Why Is Debt Monetisation Seen As A Bad Thing?

[Bloo Loo]

Maybe you use the wrong bank?

Ive never had a problem moving sums around and clearing accounts, moving money back in, maybe things are different for non residents but i dont see why

of course, there is no such thing as an unauthorised overdraft in the UK, and if there were such things, then Im sure the banks would charge only a nominal sum.

[guitarman001]

ERRRR, who on Earth DOESN'T think debt is MONEY?

AM I LIVING IN A MAD HOUSE!?

[Bloo Loo]

ERRRR, who on Earth DOESN'T think debt is MONEY?

AM I LIVING IN A MAD HOUSE!?

debt WAS money...well, the money arrived and was spent and the entity was left with debt.

so you HAD money, and now you HAVE debt.

the two are clearly, different.

[libspero]

I'm not saying I necessarily disagree, I'm just asking those that have such strong opinions on the matter to explain their reasoning. If I go to the pawnbrokers and monetize my gold watch am I adding to the destruction of humanity?

You could argue that we are simply returning the debt:base ratio to a more stable level (obviously by increasing the base).

However there are reasons why monetising debt isn't a good thing.. if there weren't we would do it as a matter of routine. By relieving people of unaffordable debt by debasing the currency you are, as with any form of government intervention, picking winners and losers.

There is nothing immediately wrong with this (other then the morality of taking wealth from one group and giving to another), except it distorts reality and changes people's behaviour. It means in future people will know there is no reward for saving, no reward for financial caution and no reward for honesty.

People know they will be rewarded for taking on as much debt as possible since it is common knowledge that debt (particularly mortgage) will provide free wealth and if not then the government will print money to pay it back for you. If you have to lie, cheat and deceive to achieve this goal it will almost certainly be worth the risk.

[Traktion]

Debt clearly isnt money as your own example alludes to as current shareholders are diluted, the same as current money holders

Why does the dilution happen? clearly if debt and money are the same then nothing happens transacting between the two. They are fundamentally different because debt is very specifically future promised wealth, money is simply the realisation of that wealth, replacing debt with money simply destroys that promise which no longer needs fulfilling thus creating dilution to the actual amount of perceived wealth (and tzhus actual wealth) measured by the monetary system in use in the economy, replace the debt with the fulfilment of the promise and the wealth has been created whilst the debt destroyed, to suggest debt and cash money are equivalent is comedy. The very monetary system we use only works on the basis of them being fundamentally different

Good post.

By rewarding malinvestment with printed bailouts, it is also encouraging more malinvestment in the future. No mistakes will have been learned from and everyone else pays for the mistakes of the few.

The flip side is default. Defaults punish malinvestment, but that also includes the naive who have been caught up in the mess. That's not an excuse for bailing them out, but we have to realise that there isn't an easy way out here - pain is coming either way.

Defaults at least reward the wise and punish the foolish. Printing money does the opposite. Constantly rewarding failure really isn't going to end well.

[Traktion]

You could argue that we are simply returning the debt:base ratio to a more stable level (obviously by increasing the base).

However there are reasons why monetising debt isn't a good thing.. if there weren't we would do it as a matter of routine. By relieving people of unaffordable debt by debasing the currency you are, as with any form of government intervention, picking winners and losers.

There is nothing immediately wrong with this (other then the morality of taking wealth from one group and giving to another), except it distorts reality and changes people's behaviour. It means in future people will know there is no reward for saving, no reward for financial caution and no reward for honesty.

People know they will be rewarded for taking on as much debt as possible since it is common knowledge that debt (particularly mortgage) will provide free wealth and if not then the government will print money to pay it back for you. If you have to lie, cheat and deceive to achieve this goal it will almost certainly be worth the risk.

You could argue that defaults do the same thing too.

As default is the default position when promises cannot be kept, which forms the basis of capitalism (risk vs reward), why is this being meddled with? What are they trying to 'save' and why?

[Traktion]

ERRRR, who on Earth DOESN'T think debt is MONEY?

AM I LIVING IN A MAD HOUSE!?

Debt isn't money. It is promises of money.

[Toto deVeer]

Prior to monetization, there was the matter of choice. Actors could choose whether they wish to take on debt or not, whether they wish to save or not.

