"Money as Debt" - Toro, I'm hoping you can watch this and comment

[Paulie]

Toro, I'll value your opinion the highest, but I'd like to hear anyone's take on this. It basically explains how money lending and creation started.

It's a little long, almost 50 minutes. I'm hoping you can find that time to watch this fully, and comment on it.

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[Toro]

Paul

I'll get to it, but it won't be for a few days since I am tied up with Christmas stuff.

Cheers!

 

[Paulie]

Paul

I'll get to it, but it won't be for a few days since I am tied up with Christmas stuff.

Cheers!

Hey, it's cool brother. I hear ya. I'm about to leave for Wisconsin for all of next week, so after I log off tonight, I probably won't even make it back onlline until next monday. No good internet connection where I'll be. Thanks for the look though. Merry X-mas. (are we still allowed to say that?)

 

[ronpaul2008]

Great summary of the current situation we are in. One thing we can do to fight this is to make sure we have no debt. As the movie says if there was no debt there would be no money. Because their money is funny money not based on value but the promise of another person to indebt themselves. This housing crisis, caused by Allen Greenspan and the Federal Reserve, took interest rates so low that caused a bubble. People who got in the bubble early may have done alright but people who got in later sometimes pledged not one but the salaries of two workers for 30 years. Greenspan made these people slaves to the bankers. If not for fractional reserve banking and other methods of creating funny money, houses would be less then a tenth of the current cost. Because one person borrows for the house, another bank ends up being able to make 9 more loans for houses, and on and on until houses are so high that people frantically try to buy a home as they see homes are becoming unaffordable. And so the price of housing, gas, education, a cup of coffee and many of the other things we spend nearly all our money on has more then tripled in the last decade but probably only the top 20% of people have had their salaries do the same during this time.

If every person and every government is in debt to the bankers then we are all slaves. I wonder what the ratio people are in debt. Probably at least 90% of adults, 100% of governments. It wouldn't suprise me if it was over 99%. They get most people right at 18 handing out credit cards and credit lines for school related expenditures on campus. Now its no interest for 3 years to buy cars, boats, plasma tvs you name it. Americans grow up into this culture of debt. We are raised in schools funded by local governments indebting their citizens in the form of bonds. We see the boats and cars on mtv or from our aquiantences who indebted themselves to get something they normally couldn't afford. And like lemmings we slide that card and indebt ourselves to the bankers. If more people saw it as a system of slavery they would likely think twice. Our school system, itself a slave to the bankers and their money, will never teach the youth about the travesty we are in. Mainstream media, not a chance. They have done the opposite to condition us to take risks by borrowing money. Our ancestors 100 years ago were much more conservative. That people have done such stupid things to the point they are living month to month or can't make their payments even though they are hardworking and successful individuals is the result of a sophisticated brainwashing system inflicted on us to make us dependant rather then independant. Now that both parents have to work to make the house payment, the kids are left to be raised more by the government and the media which are both in debt to their masters.

 

[Toro]

70&#37; of American households own their own homes. 67% owned them five years ago before the subprime debacle. During that time, the price of a home rose by 55%.

The current net worth of all American households is $58.6 trillion. At the end of 2002, it was $38.8 trillion. "Net worth" is assets minus all debts. If you include the federal government, total financial liabilities are $9 trillion. Net financial liabilities of the government are about $6 trillion. Thus, the wealth of the country is about $53 trillion.

So, this idea that we are all "slaves" because of debt is utterly silly.

http://www.federalreserve.gov/Releases/Z1/current/z1r-5.pdf

 

[ronpaul2008]

If you watch the video it is claiming that money today is created from anothers debt and multiplying that initial value by the fractional reserve rate. If this is true then much of these 53trillion in 'assets' is really not assets but IOU's and bankers creating money out of thin air by lending it around in a circular process. In the movie example 11,000 is turned into 100,000 and then 900,000 in a couple legal banking transactions. So at the end someone gets a million dollar loan and buys an asset. Did the origonal wealth just magically increase by 81 times? It seems to me what happened is they devalued ie inflated the currency.

