Fiat money = endless debt circle? I disagree.

[spudea]

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.

Reserves are destroyed because they use those funds to cover their losses. Meaning they now have less to lend out.

And I don't think you read my previous posts. If a bank cannot collect on a defaulted loan, IT IS NOT FREE MONEY IN THE SYSTEM. The bank will reabsorb the loss through lower interests on savings accounts, higher interests on loans, higher fees, etc.

Meaning other people pay the cost of the defaulted loan.

 

[Pianist4Freedom]

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.

Yes, I can see that would be the case if banks could only ever be paid back with notes that it lent out in the first place. The way that is dealt with is for the bank to gain actual stuff instead of money, right? If someone defaults on a loan, the bank gets some kind of hard asset: a house, a car...right? Once that happens, and the lent money has been spent elsewhere in the economy---that money stays in the economy and doesn't need to be paid back to the banks. Thus it is possible for most people to start a business, pay off their loans, make a profit, and stay out of debt subsequently.

I can see very clearly however that a purely credit based system such as what we have is too easy to abuse, and it obviously has been and IS being abused. What I don't see is that the system itself NECESSARILY transfers all wealth to the banks.

 

[jclay2]

I do agree that there is a little too much doom and gloom. I think one of the main problems is that it encourages politicians to spend and doesn't hold them to anything. In our history, whenever the government wants to spend more, they inflate the money supply. When government spending gets out of control, that is when you have problems. Since the fiat system largly enables the government spending, it is very bad. However, if these federal reserve jokers had any sense they would try to inflate the money supply to gdp growth. I have no idea why they don't aim for 0% inflation. We almost had this in the 50's, why not today.

 

[AceNZ]

So when someone defaults on a loan bankers “destroy” the amount of the loan in their reserves?

Yes.

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

No. No shredders. No bills. It's all digital, just like the money for the loan when it was first created (bills can only be obtained in exchange for the created-from-thin-air checkbook money).

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

That's right, it's not the original money. It's the bank reserves that get destroyed.

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?

Yes.

The new money for the loan was created from thin air, but the bank is still responsible for making sure it gets paid back. If you default on the loan, the bank takes a loss. The effect of the loss is to reduce bank reserves. In order to reduce reserves, money is destroyed -- an "equal and opposite" process to the original creation of the money for the loan. The specific portion of the reserves that are destroyed is the bank's profits; typically money previously earned as interest.

The resulting cash in the economy is not "debt free". Instead, the net effect of a loan default is to move the debt that "backs" the cash, from the original loan to some prior debt -- possibly to already existing national debt, since it's at the core of bank reserves, and thereby at the core of the money supply.

 

[AceNZ]

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.

Sorry, that's not correct. The piece you're missing is that the banks spend the interest they earn into the economy.

Let's say you borrow $10,000 from a bank at 10% interest. You buy a product from me, and pay me $9,000. Then you pay the bank their $1,000 in interest. The bank then buys a different product from me, and pays me $1,000, using the money they earned from you as interest. At this point I have $9,000 + $1,000 = $10,000. I then buy your business from you, and pay you $10,000. You pay off the loan in full. The cycle is complete. Interest was earned and paid, the loan was made and paid off.

The key point here, though, is that the bank spent the interest they earned into the economy, and that money eventually came back to them when the loan was paid off. The interest was, in effect, paid for by labor and production, since at the end of the process the bank now has a product, where before they had nothing.

What's really wrong about this to me is that the banks are able to buy things with earnings based on creating something from nothing. Granted, they do take a risk that the money won't be paid back -- but earning interest on something that it cost them nothing to create is just wrong.

 

[AceNZ]

Reserves are destroyed because they use those funds to cover their losses. Meaning they now have less to lend out.

And I don't think you read my previous posts. If a bank cannot collect on a defaulted loan, IT IS NOT FREE MONEY IN THE SYSTEM.

Agreed.

The bank will reabsorb the loss through lower interests on savings accounts, higher interests on loans, higher fees, etc.

Meaning other people pay the cost of the defaulted loan.

Maybe. This part involves business decisions by the bank, and needs to take into account competition with other banks, etc. It's not a natural consequence of how the banking system works.

 

[proximity]

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...

lol only 1500 views... get real. Videos linking spacemen to the banking system get more interest then the jew paranoia

 

[gutteck]

Sorry, that's not correct. The piece you're missing is that the banks spend the interest they earn into the economy.