The ultimate endgame of the monetization of government debt, however, is negative interest. This will take away choice. Everyone will be obliged to take on debt or starve. The proverbial 'gun to the head'.

The US Congressional Super-committee, has recently produced a report recommending that the US Treasury Secretary remove the zero bound limit on interest.

Soon, those prudent persons of society who have been enduring negative real interest rates anyway, will see their savings disappear to the banks until their balance reaches zero. They they will have to go to those same banks to borrow money so that they can eat.

[Bloo Loo]

You could argue that we are simply returning the debt:base ratio to a more stable level (obviously by increasing the base).

However there are reasons why monetising debt isn't a good thing.. if there weren't we would do it as a matter of routine. By relieving people of unaffordable debt by debasing the currency you are, as with any form of government intervention, picking winners and losers.

There is nothing immediately wrong with this (other then the morality of taking wealth from one group and giving to another), except it distorts reality and changes people's behaviour. It means in future people will know there is no reward for saving, no reward for financial caution and no reward for honesty.

People know they will be rewarded for taking on as much debt as possible since it is common knowledge that debt (particularly mortgage) will provide free wealth and if not then the government will print money to pay it back for you. If you have to lie, cheat and deceive to achieve this goal it will almost certainly be worth the risk.

ah, but you arent relieving people of unaffordable debt.

In the case of the Government, the debt it is issuing is to pay current bills....the BoE buys the debt with debt free cash, but will still be getting face interest every year till the bond is expired.

The debt hasnt gone away, indeed, if the status quo is maintained with government spend, next years deficit will be bigger by the interest on the "free" money.

The question is, is the BoE going to simply anull the bond at expiry?...If it is, then the cash out there it generated will remain. In normal circumstances, the cash should go back to the owner, in this case the BoE where it can kwell the balance sheet, cash wipes out bond.

[Bloo Loo]

Prior to monetization, there was the matter of choice. Actors could choose whether they wish to take on debt or not, whether they wish to save or not.

The ultimate endgame of the monetization of government debt, however, is negative interest. This will take away choice. Everyone will be obliged to take on debt or starve. The proverbial 'gun to the head'.

The US Congressional Super-committee, has recently produced a report recommending that the US Treasury Secretary remove the zero bound limit on interest.

Soon, those prudent persons of society who have been enduring negative real interest rates anyway, will see their savings disappear to the banks until their balance reaches zero. They they will have to go to those same banks to borrow money so that they can eat.

you could have simply said...Hyperinflation.

[Toto deVeer]

Debt clearly isnt money as your own example alludes to as current shareholders are diluted, the same as current money holders

Excluding the 3% cash in circulation, what happens to the money supply if all debts are repaid?

[Traktion]

Excluding the 3% cash in circulation, what happens to the money supply if all debts are repaid?

The end of our monetary system as we know it.

Something more sane could take over instead, hopefully sooner, rather than later.

[Bloo Loo]

Excluding the 3% cash in circulation, what happens to the money supply if all debts are repaid?

circulating cash isnt all that is money.

You have bonds, gilts, electronic cash balances....tons.

Not all debt can be paid though as some people have kept some aside...so some people wont be able to pay.

Money may equal debt in theory, but not everyone has equal amounts of both.

Monetising debt itself is one way to create an imbalance.

[Toto deVeer]

circulating cash isnt all that is money.

You have bonds, gilts, electronic cash balances....tons.

Not all debt can be paid though as some people have kept some aside...so some people wont be able to pay.

Money may equal debt in theory, but not everyone has equal amounts of both.

Monetising debt itself is one way to create an imbalance.

When Bill Clinton proudly announced that the US would pay back all it's debt within 10 years, Alan Greenspan was noted to have said "But we won't need a central bank then!"

[Oliver Sutton]

If you owned a company that had £100M debt, and then issued £100M of new shares to wipe this out, so that the only liability that you had was the shares, this would be a good thing, no?

What if it was only your company that was buying the shares?

[Bloo Loo]

Because 95% of posters do no understand or believe that debt = money. If you do not accept/believe this and have the same understanding as the sheeple then the logical conclusion is that it is bad. Whereas debt monetisation is merely moving from debt to equity based money. If you owned a company that had £100M debt, and then issued £100M of new shares to wipe this out, so that the only liability that you had was the shares, this would be a good thing, no?

so you want to exchange £100m of debt for another £100m of debt to a different creditor?

