Simple economic question: If government is heavily in debt, but has never had trade..

[Norman]

I just wanted to know this, because I live in scandinavia, and well I just watched a video where a politician says we should hyper inflate (which is nonsense in any case BUT).

Our country has always had trade surplus so, I wanted to know if our country as a whole owes stuff to other countries, as the government(and consumer) has pretty good pile of debt.

Like US for example has huge trade deficit and huge debt to china and some other countries.

There is small difference, because if you own your own debt, it means you got savings, if you don't... it could mean you are way more broke.


So for our country if europe would super inflate, our savings would be wiped and the other countries debt to us would be wiped. So obviously it's not a good deal for us at all.

You are not reporting something or else it has been misreported to you. X-M = Gs+ Cs +Bs. X=exports, M=imports, Gs= Government surplus, Cs= Consumer savings and Bs= retained earnings of businesses. X-M is also the trade surplus by definition.

Yeah, that's a other way to do it. So even if the government has these deficits, it's the business surplus plus savings that keeps our trade balance and external debt in check. (And btw what do you mean I haven't reported everything?). In US on the other hand the business earnings are not covering the government deficit and the change in savings.

So the answer to my quetion is again; yes, hyper inflation would "benefit" the countries like spain that have external debt while obliterating our savings and economy.

 

[william the wie]

I just wanted to know this, because I live in scandinavia, and well I just watched a video where a politician says we should hyper inflate (which is nonsense in any case BUT).

Our country has always had trade surplus so, I wanted to know if our country as a whole owes stuff to other countries, as the government(and consumer) has pretty good pile of debt.

Like US for example has huge trade deficit and huge debt to china and some other countries.

There is small difference, because if you own your own debt, it means you got savings, if you don't... it could mean you are way more broke.


So for our country if europe would super inflate, our savings would be wiped and the other countries debt to us would be wiped. So obviously it's not a good deal for us at all.

You are not reporting something or else it has been misreported to you. X-M = Gs+ Cs +Bs. X=exports, M=imports, Gs= Government surplus, Cs= Consumer savings and Bs= retained earnings of businesses. X-M is also the trade surplus by definition.

Yeah, that's a other way to do it. So even if the government has these deficits, it's the business surplus plus savings that keeps our trade balance and external debt in check. (And btw what do you mean I haven't reported everything?). In US on the other hand the business earnings are not covering the government deficit and the change in savings.

I saw no mention of net retained earnings in your previous posts.

So the answer to my quetion is again; yes, hyper inflation would "benefit" the countries like spain that have external debt while obliterating our savings and economy.

Exactly right. Of course it depends on which Scandinavian country you are in, the main source of domestic savings and how those savings are invested that also determines the outcome of an economic policy. Swedish Chromium and Norwegian oil/fish farms are very different from Finnish dependence on high tech or Danish dependence on high value added agricultural products.

 

[loosecannon]

You should think first, then post. The Chinese hold currency reserves in...dollars! yes, Dollars.

The Chinese get our dollars in exchange for their goods.
The Chinese then have more dollars.

Amen

 

[loosecannon]

So the answer to my quetion is again; yes, hyper inflation would "benefit" the countries like spain that have external debt while obliterating our savings and economy.

Which is why Germans are pissed as hell.

But you guys are all bound at the hips now to Spain, Greece, Ireland, Iceland etc.

How does it feel? And can you make it work? Wouldn't you like to strangle a Greek civil servant? Or maybe bludgeoning is the exorcism of choice?

 

[william the wie]

So the answer to my quetion is again; yes, hyper inflation would "benefit" the countries like spain that have external debt while obliterating our savings and economy.

Which is why Germans are pissed as hell.

But you guys are all bound at the hips now to Spain, Greece, Ireland, Iceland etc.

How does it feel? And can you make it work? Wouldn't you like to strangle a Greek civil servant? Or maybe bludgeoning is the exorcism of choice?

I thought most of Scandinavia was non-euro. I know Swedish exposure to the Baltic states and in particular Latvia is a major concern of Sweden and Denmark provides a huge chunk of breakfast for the UK and Ireland but for the most part PIIGS is not that big of an issue in Scandinavia at least not directly or so I thought.

 

[loosecannon]

So the answer to my quetion is again; yes, hyper inflation would "benefit" the countries like spain that have external debt while obliterating our savings and economy.

Which is why Germans are pissed as hell.

But you guys are all bound at the hips now to Spain, Greece, Ireland, Iceland etc.

How does it feel? And can you make it work? Wouldn't you like to strangle a Greek civil servant? Or maybe bludgeoning is the exorcism of choice?

I thought most of Scandinavia was non-euro. I know Swedish exposure to the Baltic states and in particular Latvia is a major concern of Sweden and Denmark provides a huge chunk of breakfast for the UK and Ireland but for the most part PIIGS is not that big of an issue in Scandinavia at least not directly or so I thought.

every scandi state except Norway:

The European Union is composed of 27 sovereign Member States: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Republic of Ireland, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.[33]

European Union - Wikipedia, the free encyclopedia

 

[loosecannon]

BUT you are right, only Finland has fully adopted the euro:

The euro (sign: €; code: EUR; plural: euros) is the official currency of the eurozone: 16 of the 27 Member States of the European Union (EU). It is also the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.[2] Estonia is due to join the eurozone on 1 January 2011.[3] The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans.[4] Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.