When banks lend money they create exactly what the borrower asks for. Then the bank tells the borrower that he needs to pay back that money plus interest. Banks only create the principal of the money supply. And the interest which sometimes equals more than half up to three to four times the principal depending on the lifetime of the loan is nonexistent. So when someone pays back his loan plus interest he is taking principal money away from somebody else. In other words as precise as math someone won’t be able to pay back not even the principal on his loan. So as much decorations and disguises that you want to use to try to hide this scam when you solve the function wealth is always as sure as time transferred from the borrowers to the banks.


When banks spend their profits made by counterfeiting money and lending it at interest wealth still transfers from people to the banks. Someone had to work and create new wealth to pay the interest which becomes the banks’ profit. The rule that interest money was never created and only the principal money exists in the money supply still applies. The only thing that happens is that new created wealth is transferred to the banks as well as the wealth of those who couldn’t make their payments because someone took principal money away from the money supply by paying interest.

Let's say you borrow $10,000 from a bank at 10% interest. You buy a product from me, and pay me $9,000. Then you pay the bank their $1,000 in interest. The bank then buys a different product from me, and pays me $1,000, using the money they earned from you as interest. At this point I have $9,000 + $1,000 = $10,000. I then buy your business from you, and pay you $10,000. You pay off the loan in full. The cycle is complete. Interest was earned and paid, the loan was made and paid off.

Then again. By lending money the bank didn’t have it was able to acquire your product which is real wealth and get back the $9,000 which was the principal. But wait. The bank didn’t have the $9,000 in the beginning so now it has $9,000 more in their reserves. So now they can lend those $9,000 to 9 more people and repeat the process. But wait it gets better! When the bank gave me the $9,000 the loan was backed by my promise to pay. But now the $9,000 I paid back the bank is backed by the business I sold to you. So the bank converted my promise to pay into real wealth which the banks ended up keeping. And also let’s not forget that the bank bought something from you for a $1,000 which came from the interest I paid to the bank which I paid from the sale of my business. So in the end you had to create new wealth by manufacturing whatever product you manufacture to pay for my business and the bank ended up keeping it all.

 

[AceNZ]

Then again. By lending money the bank didn’t have it was able to acquire your product which is real wealth and get back the $9,000 which was the principal.

Well, it was $10,000 in principal in my example, but otherwise, that's right.

But wait. The bank didn’t have the $9,000 in the beginning so now it has $9,000 more in their reserves. So now they can lend those $9,000 to 9 more people and repeat the process.

No. When the loan is repaid, the associated money is destroyed -- it no longer exists, and doesn't become part of the bank's reserves.

The bank can re-lend, but only by creating new money based on the amount of their reserves.

So the bank converted my promise to pay into real wealth which the banks ended up keeping. And also let’s not forget that the bank bought something from you for a $1,000 which came from the interest I paid to the bank which I paid from the sale of my business. So in the end you had to create new wealth by manufacturing whatever product you manufacture to pay for my business and the bank ended up keeping it all.

Well, they didn't keep everything.... But yes, they created money from thin air, and were able to convert that into real assets. That's the secret of banking.

 

[scooter]

I have been having this argument on here for a while. I don't particularly like all of the sentiment on here from the people who have watched these movies and gotten the idea that the banking system is this evil conspiracy that is taking over the assets of the world.

AceNZ, you are very knowledgable on the subject. You are willing to see that the debt money created by banks is returned to the economy when the bank spends it back or pays its people with it. The money that the banks "earn" is basically the money created by real advancements in the economy. They gave out a loan on future earnings, the person achieved those earnings by adding to the economy and working, and the earnings were paid back to the bank. The bank then spreads the newly created wealth into the economy.

The fiat system is not necessarily a no-win situation. The money should represent all real value of an economy, plus the estimated future value of earnings. That future value is estimated by money created for loans. If those bets don't pay out, the person and bank who miscalculated future growth will pay. The person loses the asset, the bank loses its investment in that person. The bank can recoup some of that investment by selling the asset for whatever it can get on the market. This will return the earnings that the person was able to pay until they defaulted, and will also attempt to return the assets of the depositers whose money was used for the loan.

Treat banks like an investment service. They hold your money for you and sometimes pay interest. You should know that for this service or this interest, they are going to make investments with that money. Banks typically invest in future earnings of other people or of companies.