How does that benefit?...except maybe as cash flow....one is long term debt the other might be due tomorrow.

[leicestersq]

printing (inflation) always ends in pain if used to cure excessive borrowing..the endpoint is always failure.

Deflation is painful for those in debt...but it will always end in growth and real prosperity.

Are you sure that is always true? When the UK came off the gold standard and was able to print new money in the 1930's we did relatively well compared to the rest of the world.

What we are talking about here is turning government debt into money, either notes and coins or central bank credit. Private debts remain. Whether or not it is a good thing is how the process is undertaken. I dont buy the moral argument about it destroying the incentive to work, though if someone could elucidate what they mean by that, I would be prepared to change my mind if the argument is sound.

Printing money can help an economy if it faces deflation. What we really mean by a healthy economy is one where people can trade and produce things. If you have deflation, people stop trading, and stop trusting each other. Factories and organisations can become insolvent, not because what they produce isnt wanted, it is just that people wont risk buying and selling the things it produces. Replace that debt with money, put it into peoples hands, they suddenly feel more confident and go out and buy things and that confidence suffuses through the entire economy, and keeps the productive capacity of the economy going.

There is always a risk with the policy though. Print too much, and if the productive economy cannot supply the new demand, inflation can start. If prices start rising quickly, and banks who find that they are being asked for more and more loans start supplying those loans, you can get an explosion in the money supply and balancing explosion in prices. If people see the state continuing to monetise the debt or printing to finance deficit spending, inflation can destroy the currency itself.

So it can work, it can help delever the economy, replacing borrowed money with cold hard cash. Steve Keen has been putting forward policies to help with this process. It isnt a risk free option though.

[Toto deVeer]

So it can work, it can help delever the economy, replacing borrowed money with cold hard cash. Steve Keen has been putting forward policies to help with this process. It isnt a risk free option though.

Those who lived within their means for decades, and were prudent, are watching their life savings disappear. That's a real economic motivator. Yes indeed.

[leicestersq]

Those who lived within their means for decades, and were prudent, are watching their life savings disappear. That's a real economic motivator. Yes indeed.

Toto,

I trust you have considered the paradox of thrift. If you let a deflationary collapse occur, those who have savings will watch them disappear. Savings are only worth something if you have a productive economy to give those savings value. Replacing government debt with cold hard debt free cash, can help maintain a productive economy, whereas letting the whole thing slip into deflation can destroy that productive economy.

Remember with deflation, debts have to be written off through bankruptcy. It is that process which destroys life savings, be it in cash at the bank or equity in the now defunct factory. Seeing yours and other people's saving disappear doesnt do much to motivate people to work hard and invest for the future.

[Bloo Loo]

Are you sure that is always true? When the UK came off the gold standard and was able to print new money in the 1930's we did relatively well compared to the rest of the world.

What we are talking about here is turning government debt into money, either notes and coins or central bank credit. Private debts remain. Whether or not it is a good thing is how the process is undertaken. I dont buy the moral argument about it destroying the incentive to work, though if someone could elucidate what they mean by that, I would be prepared to change my mind if the argument is sound.

Printing money can help an economy if it faces deflation. What we really mean by a healthy economy is one where people can trade and produce things. If you have deflation, people stop trading, and stop trusting each other. Factories and organisations can become insolvent, not because what they produce isnt wanted, it is just that people wont risk buying and selling the things it produces. Replace that debt with money, put it into peoples hands, they suddenly feel more confident and go out and buy things and that confidence suffuses through the entire economy, and keeps the productive capacity of the economy going.

There is always a risk with the policy though. Print too much, and if the productive economy cannot supply the new demand, inflation can start. If prices start rising quickly, and banks who find that they are being asked for more and more loans start supplying those loans, you can get an explosion in the money supply and balancing explosion in prices. If people see the state continuing to monetise the debt or printing to finance deficit spending, inflation can destroy the currency itself.

So it can work, it can help delever the economy, replacing borrowed money with cold hard cash. Steve Keen has been putting forward policies to help with this process. It isnt a risk free option though.

there is a difference between monetising wealth, and monetising debt.

