Money As Debt

[sidster]

This is a pretty good presentation on how money is created.
The graphics are a bit lame, but they aid the narration pretty
well.

I would say this is pretty essential viewing for anyone trying
to understand our current fiat money system, or trying to
explain to others why we must get rid of The Fed!


I need to watch this over again to get a better understanding
of the entire thing.

Money As Debt
http://video.google.com/videoplay?docid=-9050474362583451279


"Only the small secrets need to be protected. The
big ones are kept secret by public incredulity."
-- Marshall McLuhan, media 'guru'



p.s., Someone bump this in the morning

 

[Kludge]

Loved the arguments he present around 20 minutes in

 

[Kludge]

uggggh.... He moves towards the end to nationalize banks and the monetary supply.

Then he "presents" arguments that say making money with money is immoral and theft, which is absurd. Money is a good, just as... goods are! Should we stop producing goods for profit and sell them at-cost or GIVE THEM AWAY?! This video advocates Communism in the worst way possible!

 

[scooter]

Yeah, I wouldn't really take anything to heart from this film. It sort of describes fractional reserves pretty well, but it includes all of the conspiracy BS about how banks operate. And yes, it goes in a terrible socialist direction at the end.

 

[sidster]

uggggh.... He moves towards the end to nationalize banks and the monetary supply.

Then he "presents" arguments that say making money with money is immoral and theft, which is absurd. Money is a good, just as... goods are! Should we stop producing goods for profit and sell them at-cost or GIVE THEM AWAY?! This video advocates Communism in the worst way possible!

I don't think the video claimed anything of the sort. It did give
a history of what usury is and how it was frowned upon in the
past by religion and some governments.

Yeah, I wouldn't really take anything to heart from this film. It sort of describes fractional reserves pretty well, but it includes all of the conspiracy BS about how banks operate. And yes, it goes in a terrible socialist direction at the end.

I don't see where you are drawing the "socialist" aspect of this.
All I got from it was that it was saying money should be issued by
government and not by private organizations, such as private banks
(e.g., The Fed). Therefore, government could choose to lend out
money to its people at no interest. This makes sense since the
government, at least in our case (United States of America) is supposed
to be a government of the people, for the people and by the people.
So the government's money is our money.

I have to watch this video again sometime, it was late last night and
I was trying to do other things while watching it so I did miss some
details....

 

[Pianist4Freedom]

Also, I think that video makes some crucial errors.

It appears to assume that fiat money was introduced into the economy without there having been money in use to begin with. In that case, there can never be enough money available to pay off the interest on loans.

If however fiat money is introduced into a society which already had (real) money in circulation, that can "work" without causing the infinite debt monster that that video says will occur.

For example, say we have a small economy that already has some money in circulation: here I have several businesses who each have 1$ each, and a bank that also has 1$.

bank: 1$
biz1: 1$
biz2: 1$
biz3: 1$
biz4: 1$
biz5: 1$

Now, say the bank lends 2$ out to biz1 (via fractional reserve lending with a ratio of 2:1), and expects 4$ back. A ridiculously large interest rate, but the math is simple and good enough for this example.

bank: 0$
biz1: 3$
biz2: 1$
biz3: 1$
biz4: 1$
biz5: 1$

At this point, the bank is hoping that nobody will withdraw any of their deposits because they've loaned out more than they had into the economy. Let's assume nobody does withdraw anything.