The problem with the system is not at the banking level. The fiat money here represents real value that is in the economy or is estimated to come into the economy. The problems lie at the national level. The government puts up nothing but your sovereignty and your tax payments as collateral, and then borrows well beyond its limits. The Federal Reserve has proven it is inept in stopping this process and often fuels it at times.

The Fed is not an evil empire taking all of your wealth. They are a check and balance in the government's system of handling money that is doing a terrible job. Also, the banks have shown as of late that they aren't very good at investing in that estimated future wealth. They leveraged up their investments too far. Low fractional reserves has allowed this.

The government MUST balance their budgets, the Fed MUST raise reserve limits, and the Fed MUST stop lowering rates or taking actions to save the bad investors over the savers.

 

[kyleAF]

The problem with the system is not at the banking level. The fiat money here represents real value that is in the economy or is estimated to come into the economy. The problems lie at the national level. The government puts up nothing but your sovereignty and your tax payments as collateral, and then borrows well beyond its limits. The Federal Reserve has proven it is inept in stopping this process and often fuels it at times.

The Fed is not an evil empire taking all of your wealth. They are a check and balance in the government's system of handling money that is doing a terrible job.

Yes and no.

A conspiracy of the banks to take all wealth is silly. However, the wealth DOES gravitate toward those who get the new money first upon its creation, before the inflation of the supply results in an increase in consumer prices. There's a lag between the two. Inflation does not equal an increase in aggregate prices.

Inflation = de facto tax. That much is true as the purchasing power goes down per unit of money (fiat dollar). Most salaries are not indexed to inflation (besides the CPI not accurately reflecting it anyway) and so the resulting increase in money decreases the standard of living for the lower and middle classes more so than the wealthy investors who play with the money before it affects the prices of goods.

It also kills savings incentive and promotes a profligate credit system.

The Fed has been fueling the problem especially since Greenspan took over (really since its inception in 1913), as they have kept low interest rates during the "booms" and lowered them further during the "busts"!! They've postponed the major correction, while building up the bubble. The dotcom bubble correction is mild compared to a "real" correction of the current bubble. Bernanke--like everyone else--is human, which immediately means that he CANNOT begin to have the mental capacity required to know what the optimal interest rate for the literally trillions of economic interactions in our economy would be. He's just guessing, just like the Fed has always done.

Of course banks are a wonderful service to the economy!! They hold your money safely in vaults, for instance, and help to fund economic development through loans. However, banks currently DO contribute to the overall problem. They give out BAD loans regularly (sub-prime!), because they expect their moral hazard to get them through the rough times. And they're right. The Fed is bailing them out with the TAF right now.

"When you subsidize something, you get more of it" is a very true statement. We subsidize stupid investments, and now the credit fiasco has resulted.

The answer to the problem of over-spending by the government, is not letting them operate on credit, or only allowing them to operate on a fixed-rate credit system. This, unfortunately, isn't possible with a fiat system. If it were possible, it would have been successful in the myriad OTHER civilizations that have tried it. Instead, they collapsed. The license to inflate is the problem. Paper and fiat money always comes with that license. Only a fixed quantity money can prevent it.

 

[gutteck]

I don't particularly like all of the sentiment on here from the people who have watched these movies and gotten the idea that the banking system is this evil conspiracy that is taking over the assets of the world.

Ok attack this with coherent logic and facts as detailed as possible:

"When banks lend money they create exactly what the borrower asks for. Then the bank tells the borrower that he needs to pay back that money plus interest. Banks only create the principal of the money supply. And the interest which sometimes equals more than half up to three to four times the principal depending on the lifetime of the loan is nonexistent. So when someone pays back his loan plus interest he is taking principal money away from somebody else. In other words as precise as math someone won’t be able to pay back not even the principal on his loan. So as much decorations and disguises that you want to use to try to hide this scam when you solve the function wealth is always as sure as time transferred from the borrowers to the banks"

"When banks spend their profits made by counterfeiting money and lending it at interest wealth still transfers from people to the banks. Someone had to work and create new wealth to pay the interest which becomes the banks’ profit. The rule that interest money was never created and only the principal money exists in the money supply still applies. The only thing that happens is that new created wealth is transferred to the banks as well as the wealth of those who couldn’t make their payments because someone took principal money away from the money supply by paying interest."

Don’t just call it names and think that you get away with it.

