Debt Question

[chockfullofthat]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

 

[Toro]

Yes.

 

[chockfullofthat]

Isn't that pretty much a short term fix then?

 

[EdwardBaiamonte]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

how does fractional reserve system make it impossible to pay off debt?

 

[chockfullofthat]

Payoff the debt completely*

 

[KissMy]

It will never get paid off in your lifetime. It may stop rising in about 20 years.

 

[DSGE]

The fractional reserves system has nothing to do with paying down government debt. Why do you think it matters?

 

[ERGO]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

how does fractional reserve system make it impossible to pay off debt?

Our fractional-reserve, fiat financial system is built upon debt-based money. In this perverse arrangement, new dollars come into existence through the creation of government and private debt. Going the other way, if the private sector and the federal government ever began seriously paying down their debts, the supply of US dollars would shrink. Money is loaned into existence. Put simply, under a fractional reserve banking system all money is created out of debt.

 

[EdwardBaiamonte]

Our fractional-reserve, fiat financial system is built upon debt-based money.

correct

In this perverse arrangement, new dollars come into existence through the creation of government and private debt.

correct, although you have not established it is perverse.

Going the other way, if the private sector and the federal government ever began seriously paying down their debts, the supply of US dollars would shrink.

somewhat correct, but only in the absence of Fed action to prevent that shrinkage

Money is loaned into existence.

you're repeating yourself???

Put simply, under a fractional reserve banking system all money is created out of debt.

and?????

 

[ERGO]

Our fractional-reserve, fiat financial system is built upon debt-based money.

correct

In this perverse arrangement, new dollars come into existence through the creation of government and private debt.

correct, although you have not established it is perverse.



somewhat correct, but only in the absence of Fed action to prevent that shrinkage

Money is loaned into existence.

you're repeating yourself???

Put simply, under a fractional reserve banking system all money is created out of debt.

and?????

I was responding to your question "how does fractional reserve system make it impossible to pay off debt?

The fractional reserve system is responsible for creating debt, how do you pay off debt when the fractional reserve system creates it?

"somewhat correct, but only in the absence of Fed action to prevent that shrinkage"
The Federal Reserve would being creating more debt in order to prevent that shrinkage. The Federal Reserve creates money out of thin air and charges interest on it. When the FED creates money, IT'S MORE DEBT.
The money is loaned into existence at interest!

I don't think you know what you're talking about.

 

[EdwardBaiamonte]

I was responding to your question "how does fractional reserve system make it impossible to pay off debt?

I agree that you were

The fractional reserve system is responsible for creating debt, how do you pay off debt when the fractional reserve system creates it?

you might use tax dollars for example


"somewhat correct, but only in the absence of Fed action to prevent that shrinkage"

The Federal Reserve would being creating more debt in order to prevent that shrinkage.

if you use tax revenue to pay treasuries for example the debt is reduced

The Federal Reserve creates money out of thin air and charges interest on it.

true, and???????????

When the FED creates money, IT'S MORE DEBT.
The money is loaned into existence at interest!

true, and?????????????????

I don't think you know what talking about

but do you have a reason to say that??

 

[DSGE]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

how does fractional reserve system make it impossible to pay off debt?

Our fractional-reserve, fiat financial system is built upon debt-based money. In this perverse arrangement, new dollars come into existence through the creation of government and private debt. Going the other way, if the private sector and the federal government ever began seriously paying down their debts, the supply of US dollars would shrink. Money is loaned into existence. Put simply, under a fractional reserve banking system all money is created out of debt.

Not all money. Inside money is debt, outside money isn't. But your post makes no sense anyway. In aggregate, if there were no debt that would mean the stock of inside money would be zero, but there's still outside money. Currency isn't money as debt. So it doesn't matter anyway, even if there were no debt. But individual actors, like you, me or the government, can completely pay down our debt without impacting the money supply. Inside money grows endogenously. If Treasury debt stops getting created, other debt will expand automatically to fill the demand for money. Fractional Reserve has nothing to do with paying down debt.

 

[itfitzme]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

I get it. If your seeing what I see, the answer it that is can't.

Let me see if I can present it in a way that we can agree. Suppose the economy was running on M0 amount of money prior to the creation of the fractional reserve system. It had been created by the Treasury and State mints.

Now, the economy has gotten bigger, with banks in place, so the Federal Reserve system is built on top of it. They change the reserve requirments so that banks can loan out based on a fraction of their reserves.

Over time, the money supplyis M0, the original money in circulation, plus the money that has come out of the fractional reserve system, M_reserve

Now the money is M_borrowed + M0.

And, the NGDP is PQ which is equivalent to the money supply plus that velocity thing

(M_borrowed + M0) * V = PQ = NGDP.

As NGDP increases as a result of the increase in CPI, increase in po;ulation, and increase in standard of living, then the money supply must increase. The only way for it to happen is if M_borrowed increases.

