National Debt Thread

[gonegolfin]

So true, we have no built-in safety guards such as a gold standard as in the past. And although as you say there are other ways that the government can modify the system, do you really think our "monetary system" will be enough to head off the gathering storm?

Absolutely not. I think it will prove to be the primary problem. When I stated "there are many more ways that the government controls the money supply", I meant it as a negative in that it is more stealth than the commonly known mechanisms.

Some think we are looking at upcoming worldwide recession. This is not just because of our government debt but it is endemic to the overall problem.

I think that we will first have significant currency problems in the United States. This will precipitate a flight to other fiat currencies. But a weakened dollar is obviously going to impact the world economy. I don't think it will be long until the other fiat currencies begin to have problems as well. So, yes, I think you can lump me in with those that think we will have a worldwide recession in the next several years. Fiat currencies do not work over the long term. There comes a point when you can no longer hide the problem. Fiat currencies have failed over and over again throughout history. They will fail again.

 

[ScreamingEagle]

Absolutely not. I think it will prove to be the primary problem. When I stated "there are many more ways that the government controls the money supply", I meant it as a negative in that it is more stealth than the commonly known mechanisms.

OK, I see where you are coming from.

I think that we will first have significant currency problems in the United States. This will precipitate a flight to other fiat currencies. But a weakened dollar is obviously going to impact the world economy. I don't think it will be long until the other fiat currencies begin to have problems as well. So, yes, I think you can lump me in with those that think we will have a worldwide recession in the next several years. Fiat currencies do not work over the long term. There comes a point when you can no longer hide the problem. Fiat currencies have failed over and over again throughout history. They will fail again.

Just about all of our trade partners are going to have problems. Which currencies do you see strengthening? The Euro?

 

[Toro]

No, you are incorrect. The way this country's money and banking system is set up, the money supply is all about and only about debt (public and private). Let me put this another way ... If all of the debts of this country (public and private) were paid, there would be no money supply! Every single dollar in existence (checkbook or currency form) is debt owed by someone to someone. Very unlike a money supply that is fully (100%) backed by a tangible commodity such as gold or silver.

I am fully aware of how the government and banking cartel fraudulently controls the money supply. And the U.S. backing of the money supply (tangible assets such as gold) is at a historic low of less than 1% of the total money supply. This means that there is practically nothing backing our money supply or the value of the dollar except the full faith and credit of the US Government (which means they will inflate the money supply whenever they need to meet debt obligations). That is, our monetary system is purely fiat, through and through.

BTW, there are many more ways that the government controls the money supply than by increasing/decreasing the rate of interest paid at the Fed's discount window, by altering the commercial bank reserve requirements (which are not really 10%), or by adjusting the overnight lending rate. These are just the most obvious to the average citizen.

Brian

No, I am correct. You misunderstood what I am arguing

What many people fail to realize is that there would be no monetary policy without debt. This is because there would be no money supply.

This is simply not true. There would be a money supply without debt. It would look different. That was the argument. (And I am familiar with monetary policy.)

I'm not saying governments do not devalue fiat currency over time, because they do. And irresponsible, ignorant governments can, and have, destroyed economies without proper stewardship of the money supply.

Money is whatever people deem to be of exchangeable value and a store of value. There is nothing special or magical about gold for example. Its that people have historically been willing to use it as a medium of exchange and store of value.

 

[gonegolfin]

No, I am correct. You misunderstood what I am arguing

This is simply not true. There would be a money supply without debt. It would look different. That was the argument. (And I am familiar with monetary policy.)

In a previous post, you stated "You don't need debt for the money supply. You need reserves deposited at various federal reserve banks around the country in exchange for currency backed by the US government." Now based on the context of your post and this thread, I assumed that you are talking about the U.S. Money Supply. Not a theoretical money supply.

It seems that we are missing each other, so I will try another statement(s). Our (U.S.) money supply is backed by nothing but debt. Every cent of our money supply came into being for the purpose of being loaned to someone.

Do you agree with the above?

Now, with that, those dollars disappear when they are paid back. If everyone paid back all that was borrowed, there would not be any money (U.S. fiat dollars) left in existence.

Still in agreement?

