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Why the U.S. Need Not Fear a Sovereign Debt Crisis: Unlike Greece, It Is Actually Sovereign

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  • Thu, Jul 29, 2010 - 01:06am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

How does the physical printing of debt-free money (currency inflation) with no means to extinguish it not lead to hyperinflation down the road, especially if growth in the economy and growth in the money supply diverge for some unknown reason or circumstance?

At least with a credit-money system, the money supply is extinguished by repayment of the debt or by default. What piece of the puzzle am I missing here?

Thomas Hedin posted this interview with Byron Dale a few days ago.

https://www.peakprosperity.com/forum/them-be-fighting-words/42463

Byron talks about this at length. Its worth the listen.

What matters in the issuance of currency is how it is created. Right now new currency is issued soley by creating debt via usury. So the more currency you ‘create’ the more debt you ‘create’.  To say that the money supply is extinguished by repayment is true but its not the complete equation. In this system you must create more debt/currency next year than you did the previous year or the whole scheme starts to unravel.

Bryon’s point was that if currency was created through production not through usury then any currency increase would have to be matched by an increase in production thereby limiting how much ‘currency’ could be created. Bryon begins this explanation at 35:28 min. into the interview if you are interested. Essentialy his example goes like this; A state bank would issue currency say for road construction the same way they do now by typing it into a keyboard but there would be no usury attatched to it. Then the contractors would be paid in this way but only the exact amount to pay the bill would be created.

This process eliminates the added debt of usury and insures that currency inflation (increase in the money supply) is commensurate with production not debt.

 

 

  • Thu, Jul 29, 2010 - 01:45am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Johnny Oxygen]

What matters in the issuance of currency is how it is created.

[/quote]

Prove that one point and you might be on to something.  Just saying it is not any better than the people that claim that the quantity theory of money explains inflation.  Actually at least the quantity theory of money explanation passes the sniff test.  This statement defies common sense.

Lets look at your example of creating a road.  We all agree that in the current system money is created via loans with interest.  This interest means that the monetary system MUST GROW by at least enough to service the existing debt or bad things start to happen like they are now.  When road is created, it adds to the economies productive capacity but eventually the money that was created for construction is extinguished.  This must put some deflationary pressure as we can now continue to reap the rewards of the road, but their is no additional money in the system.  This deflationary pressure is somewhat balanced by the initial inflationary presure that the interest costs added to the projects price.  These two forces can probably reach an equalibrium at some interest rate, but it also depends upon how productive the final asset is.  If the loan was for consumption, any interest rate is probably going to be too high to balance the costs.

What I don’t see is how any equilibrium is reached in a system that creates money and spends it on infrastructure.  Without some sort of negative feedback on too much money creation, the system will surely become unstable and eventually fail.  This is doubly certain when we have a government that is already spending us into oblivion using debt based money.  Can you imagine what their actions would be like if they felt their was no costs to their actions?  If you think we are using a lot resources now, wait until this happens.  It would be a disaster of truly historic proportions.

  • Thu, Jul 29, 2010 - 01:47am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

JAG wrote:

How does the physical printing of debt-free money (currency inflation) with no means to extinguish it not lead to hyperinflation down the road, especially if growth in the economy and growth in the money supply diverge for some unknown reason or circumstance?

Hello JAG,

I’ll take a stab at answering this question.  First, Ellen Brown wrote in her article:

“So long as workers are out of work and resources are sitting idle, as they are today, money can be added to the money supply without driving prices up. Price inflation results when “demand” (money) increases faster than “supply” (goods and services). If the new money is used to create new goods and services, prices will remain stable. That is where “quantitative easing” has gone astray today: the money has not been directed into creating goods, services and jobs but has been steered into the coffers of the banks, cleaning up their balance sheets and providing them with cheap credit that they have not deigned to pass on to the productive economy.”

How do we measure and define inflation?  darbikrash explained that rising prices may or may not be market driven: 

darbikrash wrote:

Businesses also raise costs because they can. If market conditions allow, they can raise prices for no other reason than to arbitrarily increase profit. Barrier to entry, market place domination and monopoly are but a few reasons why businesses might raise prices irrespective of costs or projected future earnings.

And, Farmer Brown added that entire industries were consolidating as the big get bigger while the small are gobbled up by the unfair advantages legislated for large international corporations.  The big players form a cartel (effective monopoly) that enables them to control and regulate various industries.

Farmer Brown wrote:

Some industries are so over-regulated that only the very big boys can play. Smaller players don’t stand a chance as they are not equipped with the teams of lawyers, consultants, and government experts needed simply to comply with and obtain necessary licenses and permits. The big boys keep slipping Uncle Bens to the lawmakers to make sure those regulations – you know, the ones that are there to protect “you and me”, stay in place or are expanded, thereby guaranteeing their closely-held grip on the industry.