(M_borrowed(time 2) + M0) * V = PQ(time 2) = NGDP(time 2).

A problem is that the private economy cannot sustain the debt payments on M_borrowed(time 2) forever. Not to mention that they are purchasing from Walmart which is stocked with goods manufactured in China. So the government then borrows the money in the bank account of the Chinese and spend it, putting it back into circulation.

It now becomes

(M_borrowed(time 3) + M0) * V = PQ(time 3) = NGDP(time 3).

Where M_borrowed(time 3) is bigger then at time 2 is bigger than zero.

How is that?

 

[hortysir]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

Yes.

You really believe that our government wants to shrink our debt????

Why the continuous borrowing and budget increases, then?

 

[chockfullofthat]

how does fractional reserve system make it impossible to pay off debt?

Our fractional-reserve, fiat financial system is built upon debt-based money. In this perverse arrangement, new dollars come into existence through the creation of government and private debt. Going the other way, if the private sector and the federal government ever began seriously paying down their debts, the supply of US dollars would shrink. Money is loaned into existence. Put simply, under a fractional reserve banking system all money is created out of debt.

Not all money. Inside money is debt, outside money isn't. But your post makes no sense anyway. In aggregate, if there were no debt that would mean the stock of inside money would be zero, but there's still outside money. Currency isn't money as debt. So it doesn't matter anyway, even if there were no debt. But individual actors, like you, me or the government, can completely pay down our debt without impacting the money supply. Inside money grows endogenously. If Treasury debt stops getting created, other debt will expand automatically to fill the demand for money. Fractional Reserve has nothing to do with paying down debt.

So if we start to pay down our debt with our outside money (currency) more outside money would be created by the Fed. The Fed creating additional outside money doesn't necessarily mean that it's being created as national debt. Am I following you?

 

[DSGE]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

I get it. If your seeing what I see, the answer it that is can't.

Let me see if I can present it in a way that we can agree. Suppose the economy was running on M0 amount of money prior to the creation of the fractional reserve system. It had been created by the Treasury and State mints.

Now, the economy has gotten bigger, with banks in place, so the Federal Reserve system is built on top of it. They change the reserve requirments so that banks can loan out based on a fraction of their reserves.

Over time, the money supplyis M0, the original money in circulation, plus the money that has come out of the fractional reserve system, M_reserve

Now the money is M_borrowed + M0.

And, the NGDP is PQ which is equivalent to the money supply plus that velocity thing

(M_borrowed + M0) * V = PQ = NGDP.

As NGDP increases as a result of the increase in CPI, increase in po;ulation, and increase in standard of living, then the money supply must increase. The only way for it to happen is if M_borrowed increases.

(M_borrowed(time 2) + M0) * V = PQ(time 2) = NGDP(time 2).

Yep. Even if we freeze the monetary base, inside money will grow endogenously as real output grows. I follow you up until here:

A problem is that the private economy cannot sustain the debt payments on M_borrowed(time 2) forever.

If they weren't expected to be sustainable, the lending wouldn't happen in the first place and the money supply wouldn't expand (unless you think some sort of fraud is going on).

It is sustainable, because the money supply endogenously expands as real output, and hence real income grows. The money supply only expands as our ability to service that debt expands.

 

[itfitzme]

This is probably a pretty basic question here. If it is impossible to payoff the debt because of our fractional reserve system, what does the government want to do with the debt? Do they simply want to trim it down from it's current levels right now?

I get it. If your seeing what I see, the answer it that is can't.

If they weren't expected to be sustainable, the lending wouldn't happen in the first place and the money supply wouldn't expand

It is sustainable, because the money supply endogenously expands as real output, and hence real income grows. The money supply only expands as our ability to service that debt expands.

(unless you think some sort of fraud is going on).

Of course not, that's a paranoid delusional perception. Leave that for others. It is just a world full of people doing their job according to the rules that someone else set up for them to follow.


One person takes out $100. At some point he will pay back that $100, but not before two others have borrowed another $100 each. As long as there is a borrowing , repayment, expanding economy with expanding borrowing, it's not necessarily the same as a household borrowing from Peter to pay Paul.

because the money supply endogenously expands as real output, and hence real income grows. The money supply only expands as our ability to service that debt expands

is well stated. That's the statement I've been waiting for. I knew if the question was present right, you would have the words.

It sure would be nice to see that expressed mathematically because I am left with this impression of it being rather precariously balance.

It is sustainable

And there is the second issue that I have. When a balance sheet recession occurs, the effect is magnified. Not only does this process of endogenous expansion stop, but it contracts just as well.

Then there is the third issue that the cost of that debt, especially when it is revolving credit, becoming excessive.

Sure, we expect, in theory, that the credit markets are balanced by the supply and demand for money. But you know, in practice, there are forces that don't necessitate that it be balance.

