A question on bonds

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Crash's picture
Crash
Status: Silver Member (Offline)
Joined: Nov 26 2008
Posts: 171
A question on bonds

Hi there everyone,

I have been half trying to follow the thread on money creation which has been going on on this chapter topic. I think I understand what is going on about 40% of the time. I read the posts and both "sides" of the debate seem at different times to me equally valid or the same, just looked at from different viewpoints.

I don't want to start another debate along the same lines here, but I do have a question and I hope there may be someone willing to take the time to respond.

I am a proponant of monetary reform and often talk about LETS as a good base-line from which to build a suitable solution. I am also well self-indoctrinated to the basic info on CC and Money as Debt film etc, so often find myself 'enlightening' my fellow humans on subjects such as money supply, ownership and interest and money creation.

Can anyoneplease tell me I have this right or not:

When a government wants money it creates bonds (sometimes).

 

These bonds are bought by the Federal Reserve (recently known as quantative easing).

 

This is a loan.

 

The FED loans X to the gov by way of purchasing bonds.

 

The gov. agrees to pay Y as a return.

 

This is tantamount to paying interest on a loan.

 

Y will always be above R (rate of inflation) in order to make the porosition palatable.

 

The bonds are then traded amongst the banks (some of whom are shareholders of the FED) as commodities.

 

X is money creation out of thin air by the FED.

 

X is created as debt.

 

X = Money creation.

 

X = money supply expansion

 

X = pressure on inflation

 

X needs to be paid back to the FED + interest (and where does the money come from? - more debt.).

 

Thomas Hedin's picture
Thomas Hedin
Status: Platinum Member (Offline)
Joined: Jan 28 2009
Posts: 815
Re: A question on bonds

Great Posting Crash.

To make it even simpler all that is going on is when the government puts up a bond they are pledging your property as collateral to the banking system who only gives us some numbers in a checking account, and then the banks demands back more that what has been created, or you lose your property.

 

One important thing to note is that the government only pays the interest, never the principle.  This allows us the people to have access to money that we don't personally have to borrow.  Next time you talk with your congressman you should thank him for borrowing so much that way we can have access to money that we don't have to borrow ourselves.  The worse thing to happen is that our taxes will increase.

 

 

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Re: A question on bonds

Yes. Nice clear, concise post Crash.

Now let me add something.

This understanding that the system HAS to accrue more debt to survive is by design, via the bankers, for obvious reasons. Now take it a step further from a bankers perspective. What if, periodically, you built up the debt to a very high level then closed off all lending capabilities, which bankers have the power to do?

The system would collapse. People could not pay their debts and what happens with people can't pay their debts? There is a transfer of wealth. The bigger the debt the more profit is made. Remember, wealth isn't destroyed it is only transfered. You will note that if the credit contraction is big enough it will effect stocks, bonds, commodities...everything!

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
Re: A question on bonds
Johnny Oxygen wrote:

This understanding that the system HAS to accrue more debt to survive is by design, via the bankers, for obvious reasons. Now take it a step further from a bankers perspective. What if, periodically, you built up the debt to a very high level then closed off all lending capabilities, which bankers have the power to do?

The system would collapse. People could not pay their debts and what happens with people can't pay their debts? There is a transfer of wealth. The bigger the debt the more profit is made. Remember, wealth isn't destroyed it is only transfered. You will note that if the credit contraction is big enough it will effect stocks, bonds, commodities...everything!

This statement pretty much says it all.  Isn't it interesting how this cycle has occurred again and again yet it's never taught in schools and most of the public never recognizes it.

Crash's picture
Crash
Status: Silver Member (Offline)
Joined: Nov 26 2008
Posts: 171
Re: A question on bonds

Ok, Thanks guys, I seem to have that part of things pretty sussed.

Thanks very much for your responses.

Interesting that you say this isn't taught in schools.

I have an economics degree and this stuff wasn't mentioned at all at uni.

hugs

Crash.

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