 

[Toro]

I think I've seen parts of this video before then, but I'll watch it in the days ahead since Paul requested I do so. I am well aware of the problems of fiat currency. However, "money" is whatever society chooses is money. It is an intangible, determined by what people believe. Gold is nothing more than that. If gold wasn't shiny and pretty, then people a thousand or two years ago people would never have chosen it as a medium of exchange (amongst other reasons). There is nothing magical about gold other than people believe its magical. If you were take people's belief in gold away, and value it merely on its practical use, it would be worth maybe $50 an ounce.

High-powered money is the basis for the monetary system, and a confidence and trust that the financial system will hold. It is that confidence and trust which allows for the creation of fractional banking, which allows banks and other financial institutions to extend credit beyond their monetary base. It is an unstable system, but it has also corresponded to the greatest increase in living standards in the history of humanity, and that is no accident.

 

[indago]

Toro wrote:

It is an unstable system, but it has also corresponded to the greatest increase in living standards in the history of humanity, and that is no accident.

The markets giveth, and the markets taketh away...

 

[Paulie]

Toro, thanks for the insight. I know it's tough to sit and watch a movie at the computer for that long, which is why I normally wouldn't request such a thing, but this subject is important to me and you're the one here that I trust the most to be fair and knowledgable in assessing an economic situation.

I just like this movie because it simplifies the whole scenario into layman's terms, so that anyone who doesn't have knowledge of economics and the terminology that accompanies it, can still understand the message.

No matter what, I'm always going to have a problem with the Federal Reserve, and our current monetary policy. I don't like the idea that bankers independent of our own government, some not even from the US, control and dictate our money and economy. It undermines the constitution, it undermines sovereignty, and it keeps us from empowering ourselves.

The way you described gold, and it's perceived worth, was spot on. My take though, is that at least gold has always held a constant steady value. There's only so much of it, and because of that, if paper money backed by it was used, there could only be so much paper money printed. I don't like that new money can be printed out of nowhere, with nothing guaranteeing it's value except 'trust'. What happens when that trust is finally lost? WE LOSE.

The fiat system might not be such a bad thing if we weren't trying to maintain an international empire that has us so much in debt, that some nations actually ARE starting to lose their trust.

We HAVE to stop spending so much money overseas on military escapades. I see us looking more and more like the Roman Empire everyday. We hoarded all the gold, we created a fiat monetary system, and we wage wars by borrowing and spending fake money. It was economic downfall that killed the Roman Empire, and it looks as though the same could happen to us.

 

[Mr.Conley]

The way you described gold, and it's perceived worth, was spot on. My take though, is that at least gold has always held a constant steady value. There's only so much of it, and because of that, if paper money backed by it was used, there could only be so much paper money printed. I don't like that new money can be printed out of nowhere, with nothing guaranteeing it's value except 'trust'. What happens when that trust is finally lost? WE LOSE.

The problem with your argument is that with a gold standard, gold's value isn't going to "h[o]ld a constant steady value." Rather, because as you said, "there's only so much of it," gold's value will dramatically increase as the economy grows. This is bad, and here's how:

As the economy gets larger and larger we need more and more money to grease the engine so to speak. In a gold-backed economy there's only two ways to respond to the need for more cash: 1. find more gold (pretty hard if not impossible given the quantity we're talking about) or 2. increase the value of the gold we have. 1. is pretty much impossible, so 2. becomes our only option other than recession/depression. What this means is that as long as the economy continues growing, the value of gold is going to have to keep on increasing. If gold was worth (for example) $1000 in 2010, then deflationary pressure- or government fiat- will dramatically increase the value with each passing year. Within a few years, gold could easily triple, quadruple several times over. This deflation HAS to happen in a gold-backed, growing economy or else there wouldn't be enough cash.

The problem with this scenario is that the deflationary pressure on gold will severely discourage investment and spending. In a gold backed economy why lend money, even at interest, when I can increase the value of my holdings by simply not spending it? Under the current system, if you want to increase the value of your assets you HAVE to invest- just like banks currently do. If you invest wisely, then you can dramatically increase your holdings, but your investment has the added side effect of encouraging growth, creating jobs, spurring innovation, etc. etc. In a gold-backed system investors have no reason to invest, loan, or buy because their gold holding will, due to the inherent nature of the system, inexorably increase. If anything, a gold standard system discourages investment. The deflationary pressure on the currency would make repaying loans almost impossible, so why loan at all. Once people realize this simple truth then, rather than invest, speculators and anyone with a brain is going to sit on their gold and watch it's value spiral upward. That's great for the individual speculators, but the economy will hit the tanker because suddenly there's no currency anymore.