Lots of other nations still peg to or have some kind of dual use of the euro.

 

[william the wie]

BUT you are right, only Finland has fully adopted the euro:

The euro (sign: €; code: EUR; plural: euros) is the official currency of the eurozone: 16 of the 27 Member States of the European Union (EU). It is also the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.[2] Estonia is due to join the eurozone on 1 January 2011.[3] The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans.[4] Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.

Lots of other nations still peg to or have some kind of dual use of the euro.

as long as debts are not in Euros there is little to fear from the PIIGS. It does create problems when a nation's debt issues are in numerous currencies for example Mexican peso debts were investment grade last time I heard (BBB) but Mexico's US dollar denominated debts have been rated junk since the 1920s or 30s. (I do not follow the bond market that closely because it confuses the crap out of me. NYT B grade bonds yield 5% and junk bond defaults are running 5%, what kind of idiot buys such crap? You need a yield of 5.45% to get to a risk adjusted return of 0% so these bond buyers are giving 0.45% yield to a dying company? Why????)

 

[loosecannon]

zoloft?

 

[william the wie]

zoloft?

As good an explanation as I have ever heard. F.I.A.S.C.O. which is available in reprint can make your hair stand up on end. One trade involved 125% collateral in BBB Peso bonds to create AAA USD bonds sticks out in my mind how that is possible I have no idea. To me bonds seem insanely risky.

 

[Norman]

I have a other (very) stupid question regarding banking and expansion of money.

So we have universe that has 100 units of base money, and no more is being printed out of the FED bank ever.

The money then goes to bank and the bank gets to invest 9x amount of it as result of fractional reserve banking.

The investments turn to be profitable, and interest is paid on them.

So as final result, can the money supply M2 ever exceed 900 units of money?

Obviously the bank can not create money out of thin air without real produce representing the added wealth. But can the bank really create money at all after the 900 limit?

In short, can the money in circulation ever exceed 9x of the base money supply? If reserve ratio is like it is right now.

 

[CrusaderFrank]

Whoever buys the debt has to do so with dollars. The trade deficit puts dollars in the hands of people on the trade-surplus side, iow foreigners.

Maybe someone can invent a market where currencies are traded every day?!

ZOMG!!!

What a great idea!

And so new too!

A market for currencies!

Who could ever dream up an idea like that?

Chinese can trade their currencies for dollars (that's the new and clever part) and then use the dollar to buy bonds!

I have to call my patent attorney to see if this works

BRB

Frank,

You should think first, then post. The Chinese hold currency reserves in...dollars! yes, Dollars.

The Chinese get our dollars in exchange for their goods.
The Chinese then have more dollars. They can't add to their reserves without inflating their own currency. They are left with these dollars and they can do a few things:

1. They can bury them under a rock.
2. They can buy other currencies. Which ones? Euros maybe. but...Buying euros with their excess dollars drives down the value of their own reserves.
3. They can buy dollar-denominated assets.
4. They can deposit the money in US banks.

The last two are quite popular, as you may have heard.

AND NOW!...Macro lesson 2:

Private saving finances domestic investment, the government deficit and the current account surplus.

Even if a country never earned a single US dollar they could still buy US bonds.

The trade deficit/surplus has nothing to do with anyone's ability to buy US debt.

You got off on a silly tangent and are trying to resurrect your credibility, don't insult me in the process.

 

[CrusaderFrank]

I have a other (very) stupid question regarding banking and expansion of money.

So we have universe that has 100 units of base money, and no more is being printed out of the FED bank ever.

The money then goes to bank and the bank gets to invest 9x amount of it as result of fractional reserve banking.

The investments turn to be profitable, and interest is paid on them.

So as final result, can the money supply M2 ever exceed 9000 units of money?

Obviously the bank can not create money out of thin air without real produce representing the added wealth. But can the bank really create money at all after the 9000 limit?

In short, can the money in circulation ever exceed 9x of the base money supply? If reserve ratio is like it is right now.

9 * 100 = 900, no?

Is there only one bank in your hypothetical world?

 

[Norman]

I have a other (very) stupid question regarding banking and expansion of money.

So we have universe that has 100 units of base money, and no more is being printed out of the FED bank ever.

The money then goes to bank and the bank gets to invest 9x amount of it as result of fractional reserve banking.

The investments turn to be profitable, and interest is paid on them.

So as final result, can the money supply M2 ever exceed 9000 units of money?

Obviously the bank can not create money out of thin air without real produce representing the added wealth. But can the bank really create money at all after the 9000 limit?

In short, can the money in circulation ever exceed 9x of the base money supply? If reserve ratio is like it is right now.

9 * 100 = 900, no?

