Debt Myths

[scepticus]

Savings are required to invest. This is a law of physical reality that cannot be broken. Fiat money however, is not savings.

So onto the next point, which is to address injins point above.

Loans create deposits, not the other way round as injin asserts. The empirical evidence for this is that increases in the broad money supply, M3, M4 or whatever lead the increase in M0, reserves. This is well established by empirical data. It was also pointed out by keynes way back when he wrote the general theory. More recenrtly Steve Keen wrote a seminal article describing this process. If you have not read this yet, I highly reccomend it, it will be worth your while.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

In this process, when a growth opporunity occurs a loan is made to an investor to take advantage of it. This loan immediately creates new deposits (savings) in the accounts of other participants in the economy. The bank later goes and looks for some reserves to offset their risk on the loan, if they are doing their job properly. You may not think that this is a good idea, but it is the wway the economy works. Terminology wise, we say that money is endogenous to the economy, that is the economy will create the amount of money it needs, and that an external limit on that money supply cannot be imposed by gold, by government decree or anything else, at least not in a free, capitalist society without it ending in tears. This point bears also in spaniards comments about having a full reserve system. You could have that, but not with growth capitalism - you would have some other system that would not be able to support the complexity of our society.

So, loans create deposits (and savings), and spending by borrowers creates income for others that can support their saving requirements, and/or their debt service requirements. Therefore in order for the indebted UK household sector to be able to pay down their debts, loans must be made to create the deposits that can then be used for saving or de-leveraging. The minimum requirements is that the existing money stock is recirculated.

If we sit and wait for income to materialise to pay down our debts but the money supply is not being re-lent and re-spent, those income flows will never materialise, and our economy will eventually collapse, since the circuit of investment, lending and saving that we all rely on will have been broken.

[HumanAction]

Money on its own should never be used as a store of value for any significant length of time. It is an aberration to expect otherwise because the bankers will steal the stored value if you do so.

I made my own corrections in italics.

[Injin]

But money is nominal promises

If they return the promises - no default.

For the losing half of the contract, it's a default. It's also a default from the winning side, we know this because they claim the benefit derived and keep doing it.

If one half of a contract is operating on vastly different understanding than the other, then both parties should be returned to the position they started at due to invalidity of the contract from the get go. No chance in a statist court of course, but the principle is sound.

[Injin]

So onto the next point, which is to address injins point above.

Loans create deposits, not the other way round as injin asserts. The empirical evidence for this is that increases in the broad money supply, M3, M4 or whatever lead the increase in M0, reserves. This is well established by empirical data. It was also pointed out by keynes way back when he wrote the general theory. More recenrtly Steve Keen wrote a seminal article describing this process. If you have not read this yet, I highly reccomend it, it will be worth your while.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

In this process, when a growth opporunity occurs a loan is made to an investor to take advantage of it. This loan immediately creates new deposits (savings) in the accounts of other participants in the economy. The bank later goes and looks for some reserves to offset their risk on the loan, if they are doing their job properly. You may not think that this is a good idea, but it is the wway the economy works. Terminology wise, we say that money is endogenous to the economy, that is the economy will create the amount of money it needs, and that an external limit on that money supply cannot be imposed by gold, by government decree or anything else, at least not in a free, capitalist society without it ending in tears. This point bears also in spaniards comments about having a full reserve system. You could have that, but not with growth capitalism - you would have some other system that would not be able to support the complexity of our society.

So, loans create deposits (and savings), and spending by borrowers creates income for others that can support their saving requirements, and/or their debt service requirements. Therefore in order for the indebted UK household sector to be able to pay down their debts, loans must be made to create the deposits that can then be used for saving or de-leveraging. The minimum requirements is that the existing money stock is recirculated.

If we sit and wait for income to materialise to pay down our debts but the money supply is not being re-lent and re-spent, those income flows will never materialise, and our economy will eventually collapse, since the circuit of investment, lending and saving that we all rely on will have been broken.

Loans don't create deposits.

Loans don't actually happen, and deposits aren't there.

Later on the CB will print money up to stop the bankers being caught out in their fraud.

In any event, I was describing saving - which has nothing to do with double entry bookkeeping, loans or deposits,.

