Investing in precious metals 101

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

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  • Sat, Jul 31, 2010 - 05:16pm

    #61
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Farmer Brown wrote in Post 31:

So basically, your theory rests upon the erroneous assumption that interest payments on loans dissapear upon payment and therefore a net decrease in money compared to debt results due to time and interest kicking in.

Sorry if I implied that none of the interest is returned to circulation as I agree with you, much of the interest money is returned to circulation (M2) but not all of it.  And even if it is returned to circulation, how much of it ends up in the hands of the people who need to pay interest?

I agree that the elementary formula P+I > P (principal plus interest is always greater than the principal) needs tweaked when we look at what happens in the economy: 

  • P+I > P+Ir (principal plus interest is almost always greater than the principal plus interest returned to the economy)

The amount of Ir (interest returned) is affected by many variables, for example some of the interest paid leaves the country to become part of other economies.  And, some of it is used for investments which takes it from circulation (M2).  There will always be some leakage as the economy is an “open system.”

The fact that there is some leakage means that at least some of the interest must be borrowed which establishes a perpetual loop, we must borrow to repay our debt which of course creates new debt.  Once established, this loop grows exponentially as we can see in our economy as there is only around $14 trillion (M3) and our private and national public debt is around $57 trillion (not including local government debt and future liabilities). 

Correct me if I’m wrong, but it appears that other than default, there is only one way to solve the problem.  We need a large amount of debt free money.  Any other possibilities?

Larry

  • Sat, Jul 31, 2010 - 07:12pm

    #62
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

 

Once we remove legal tender laws,   all the funny money would be bundled up and sold for recycling. .    The ones people trust would be widely used., period. 

 

  • Sat, Jul 31, 2010 - 08:48pm

    #63
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

Can we find some agreement?

There have been many great responses in this thread that have helped me amend and extend my understanding of “sovereign money” and how it might be implemented – thanks!

It looks as if a consensus may have been reached through an evolving discussion:

  • If all money were created debt free, the money supply would grow year after year diluting its value
  • A combination system is needed, the creation of both debt based (temporary) and debt free (permanent) money offers us a way to cancel out the resulting deflationary and inflationary forces

A combination system is preferred for mathematical and equitable reasons.  To justify debt (temporary) money let me give an example of how equity enters the equation.  Let’s say you secure a mortgage for $100,000, backed by the value of the real estate, and you pay it off.  The wealth supported by the mortgage contract transfers upon its completion.  When you pay off the mortgage, you own the home.  The money rightfully disappears as homeowner equity increases.  The homeowner may move equity into circulation by taking out a home equity loan, which creates money from a new debt contract.

Questions still remain.  For example, is there an ideal ratio between debt (temporary) and debt free (permanent) money?  Will this ratio be adjusted as a natural phenomenon or will it need to be artificially regulated?  How do you know if you are creating too much debt free money? 

I hope my previous posts have convinced you that at least for the foreseeable future, and under a “productivity standard“, it would be almost impossible to create too much debt free money (public and private debt $57 trillion – $14 trillion M3 = $43 trillion shortfall).

Larry        

  • Sat, Jul 31, 2010 - 10:23pm

    #64
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

It looks as if a consensus may have been reached through an evolving discussion:

Yes. That is why this site is so valuable.

  • Sat, Jul 31, 2010 - 10:48pm

    #65
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=DrKrbyLuv]

Can we find some agreement?

There have been many great responses in this thread that have helped me amend and extend my understanding of “sovereign money” and how it might be implemented – thanks!

It looks as if a consensus may have been reached through an evolving discussion:

  • If all money were created debt free, the money supply would grow year after year diluting its value
  • A combination system is needed, the creation of both debt based (temporary) and debt free (permanent) money offers us a way to cancel out the resulting deflationary and inflationary forces

A combination system is preferred for mathematical and equitable reasons.  To justify debt (temporary) money let me give an example of how equity enters the equation.  Let’s say you secure a mortgage for $100,000, backed by the value of the real estate, and you pay it off.  The wealth supported by the mortgage contract transfers upon its completion.  When you pay off the mortgage, you own the home.  The money rightfully disappears as homeowner equity increases.  The homeowner may move equity into circulation by taking out a home equity loan, which creates money from a new debt contract.

Questions still remain.  For example, is there an ideal ratio between debt (temporary) and debt free (permanent) money?  Will this ratio be adjusted as a natural phenomenon or will it need to be artificially regulated?  How do you know if you are creating too much debt free money? 

I hope my previous posts have convinced you that at least for the foreseeable future, and under a “productivity standard“, it would be almost impossible to create too much debt free money (public and private debt $57 trillion – $14 trillion M3 = $43 trillion shortfall).

Larry        

[/quote]

I am not quite sure that I would say a consensus has been reached.  I think most people will agree with your first point but there still might be a few that are not convinced (Thomas and Byron come to mind).  The second point I think is still up for discussion.  Although I think such a system probably could work, I would prefer a system that was less centralized, had competition, and did not require any force ( no legal tender laws ).  I also doubt that the firm hard money supporters have changed their minds.

With that being said, I do think we have a better understanding of where each other is coming from and that alone is a very positive step. 

  • Sun, Aug 01, 2010 - 10:42pm

    #66
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    Re: Why the U.S. Need Not Fear a Sovereign Debt Crisis: …

[quote=DrKrbyLuv]

Can we find some agreement?

There have been many great responses in this thread that have helped me amend and extend my understanding of “sovereign money” and how it might be implemented – thanks!

It looks as if a consensus may have been reached through an evolving discussion:

  • If all money were created debt free, the money supply would grow year after year diluting its value
  • A combination system is needed, the creation of both debt based (temporary) and debt free (permanent) money offers us a way to cancel out the resulting deflationary and inflationary forces [/quote]
  • I think this is a good idea if the temporary debt money markets are regulated so that they do not also contribute to significant asset inflation. Obviously speculative credit bubbles have been behind every single asset bubble in modern history, and this is a destructive process which allows debt pushers to concentrate wealth and assets. As you stated before, the debt money should only be loaned from actual reserves raised by the banks and there should be oversight ensuring appropriate lending standards.
  • [quote=DrKrbyLuv]

A combination system is preferred for mathematical and equitable reasons.  To justify debt (temporary) money let me give an example of how equity enters the equation.  Let’s say you secure a mortgage for $100,000, backed by the value of the real estate, and you pay it off.  The wealth supported by the mortgage contract transfers upon its completion.  When you pay off the mortgage, you own the home.  The money rightfully disappears as homeowner equity increases.  The homeowner may move equity into circulation by taking out a home equity loan, which creates money from a new debt contract.

Questions still remain.  For example, is there an ideal ratio between debt (temporary) and debt free (permanent) money?  Will this ratio be adjusted as a natural phenomenon or will it need to be artificially regulated?  How do you know if you are creating too much debt free money? 

I hope my previous posts have convinced you that at least for the foreseeable future, and under a “productivity standard“, it would be almost impossible to create too much debt free money (public and private debt $57 trillion – $14 trillion M3 = $43 trillion shortfall).

Larry        

[/quote]

My issue is not whether we can create enough debt free money to offset current private and public debt, it’s how creditors will react when their debts start getting paid off with printed money. I believe the printed money should only go towards productive development of natural resources and targeted aid for people who are really struggling, meaning we will still have to suffer some level of debt deflation.

Other than that, I pretty much agree with everything else.

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