Ultimately you'll find yourself enslaved to a very small, influential group of people who stocked up on gold beforehand, then waited while deflation exponentiates the value of their holdings with absolutely no effort on their part, and to the detriment of every other member of the economic system.

 

[Toro]

Toro, thanks for the insight. I know it's tough to sit and watch a movie at the computer for that long, which is why I normally wouldn't request such a thing, but this subject is important to me and you're the one here that I trust the most to be fair and knowledgable in assessing an economic situation.

I just like this movie because it simplifies the whole scenario into layman's terms, so that anyone who doesn't have knowledge of economics and the terminology that accompanies it, can still understand the message.

No matter what, I'm always going to have a problem with the Federal Reserve, and our current monetary policy. I don't like the idea that bankers independent of our own government, some not even from the US, control and dictate our money and economy. It undermines the constitution, it undermines sovereignty, and it keeps us from empowering ourselves.

The way you described gold, and it's perceived worth, was spot on. My take though, is that at least gold has always held a constant steady value. There's only so much of it, and because of that, if paper money backed by it was used, there could only be so much paper money printed. I don't like that new money can be printed out of nowhere, with nothing guaranteeing it's value except 'trust'. What happens when that trust is finally lost? WE LOSE.

The fiat system might not be such a bad thing if we weren't trying to maintain an international empire that has us so much in debt, that some nations actually ARE starting to lose their trust.

We HAVE to stop spending so much money overseas on military escapades. I see us looking more and more like the Roman Empire everyday. We hoarded all the gold, we created a fiat monetary system, and we wage wars by borrowing and spending fake money. It was economic downfall that killed the Roman Empire, and it looks as though the same could happen to us.

I think having the Fed independent is a good thing. I think its not independent enough, frankly, and if you put it on a spectrum of the industrialized economies' central banks, it would be in the middle, perhaps leaning on the "less independent" side. For, if you think central bankers are too loose with the purse strings, politicians would be 1000x worse. They would crank the printing presses like drunken sailors, and they have in places like Zimbabwe today and Latin America and the Weimer Republic in the past, creating economy-destroying hyperinflation. It is my opinion that if central banks could operate in a vacuum outside the circus of the political arena, then the value of fiat money would hold more readily. They would still make technical mistakes, as the Fed is doing now IMO, but those are better than political mistakes.

I own gold personally, and will probably buy more in the near future. However, the problem with gold as a currency is that its supply is dependent upon the profits of mining companies, which I think is not a good foundation on which to base monetary policy. It does hold its value against fiat currencies though, and I wouldn't be surprised if it went above $1000 this year, and maybe higher in the future.

As for your comments about Iraq, there is absolutely no doubt that the war has debased the value of the currency. And America is poorer for it.

 

[Warner]

... It is an intangible, determined by what people believe. Gold is nothing more than that. If gold wasn't shiny and pretty, then people a thousand or two years ago people would never have chosen it as a medium of exchange (amongst other reasons). There is nothing magical about gold other than people believe its magical. If you were take people's belief in gold away, and value it merely on its practical use, it would be worth maybe $50 an ounce.

Actually Gold does have a "magical" property. It is the only metal which does not oxidize. Unlike copper or silver, when you store an ounce of (pure) gold today you know that 5 years from now, or 1000 years from now, when you go to retrieve it there will be an ounce of gold waiting for you. With copper you might find nothing but a pile of greenish powder! The fact that gold does not rust makes it uniquely well suited for currency. The fact that it is in rather limited supply also makes it well suited for currency.

BTW: I agree that the value of gold is arbitrary, just pointing out that it does have special properties compared with other medium of exchange.

 

[Warner]

Toro,

Watch the movie starting at 13 minutes. Here it shows how a Bank places $1111.12 on account with the Fed. The required reserve ratio is 9:1. The bank then "conjures into existence" $10,000 to loan to a customer (lets call him customer A) based solely upon his promise to repay. Customer A then buys a used car and the seller deposits the $10,000 in his/her bank. Since the banks are all tied together via the fed, lets assume there is only one bank for the rest of this discussion.