At all.

[HumanAction]

Not really.

I need to understand reality if I am to understand reality.

Yes, people believe shite and that changes their decisions.

Yes, this means you have to adapt.

No, that doesn't make them correct.

Humans are part of reality, you are very very naive if you imagine that you can understand reality by ignoring part of it.

[Bloo Loo]

Bloo, you have failed to incorporate some crucial aspects in your analysis.

1. you assume the bankers didn't spend their interest payments on wages, dividends, porsches, chablis etc.

2. you didn't follow where that £ lent to the borrower went. He used the £ lets say to buy capital equipment for his business. The £ then went into the deposit account of the equipment supplier, in another bank. In this way the £ can come back to the borrower as income to his business, and fund his interest payment (recall that his payments are due over perhaps 10 years, not on a single day of reckoning.

So you have fallen victim to making a static analysis of a dynamic system. Also you have fallen victim to the fallacy of composition in which one models the situation as it pertains to one individual or pair of individuals and then scale it up unchanged to the level of the whole economy.

I realise that this description gets very circular and difficult to visualise, it takes time to understand it properly. I have looked for a diagramatic explaination of all this but haven't found anything yet. Accordingly I'm happy to continue to debate this point and answer further objections you may have, since you have taken the time to engage in a sensible debate, but I'm also going to move onto the next point.

thanks for your reply.

I would suggest you make a lot of assumptions here.

1. that the borrower spent the money. he may not.

2. that there is no single day of reckoning.

3. sources of loans from other places.

In my model, the bank would represent the sum of all banks. the borrower would represent the sum of all borrowers.

at the end of the day, no matter how much credit the banks create, they have created not one penny of new money. the entire system relies on the money issued and backed by the nations taxpayer.

course, in addition to the sums paid in interest to the bank, the borrower is required to pay TAX to cover the costs the government has in issuing the £1 to the Central bank in the first place. He is paying twice, the moment he uses the money.

the day of reckoning...well thats every year...fixed in the contract.

now the bank could issue a new cashless loan to the borrower to cover the interest it owes. even if it did this, the interest is compounded yet again over the life of the loan...lets say its 10 years.....ie, at 10 years, the bank is going to want to see the capital back and the compounded interest.

clearly, as there is only £1 in the system, the bank cant have, on the day of reckoning, its £1 and its interest.

Now I take your point about production and wealth creation, but it all involves creating more and more loans. surely, lending more and more to buy houses as the means of wealth creation is the same as having no production at all, as in the one bank one borrower scenario.

Edited October 7, 2009 by Bloo Loo

[Alan B'Stard MP]

I made my own corrections in italics.

Mmmmm....maybe you should replace 'money' with 'chicken' in your inner discourses then maybe you would realise that no one can steal it from you with due process being on the table.

Ask yourself - what could my tenner have bought me this week. Then ask again, what could it have bought me today. Then ask yourself - why didn't I buy it?

Edited October 7, 2009 by Alan B'Stard MP

[HumanAction]

But money is nominal promises

If they return the promises - no default.

Money of this type cannot remain money for long. It's why fiat currency usually gets abandoned after hyperinflations. If money doesnt store value it isnt worth having and if its not worth having no one will want to accept it in exchange. You can get away with stealing just a bit ( hence 2% infdlation targetting ) but take it too far and people stop going along with the game and start using something that will store value.

[Injin]

Humans are part of reality, you are very very naive if you imagine that you can understand reality by ignoring part of it.

Humans are inferior to reality.

You are never going to understand reality if you think that opinions mean anything in the face of it, because they dont.

As I said, I fully understand that there are people with a head full of broken biscuits who need to be worked around. This just means that in reality there are people with a head full of broken biscuits who need to be worked around.

Reality remains and doesn't give a shit.

[scepticus]

Loans don't create deposits.

Loans don't actually happen, and deposits aren't there.

Later on the CB will print money up to stop the bankers being caught out in their fraud.

In any event, I was describing saving - which has nothing to do with double entry bookkeeping, loans or deposits,.

At all.

Please read the link. It is a vital insight, and comes from a non-classicial economist who is totally against the current banking system is it is run today, as am I.