 

[scooter]

Ok attack this with coherent logic and facts as detailed as possible:

"When banks lend money they create exactly what the borrower asks for. Then the bank tells the borrower that he needs to pay back that money plus interest. Banks only create the principal of the money supply. And the interest which sometimes equals more than half up to three to four times the principal depending on the lifetime of the loan is nonexistent. So when someone pays back his loan plus interest he is taking principal money away from somebody else. In other words as precise as math someone won’t be able to pay back not even the principal on his loan. So as much decorations and disguises that you want to use to try to hide this scam when you solve the function wealth is always as sure as time transferred from the borrowers to the banks"

"When banks spend their profits made by counterfeiting money and lending it at interest wealth still transfers from people to the banks. Someone had to work and create new wealth to pay the interest which becomes the banks’ profit. The rule that interest money was never created and only the principal money exists in the money supply still applies. The only thing that happens is that new created wealth is transferred to the banks as well as the wealth of those who couldn’t make their payments because someone took principal money away from the money supply by paying interest."

Don’t just call it names and think that you get away with it.

Listen, don't get me wrong. I think our system of credit is a house of cards and is incredibly mismanaged. But it's not an evil system that's trying to steal wealth away from people.

The banks provide a service. Their main service is to allow a person or business to offer up future earnings so that they can purchase an expensive item now. If the people wanted to wait and save up money before they bought something big, then the banks wouldn't have customers. But unfortunately, the masses are hooked on the system of credit.

The new money banks create gets paid back with real production. They get paid back with the future earnings of the person they made the loan for. The debt-based money is erased by the real earnings of that person.

The only money created "out of thin air" is the stuff done at the federal level through the Fed, mostly from deficit spending by our wasteful government.

You should target your complaints at the incredible mismanagement of money by our government and unwillingness of our Fed to do anything to stop it.

 

[Pianist4Freedom]

I have been having this argument on here for a while. I don't particularly like all of the sentiment on here from the people who have watched these movies and gotten the idea that the banking system is this evil conspiracy that is taking over the assets of the world.

AceNZ, you are very knowledgable on the subject. You are willing to see that the debt money created by banks is returned to the economy when the bank spends it back or pays its people with it. The money that the banks "earn" is basically the money created by real advancements in the economy. They gave out a loan on future earnings, the person achieved those earnings by adding to the economy and working, and the earnings were paid back to the bank. The bank then spreads the newly created wealth into the economy.

The fiat system is not necessarily a no-win situation. The money should represent all real value of an economy, plus the estimated future value of earnings. That future value is estimated by money created for loans. If those bets don't pay out, the person and bank who miscalculated future growth will pay. The person loses the asset, the bank loses its investment in that person. The bank can recoup some of that investment by selling the asset for whatever it can get on the market. This will return the earnings that the person was able to pay until they defaulted, and will also attempt to return the assets of the depositers whose money was used for the loan.

Treat banks like an investment service. They hold your money for you and sometimes pay interest. You should know that for this service or this interest, they are going to make investments with that money. Banks typically invest in future earnings of other people or of companies.

The problem with the system is not at the banking level. The fiat money here represents real value that is in the economy or is estimated to come into the economy. The problems lie at the national level. The government puts up nothing but your sovereignty and your tax payments as collateral, and then borrows well beyond its limits. The Federal Reserve has proven it is inept in stopping this process and often fuels it at times.

The Fed is not an evil empire taking all of your wealth. They are a check and balance in the government's system of handling money that is doing a terrible job. Also, the banks have shown as of late that they aren't very good at investing in that estimated future wealth. They leveraged up their investments too far. Low fractional reserves has allowed this.

The government MUST balance their budgets, the Fed MUST raise reserve limits, and the Fed MUST stop lowering rates or taking actions to save the bad investors over the savers.

Thanks for this reply, this seems to corroborate everything I've learned recently from everyone on this forum. That is, fiat money can work, but if abused (as it is today), you can "over promise" beyond the economy's productive capacity. I sincerely hope that this can be reversed without too much economic pain in this country. What do you think? Most people here seem to think we're all going to be living in burlap sacks before long, trading gold and silver coins for what vegetables we're able to grow and rats and mice we're able to trap for food...

 

[Devil_rules_in_extremes]

Fiat money is extremely flawed and is UN-Constitutional in the United States. Article 1 Sec. 10 says only Gold and Silver shall be legal tender, and that the Congress has the power to set it's weight and measures, not a Central Bank like the Federal Reserve.

