We are never going to be able to pay back the Fed right?

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etsan's picture
etsan
Status: Bronze Member (Offline)
Joined: Apr 22 2009
Posts: 57
We are never going to be able to pay back the Fed right?

Hello,

I have question in regards to paying back the Fed.

If the government borrows $1000 from the Fed. Then it gives it out to 10 people for their services, lets say 100 each.

At the end of the year, the govt taxes the people so that they can pay back the Fed.

But how the heck can the govt pay back the $1000 plus interest when there is just a total of $1000 out there and only a portion of the $100 can be taxed on each individual?

I know its more complicated than this, but I wanted to keep it simple so that I can understand it.

Is the whole idea of the Fed's game to not care for re-payment but instead just want to put people in debt indefinitely and just collect interest?

Thanks

compinthegroove's picture
compinthegroove
Status: Silver Member (Offline)
Joined: Nov 8 2009
Posts: 113
Re: We are never going to be able to pay back the Fed right?

etsan wrote:

But how the heck can the govt pay back the $1000 plus interest when there is just a total of $1000 out there and only a portion of the $100 can be taxed on each individual?

Is the whole idea of the Fed's game to not care for re-payment but instead just want to put people in debt indefinitely and just collect interest?

Thanks

You just answered your own question.

logBurner's picture
logBurner
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 58
Re: We are never going to be able to pay back the Fed right?

Remember also, money is just a promise to pay (not backed by any tangible goods or value at all any more). So money released, just captures more promises - more complicated than that of course but adds to the argument about interest.

Mr. Fri's picture
Mr. Fri
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 208
Re: We are never going to be able to pay back the Fed right?

You just discovered the pitfall of having a debt based economy.  The answer it that next year they must borrow more money to pay the interest on this year's loan.  This is why a debt based economy (like in the US) needs to expand every year.  This is why congress says it's OK to have a national debt if it has an "acceptable ratio."  The reality is that we can't keep expanding forever. AND, there starts to be interest on the interest payments so the debt gets out of control very quickly. There are different economy systems but this is the one we're stuck with for now.

docmims's picture
docmims
Status: Platinum Member (Offline)
Joined: Jun 17 2009
Posts: 644
Re: We are never going to be able to pay back the Fed right?

Default is a foregone conclusion,  The only question is when.

piquod12's picture
piquod12
Status: Bronze Member (Offline)
Joined: Apr 13 2010
Posts: 99
Re: We are never going to be able to pay back the Fed right?

If the government borrows $1000 from the Fed

Govmnts don't borrow from central banks, they borrow from the private sector. And as long as their income (tax) is higher than the interest on the loans then they can continue to service them and pay them down. Note how historically govmnt finances have often swung between deficit and surplus. Recently there has been a ballooning of some countries deficits due to a combination of excessive spending, reduced tax take (recession) and the assumption of private debt onto public books. The hope is that a resumption of growth will get them out of the hole (by raising the income side of the equation). It is this hope that is now largely missing from the Greek economy.

The massive increase in debt seen over the last decade is not a consequence of something inherent in the use of debt (debt has been around for a long time) but rather the mispricing of risk by the central banks. Ironic really that they are amongst those accusing the banks of casino capitalism!

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