You can't talk of saving in isolation, especially not in a fiat economy. Saving and debt are two sides of the same coin. You physically cannot save in a fiat economy without having a borrower on the opposite side. You either have a private borrower on the other side, intermediated by a commercial bank, or if your savings are not lent out by the bank, they will be on deposit at the central bank, which means the government is on the other side of the transaction as the borrower, again mediated by the commercial bank's balance sheet.

That is the nature of double entry book-keeping in a fiat economy, and that is an accounting identity, not a matter of opinion. If you want to believe otherwise then no-one can stop you however you won't be in the real world with the rest of us. There can be no asset (saving) without an equivalent liability (debt) in our economy. There can't be any entries in the ledger without both sides balancing.

[Bloo Loo]

"If we sit and wait for income to materialise to pay down our debts but the money supply is not being re-lent and re-spent, those income flows will never materialise, and our economy will eventually collapse, since the circuit of investment, lending and saving that we all rely on will have been broken."

well it collapsed without waiting too. it collapsed because bankers created too much credit, and the flow of money stopped, causing the assets on their balance sheets to fall, causing other bankers to consider the rest to be unstable, stopping lending and starting a scrabble for cash.

at the end of the day, the cash is finite, created by a taxpayer liability. there comes a time when the lending is too great to be supported by the economy and it folds into a BUST.

this is normal. its not about money....its about CREDIT.

[Stars]

For the most part they probvably cannot do so

If people can use other currencies...

and if they can they will probably still incur costs in doing so.

Just normal costs of making choices - there will be benefits and costs associated with using any currency at any particular time. If i choose to speculate in oil and at the same time somebody produces a lot of it, i will also be negatively impacted.

[Injin]

Please read the link. It is a vital insight, and comes from a non-classicial economist who is totally against the current banking system is it is run today, as am I.

i did. Its cobblers.

You can't talk of saving in isolation, especially not in a fiat economy.

yes I can. I talk of what saving is in reality.

Saving and debt are two sides of the same coin.

no they aren't. Savings are (by definition) not owed, owing or used in any way. Savings are real things put by and unused to be used later.

You physically cannot save in a fiat economy without having a borrower on the opposite side. You either have a private borrower on the other side, intermediated by a commercial bank, or if your savings are not lent out by the bank, they will be on deposit at the central bank, which means the government is on the other side of the transaction as the borrower, again mediated by the commercial bank's balance sheet.

Just as well that the fiat thing is a delusion, a fantasy, a tiny part of a much larger physical universe that is in every way superior to it.

That is the nature of double entry book-keeping in a fiat economy, and that is an accounting identity, not a matter of opinion. If you want to believe otherwise then no-one can stop you however you won't be in the real world with the rest of us. There can be no asset (saving) without an equivalent liability (debt) in our economy. There can't be any entries in the ledger without both sides balancing.

Double entry book keeping is cobblers as well.

Useful servant, useless and evil master and quite, quite inaccurate. it's up there with the bell curve and numbers in the "half decent idea that humans have fallen into the trap of obeying like it matters" camp.

[thecrashingisles]

4. The UK has a huge national debt. This is untrue. The USA, canada, france, germany, switzerland, norway, italy, and japan all had higher national debt as percentage of GDP as of 2007.

That depends on your figures and public sector pension liabilities are not accounted for in those figures as far as I know.

Would you dispute that the UK has a huge budget deficit at the moment? Would you dispute that this has a structural component that will remain after the recession ends?

[HumanAction]

Mmmmm....maybe you should replace 'money' with 'chicken' in your inner discourses then maybe you would realise that no one can steal it from you with due process being on the table.

It's value or wealth that gets stolen, not money. Money is being used as the distraction that keeps people from noticing what is actually going on. Sleight of hand.

Ask yourself - what could my tenner have bought me this week. Then ask again, what could it have bought me today. Then ask yourself - why didn't I buy it?

Perhaps I neither want or need whatever it is this week. Perhaps I anticipate a need tomorrow that is best filled tomorrow.

[Alan B'Stard MP]

You're my hero.

I demand a manhug !

