There's one point I want to clarify, from yesterday's post on Debt Ceiling Fallacies. It's the mechanics of the national debt.
The details are carefully obfuscated. It's more complicated than "Let's print new money and spend it!" By obfuscating the details of deficit spending, it seems legitimate.
Congress has (unconstitutionally) delegated money-creation authority to the Federal Reserve. However, the Treasury may still create Treasury debt. That debt is sold to the banksters and Federal Reserve, for newly created money.
Suppose there is $1T of deficit spending.
The Treasury secretary creates $1T of new Treasury debt.
There is a Treasury auction. That $1T is sold to the banksters.
There is fractional reserve banking, with a 10:1 reserve ratio. Having just purchased $1T in Treasury debt, the banksters now have a reserve deficiency of $100B.
The banksters take $100B of Treasury debt and sell that debt to the Federal Reserve. The Federal Reserve creates $100B of new reserves and buys that Treasury debt. This is the "monetizing the debt" trick.
The Treasury bonds sold to the Federal Reserve are usually not the same ones just auctioned. However, in "Quantitative Easing 2", the banksters bought Treasury bonds and immediately flipped them to the Federal Reserve for a profit. The blog "zerohedge" was tracking this more.
Now, the Federal government has $1T of new money. That money is spent, purchasing real goods and services. This causes $1T of inflation.
If the money supply increased from $10T to $11T, then everyone holding dollars lost 10% of their purchasing power to inflation.
If the Federal government directly printed and spent $1T, that would be to obvious. The details are carefully obfuscated.
By making deficit speding unnecessarily complicated, it gives the process an illusion of legitimacy.
Sunday, May 29, 2011
National Debt Mechanics
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11 comments:
FSK,
Why do you keep promoting this medieval notion of "Compound Interest Rate Paradox"? Every time you mention this, I think "he is going to see it through", but you never do (too busy with hectic work and the damn blog to stop and think?).
There isn't such thing, and it is easy to see. I am going to attempt to show you just that.
Suppose you borrowed 100RED dollars from me at %10 rate, so that you will have to return 110RED dollars (I painted them red for scarcity).
According to CIRP, this is an impossible feat to return that money without me, the lender, lending 10RED dollars more to you.
Let's see. You have 100RED, and you have earned an additional 10RED from me by providing me with an illegal devious sexual favor.
Can You now come up with the required payment of 110RED without taking on an additional debt?
Yes! You certainly can! Wow! Cool! Why did this happen?
Because the money is a system of accounting for merits. New merits change accounting totals. The target total my be arrived at by taking on the debt, but it could be paid for by doing hard work (or easy work :)
For CIRP to be true, it must be assumed that there is only a debt exchange and no work done in a given economy. The work must be considered a cheating of a system, if CIRP desires to remain true.
Accordingly, your audacious assertion that the current economy needs constant inflation simply to escape the consequences of CIRP, is well, forgive me the pun, without merit.
The current system does experience constant inflation simply because as any government system it is built to steal from the masses, and not to satisfy some CIRP. The desire to steal IS the whole point and reason of having the current system, which is allowing to inflate, which satisfies the desire to steal. If we didn't try to steal, we could just as well had honest money system!
Keep the good thing up, bud.
Unfortunately, that is not the way the US monetary system works. The additional $10 is never created.
First, yes, they are constantly created, you said it yourself, when you used this additional $10 to justify the inflation as being necessary for satisfaction of CIRP.
Second, it is not necessary to create any additional money.
(I did allow a small technical mistake, - I just noticed re-reading my post. I should have said "I paint ALL my money RED for scarcity".)
You earned that additional 10RED from me. This is how economy works.
As it would apply to our existing system, you earn additional money by working for someone, you earn the money that at the end of a chain, were earned from the government.
So, you might say, and you would be correct in that, that borrowing money with an interest places a borrower in a position where he necessarily must earn the interest.
Having government to create the money, then further simplifies this statement to "necessarily must earn the interest by working for the government", which is morally wrong, as government simply creates the money, never earns it.
But there is nothing wrong with that. One can't have borrowed capital and gave nothing for it.