If not, you should check out Marriner Eccles' (Governor of the Federal Reserve System) testimony before the House Committee on Banking and Currency (1941). When asked to clarify how there could be nothing behind our money except our government's credit, he put it quite succinctly when he testified the following ... "That is what our money system is. If there were no debts in our money system, there would not be any money".

Brian

 

[gonegolfin]

Just about all of our trade partners are going to have problems.

Certainly.

Which currencies do you see strengthening? The Euro?

Assuming that there is a crisis with the dollar, I think that initially you will see the Euro strengthen because that is what most will dump their dollars for. Undoubtedly you have seen some news where this has already begun to happen on a small scale (hopefully small). Some will seek gold or other precious metals as a safe haven (note the significant rise in gold over the past couple of years). Even others might opt for oil. But shortly thereafter, the Euro will begin to have serious problems as well. All fiat currencies will. Which is why fiat currencies will not be a good investment.

I think the Euro will have trouble shortly (6 Months -> 1 Year) after a dollar crisis because the European economy is so dependent on America to keep its economies out of recession. The shackles of Socialism in Europe has made it extremely difficult to eek out positive growth in their respective GDPs. Europe is overextended with its ridiculous entitlement programs. Debt levels are obscene. If America stops purchasing due to significant weakness in the dollar, Europe will instantly be in recession (a nasty one at that). This will cause a cascading effect of weakness in the world's fiat currencies. I would not invest in any of the world's fiat currencies. There is too much risk of holding the bag at the end of all of this.

Brian

 

[Toro]

In a previous post, you stated "You don't need debt for the money supply. You need reserves deposited at various federal reserve banks around the country in exchange for currency backed by the US government." Now based on the context of your post and this thread, I assumed that you are talking about the U.S. Money Supply. Not a theoretical money supply.

You had said you cannot have money supply without debt (assuming there was nothing backing the currency). I took that to mean under any circumstance. You can have a money supply without debt. Or gold. But you are correct if you say that the supply of money is linked to the level of government debt in the United States.

It seems that we are missing each other, so I will try another statement(s). Our (U.S.) money supply is backed by nothing but debt. Every cent of our money supply came into being for the purpose of being loaned to someone.

Do you agree with the above?

Now, with that, those dollars disappear when they are paid back. If everyone paid back all that was borrowed, there would not be any money (U.S. fiat dollars) left in existence.

Still in agreement?

If not, you should check out Marriner Eccles' (Governor of the Federal Reserve System) testimony before the House Committee on Banking and Currency (1941). When asked to clarify how there could be nothing behind our money except our government's credit, he put it quite succinctly when he testified the following ... "That is what our money system is. If there were no debts in our money system, there would not be any money".

Brian

I do not fully agree with that. I would say there is a lot of truth though, but its not entirely correct. (I would also like to see the entire passage by Eccles to see the context of the statement.)

Without getting into a long discussion on this, I'll make three points.

First, the government can print money, flat out. Ben Bernanke alluded to this phenomenon when he said the Fed could drop dollars from helicopters if need be.

Second, lets look at a real world example. The government of Canada has been paying down debt every year for the past decade. However, the supply of money has increased. This cannot be if money is only backed by goverment debt. Government debt is backed by nothing except the full faith of the government. But government isn't the only mechanism that creates money. Which gets to my final point.

Money is created through the banking system through the expansion of debt. That's a subtle but important point because it doesn't mean money through debt issuance via the banking system is created out of nothing (though it can be). This is important: Ceteris paribus, debt created through the banking system must be backed by assets.

Now understand I am talking about the mechanics of the money supply. I am not saying that money is not created by fiat. What I am saying is that its much more complex than that. Money is a very complicated thing. You do not need gold or government debt to have actively circulated money. In the United States, well into the 19th century, banknotes issued by various banks circulated throughout the nation before, and even during the issuance of the greenback. Those banknotes were essentially calls on the capital base of the issuing bank.

 

[gonegolfin]

You had said you cannot have money supply without debt (assuming there was nothing backing the currency). I took that to mean under any circumstance. You can have a money supply without debt. Or gold. But you are correct if you say that the supply of money is linked to the level of government debt in the United States.