The bank now has the sellers $10,000 on account, and based upon the required reserve ratio of 9:1 it can now loan out $9,000 of that to another borrower, who we will call customer B. Customer B in turn uses this loan to go buy a boat and deposits the $9000, etc. etc.. until the bank has loaned out and is collecting interest on almost $100,000 it never had! $100,000 has been added to the money supply, not by the government but by the bank. More than 95&#37; of the money supply has been created in this way. But how can this work if on a typical long term loan half (or more) of the debt is interest, not principal? Since 95% of the money in the economy is in fact debt, there is not enough money to pay off the debt+principal owed! The answer is the time lag between borrowing and repaying allows more debt money to be created in time to make the payments. However this obviously can only go on so long, since the rate of growth of the debt and the interest owed (and the money supply as well) are all growing at a geometric rate, with the debt+interest growing faster than the actual money supply. Watch from about 24 mins on to see this part.

------------

I really hate how this board logs me out after only a few minutes. I frequently loose my post as a result as happened this time - and due to time constraints I do not have time to fully recompose it! The time-out needs to be increased to at least 30 mins!

 

[Toro]

Actually Gold does have a "magical" property. It is the only metal which does not oxidize. Unlike copper or silver, when you store an ounce of (pure) gold today you know that 5 years from now, or 1000 years from now, when you go to retrieve it there will be an ounce of gold waiting for you. With copper you might find nothing but a pile of greenish powder! The fact that gold does not rust makes it uniquely well suited for currency. The fact that it is in rather limited supply also makes it well suited for currency.

BTW: I agree that the value of gold is arbitrary, just pointing out that it does have special properties compared with other medium of exchange.

No, I understand that, and that was one reason why people gravitated towards gold as a medium of exchange. However, it was because of its aesthetics that people gravitated to it, and still do today. Three-quarters of all gold consumed is as jewelry.

I am more than aware of the attributes and deficiencies of gold. I started buying gold about six years ago, and have traded in and out of it since. I have been buying the past few weeks, including today.

 

[Toro]

Toro,

Watch the movie starting at 13 minutes. Here it shows how a Bank places $1111.12 on account with the Fed. The required reserve ratio is 9:1. The bank then "conjures into existence" $10,000 to loan to a customer (lets call him customer A) based solely upon his promise to repay. Customer A then buys a used car and the seller deposits the $10,000 in his/her bank. Since the banks are all tied together via the fed, lets assume there is only one bank for the rest of this discussion.

The bank now has the sellers $10,000 on account, and based upon the required reserve ratio of 9:1 it can now loan out $9,000 of that to another borrower, who we will call customer B. Customer B in turn uses this loan to go buy a boat and deposits the $9000, etc. etc.. until the bank has loaned out and is collecting interest on almost $100,000 it never had! $100,000 has been added to the money supply, not by the government but by the bank. More than 95% of the money supply has been created in this way. But how can this work if on a typical long term loan half (or more) of the debt is interest, not principal? Since 95% of the money in the economy is in fact debt, there is not enough money to pay off the debt+principal owed! The answer is the time lag between borrowing and repaying allows more debt money to be created in time to make the payments. However this obviously can only go on so long, since the rate of growth of the debt and the interest owed (and the money supply as well) are all growing at a geometric rate, with the debt+interest growing faster than the actual money supply. Watch from about 24 mins on to see this part.

I understand fractional banking, as well as its benefits and its weaknesses.

But how can this work if on a typical long term loan half (or more) of the debt is interest, not principal?

The way it can work is through the cash generated by the investment of the loan. Remember that you must make a double entry on the balance sheet of the economy when you take out a loan. When a company takes out a loan, it uses the proceeds to invest. The cash generated by the investment will exceed, in aggregate, the interest payments of the loan. It has to, otherwise there is no profit in the economy. Also, when you take out a student loan, you are paying for the human capital required to generate a higher level of income in the future. When you take out a home loan, you increase the economic activity in the residential construction industry. Imagine if there were no mortgages and you had to save all the money to buy the house. The nation would be materially poorer and most people would be living in small, cramped rental units owned by relatively few people.

The creation and democratization of credit has been an enormously important aspect of the development of the modern economy. Without it, we would be much poorer than we are today.