Cartels (monopolies) enable companies to raise prices separate from the traditional forces of supply and demand.  My point is a question; how do you measure inflation?

In measuring inflation, I think we should consider other metrics that better reflect the real economy.  I think unemployment figures are a much better way to measure inflation.  If unemployment is high, like now (+20%), then that is a sign that there is not enough money in the system which would be deflationary.  On the other end of the spectrum, if unemployment dropped to say 4%, then that is a good indication that there is enough money in general circulation.

As mentioned in the article, we are suffering from deflation now and our unemployment is high “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard observed: “The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.”

As long as unemployment stays high, I don’t think there will be any inflation, at least not in the traditional sense (supply and demand).

Another contributing factor is that our debt based money system is inherently deflationary.  Every day money is destroyed which reduces the amount of money in circulation.  In order to keep the money supply stable, new money must be added to the system at a rate at least equal to the rate of money destroyed.

Larry

  • Thu, Jul 29, 2010 - 02:33am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Farmer Brown]

Barriers to entry are usually surmountable as the only real barrier to entry into any market is capital.  However, most barriers are created by the very same government regulations that are supposed to “protect” the citizen/consumer, and instead provide the consumer with fewer choices, higher prices, and lower quality. Some industries are so over-regulated that only the very big boys can play.  Smaller players don’t stand a chance as they are not equipped with the teams of lawyers, consultants, and government experts needed simply to comply with and obtain necessary licenses and permits.  The big boys keep slipping Uncle Bens to the lawmakers to make sure those regulations – you know, the ones that are there to protect “you and me”, stay in place or are expanded, thereby guaranteeing their closely-held grip on the industry.  

[quote]

Sometimes governments do impose regulatory requirements on business that raise operating costs. [/quote]

Sometimes?  How about just about every other month?  The US congress alone has passed over 6,000 pages of legislation this year alone.  Consider state, municipal and city legislatures who, while maybe not on the same steroidal warpath to drown America in legislation as our dear congress is, surely have also passed some of their own this year, and the word “some” is simply not even in the ballpark.

 

[/quote]

It is not always the case that simple application of private capital can ease the obstacle of barrier to entry. Technology is often an effective barrier with or without the enforcement of IP. Even for low tech businesses, adequate capital availability is often insufficient to dislodge a large competitor with a declining profit margin in an established industry. A useful example might be a car company. It is unlikely that a competitive car company (as a start up ) could attract sufficient private capital to challenge the established Big Three.

The exception is the government subsidies of capital for the Tesla and Lister electric cars. Without the draw of alternative fuel technology, (and even with it) there is insufficient private capital to fund a multi-billion dollar start up in such a market with established multi-nationals. The risk is too high and the ROI (based on declining margins) is too low.

But I’m off point.

The issue here that I am trying to highlight is to identify the source of the unwieldy regulation, not that it doesn’t exist or that it is somehow beneficial. It is not.

There is a difference between self serving government taxes, regulations and entitlements (such as obscenely large pension funds for government employees) and regulations and legislation imposed on citizens and business by business. It is the corporate initiation and underwriting of these punitive and offensive rules that I am trying to draw attention to. I am making the point that for these cases, the government is a captured intermediary, captured by the corporations that are paying the lobbyists, and funding the campaigns of the legislators that are biasing regulations to benefit the large multi-nationals in the first place. So who is the enemy here?

 

Those that are captured, or those that are doing the capturing?

  • Thu, Jul 29, 2010 - 02:38am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Johnny Oxygen wrote:

What matters in the issuance of currency is how it is created. Right now new currency is issued soley by creating debt via usury. So the more currency you ‘create’ the more debt you ‘create’. To say that the money supply is extinguished by repayment is true but its not the complete equation. In this system you must create more debt/currency next year than you did the previous year or the whole scheme starts to unravel.

This process eliminates the added debt of usury and insures that currency inflation (increase in the money supply) is commensurate with production not debt.

Johnny O, thanks for the fantastic explanation!  I think you hit the key point very concisely…look forward to what others may say and your response to goes211‘s interesting challenge.

Larry

  • Thu, Jul 29, 2010 - 03:48am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

The beauty of debt-based money is that it is self-extinguishing, and therefore the money supply is somewhat self-regulating.

Are you trying to say that it is a beautiful thing that the debt always increases faster than the money supply?

  • Thu, Jul 29, 2010 - 03:52am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Larry thanks for the reply.

I’m aware that the creation of debt-free money would be tied to production, and this does seem to balance the money supply in the short term. But the problem, as I see it, is that once it’s been created, debt-free money will accumulate in the economy over generations. The money supply of future generations will not just consist of the money created with their production, but also include all the money created by the previous generation’s production.