We were talking about the U.S. money supply, not just a theoretical money supply. It is not that "the supply of money is linked to the level of government debt in the United States". The supply of money in the U.S. is debt (not just government, but both government and public).

I do not fully agree with that. I would say there is a lot of truth though, but its not entirely correct. (I would also like to see the entire passage by Eccles to see the context of the statement.)

Specifically what do you not agree with?

You can find part of this transcript at the following link ...
http://www.mega.nu:8080/ampp/corporate.html

I have included some of the text below ...

The answer is that in 1913 the Congress gave the Federal Reserve the legal "right" to print our money and that right is "as good as gold." Therefore, if we want to use the Fed's money, we have to borrow it and give the Fed IOU's, for the amount obtained. And, of course, each IOU (government bond) is something on which interest must be paid.

This whole arrangement is so totally irrational that the chairman of the Banking and Currency committee, Congressman Wright Patman, asked Marriner Eccles, Chairman of the Federal Reserve Board, the following:

"Mr. Eccles, how did you get the money to buy these two billion dollars of government bonds?
Mr. Eccles: "We created it."
Mr. Patman: "Out of what?"
Mr. Eccles: "Out of the right to create credit money.

Although it is not stated in this article (but several books have the below text as well) ... the conversation proceeds as follows ...

Mr. Patman: "And there is nothing behind it, is there, except our government's credit?"
Mr. Eccles: "That is what our money system is. If there were no debts in our money system, there wouldn't be any money."

Robert Hemphill (former Credit Manager of the Atlanta Federal Reserve Bank and British banker) has been quoted as saying the following ...
"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent upon the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous, if not, we starve. We are absolutely without a permanent monetary system."

Part of this quote can be found at the below link as well as many other places on the web and several books ...
http://www3.sympatico.ca/truegrowth/kutyn.htm

Without getting into a long discussion on this, I'll make three points.

First, the government can print money, flat out. Ben Bernanke alluded to this phenomenon when he said the Fed could drop dollars from helicopters if need be.

No disagreement here.

Second, lets look at a real world example. The government of Canada has been paying down debt every year for the past decade. However, the supply of money has increased. This cannot be if money is only backed by goverment debt. Government debt is backed by nothing except the full faith of the government. But government isn't the only mechanism that creates money.

Agreed, the banks create money as well. But this is more debt.

I never stated that "money is only backed by government debt". I said that it is backed by debt (government and public). And to this point, yes the money supply can increase even if the government is getting out of debt. This happened on the eve of the Depression. Robert Patterson discusses this in his book "The Great Boom and Panic". As the many publicly held bonds (mostly from the war) matured, the Treasury rolled them over and the Fed picked them up. If the banks had not purchased the bonds, the money supply would have decreased and the Fed did not want that. Whereas, the original bonds purchased by the public did not increase the money supply since this money already existed. Because of all of this, there were fewer total bonds in 1928 than during the war, but the System held more in 1928 than previously.

You do not need gold or government debt to have actively circulated money.

But in our system *today*, we have circulated money *only* because we have debt (again, government and public). That is my point. Therefore, your statement above is false with respect to the current system implemented in the United States.

Brian

 

[Toro]

The answer is that in 1913 the Congress gave the Federal Reserve the legal "right" to print our money and that right is "as good as gold." Therefore, if we want to use the Fed's money, we have to borrow it and give the Fed IOU's, for the amount obtained. And, of course, each IOU (government bond) is something on which interest must be paid.

Okay, I understand what you are saying. I thought what you were arguing was solely the actual issuance of debt (which does effect the money supply), as opposed to a claim on the creditworthiness of the US government, or the IOUs you mention. That's why I was making a distinction between fiat money (the IOUs) and government debt. Then I would agree with you on that point. And if the US government paid off all its debt, it could still operate a functional monetary system. (Also, I interpreted your statement as a broad-based theoretical pronouncement as opposed to the practical application of monetary policy in the economy today.)

As for what I think is your other criticism, either implicit or explicit, that there is a problem with money creation through the fractional banking system, I'm not sure if I agree with that. I do understand the problems with the system - its instability and, in the presence of government manipulation, its proclivity towards inflation - but I'm not convinced that the alternatives are better. Perhaps they are, I'm just not convinced of it.