Having said that, I do agree with you that at some point, credit cannot be expanded indefinitely at a constant rate of equity. The fractional banking system is inherently unstable, and problems that arise can be magnified exponentially, as we see today with the problems in the structured finance market where all the subprime mortgages reside. (And this is a problem of structured finance more than subprime mortgages.)

 

[Warner]

Toro, have you watched this little movie yet? (Just curious)

While I've not really considered it in depth (too busy), it does raise some interesting points. In particular that the money supply is generated by banks which are gleaning huge profits for simply creating money. On the face of it does it seem reasonable to you that if I start a bank and put 1112 on deposit with the fed that I should then be allowed to loan out $100,000 based upon this deposit and collect something around $7000 a year in interest. And that, should the borrower then default I get the property? Even if I loan someone $10,000, they buy a car and then default and I repo the car and can only sell it for $5000, I still win!

This movie predicts that the money supply will grow an an exponential rate until collapse. Look at how our money supply has in fact grown at an exponential rate. Between about 1945 and 1971 the money supply doubled 3 times for an 8 fold increase. In 1971 Nixon took the US off the "gold standard", and between 1971 and about 2005 the money supply doubled 13 times, for an 8000 fold increase! Clearly the USA is not 8000 times more productive today than it was in 1971.

Just like gold, the value of other things is also largely about perception. Is the land in Malibu really worth 2000 times more per acre than the land in Tulsa? I'd argue that the land in Tulsa, valued (lets say) at 10,000 per acre is properly valued because this value is based mostly upon the productivity the land can generate in terms of food or oil. But the land in Malibu is arbitrary since it is not "productive" land. It's value is totally dependent upon how much people desire to live on that land and how much money they have to spend. So when a $2,000,000 loan is issued to buy 2000 acres for a cattle ranch in Tulsa, this represents an expansion of the economy. But when a $2,000,000 loan is issued to buy an acre in Malibu, this represents inflation, since there is no expansion of the economy.

(Hope this posts since I don't have time to recompose it!)

 

[Toro]

I've seen parts of it and I will watch it in its entirety.

The money that is created "out of nothing" is not created for free. There is a cost to the creation of the money. Remember, you have to account for both sides of the balance sheet. So when people put money on deposit, you must pay them for the use of their funds. Banks then lend it out at a higher rate. The spread is where they make their profits. But just because they leverage their capital at a rate of about 12:1 does not mean the cost of funds is free.

And the liabilities and assets much match. A bank cannot take in a $10,000 (not $1112) deposit and lend out $100,000 without a corresponding liability.

It should be noted that it is not deposits upon which are being levered up 10:1. Its capital. Deposits are a liability of the bank. Loans are an asset.

I don't know if the fiat system will collapse. Nobody does. It has in many countries, Zimbabwe today for example. It depends entirely on the stewardship of the bank, which is why it is so critically important that politicians never get their hands on the bank.

However, I completely agree about your assessment that there is too much money floating around in the world. That's one reason why I own so much gold.

 

[Paulie]

I don't know if the fiat system will collapse. Nobody does. It has in many countries, Zimbabwe today for example. It depends entirely on the stewardship of the bank, which is why it is so critically important that politicians never get their hands on the bank.

You could argue that they DO have their hands on the bank. Congress can spend however much it allows itself to. When you have bankers, who profit from the money-lending, lobbying the politicians to borrow and spend more money, you have politicians who indirectly already have their hands all over the bank. It's a mutual back scratch.

Still though, the constitution expressly states that congress is supposed to be coining money. Not private banks. Private central banking influence was one of the key factors in our fight for independence from England. When you have super wealthy bankers controlling our monetary system along with the politicians you have yourself an oligarchy. That's what we were fighting for our independence from. England hasn't changed since, and now here we are, doing what we fought against. It's history repeating itself because people forgot.

Whether or not it's a good system has nothing to do with whether or not it's even authorized in this country. That's my take on it, anyway.

I'm not necessarily arguing for a restored gold standard, but you have to question why the government rounded up all the gold, hoarded it, and then cancelled it as an exchange on our paper money.

 

[Warner]

Actually they spent it.

Look into it. There is supposed to be an accounting of the Gold in Fort Knox, I believe every 10 years. Yet no such accounting has been done since the early 70's.

Could this be because...there is no gold in Fort Knox!