believe it does earn interest on the interest...)

 

[spudea]

banks can’t call it back and therefore it is for the people to keep.

Yes they can and DO get it back. Banking is a business. And when a business incures losses, they have to make up for the lost capital, by raising prices.

Our central banking system does the same thing. When a loan is defaulted, they spread the loss out through lower rates on savings, higher rates on loans, fees, and tighter lending. And then the Fed goes and screws up everything by injecting billions of dollars of new money that has ZERO value into our system as DEBT, that also has interest attached to it, which causes inflation, which hits the pockets of every citizen in the nation and mortgages the future production value of your children.

It all eventually gets absorbed back into the system. Business can now afford to pay higher loan rates because of rising prises caused by inflation. But when the Fed created all the new money. You all of a sudden didn't recieve a pay wage. SO for a period of time you are paying more for goods and services while still having the same income. Your work is worth less because of the manipulation by the FED.

 

[gutteck]

Originally Posted by Pianist4Freedom
"When I find dozens of videos by nazi anti jewish nut jobs on youtube screaming about how evil fiat money is, I start to wonder whether they are thinking clearly."

Obviously they're not.

Since Ron Paul claims to take his economics lessons from Hayek and Mises, it would be great to hear more technical economic explanations from that camp as opposed to the mere parroting of the "worthless paper" meme over and over again.

SHOW ME ONLY 1 video with a nazi anti jewish nut job blaming Jews and calling fiat money "evil".

Why even call nazi anti jewish whoever opposes fractional lending?

 

[AceNZ]

If you don’t pay your car loan because you die or you just don’t want to pay for it the only thing that happened is that YOU created debt free money. Sure you inflated the money supply and thus depreciated the currency but at least the money is in the system already and because it is debt free money – for those that advocate for the bank he died ok, banks can’t call it back and therefore it is for the people to keep.

If you take out a loan and then default on it in some way, then an equivalent amount of bank reserves are destroyed when the loss is recorded on the bank's books. Reserves are the original "debt free" money.

Money IS taken out of the economy -- hence the current deflationary atmosphere that has resulted because of the large and growing number of subprime mortgage defaults.

 

[Pianist4Freedom]

Ok.

Why couldn’t the borrower issue his notes in his garage with his school note book and a pen to pay back the bank? Ok maybe the notes wouldn’t be as pretty so lets say he uses his computer and prints pretty notes. Why would the bank want real wealth when borrowers have paper and ink I don’t get it?

Because that wouldn't be fair to other people in the economy for whom the bank is also managing promises. The only wealth the bank actually acquires is the interest on the loan he gave out. I don't see how a risky loan isn't real wealth---it provides opportunity, and money itself provides efficiency of trade. A haircut is real wealth, isn't it? It is something of value. It isn't an actual THING, so it couldn't be collected as a hard asset or anything, but it is wealth. Similarly, taking a risk on a new business via a loan is definitely a form of wealth.

when loans are paid back the bank doesn't get the principal, it only gets the interest, right? what is wrong with that? It seems to me it would be the same in a barter economy.

If you want to start a business you'll need to borrow all sorts of goods and services to get it started. When you get it started, you can pay off all the people you borrowed things from with real wealth that you create. This may be inefficient because they may want to be paid off by other things. Banks take this exact same process and make it more efficient. Maybe there's something I still don't get about this but personally I see loans at interest as taking risks on budding businesses so they have a chance to get started...isn't that real wealth?

 

[Pianist4Freedom]

Originally Posted by Pianist4Freedom
"When I find dozens of videos by nazi anti jewish nut jobs on youtube screaming about how evil fiat money is, I start to wonder whether they are thinking clearly."




SHOW ME ONLY 1 video with a nazi anti jewish nut job blaming Jews and calling fiat money "evil".

Why even call nazi anti jewish whoever opposes fractional lending?

I am not calling people who oppose fractional lending nazi or anti jewish. There are some videos on youtube which appear to be extremely anti jewish, such as:

President Andrew Jackson VS Zionist Rothschild Bankers

And many others have referred to "the international bankers" without going so far as referring to everyone involved as a JEW. So...this video combined with other less extreme videos freaked me out a bit...

 

[Pianist4Freedom]

This is not correct.

The mistake in this logic is in assuming that the bank doesn't participate in the rest of the economy. It is perfectly possible for a bank to charge interest on loans without creating a "debt monster". Think of it this way: imagine that the banks are selling a product. They collect a fee for their product, just like the baker or the butcher. They can then spend that fee into the economy, to buy other goods and services, just like the baker. The difference is that the banker's product isn't tangible; it's the use (and creation) of money.

That's what I thought. However, in this tiny thought experiment (see experiment #2), how can the bank charge interest and have that interest paid off with money in addition the loans he has already given out? It seems like, in order to introduce money to a barter economy which previously had no money, the interest would have to be collected in real wealth at first. Can banks do that? That's kinda what I'm getting at: Can banks collect interest via some other method than money itself? I know they can collect someone's property if they default on a loan, but is it ever just part of a loan that wasn't paid off?

 

[forsmant]

I prefer to call them international banksters.

 

[spudea]

Maybe there's something I still don't get about this but personally I see loans at interest as taking risks on budding businesses so they have a chance to get started...isn't that real wealth?

No it isn't real wealth. It is a future obligation based on the predicted value of the future value created by the business. And if the business does not meet that future value, the banks take a hit on that debt, and pass on the losses to everyone else.