As prices rise, credit is taken out to meet the demands of rising prices. The purchasing on credit is the signal to the supply that prices can be raised. Just as an increase in the money supply will increase output and will increase prices, so will the increase in credit increase prices and increase output.

Isn't this what happened in the housing market, the increase in money available thru credit helped drive up prices which returned equity? The equity then became a source of credit to bid up the price of housing. At least until something hit a limit.

What was the shock that hit the economy? Yes, we get a shock, like 9/11, and the system recedes a bit before recovering. But what about this last time around? As far as I know, there was no shock.

I have some familiarity with feedback systems. They are precariously balance and susceptible to small perturbations being amplified.

That is the best I can do without having some mathematical model to work with. And I'm not Newton.

 

[DSGE]

It sure would be nice to see that expressed mathematically because I am left with this impression of it being rather precariously balance.

Yeah, I'd like that too. The next paper on my list to read is King & Plosser (1984) which I suspect will have that maths. If not, I've heard that George Selgin's Theory of Free Banking does a lot of stuff on endogenous money growth. I'll have to get around to that soon.

And there is the second issue that I have. When a balance sheet recession occurs, the effect is magnified. Not only does this process of endogenous expansion stop, but it contracts just as well.

I don't think the process stops. I think it's that the demand for money falls, and so the amount of inside money the financial system is willing to supply also falls.

Then there is the third issue that the cost of that debt, especially when it is revolving credit, becoming excessive.

Well it depends. My (unrigorous) proposition is that inside money (debt) only expands as fast as real income. Intuitively that makes sense because, in a moderately well functioning market, people won't lend to you if they don't expect you can pay them back. There is one big problem though: since debts are contracted in nominal terms, a negative shock to nominal income increases the real burden of that debt. But the solution to that seems pretty obvious: nominal income targeting!

As prices rise, credit is taken out to meet the demands of rising prices. The purchasing on credit is the signal to the supply that prices can be raised.

Ahh, be careful here. Aside from the question of how people get access to more credit if their real income hasn't increased, the first thing to point out would be that rising prices are a symptom of increased credit/money, and don't necessarily cause credit to rise. Unless you think there's this feedback loop where higher prices => more credit => higher prices, in which case why haven't we observed the price level exploding at any point in time? It would seem more consistent with observation if higher prices => less credit => lower prices => more credit, which eventually settles into equilibrium.

And second, aggregate demand doesn't increase supply at all in the long run. Aggregate output is determined on the supply side, resulting in a vertical AS curve. At the micro level, a change in the relative demand for a good, say from Nintendo 64s to Playstations, can cause resources to be diverted and the supplies of those goods to change. But not in aggregate.

Isn't this what happened in the housing market, the increase in money available thru credit helped drive up prices which returned equity? The equity then became a source of credit to bid up the price of housing. At least until something hit a limit.

My feeling is that that wasn't the mechanism, but I can't put it into words just yet...

Give me some time, I'll get back to you on that.

What was the shock that hit the economy? Yes, we get a shock, like 9/11, and the system recedes a bit before recovering. But what about this last time around? As far as I know, there was no shock.

There was a shock to the demand for money. Uncertainty surrounding the financial crisis, whatever happens to make people to suddenly want to start holding more liquidity. This shock wasn't offset with sufficiently loose monetary policy; nominal income/spending declined; recession ensued; the Fed still haven't attempted to restore nominal spending. They're sticking to a 2% inflation target going forward.

That is the best I can do without having some mathematical model to work with. And I'm not Newton.

Yeah, fair enough.

 

[editec]

One person takes out $100. At some point he will pay back that $100, but not before two others have borrowed another $100 each.

Wait...what about the INTEREST on the debt?

$100 was created when the debt was assumed, but the outstanding debt is for an amount GREATER than the $100 created.

Where does the additional money to pay the interest on that originaal $100 come from?

More debt, right? ALSO at interest, right?

I think THAT is his point.

 

[DSGE]

One person takes out $100. At some point he will pay back that $100, but not before two others have borrowed another $100 each.

Wait...what about the INTEREST on the debt?

$100 was created when the debt was assumed, but the outstanding debt is for an amount GREATER than the $100 created.

Where does the additional money to pay the interest on that originaal $100 come from?

More debt, right? ALSO at interest, right?

I think THAT is his point.

Except it's not true. There's already a stock of money. You get paid income out of the existing stock of money and use that to pay the interest. Simple example where we start off with no inside money, only $100 in outside money.

$100 in currency is held by a firm, you have no money. You work for the firm. The firm puts the currency in the bank. The bank lends you $20. You go buy stuff. The firm withdraws $30 currency from its account. You get paid a wage of $30 working for the firm. You give $20 in principal back to the back, along with $5 interest. At the end of the day, the firm has $70 currency. You have $5 currency. All debt has been paid off, including interest.