Biz1 now buys some things to build whatever product it wants to sell:

bank: 0$
biz1: 2$
biz2: 2$
biz3: 1$
biz4: 1$
biz5: 1$

Now that the biz has what it needs, it goes ahead and creates the wealth it knows how to create, and sells its stuff to the other businesses:

bank: 0$
biz1: 4$
biz2: 2$
biz3: 0$
biz4: 0$
biz5: 1$

Now biz1 has enough money to pay off the bank at interest:

bank: 4$
biz1: 0$
biz2: 2$
biz3: 0$
biz4: 0$
biz5: 1$

At this point, all debts have been paid off, and now instead of 6 dollars in circulation, we have 7 dollars in circulation. The bank has more money than everyone else, but nobody owes anyone anything. the bank then invests in the economy:

bank: 1$
biz1: 1$
biz2: 2$
biz3: 1$
biz4: 1$
biz5: 1$

Now the process can repeat. As long as the bank only loans to a couple people at a time (relatively speaking) there will always be enough money in the economy to pay off all debts. It is only when the debt becomes too large or grows too quickly that it becomes unservicable. I'm concerned we ARE reaching that point in today's society, but I don't think that it is doomed out of logical necessity as that video suggests. It is only doomed because politicians are undisciplined and don't have our best interests in mind.

I want to stress I do understand and my example shows how this transfers purchasing power to net debtors at every stage in the process---and I agree this is bad. All I hope to point out with my thought experiment is that it isn't doomed *of logical necessity.* But simply because it is far too easy to abuse.

 

[AceNZ]

This is a pretty good presentation on how money is created.

That video mixes some good info with a bunch of distortions.

For an alternative explanation of how money is created and destroyed, have a look at the video in my signature.

 

[Matthew P.]

I saw that video a few days ago and appreciated it. You have to watch the one titled "Money, Banking, and the Federal Reserve" - that one is fascinating.

 

[sidster]

Also, I think that video makes some crucial errors.

It appears to assume that fiat money was introduced into the economy without there having been money in use to begin with. In that case, there can never be enough money available to pay off the interest on loans.

If however fiat money is introduced into a society which already had (real) money in circulation, that can "work" without causing the infinite debt monster that that video says will occur.

For example, say we have a small economy that already has some money in circulation: here I have several businesses who each have 1$ each, and a bank that also has 1$.

bank: 1$
biz1: 1$
biz2: 1$
biz3: 1$
biz4: 1$
biz5: 1$

Now, say the bank lends 2$ out to biz1 (via fractional reserve lending with a ratio of 2:1), and expects 4$ back. A ridiculously large interest rate, but the math is simple and good enough for this example.

bank: 0$
biz1: 3$
biz2: 1$
biz3: 1$
biz4: 1$
biz5: 1$

At this point, the bank is hoping that nobody will withdraw any of their deposits because they've loaned out more than they had into the economy. Let's assume nobody does withdraw anything.

Biz1 now buys some things to build whatever product it wants to sell:

bank: 0$
biz1: 2$
biz2: 2$
biz3: 1$
biz4: 1$
biz5: 1$

Now that the biz has what it needs, it goes ahead and creates the wealth it knows how to create, and sells its stuff to the other businesses:

bank: 0$
biz1: 4$
biz2: 2$
biz3: 0$
biz4: 0$
biz5: 1$

Now biz1 has enough money to pay off the bank at interest:

bank: 4$
biz1: 0$
biz2: 2$
biz3: 0$
biz4: 0$
biz5: 1$

At this point, all debts have been paid off, and now instead of 6 dollars in circulation, we have 7 dollars in circulation. The bank has more money than everyone else, but nobody owes anyone anything. the bank then invests in the economy:

The mistake you make here is that after biz1 pays off its
debt to the bank, the bank will now need to "erase" the
debt from the "computer", the money it entered into biz1's
account (the $1). So you are now back to $6 not $7:

bank: 3$ (erase $1 it created out of thin air)
biz1: 0$
biz2: 2$
biz3: 0$
biz4: 0$
biz5: 1$
--------Total $6 in circulation (real money)

Until the next debt when new money (credit/debt) can be
created (or entered into the computer system).

 

[sidster]

That video mixes some good info with a bunch of distortions.

For an alternative explanation of how money is created and destroyed, have a look at the video in my signature.

I have signatures turned off. For others who also have sigs
turned off here is the link to AceNZ's video (clicky).
I have not yet watched this myself...maybe later tonight.

