can you explain what if someone defaults?

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joshrain's picture
Status: Member (Offline)
Joined: Jul 7 2008
Posts: 2
can you explain what if someone defaults?

hello doctor,
first thanks for educating us.
can you explain, what happens when someone defaults, what happens to the money? it is still in the system correct?
so with all this housing bubble and people not being able to pay their mortgages, where did all this money disappear and why are banks facing credit crunch?
for example,
builder sells a house for 100k
partyA borrows money from the bank, bank creates 100k and gives it to the builder. partyA defaults, bank doesn't get the money but gets a level3 (illiquid) asset. but 100k is still in the system with the builder. so where is all this money going?

jetgraphics's picture
Status: Member (Offline)
Joined: Jul 8 2008
Posts: 1
Sigh - no clue

Usury, and usury based investing, is mathematically impossible in a finite money token system. Over time, the aggregate debt (principle and interest) exceeds the sum total of all money tokens. Thus a portion of debtors must default, and suffer the loss of pledged collateral. This is why usury has been condemned from time immemorial. Yet each generation convinces itself that usury is reasonable, and embraces it.

In America's situation, it has gone far beyond sanity.

A unit dollar, by constitutional law, is a silver coin (3/4 ounce). A one ounce gold coin was equivalent to 20 unit dollars. In 1872, the Federal government demonetized silver (alleged gold standard), creating a huge money shortage. The following economic chaos "softened" up public opinion to accept the "solution" - an elastic money supply (debt credit).

With the institution of the Federal Reserve Act (1913), debt credit (Notes issued at usury) was substituted for hard money. By 1933, the aggregate debt bankrupted Congress. In House Joint Resolution 192, they repudiated their promise (Title 12 USC Sec.411) to redeem Federal Reserve Notes (FRNs) with lawful money (gold and silver coin). After that point, ALL FRNs BECAME WORTHLESS. (No par value).

What Americans call "dollars" *(paper currency) are NOT dollars. Ask a judge to rule that a FRN is a dollar, and he will demur. So if you think you are dealing with dollars, at law, you are not. (Now you know why fractional metallic coin is becoming more and more expensive. The "paper" is worth less and less.)

For generations, people have been buying and selling with a money token that is devoid of any value or standing at law. Which might explain the insanity that comes from Congress and the courts.

M1 (2008) = 1.4 T (available cash and travelers checks)
National debt = 9.4 T
Private housing debt = 27 to 48 T

Does anyone notice the discrepancy, yet? That which is owed is far greater than the sum of available money tokens. How did we get 'inflation' when the obligation far outstrips the sum of money tokens? Where's the "too much money chasing too few goods"?

Last year, Congress borrowed MORE than the interest it paid on the national debt. That's right - Congress is paying its interest bills with borrowed money! And you thought that Congress just "printed up new money."
(No, it doesn't. Congress has the constitutional power to coin money (stamp bullion) or borrow money. If it DID have the power to create new money, it wouldn't need to BORROW it.)

Worse, the national debt (9.4 T) is denominated in lawful money, and FRNs cannot pay it. If computed in terms of ounces of gold, America's national debt is roughly 99 times greater than the whole world's stock of above ground bullion. At current mining rates, it would only take 87 thousand years to dig up enough - if the debt was frozen right now. And thanks to the 14th amendment, you cannot question the validity of the national debt. (!)

Ludwig Von Mises and any other economist who fails to condemn usury (charging a fee for the use of money - not just excessive interest), will mislead you every time.

The logical result is an utter collapse of the American money token system, and financial ruin for anyone holding "paper" as an asset. If you are a creditor owed money, you will be ruined. If you are a debtor owing money, you will be ruined. There's not enough gold and silver to operate a hard money economy, and the current system based on usury is insane.

To put it into perspective, in the dim past (1900s), a Sears Catalog mail order house would set you back $500 to $1400. That's when money was still money, and not "bubbles". (500,000 FRNs for a dinky apartment in LA or NYC? Beyond insane!)
gsti's picture
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
I will give it a go

Hi joshrain,

 when you default on your i.e homeloan and eventually the bank take your home, all the money they lent you is still in the system.  You have defaulted and your illiquid asset is taken, as you say by the bank.  The money you borrowed for the purchase of the house, you have already spent to buy the house, and the receiver of that money has probably spent it too paying back their debt to the bank for the original purchase, either way it is still in the system and will never leave it, unless you make good on your debt.  

The bank will then sell its newly acquired property to recoup its losses.  Any excess will be still be owed by you.  If you eventually pay that excess off, then all the money has returned to the bank and the debt money disappears.  So it works ok for the bank,

 I think the previous post to mine explains very well how it effects the economy as whole.  Which is why I dislike the FR system so much.

 In summary, for the bank, it is just about matching illiquid assets with liquid borrowing, so they will quickly balance their books, and really here, there is no problem.  If too many people default it is a problem for the bank.  The wider economy, there is no money control for this, so the money stays in the economy.

I hope that answerd your question.

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