You had lamented earlier that only 1% of the money supply is backed by real assets. Money is whatever people believe is money. Greenbacks are used in countries with hyperinflation in the black market. Cigarettes are used in jail. (So I've read. Honest!) Friedman gives the example of the tropical island where large rocks at the bottom of the ocean, which no one can see or touch, are used as money. Thus, real assets as a monetary base only works if people value those assets. But that's no different than if people value greenbacks. Also, the expansion of the supply of real assets often occurs with no correlation to the economy. For example, the production of gold from the late 70s to the mid- to late-90s was over 2x faster than the expansion of gold production from WWII to the late 70s. (Having said that, I now and have owned gold stocks for several years.)

 

[Toro]

Assuming that there is a crisis with the dollar, I think that initially you will see the Euro strengthen because that is what most will dump their dollars for. Undoubtedly you have seen some news where this has already begun to happen on a small scale (hopefully small). Some will seek gold or other precious metals as a safe haven (note the significant rise in gold over the past couple of years). Even others might opt for oil. But shortly thereafter, the Euro will begin to have serious problems as well. All fiat currencies will. Which is why fiat currencies will not be a good investment.

I think the Euro will have trouble shortly (6 Months -> 1 Year) after a dollar crisis because the European economy is so dependent on America to keep its economies out of recession. The shackles of Socialism in Europe has made it extremely difficult to eek out positive growth in their respective GDPs. Europe is overextended with its ridiculous entitlement programs. Debt levels are obscene. If America stops purchasing due to significant weakness in the dollar, Europe will instantly be in recession (a nasty one at that). This will cause a cascading effect of weakness in the world's fiat currencies. I would not invest in any of the world's fiat currencies. There is too much risk of holding the bag at the end of all of this.

Brian

I'm not convinced that there will be a "dollar crisis" - though there may be - but your analysis you've given is already occurring. The run in the euro from $0.88 to $1.30 is this initial strengthening of the euro you mention. But now its fallen back.

Its always been my contention that if America was going to flood the world with liquidity and thus debase the dollar, Europe and Japan would have no option but to follow since their economies are so weak. This has happened, and now you have Deustchebunds yielding a point below T-Bonds. JGBs are even lower (though rising). Even Greek bonds, which once traded over 1,000 basis points above German bonds, are trading below US government debt - which is amazing considering the historical fiscal ineptness of the Greek government. According to Morgan Stanley economist Andy Xie, MZM as a percentage of the US economy is 53%, down from 56% at the beginning of the year. In the EMU, M1 relative to the economy was 37% at the beginning of the year and is now 42%. You can see this in the gold market. Until about a year ago, gold was trading off the euro/dollar relationship. That relationship has been decoupling over the past year or so.

 

[Mariner]

yet mentioned is who holds the national debt. In the "old days," most of the debt was held by Americans themselves, via savings, and by friendly other nations, via investment in us.

The trillion-plus dollar increase in the national debt under GWBush is held primarily by countries who are not necessarily our friends--China, which has major human rights, piracy, and environmental issues, and Saudi Arabia, a sick oil empire where Al Qaeda originated.

Holding our debt is power over us. If a major creditor asks for its money back, our economy would die instantly. Therefore, we couldn't go after Saudi Arabia hard following 9/11 (remember how Bush let all the nice bin Ladens go home rather than questioning them? Instead a attacking Iraq, we should have been forcing Saudi Arabia to root out the Saudi fundamentalism that was the actual cause of 9/11.) And we're limited in our influence over China.

Those who say "debt isn't a bad thing" ignore its corrosive effect on our foreign policy. Basically, by letting unfriendly foriegn countries own us, through fear of taxing us equal to his spending, GWBush has given away our ability to act freely in the world. And it places us in grave peril if the dollar falls too far. China and Saudi Arabia have been happy to play along for the moment, for their own twisted reasons, but other investors will start to pull their money out if they see their U.S. investments losing. Why can't we just pay our way. A modest increase in taxes, as Bush the elder did, could produce an encore of the Clinton years. We're living on an international credit card, to the tune of a billion dollars a day.

Mariner.