Is there only one bank in your hypothetical world?

Uh yes, sorry I meant 900. (editing it soon).

It doesn't matter if there is one or many banks, I just want to know if it's possible for banks to ever exceed the 9x limit. Aka can they really create money out of thin air, or just rather "control" the amount of money in 0-9x ratio (aka I think 10% reserve ratio).

 

[loosecannon]

They can create unlimited virtual assets with that 900$, but that 900$ disappears from the economy as the original loans that created it are repaid.

 

[CrusaderFrank]

I have a other (very) stupid question regarding banking and expansion of money.

So we have universe that has 100 units of base money, and no more is being printed out of the FED bank ever.

The money then goes to bank and the bank gets to invest 9x amount of it as result of fractional reserve banking.

The investments turn to be profitable, and interest is paid on them.

So as final result, can the money supply M2 ever exceed 9000 units of money?

Obviously the bank can not create money out of thin air without real produce representing the added wealth. But can the bank really create money at all after the 9000 limit?

In short, can the money in circulation ever exceed 9x of the base money supply? If reserve ratio is like it is right now.

9 * 100 = 900, no?

Is there only one bank in your hypothetical world?

Uh yes, sorry I meant 900. (editing it soon).

It doesn't matter if there is one or many banks, I just want to know if it's possible for banks to ever exceed the 9x limit. Aka can they really create money out of thin air, or just rather "control" the amount of money in 0-9x ratio (aka I think 10% reserve ratio).

Not unless the bank adds capital.

Say the bank makes 9 loans of 100 each and each loan pays 10% interest per annum. At the end of year 2 bank has 190 in capital and can make 900 in additional loans.

Of course, to get it's CRA standing the bank would buy back the first 9 mortgages it made, then obtain credit enhancement from AIG then sell the loans to an offshore syndicate, or just sell them directly to Fannie and Freddie

Rinse lather repeat.

 

[Norman]

They can create unlimited virtual assets with that 900$, but that 900$ disappears from the economy as the original loans that created it are repaid.

I didn't fully understand this...

 

[loosecannon]

Say the bank makes 9 loans of 100 each and each loan pays 10% interest per annum. At the end of year 2 bank has 190 in capital and can make 900 in additional loans.

Only in theory, not in practice. Most money is generated as simple data entries on ledgers. It doesn't really exist. So when loans are repaid within a fixed system the money disappears entirely and the money supply must be replenished via new debt from the central bank thru the commercial banks.

 

[Norman]

9 * 100 = 900, no?

Is there only one bank in your hypothetical world?

Uh yes, sorry I meant 900. (editing it soon).

It doesn't matter if there is one or many banks, I just want to know if it's possible for banks to ever exceed the 9x limit. Aka can they really create money out of thin air, or just rather "control" the amount of money in 0-9x ratio (aka I think 10% reserve ratio).

Not unless the bank adds capital.

Say the bank makes 9 loans of 100 each and each loan pays 10% interest per annum. At the end of year 2 bank has 190 in capital and can make 900 in additional loans.

Of course, to get it's CRA standing the bank would buy back the first 9 mortgages it made, then obtain credit enhancement from AIG then sell the loans to an offshore syndicate, or just sell them directly to Fannie and Freddie

Rinse lather repeat.

So quiet simply, the equity of bank increases (obviously), but the money in circulation can't ever exceed 900? (Again in current fractional reserva banking system and the whole earth or whatever has only 100 pieces of currency).

So banks can't create money... but can multiply the amount of base money by 9x when "needed".

 

[loosecannon]

They can create unlimited virtual assets with that 900$, but that 900$ disappears from the economy as the original loans that created it are repaid.

I didn't fully understand this...

When money is created the process goes roughly like this:

The fed R requests "money" from the Treasury but it isn't really money, it some kind of note or authority issued by the treasury. The fed and treasury trade documents back and forth and the fed eventually ends up with an asset that it can use as reserves to lend money.

So commercial banks borrow this money, only it isn't really money just data entires.

Those banks can hold that "money" they borrowed from the FR and with fractional reserve banking they can lend fictional money against the reserves.

If the reserve requirement is 5% then those banks can lend 19 times as much fictional money as the reserves they retain.

But the commercial banks still owe the federal reserve money for the original loans, so they have to repay the fed. As they do their reserves shrink and the amount they can have outstanding reduces accordingly.

Eventually the commerical banks recover everything that they lent and repay the federal reserve in full and all of that money is gone except the fictional money created via interest rate charges. Ironically the original fictional money printed wasn't enough to fully satisfy those charges so new debt must be issued meanwhile to make up for that shortage and so the cycle continues.

I dunno if that will be confusing or not.

There is some real money, but not much. About $600 billion in real money, or cash/federal reserve "notes" does exist, half of that outside the USA. Leaving a mere $1000/American to cover our transactions in cash. That is a permanent or durable money supply that doesn't need to be replenished. I suspect it is a holdover from our days on the gold standard.

But even with fractional reserve banking $600 billion is not nearly enough to serve our economy.