For example, lets say the next generation is exactly the same size as the current generation. Now if both generation’s production are roughly equal, that means the future generation’s money supply will be roughly double the current generation’s money supply. Removing velocity from the equation, this means prices will be roughly double for the next generation, or 100% inflation in 20 years time. And what if there is a war or natural disaster that drastically reduces the population and economic production in the future? You could easily have 10 times the amount of money relative to production/goods in that scenario.

Now if you have a means of removing debt-free money from the system, this might be a mute point. But I have yet to read any proposals, other than the removal of money through taxation, on how this might be achieved. Has anyone seen any different proposals for the removal of debt-free money from the money supply? 

The beauty of debt-based money is that it is self-extinguishing, and therefore the money supply is somewhat self-regulating.

Thanks, Jeff

(Edited for clarification)

  • Thu, Jul 29, 2010 - 04:04am

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Thomas Hedin]

The beauty of debt-based money is that it is self-extinguishing, and therefore the money supply is somewhat self-regulating.

Are you trying to say that it is a beautiful thing that the debt always increases faster than the money supply?

[/quote]

It figures that you would choose to single out that one line and ignore the rest of the argument. Typical Thomas.

But to answer your question, no, I’m not saying that because such a statement ignores the velocity of money in determining the “effective” money supply. The “effective” money supply is actually larger than the debt. Read Steve Keen.

  • Thu, Jul 29, 2010 - 12:51pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

But to answer your question, no, I’m not saying that because such a statement ignores the velocity of money in determining the “effective” money supply. The “effective” money supply is actually larger than the debt. Read Steve Keen.

I’m sorry but that simply is not true.  The last time i checked the money supply was around 8 trillion and the total debt was getting close to 60 trillion.  It’s obvious that the debt is larger than the money supply.  This is also referred to as the exponential growth of debt.

 

Velocity of money never increases the money supply.  If this Steve Keen guy is saying that he is either without the facts, or purposely trying to deceive you.

 

“It is often stated, in support of the Banking System’s fractional reserve method of creating money that, “It would have been impossible to have the progress of the industrial age using gold for money.” Proponents of fractional reserve banking argue that the gold would not have allowed the expansion of the money supply necessary to fund the Industrial Age.

Economists and others that support bank-created money love to argue that it’s really the ‘velocity of money’ that makes the money supply grow. But, they always forget or neglect to acknowledge that if that statement were true, then increasing the velocity of the gold coinage would have also increased the money supply of gold coinage thereby providing the money supply required to fund the Industrial Age. They never acknowledge the fact that in 1792…………………”

For the rest of the article follow the link below.

http://www.wealthmoney.org/articles/The-Industrial-Age.html

  • Thu, Jul 29, 2010 - 01:43pm

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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=Thomas Hedin]

But to answer your question, no, I’m not saying that because such a statement ignores the velocity of money in determining the “effective” money supply. The “effective” money supply is actually larger than the debt. Read Steve Keen.

I’m sorry but that simply is not true.  The last time i checked the money supply was around 8 trillion and the total debt was getting close to 60 trillion.  It’s obvious that the debt is larger than the money supply.  This is also referred to as the exponential growth of debt.

 

Velocity of money never increases the money supply.  If this Steve Keen guy is saying that he is either without the facts, or purposely trying to deceive you.

 [/quote]

LOL!

Yes, Steve Keen is out there DECEIVING people!!  How eeeeeevil!!! 

Good grief man!  Why don’t you visit Keen’s website and read about his models on money, debt, and velocity.  The man is one of 11 economists out of 11,000 that predicted the 2008 crash.  Just maybe he has some insight on things like money.

By the way, debt being larger than the money supply in no way precludes payment of 100% of the debt with that money supply.  If you do not understand why, then ever more reason to study Keen’s work.

Productive debt can always be paid back, no matter how much larger than the money supply it is.  As long as it is productive debt, and it produces money flows greater than the flows demanded by interest and principal payments, it can support debt many times larger than the initial loan.  It is hedging debt and moreso, Ponzi debt, that leads to credit bubbles and eventual crashes, cannot be paid back, and eventually results in default or severe devaluation of the currency.  However, economic judgements based solely on the size of debt compared to the size of the money supply are completely meaningless.  It is the kind of debt incurred that matters, and whether or not it leads to productive capacity that determines whether it is sustainable/payable or not.

In any case, do some research and open your mind for once.  This is not the first time I see charges of “deceiver” from you and I’ve seen worse.  I was also called a “liar” by your mentor and hero, Byron Dale in a thread some months ago.  Real mature there.  Grow up. 

 

 

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