[Harry Sacks]

Which backs my point

Does it?

[Alan B'Stard MP]

It's value or wealth that gets stolen, not money. Money is being used as the distraction that keeps people from noticing what is actually going on. Sleight of hand.

Perhaps I neither want or need whatever it is this week. Perhaps I anticipate a need tomorrow that is best filled tomorrow.

Buy something you can flog.

[Alan B'Stard MP]

It's value or wealth that gets stolen, not money. Money is being used as the distraction that keeps people from noticing what is actually going on. Sleight of hand.

Money has no value. ITS PAPER. You just think it has value. It the short term I would support you. Beyond that you are on your own.

[HumanAction]

If people can use other currencies...

Just normal costs of making choices - there will be benefits and costs associated with using any currency at any particular time. If i choose to speculate in oil and at the same time somebody produces a lot of it, i will also be negatively impacted.

See that if in your post? Thats the problem. For the most part the whole thing falls at that very first conditional clause. Which makes it all pointlessly tangential. As for the attempt to handwave the costs incurred. I'd imagine that if you take a step back even you can see how absurd that is when it's the very issue you want to quibble over?

[CarbonBasedLifeform]

Fixed.

I LOVE YOU INJIN,

You are my favourite hpcer,not many of us uber bears left after the recent price gains in financial ball and chains (oops!, i mean houses).If you looked liked your avvatar i,d like be suggesting sexytime , but i checked out your blogspot and unfortunatley the reality is a bit different, not to mention the wrong gender for my tastes.

Will keep on enjoying your posts all the same, keep up the good work.

[scepticus]

well it collapsed without waiting too. it collapsed because bankers created too much credit, and the flow of money stopped, causing the assets on their balance sheets to fall, causing other bankers to consider the rest to be unstable, stopping lending and starting a scrabble for cash.

I agree with that statement. The problem is falling velocity of money. Yes the bankers created too much credit, 2001 onwards given real growth potential.

But the credit inflation the last 30 years has been driven by demographics mainly, the rising baby boom population bulge, all over the world, created a real, and valid demand for more money, and represented real growth. As that population boom approaches retirement they slow spending and increase saving (age 50 is about peak spending age) and much of the wealth they created from themselves must vanish. Alan B, MP alluded to this earlier.

So you could say that the ponzi is literally embedded in us, since we cannot grow population forever.

The big mistake was to try and sustain the ending of this boom post 2001, rather than deal with it properly. This has left us with some problems. If we deal with them by going into turtle mode then the problems will never go away.

[spivT]

and much of the wealth they created from themselves must vanish

couldn't they just pass this wealth on to their kids, rather than have it 'vanish' ?

Or better still buy assets themselves, and sit back and watch as govt. protects these asset values at all costs ?

[scepticus]

Money has no value. ITS PAPER. You just think it has value. It the short term I would support you. Beyond that you are on your own.

Alan is correct. Back when the roman empire was on its upward trajectory 200BC onwards, and metal coinage was used, there was significant price inflation. This was as a result of the expanding complexity of their civilisation, with more middlemen being inserted between a man and his loaf of bread for example. That is specialisation of roles. It makes things more expensive in nominal terms however during periods of real growth incomes rise to more than match the price increases. Nevertheless, had you been a long lived roman holding coins under the mattress during this time, your coins would have depreciated in value.

Where did the romans get the extra specie they required to fund their expansion and make inflation happen durig a period of growth? That was what the legions were for. They extracted tribute.

Nowadays, we have a different way of finding the new money, but unfortunately it is at times as unreliable as the process of conquoring ones neighbours.

[Stars]

See that if in your post? Thats the problem. For the most part the whole thing falls at that very first conditional clause. Which makes it all pointlessly tangential.

Wrong. You can either choose to agree with the statement or not or find some problem with it or ignore it

As for the attempt to handwave the costs incurred. I'd imagine that if you take a step back even you can see how absurd that is when it's the very issue you want to quibble over?

But the original point was whether somebody making a debt based agreement with a banker negatively affects others. If people have a choice about which currency to use, then morally it becomes a matter of people being negatively affected by their own choices, not by the banker.

Edited October 7, 2009 by Stars