Economy expands, money expands, what's the problem

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mariusm98
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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.

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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.

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mariusm98
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Thomas Hedin wrote: The
Thomas Hedin wrote:

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

Sure, but what is the problem with that?

 

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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.

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Damnthematrix
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Thomas Hedin wrote: Because
Thomas Hedin wrote:

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.

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

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mariusm98
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Thomas Hedin wrote: Because
Thomas Hedin wrote:

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.

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.

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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.

 

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mariusm98
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Thomas Hedin wrote:  When
Thomas Hedin wrote:

  When all money is created as an interest bearing debt there is simply no mechanism in place to pay the interest. 

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.

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Damnthematrix
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growth is the problem
mariusm98 wrote:
Thomas Hedin wrote:

  When all money is created as an interest bearing debt there is simply no mechanism in place to pay the interest. 

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.

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.....

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mariusm98
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  [/quote] don't you see

 

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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Damnthematrix
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Last attempt...

I see absolutely no problem in the simple fact that money supply is growing as long as the economy is growing.

Right..... but the economy can NEVER grow as fast as the money supply.  I can't spell it out any simpler than that...

Mike

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soddy agrees with you DTM

 

 http://en.wikipedia.org/wiki/Wealth,_Virtual_Wealth_and_Debt

 Soddy was essentially the Malthus of Economics.

 Virtual wealth/debt can compound indefinitely, physical wealth can't.

  "Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era."

 And he would have a laughing fit at the concept of Thomas's "wealthmoney"...

 http://www.nytimes.com/2009/04/12/opinion/12zencey.html?_r=1&ref=opinion

 

 (some repeated links.. but they deserve repeating IMHO)


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mariusm98
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Damnthematrix
Damnthematrix wrote:

Right..... but the economy can NEVER grow as fast as the money supply.  I can't spell it out any simpler than that...

Mike, you are spelling things out quite simply, but you are not pointing to what is wrong with the state of things, or rather, why the things you are pointing at are so wrong. So, money expands somewhat faster than the economy, and this leads to inflation. As long as inflation is low (whatever the exact figure might be) it seems everything runs smoothly.

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Damnthematrix
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mariusm98
mariusm98 wrote:
Damnthematrix wrote:

Right..... but the economy can NEVER grow as fast as the money supply.  I can't spell it out any simpler than that...

Mike, you are spelling things out quite simply, but you are not pointing to what is wrong with the state of things, or rather, why the things you are pointing at are so wrong. So, money expands somewhat faster than the economy, and this leads to inflation. As long as inflation is low (whatever the exact figure might be) it seems everything runs smoothly.

When debt finally reaches blow out proportions..... it can't be repaid because of insufficient growth.  ESPECIALLY in the face of Peak Oil and other resource depletion pushing prices up.

 

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You can't explain this on a 7:13 clip

  http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

I know this post is old, but why not.

I think you were a bit confused about chapter 8 clip as much I am  now.

You can click the link I provided on top. You can see that when the housing crash was just about to happen liquity facilities balance jumped. Then after series of injection to banks their balance has been decreased for some time now. The Fed does in a way create money, yet they don't. The Fed, as they promised, did get the money back from the banks as it seems to show here. However, you can also see that the Fed has picked up their securities buying trend whenever balance from the liquity project slowed down a bit. Contrary to common beliefs these days, the Fed does have a balance sheet. However, the meaning of their balance sheet cannot be compared to regular banks or average joe like you or me or anyone else. They look at inflation. They are, too me, way too concern about misrepresented inflation rate. They will continue to buy securities to lower the rate in the market, to a certain degree obviously. What they are ultimately hoping for is that the economy will grow. IF, and that's a big IF, economy does grow, then they will reverse their action. They will start dumping. Recently, as unemployment figures came out, many analysts were wanting the Fed to start dumping. They are concerned that if unemployment rate trend is as positive as it looks now then the Fed needs to react to retract the grow margin that will supposedly happen in the near future. You probably heard the Fed's recent QE that entailed lending and borrowing back bonds. Unfortunately they are in a big trouble. The U.S. economy is not growing as fast as they want it to, but they cannot continue to inject money into the market unless they are willing to let the inflation take its course. In a way, the Fed is doing us a bit of favor. Logically, no one wants to lose money. We just had a solvency crisis and no one wants to lose and when some do lose then it will be too big of a hit. As so, all the Fed is doing now is to slow the crash and let it phase out. With the slow crash, you face high inflation rate with steady wage. Fast crash? You have low inflation rate with NO wage. Which one would you prefer? Obviously whoever created this website wants people to think that the Fed is evil, but I would like to see them come up with a new idea!

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Carl Veritas
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"They look at inflation"

"They look at inflation" -----Khan

That's odd.    Since the birth of the Federal Reserve the purchasing power of the US Dollar has declined by over 90 percent.  They should be looking at the mirror.

Who benefit from confiscating,  criminalizing and slapping a capital gains tax for using gold as money?  Banks and governments.   If fiat money was superior, why remove the competition?     What are they afraid of?

 

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