We can talk about the pro's and con's of Fiat money all day long, but in the end, it's illegal and UN-Constitutional.

This is Ron Paul in a recent interview on FIAT money:

http://video.google.com/videoplay?docid=-2962369311366680572&hl=en

 

[moshe kerr]

a regulated bank/central bank its primary purpose centers around financing government. Free banking its chief function revolves around financing trade. The civil war ended the era of free banking in the US because the Yankee government desparately needed money to finance its war against the South.
The opposition to the Conservatism of Paul centers upon the fear of the post civil war establishment that our man seeks to re establish states rights, state control of intra and inter state commerce and to restore a free banking era unto the American peoples. As far as the opponents of RP go, they think he might recommend restoring the State legislators power of appointing Federal Congressmen and Senators. States Rights scares the hell out of these fat cats.

 

[scooter]

Fiat money is extremely flawed and is UN-Constitutional in the United States. Article 1 Sec. 10 says only Gold and Silver shall be legal tender, and that the Congress has the power to set it's weight and measures, not a Central Bank like the Federal Reserve.

We can talk about the pro's and con's of Fiat money all day long, but in the end, it's illegal and UN-Constitutional.

This is Ron Paul in a recent interview on FIAT money:

http://video.google.com/videoplay?docid=-2962369311366680572&hl=en

Article I - Section 10 is taken out of context a lot. Section 10 is a list of the "Powers prohibitive of States." The section basically is the elimination of the colonial scrip system where the states were issuing their own currency. They wanted currency creation to be handled at the federal level.

In fact, Article I - Section 8 says that Congress has the sole power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."

The gold/silver restriction as payment of debts is a measure placed against the states. Congress clearly has the power to coin and regulate money. The question is, did they have the power to delegate this task to a semi-private bank?

To answer your question Pianist... I definitely think the economy is in for some pain, however I am different than many on this forum. I don't see a shit hit the fan scenario happening any time soon, and I see different culprits.

I don't subscribe to the wild conspiracy theories. The fact of the matter is that the federal government and Fed are terribly mismanaging things and our major banks went crazy and forgot how to manage risk.

 

[AceNZ]

The only money created "out of thin air" is the stuff done at the federal level through the Fed, mostly from deficit spending by our wasteful government.

Loan money is also created out of thin air. Loans are not made from reserves. They are newly-created money.

It's true that loans are "backed" by the borrower's promise to pay, and are therefore in effect a lien against the borrower's future earnings. However, a promise, too, is created from thin air. Promises can be broken, and there's no limit on how many of them can be created.

I agree with scooter that the problems with the banking system have nothing to do with conspiracies and that they relate primarily to mismanagement. However, I also think that fractional reserve banking is terribly flawed at its core, and that it engenders the type of abuse we're seeing today.

 

[gutteck]

I agree with scooter that the problems with the banking system have nothing to do with conspiracies and that they relate primarily to mismanagement. However, I also think that fractional reserve banking is terribly flawed at its core, and that it engenders the type of abuse we're seeing today.

The Rothschilds a predominant figure in the Bank of England and thru their European Banks a predominant figure in the Federal Reserve have an estimated network of about 500 trillion dollars. With a “T”. That is many times the GDP of the US.

Pure capitalism is not able to account for such a fortune. So any of you saying that banking is not extremely lucrative should look at the wealth of bankers to get a new perspective.

 

[kyleAF]

The Rothschilds a predominant figure in the Bank of England and thru their European Banks a predominant figure in the Federal Reserve have an estimated network of about 500 trillion dollars. With a “T”. That is many times the GDP of the US.

Pure capitalism is not able to account for such a fortune. So any of you saying that banking is not extremely lucrative should look at the wealth of bankers to get a new perspective.

Source?

The entire world GDP is only around 50-60 Trillion (Edit: 66 Trillion) dollars, last I checked. That's a helluva feat to acquire 10 times the GDP of the entire globe...

Wealth is actual goods and products... the sum total of all goods and products would be the world's GDP (unless they've got crazy accounting going on). How can a family acquire 10 times the wealth of all the wealth in the world, when that same family is a part of the world??

That being said, Nathan Rothschild (1791) agrees that central bankers have a lot of power: "Let me issue and control a nation's currency and I care not who makes its laws"