Monetising wealth is the way it is usually done....an entity pledges to repay and pay at interest. this is normal and it is wealth that backs the debt.

In the case of monetising debt, the debt you monetise is already a pledge against some wealth, so in effect, the same wealth monetised once is monetised again...

We could see this happening in the shadow banking system, where one house backs a mortgage, the debt is sold, the debt becomes a financial asset, which was again resold..a circle jerk of unpayable ponzi debt.

[Bloo Loo]

Toto,

I trust you have considered the paradox of thrift. If you let a deflationary collapse occur, those who have savings will watch them disappear. Savings are only worth something if you have a productive economy to give those savings value. Replacing government debt with cold hard debt free cash, can help maintain a productive economy, whereas letting the whole thing slip into deflation can destroy that productive economy.

Remember with deflation, debts have to be written off through bankruptcy. It is that process which destroys life savings, be it in cash at the bank or equity in the now defunct factory. Seeing yours and other people's saving disappear doesnt do much to motivate people to work hard and invest for the future.

and inflation is different?...how?

[Toto deVeer]

Toto,

I trust you have considered the paradox of thrift. If you let a deflationary collapse occur, those who have savings will watch them disappear. Savings are only worth something if you have a productive economy to give those savings value. Replacing government debt with cold hard debt free cash, can help maintain a productive economy, whereas letting the whole thing slip into deflation can destroy that productive economy.

Remember with deflation, debts have to be written off through bankruptcy. It is that process which destroys life savings, be it in cash at the bank or equity in the now defunct factory. Seeing yours and other people's saving disappear doesnt do much to motivate people to work hard and invest for the future.

Capitalism without bankruptcy is not capitalism. The end point of what you are supporting is Fascism. This idea of the paradox of thrift is a theoretical nonsense. In the real world there are winners and losers. What you are proposing is to not permit losers, by penalizing winners.

Deflation actually rewards the prudent. Inflation penalizes, and rewards those who have access to money first. The 'trickle up' effect. What you are proposing is more of the same.

As this continues there will be fewer and fewer people who will be motivated to work. The working population will dwindle. People will choose to opt out of the system. This is already happening in the US.

[leicestersq]

and inflation is different?...how?

There are different definitions of inflation. The most common one is the devaulation of money versus goods and services, also known as price increases.

Another definition is an increase in the money supply. The main difference between the two is that one doesnt take account of changes in the aggregate supply, so money and production can increase in step with no price level change.

The thing about inflation is that whichever definition you choose, it doesnt create on its own, a crushing burden of debt that can bring a halt to productive output. The biggest danger is that a generally rising money supply can cause the misallocation of resources as people make the mistake of overvaluing the money they receive in return for the good or service they provide. Hyper-inflation is somewhat different, where people no longer wish to hold a certain currency at all.

[Milton]

Capitalism without bankruptcy is not capitalism. The end point of what you are supporting is Fascism. This idea of the paradox of thrift is a theoretical nonsense. In the real world there are winners and losers. What you are proposing is to not permit losers, by penalizing winners.

Deflation actually rewards the prudent. Inflation penalizes, and rewards those who have access to money first. The 'trickle up' effect. What you are proposing is more of the same.

As this continues there will be fewer and fewer people who will be motivated to work. The working population will dwindle. People will choose to opt out of the system. This is already happening in the US.

+1e012

And here. There is no point in working.

Edited February 13, 2012 by Milton

[leicestersq]

there is a difference between monetising wealth, and monetising debt.

Monetising wealth is the way it is usually done....an entity pledges to repay and pay at interest. this is normal and it is wealth that backs the debt.

In the case of monetising debt, the debt you monetise is already a pledge against some wealth, so in effect, the same wealth monetised once is monetised again...

We could see this happening in the shadow banking system, where one house backs a mortgage, the debt is sold, the debt becomes a financial asset, which was again resold..a circle jerk of unpayable ponzi debt.

Well yes, we are talking about monetising government debt, which is a pledge against the taxes raised on future production. Instead of it being a debt for the future, you increase the supply of money now with something that has no debt (debt being defined as something you can extract payment for in a court of law).

Whether or not that is a good choice depends on the circumstances, but it isnt always a bad choice.

I am not sure what relevance 'monetising wealth' has in this debate.