Current system, being horrible as it is, has many problems, however CIRP is not one of them.
Usury isn't a problem either. Usury provides necessary arbitrage against fullish behavior.
If you outlaw the interest (usury being only a matter of a line in the sand), then you can not have any capital available for production, other than your own saved capital.
You are confusing the current system with a free market.
In a really free market, bank expenses equal interest collected. There is no Compound Interest Paradox in a really free market.
In the present, banks pay expenses out of other interest income. When the Federal Reserve "monetizes the debt", they only create the principal and not the interest.
If you have been brainwashed as an economist, you won't understand the point. We are arguing axioms. Your axioms are wrong.
Here is a good question to answer, if you decide to persist with your pro-State trolling.
If the Compound Interest Paradox does not exist, then why is the national debt ($14T) greater than the M2 money supply (approx $10T)?
You probably will go ahead and repeat your troll tag line again, fine, ad hominem if you must, I allow you.
Now, to our sheep.
This isn't an axiom. I am not an established economist, I would despise to be such. I am a self-learner. I, likely, still am brainwashed to a degree, aren't you? But, I am consciously working on that. Anyway, I am not familiar with such an axiom. If it existed, as an axiom, I would have heard of it. Not to presume it to be less worthy if it wasn't published by someone famous, but is this your own theory? Or is there anyone else who might be arguing it better? I am aware of it as of notion, opinion, no where near the status of axiom. Is this how you define an axiom? You confuse me.
In RFM, banks pay their expenses from interest. By this, you intended to note that the interest payment money is earned back from the banks, just like the 10RED in my example. Yes? (If not, then where are they coming from?)
You concede, then, that at least in really free market, NO ADDITIONAL MONEY IS NEEDED TO BE CREATED FOR INTEREST REPAYMENT TO BE POSSIBLE. Good. Small battle won for me.
The interest in RFM does not equal expenses. It equals expenses plus profits. Technical correction. As there is no CIRP in RFM banking, then it should be readily observable that the profits, too, are not causing the CIRP, which means that profits are earned back by the borrowers just like the bank expenses, or we would have a CIRP problem.
Once you agree with this, you have to also agree that since profits are earned back by the borrowers through goods, labor and services, then no matter the system, RFM or Not Really Free Market, the only reason to earn profit for anyone is to spend it, i.e. to let the market to earn it back, even in NRFM!
The only thing that is changing during a switch from RFM to NRFM is that banks start to earn more, while not doing any more work, and the rest of the market participants on the balance start to render more goods, services and labor to the banks to earn those higher profits back. Do you follow?
The difference between RFM and NRFM with respect to this discussion is only that the bank profits were increased, while still completely, 100% spent back into economy. This, of course, is not enough of the reason for the CIR Paradox to materialize.
Then, you again, jump on the fact that the monetization only creates the principal, as if we haven't established yet, that the repayment of the interest does not require any additional money to be created.
You may have a feeling, that I am escaping the discussion of money creation in NRFM. I am. I do not see it as necessary, if I had that small battle won. I believe that you are much confusing yourself taking in the account the mechanics of "modern" money creation. This is because the latter was intentionally convoluted to escape being detected as a simple counterfeit scam. The matter of our argument, anyway, lies whether my words in bold are true or not, in context of that paragraph.
You are wrong, because you don't understand how the monetary system actually works.
Example:
1 banker
1 worker
Really free market details:
Bank lends 10 ounces gold to worker at 10% interest for 1 year.
Worker has 10 ounces of gold.
Bank spends 1 ounce of gold buying food and other expenses from worker.
Worker has 11 ounces of gold.
Worker repays loan.
All books balance.
In a really free market, if banker overcharges worker, banker #2 competes with banker #1.
You are half right. In a really free market, banking is not evil. There is no Compound Interest Paradox in a really free market.
Current system example:
1 banker
1 worker
Bank lends $1M to worker at 10% interest.
Worker has $1M, but $1.1M is due.
Bank lends worker another $1M at 10% interest.
Worker has $2M, $1.1M in current debt, $1.1M due in a year.
Worker repays current loan.
