Boom And Bust

[Authoritarian]

having the indebted balancing their books will prove to be impossible even straight off the bat unless there is someone on the other side of the trade.

consider actors A, B, C, D.

A = -5

B = -2

C =+3

D = +4

--

total outstanding debt = 7

now, for A to get hold of 1 to pay C, either C or D must pay him some money. Lets say D gives A the 1 for some service.

Now we have:

A = -4

B = -2

C = +2

D = +4

--

total debt outstanding =6

this only works because C has agreed to reduce its surplus position. Basically, C has consumed his surplus rather than invested it.

so debt repayment can only happen (assuming no NEW debt is created) if those holding surplus (savings) agree to spend them on consumption.

Except in the govt's case they can force others to trade with them - taxes - which gives them the upper hand in theory with debt management. But first they to eliminate the annual deficit, the scenario you're describing is years away from being a reality; balanced books havn't been mentioned yet.

Even those with huge surpluses still spend back into the economy, there's no way you can live without consumption and so the indebted will get their chance to pay backs the hard way if they wish.

I do agree, and there are only two ways that can happen:

1. debtors and savers swap roles, with the former saving and the latter spending (on consumption not investment)

2. simply have some defaults so we reduce net surplus AND deficit positions.

the madness of of austerity is that it suggests debt can be paid back while C and D retain their existing surplus positions.

The money supply doesn't have to be ground down to zero overnight; we need a certain amount of money debt to lubricate the system, but the economy is crying out for a reality check.

Money should be used to represent the amount of trade that is happening at any given time, not the amount of debt we can trap each other in by exploiting the monopoly force of the housing market. I don't think it's wise to manipulate the amount the debt that individuals can get themselves into as ultimately it's a decsion between private parties, but actively forcing others into debt is wrong.

It's needs to stop.

[scepticus]

I don't think it's wise to manipulate the amount the debt that individuals can get themselves into as ultimately it's a decsion between private parties, but actively forcing others into debt is wrong.

It's needs to stop.

It can't stop. Its a double entry system and would be the same if we had full reserve.

if all the surplus holders refuse to spend their surplus then the debtors can't possibly acquire the money to pay down their debt

[Authoritarian]

It can't stop. Its a double entry system and would be the same if we had full reserve.

I wasn't talking about accounting technicalities, the nation is trouble because we've used the housing market and the gov't purse to trap each other into debt.

This is wrong and it needs to stop. Spending it up and then presenting somebody else with the bill is a form of financial slavery.

if all the surplus holders refuse to spend their surplus then the debtors can't possibly acquire the money to pay down their debt

This wouldn't be too much of a problem if we ran a proper economy. No matter how sound the system was some people will always default on their obligations and banks can offset this when it happens in dribs and drabs. But the real issue is how we allowed many to acquire these huge surpluses in the 1st place, it wasn't because they were running around providing the community with lots of economic benefits.

Edited June 30, 2010 by Chef

[Traktion]

It can't stop. Its a double entry system and would be the same if we had full reserve.

if all the surplus holders refuse to spend their surplus then the debtors can't possibly acquire the money to pay down their debt

Full reserve where investments don't guarantee a return are a different beast though. In a free market, a bad investment doesn't guarantee a return of even the principle, never mind the interest. State backed fractional reserve banking guarantees the return of the principle (without considering negative rates, which you know my opinion on).

Free (fractional reserve) banking is better (in preventing huge imbalances swelling), as at least a bank can fail, causing the collective savers to take a hair cut (or a complete loss). However, the first come, first serve nature of a bank run isn't very fair either - some get all their money, some get next to none.

As I keep repeating, the problem is the appropriation of risk. There has to be risk when investing (ie. returning interest on savings) or imbalances will form and this should correlate directly to the investments made by an individual.

Whether free or state backed, fractional reserve banking doesn't distribute risk well, as they're promising something which they can't deliver - positive returns on savings at all times (the stated interest rate). A bank run or a state bailout doesn't distribute the risk appropriately either. Limited Purpose Banking distributes risk on a per investor/saver level, which means it doesn't suffer from these problems.

To link back in with your final point, if surplus holders refuse to spend, then the debtors default, then those with surplus invested in said sector will take a hair cut. In the process, the balance gets closer to being restored.

[Traktion]

And that is exactly what we didn't allow happen with the banks. The balance is now more out of kilter than ever.

Yes, I completely agree. They saved the wealthy, then distributed the bill between the rest of us.

The problem is, our state backed fractional reserve banking system works directly against maintaining a balance (in fact, it helps to maintain an imbalance). Hell, even free (fractional reserve) banks handle it in a pretty blunt way (bank run = first come, first serve).

Fractional reserve banks are incapable of assigning risk appropriately, as they just lump all the money together, then have a problem when they can no longer honour their liabilities.

Mervyn King has spoken of fire walling current accounts, so that if the bank is getting close to not servicing these, it would be wound up. While this gives safety to those with current accounts, it doesn't help any other types of investments which people hold with a bank - they are still lumped together. It's better than what we have now, but it's not a complete solution, IMO.

Edited June 30, 2010 by Traktion