 

[Deborah K]

I like this video and I recommend it often. It is a great tutorial regarding the history of money and lending. Maybe you don't like their solutions to the problem, but they do a superb job of spelling out the way the system works to the average layman. Btw, those of you who don't like their solutions, do you have any?

 

[AceNZ]

Btw, those of you who don't like their solutions, do you have any?

Yes!

The problems with today's banking and monetary systems stem from fiat money and fractional reserve banking. Once you see the root of the problems, then the solutions are obvious:

1. Establish a full gold standard (no more fiat money)
2. Abolish fractional reserve banking

There are several intermediate steps to get there from where we are now -- but they are all manageable.

 

[Deborah K]

Yes!

The problems with today's banking and monetary systems stem from fiat money and fractional reserve banking. Once you see the root of the problems, then the solutions are obvious:

1. Establish a full gold standard (no more fiat money)
2. Abolish fractional reserve banking

There are several intermediate steps to get there from where we are now -- but they are all manageable.

Do you realize how many times US currency has moved back and forth from gold-backed to fiat over the last 200 years? http://www.kwaves.com/fiat.htm

 

[sidster]

Yes!
...
1. Establish a full gold standard (no more fiat money)

One problem I see with a fixed gold standard or similar, is that
the wealth of the country is now fixed. The country will never get
any richer. The amount of gold is fixed. You can't create gold.
Once you are done mining all the gold on Earth you are done.
A country with a gold standard will never be able to increase its
wealth.

Imagine the case where a country increases number of engineers,
doctors, producers, inventors, etc. Theoretically, this country
would be able to increase its "wealth" as these new inventors
should be able to produce and propel the country forward. The
workforce of the country and production capacity of the country
have increased, yet the country's wealth remains the same.

 

[Acala]

increasing wealth

A static money supply is not hindrance to the creation of wealth. You are confusing the currency with wealth. Wealth consists of all the goods and services people create and trade among themselves. Money is just a medium of exchange that acts as an efficient way to represent divisible chunks of wealth for purposes of trade and storage of value. If the level of trade and need to store value increases, the demand for money will increase. If the supply of money stays the same, the law of supply and demand says that the exchange value of money will go up.

So if we had gold money and the supply of gold money never changed but the economy grew, the exchange value of the money would go up. You would buy more with less gold. This is deflation due to increased demand and static suppy. No problem.

 

[AceNZ]

Do you realize how many times US currency has moved back and forth from gold-backed to fiat over the last 200 years? http://www.kwaves.com/fiat.htm

Yes. And are you aware that the 76 years on the gold standard before the civil war was one of the most productive, wealth-creating periods in human history?

Also, the page you referenced is misleading. A true gold standard means that all money in existence can always be fully converted into gold. The US has never really been on a true gold standard, because it has always had fractional reserve banking. Unless you fix BOTH problems, banking and monetary system problems will remain.

One problem I see with a fixed gold standard or similar, is that the wealth of the country is now fixed. The country will never get any richer. The amount of gold is fixed. You can't create gold. Once you are done mining all the gold on Earth you are done. A country with a gold standard will never be able to increase its wealth.

As Acala said, money is not wealth. On a full gold standard, there would be a (relatively) fixed amount of money, but that money can change in value over time. For example, let's say that $20 = 1 oz of gold, as it did a century ago. And let's say that you have $1000 (50 oz gold) and that the price of a new suit is $20 (1 oz) -- the purchasing power of your $1000 is 50 suits. Then the economy grows. Demand for money increases, so it becomes worth more. The price of a new suit drops to $10 -- the purchasing power of your $1000 is now 100 suits. The same amount of money can buy more stuff, so you are wealthier. Assuming the total amount of money in the economy remains the same, the wealth of the whole country has been increased.

I should say, though, that true wealth is better defined as a source of production, like a mine, a factory or a farm. If someone wins the lottery, for example, they aren't really wealthy. They might be temporarily rich, but after a while, their money will flow to the owners of production as it gets spent. The producers will end up with the money. It's the ultimate destination of that flow that defines real wealth. (See my video for a demonstration of that concept).