Worker has $0.9M in cash and $1.1M in debts.
Bank has $0.1M in interest payments received.
Bank uses that $0.1M to pay operating expenses.
Notice that worker is screwed. Worker can never repay the loan.
Your counterexample is wrong, because you're confused about the assumptions of how the US monetary system works.
THE CURRENT SYSTEM IS NOT A FREE MARKET!
At this point, we're arguing axioms. You're confused about how the US monetary system actually works.
I shall not argue "axioms". I will use your own words:
Your example is missing few lines, I have reinserted them, and prefixed them with ">>>":
Current system example:
1 banker
1 worker
Bank lends $1M to worker at 10% interest.
Worker has $1M, but $1.1M is due.
>>>Bank spends $0.1M buying food and other expenses from worker.
>>>Worker earned $0.1M selling food and othergoods to the banker.
>>>Worker now has $1.1M cash and $1.1M outstanding loan balance.
Bank lends worker another $1M at 10% interest.
>>>Bank spends $0.1M buying food and other expenses from worker.
>>>Worker earned $0.1M selling food and othergoods to the banker.
>>>Worker now has $2.2M cash and $2.2M outstanding loan balance.
>>>All books balance.
---the rest shows incorrect figures calculated by you *
Worker has $2M, $1.1M in current debt, $1.1M due in a year.
Worker repays current loan.
Worker has $0.9M in cash and $1.1M in debts.
Bank has $0.1M in interest payments received.
Bank uses that $0.1M to pay operating expenses.
Notice that worker is screwed. Worker can never repay the loan.
*Why did you not allow a banker in not so free market to pay his expenses as in the previous example?
Here is your first example, however, after we disallow the banker to pay his expence.
Notice, how it becomes just the same as the second:
Example:
1 banker
1 worker
Really free market details:
Bank lends 10 ounces gold to worker at 10% interest for 1 year.
Worker has 10 ounces of gold.
>>>not allowed>>>Bank spends 1 ounce of gold buying food and other expenses from worker.
>>>Bank lends to the worker another 10 ounces of gold, for %10 interest
>>>Worker has 20 ounces of gold, 11 ounces of gold in current debt, and 11 ounces due in a year.
>>>Worker repays current loan.
Worker has 9 ounces in cash and 11 ounces of debts.
Bank has 1 ounce in interest payments received.
Bank uses that 1 ounce to pay operating expenses.
Notice that worker is screwed. Worker can never repay the loan.
---the rest does not apply---
Worker has 11 ounces of gold.
Worker repays loan.
All books balance.
FSK, you either need to stop posting my replies, or to start showing some good argumentation.
Other folk reading this too. You're losing your status. Where is the Compounded Interest Paradox?
The system now is not a free market, and that is terrible. It does not, however, create any Compounded Interest Paradox.
Your counter-examples are wrong, because that's not the way the US monetary system works.
We are arguing axioms. You are wrong. You are trolling. On my site, I get to define who's trolling.
You aren't convincing me. I'm not convincing you. This is a waste of time.
We disagree with "This is how the US monetary system works." There's no point in debating further. Do your research.
I believe what Anonymous is missing, is that the monetary system does not allow banks or the FED to create money, specifically "high-powered money", to cover its own expenses. Money is only created when it is loaned, at interest. So all new money created, is less than the money that needs to be repaid. Thus the Paradox.
Here's a good exercise. Read the exact law that allows the Federal Reserve to "monetize the debt". There are two bits:
1. The Federal Reserve may "buy" Treasury debt.
2. The Federal Reserve is exempt from capital requirements.
Suppose the Federal Reserve buys $1B in Treasury Bills with a fair market value of $999M.
The Federal Reserve creates a debit in its own account of -$999M. The Federal Reserve creates a debit in the bank of +$999M.
When the Federal Reserve redeems the Treasury debt, it redeems it for $1B. There is a money supply deficit of $1M. The Federal Reserve has a balance of +$1M in its account, but "society as a whole" is $1M deeper in debt.
The scam continues indefinitely, because the Federal Reserve and Federal government are exempt from capital requirements.
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