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Economy expands, money expands, what’s the problem

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  • Thu, Jun 16, 2011 - 11:58am

    #1
    Marius Mollersen

    Marius Mollersen

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    Economy expands, money expands, what’s the problem

I read chapter 8, and I get a feeling that the author is mixing up what is actually happening with what must necessarily happen (to sustain the “system”).
Money is backed by loans. Loans have some sort of security. If not an explicit collateral, such as real estate, then at least the future capability of the debtor to raise money. Most individuals will work. The government rests on its ability to collect taxes.

The total amount of loans in the economy grows, and with it the total amount of money in circulation. But as long as the production grows along (or rather, grows ahead) I can’t see the problem.

If, one day and for a long time, the production does not grow, the inflation and interest would close in on zero, and the money in circulation would stagnate with the loans given. Where is the necessity of growth?

It also seems that defaults are not counted in:
The bank lends out 1000 each to 11 people at 10% interest. The bank cashes out 11000.
One of the debtors defaults. The bank gets back 1100 from 10 people, a total of 11000.

  • Thu, Jun 16, 2011 - 09:37pm

    #2

    Thomas Hedin

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    The reason.

The problem is because all of that expansion of money only occurs as an expansion of interest bearing debt.

Defaults actually dry up the money supply.  When someone defaults on a loan the bank takes money from their income account (or whatever you want to call it) and applies it to the remaining principle amount owed.  When that transaction is finished that amount of money is extinguished from circulation and no longer exsists.

 

If every loan had to stand on its face every loan would fail.

  • Sat, Jun 25, 2011 - 03:45pm

    #3
    Marius Mollersen

    Marius Mollersen

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    Thomas Hedin wrote:The

[quote=Thomas Hedin]

The problem is because all of that expansion of money only occurs as an expansion of interest bearing debt.

[/quote]

Sure, but what is the problem with that?

 

  • Sat, Jun 25, 2011 - 05:27pm

    #4

    Thomas Hedin

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    Only the principle

Because only the principle is put into circulation, never the interest.  This process creates a money shortage as soon as time and interest kick in because now the debt has grown but the money supply simply has not.

You have to remember that when you pay off bank debt money is extinguished and no longer exsists.

  • Sat, Jun 25, 2011 - 09:16pm

    #5

    Damnthematrix

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    Thomas Hedin wrote:Because

[quote=Thomas Hedin]

Because only the principle is put into circulation, never the interest.  This process creates a money shortage as soon as time and interest kick in because now the debt has grown but the money supply simply has not.

You have to remember that when you pay off bank debt money is extinguished and no longer exsists.

[/quote]

Furthermore, because of the interest, the level of debt is inceasing faster than the GDP, and the difference between the two is growing exponentially.  Like all hockeysticks, at first this is imperceptible, but eventually it blows up in your face.

Now is kaboom time…..

Mike

  • Sun, Jun 26, 2011 - 11:16am

    #6
    Marius Mollersen

    Marius Mollersen

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    Thomas Hedin wrote:Because

[quote=Thomas Hedin]

Because only the principle is put into circulation, never the interest.  This process creates a money shortage as soon as time and interest kick in because now the debt has grown but the money supply simply has not.

You have to remember that when you pay off bank debt money is extinguished and no longer exsists.

[/quote]

I agree to this as well, but I fail to see the problem. Apparently, money is being created fast enough to avoid any kind of money shortage. As long as the production adds enough value to the economy to keep paying interest, I see nothing unsound in continuously expanding money supply. If the production should one day be insufficient to pay interest, we will probably se major defaults and interest closing in on zero, which will halt the expansion of money supply.

  • Sun, Jun 26, 2011 - 01:06pm

    #7

    Thomas Hedin

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    the problem is.

I agree to this as well, but I fail to see the problem. Apparently, money is being created fast enough to avoid any kind of money shortage. As long as the production adds enough value to the economy to keep paying interest, I see nothing unsound in continuously expanding money supply. If the production should one day be insufficient to pay interest, we will probably se major defaults and interest closing in on zero, which will halt the expansion of money supply.

I think the part you’re missing is that production creates no money.  Our production does create goods and services, but goods and services are not money, and cannot be used to pay bank debt.  The only thing that can be used to service bank debt is money.  Today all money in circulation is created by the banking system and only goes into circulation as an interest bearing debt.

Expanding the money supply as interest bearing debt on its face looks like a really good thing.  The people have the needed increase in money to conduct business, and interest bearing debt can be used as a meduim of exchange but there is serious consequences to this.  When all money is created as an interest bearing debt there is simply no mechanism in place to pay the interest.  Its true that all we use for money is debt but not all debt is money.

The banks will not accept production in payment of debts.  I personally know someone who tried to pay with production and I wouldn’t recommend trying it.

 

  • Sun, Jun 26, 2011 - 08:11pm

    #8
    Marius Mollersen

    Marius Mollersen

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    Thomas Hedin wrote:  When

[quote=Thomas Hedin]  When all money is created as an interest bearing debt there is simply no mechanism in place to pay the interest. 

[/quote]

Production does not create money, but creates valuable collateral for loans, and these create money. 

I don’t understand what you mean by stating that there is no mechanism in place to pay interest. It is apparently being done all the time.

Neither do I see the point in paying debt with “production” (goods or services). These should be readily exchangeable for paper or electronic money, and as the debt is in a figure in money, it makes all possible sense to exchange production for money to pay off the bank. When debtor default, banks do “accept” whatever real value they can get their hands on, but as they deal in money, they will make the exchange promptly.

  • Sun, Jun 26, 2011 - 08:25pm

    #9

    Damnthematrix

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    growth is the problem

[quote=mariusm98]

[quote=Thomas Hedin]  When all money is created as an interest bearing debt there is simply no mechanism in place to pay the interest. 

[/quote]

Production does not create money, but creates valuable collateral for loans, and these create money. 

I don’t understand what you mean by stating that there is no mechanism in place to pay interest. It is apparently being done all the time.[/quote]

Yes…  it’s done with GROWTH.  To feed growth, more money is created, and bingo, there’s the money to pay the interest on old debts.  But no money to pay the interest on the new debt!  So off we go looking for even more growth….  don’t you see it’s a dog chasing its tail, and that THERE is where the problem is?

Furthermore, you can only have continuous growth like this if you have the energy to do it with, and as soon as energy expansion slows or, Heaven forbid, shrinks, then you can no longer create enough “stuff” to generate the growth that generates the money/debt that pays the interest on all the old debts…  AND as I posted before, the money supply is growing/has to grow faster than the GDP, and that difference in rates is exponential…..

  • Sun, Jun 26, 2011 - 10:33pm

    #10
    Marius Mollersen

    Marius Mollersen

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     [/quote] don’t you see

 

[/quote]

don’t you see it’s a dog chasing its tail, and that THERE is where the problem is?

[/quote]

Seriously, no, I still don’t understand what the problem is. There may be a number of other problems (we can get back to GDP and inflation), but I see absolutely no problem in the simple fact that money supply is growing as long as the economy is growing. Actually, money supply (paper and electronic) has to grow, to intermediate ever increasing exchanges of goods and services.

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