 

[Pianist4Freedom]

That video mixes some good info with a bunch of distortions.

For an alternative explanation of how money is created and destroyed, have a look at the video in my signature.

Ace, what do you think of the little thought experiment I stated earlier in this thread? I've been thinking a lot about how money is created and destroyed, partly inspired by the "Money as Debt" video and partly inspired by your video about money creation/destruction. However it appears to me that Money as Debt seems to assume that debt cannot stop growing under a fiat monetary system...I pointed out in my thought experiment that isn't correct.

In your video, you do not explain where the extra money comes from to pay off the government bond---which could easily lead someone like the guy who made Money as Debt assume the same error (where the heck does the interest come from).

I'm pretty certain my thought experiment addresses this issue---I can't see how else it could possibly work. Do you think it was a good explanation? If so I think people might benefit from seeing a similar thought experiment in a future video. If not can you explain where I went wrong?

Regards,
-Derek

 

[sidster]

I saw that video a few days ago and appreciated it. You have to watch the one titled "Money, Banking, and the Federal Reserve" - that one is fascinating.

Pretty good video also. Has Ron Paul in it!

Link: http://video.google.com/videoplay?docid=-466210540567002553

 

[AceNZ]

Ace, what do you think of the little thought experiment I stated earlier in this thread?

sidster's comment was correct. When the loan is paid off, money is destroyed. Otherwise, though, the basic idea is right: it is possible to pay interest on all debts without causing infinite debt because banks spend their earnings into the economy.

In your video, you do not explain where the extra money comes from to pay off the government bond---which could easily lead someone like the guy who made Money as Debt assume the same error (where the heck does the interest come from).

If the example in my video is changed so that the bond held by the Fed has interest paid on it, then it could be paid off as follows:

1. Let's say the bond has 10% interest, or $100 interest due on the $1000 example
2. The Treasury changes the terms on bonds slightly so that no interest is due if they are paid off on the same day they're issued. It then issues a new bond in the amount of $100.
3. The Fed buys the $100 bond from the Treasury with newly created money
4. The Treasury now has the $1000 it received in taxes, plus the $100 in new money, and uses that to pay off the original $1000 bond, plus interest
5. The Fed now rebates the $100 in interest to the Treasury (all interest received by the Fed is rebated to the Treasury every year)
6. The Treasury uses the $100 rebate to pay off the $100 bond. Since it is paid on the same day it was issued, no additional interest would be due.

 

[Acala]

question

I have a question.

Suppose a bank makes a loan, fractional reserve of course. In so doing, it creates new money and puts it in the hands of the borrower. The borrower turns around and spends that money on whatever. That money is now in circulation.

The borrower is obligated to pay back the loan (with interest). When they do pay back the loan, that money is removed from the market and put into the hands of the bank and the bank presumably turns around and lends it out again. This increases the money supply once again until the loan is paid back. Does that make sense so far?

Now suppose the borrower defaults - just walks away without paying back any of the money. The amount of the loan is already in circulation and the borrower has not returned anything to the bank. So isn't the money supply permanently expanded by the amount of the loan? The bank is deprived of the money and so is unable to loan it out again (assuming it isn't bailed out) but the money hasn't been removed from the economy - it is still in circulation because it was not paid back.

So if this is true, why would masive loan defaults be deflationary? Wouldn't they, in fact, be inflationary since the borrowed money stays in circulation forever?

What am I missing here? Is it the unavailability of new loans as a result of loss of bank reserves that is the deflationary force? But would that be truly deflationary (as in a reduction of the money supply) or would it just be recessionary in the sense of setting off the correction to the inflation-induced malinvestment through unavailability of credit?

If I am understanding this correctly, massive defaults will not reduce the money supply and cause deflation, but will cause recession through loss of avaialble new credit while still keeping prices high. In this way you get an inflationary depression.