 

[kyleAF]

No it isn't real wealth. It is a future obligation based on the predicted value of the future value created by the business. And if the business does not meet that future value, the banks take a hit on that debt, and pass on the losses to everyone else.

Exactly. That's only "promised" wealth, not "real" wealth.

Pianist4Freedom is correct in differentiating between money and wealth, though. Food, shelter, goods, etc. are wealth. Money is just a thing that can be exchanged for wealth, but only if there is wealth to be had.

 

[gutteck]

If you take out a loan and then default on it in some way, then an equivalent amount of bank reserves are destroyed when the loss is recorded on the bank's books. Reserves are the original "debt free" money.

Money IS taken out of the economy -- hence the current deflationary atmosphere that has resulted because of the large and growing number of subprime mortgage defaults.

Ok, you lost me here.
So when someone defaults on a loan bankers “destroy” the amount of the loan in their reserves?

So there is actually someone with a paper shredder destroying bills when people default on their loans?

That doesn’t make sense. Because whatever the bank is destroying is not the original lent money.

For example:
John borrows $10,000 to buy a car. Then the seller buys gold with that money. Then John dies and the car gets stolen the same day. John does not pay the bank back and the car is sold in parts on the streets.

Are you telling me that after losing $10,000 the bank will go and destroy another $10,000?

The debt free money that was created by John is for the people to keep as I said before. Because the seller keeps his gold and nobody has to pay back the loan so the money stays in the system.

 

[TruthAtLast]

I'm well aware there are valid criticisms of fiat money, of central banking, etc. Just as there are valid criticisms of a commodity backed monetary standard.

My original post was only intended to counter the over simplistic logic in several videos I've seen on youtube which seem to imply that just because we are using a fiat money system that all wealth will go to bankers and we'll all be impoverished slaves eventually.

I can see that one can become a slave to bankers via unwise borrowing, but I don't think this is ever absolutely necessary, for anyone.

This was not intended to be a troll post---I greatly admire Ron Paul and everything he stands for. I'm only interested in learning the truth by examining a broad spectrum of ideas. When I find dozens of videos by nazi anti jewish nut jobs on youtube screaming about how evil fiat money is, I start to wonder whether they are thinking clearly. Hence my post. I'm not implying any of you are nut jobs of course, like I said: I'm sure there are valid criticisms of fiat money and central banking. But not so much that it is just inherently going to ruin us like some sort of automatic killing machine.

Will someone read and critique my thought experiments? I've been thinking very hard about these issues and I'd really enjoy some thoughtful responses that could help me learn where I've gone wrong or what I've gotten right. Thanks.

Of course fiat money CAN work. Colonial Script worked for the colonies as it facilitated the exchange of goods and services, but it was debt free. The people should never be charged interest for the USE OF CURRENCY.

Also, the fractional reserve banking allows banks to lend something that they don't even have. It is debt money backed by debt money. So for them to ask for interest on something that was created out of thin air and the exact moment you borrowed it, is undermining the entire purpose of currency. The only thing of value they have is your promise to pay the fake money back. And by endlessly increasing the money supply, it devalues every other dollar in the world because goods and services (or production) doesn't keep up with the amount of new money that is being added to the supply every time any loan is being taken out.

 

[gutteck]

The only wealth the bank actually acquires is the interest on the loan he gave out. I don't see how a risky loan isn't real wealth---it provides opportunity, and money itself provides efficiency of trade. A haircut is real wealth, isn't it? It is something of value. It isn't an actual THING, so it couldn't be collected as a hard asset or anything, but it is wealth. Similarly, taking a risk on a new business via a loan is definitely a form of wealth.

So in your fairy tale banks actually have the money they loan out to people. That is why you are saying that banks get back the principal and the interest paid is the profit. This is what people think out there.

Actually the bank does not have the money it loans to people. It does however have a license given to it by the FED that gives it the legal permission to counterfeit money. In other words the bank can legally replicate dollars and lend them to people at interest.

The only risk the bank is taking is the risk of people figuring out their scam.

when loans are paid back the bank doesn't get the principal, it only gets the interest, right? what is wrong with that? It seems to me it would be the same in a barter economy.

The interest on most loans exceeds the principal. For example a mortgage loan if paid in full plus interest it is three or four times the amount lent. When the bank gives out a loan it only creates what the borrower asks for.

For example if someone asks for $100,000 then the bank only creates $100,000 when the bank gives the person the check. This is true for all loans. So who creates the interest money? Where do the money to pay the interests on all loans come from? The truth is that it doesn’t exist.

See. Even if all the money in the system is paid back to the banks that would only pay the principal but not the interest. This makes it impossible to pay back the banks. Therefore in the end the bank will own our wealth no matter what.

 

[TruthAtLast]

For example if someone asks for $100,000 then the bank only creates $100,000 when the bank gives the person the check. This is true for all loans. So who creates the interest money? Where do the money to pay the interests on all loans come from? The truth is that it doesn’t exist.

See. Even if all the money in the system is paid back to the banks that would only pay the principal but not the interest. This makes it impossible to pay back the banks. Therefore in the end the bank will own our wealth no matter what.

exactly!

+1000

 

[gutteck]

I am not calling people who oppose fractional lending nazi or anti jewish. There are some videos on youtube which appear to be extremely anti jewish, such as:

President Andrew Jackson VS Zionist Rothschild Bankers

And many others have referred to "the international bankers" without going so far as referring to everyone involved as a JEW. So...this video combined with other less extreme videos freaked me out a bit...

Because the scam might get people angry? If someday people put a stop to this only those responsible will be held accountable. Not those that share their blood or religious beliefs.