Staggering World Debt Points toward Crisis

[MachineGhost]

This seems to happen a lot. If you could be a little less closed-minded, you might learn something hanging around here.

He's just old, stubborn and probably a liberal.

[Pointedstick]

This seems to happen a lot. If you could be a little less closed-minded, you might learn something hanging around here.

He's just old, stubborn and probably a liberal.

All three, in fact. Not that there's really anything intrinsically wrong with this, but I always find it amusing that some of the most closed-minded people I meet have a self-image that heavily emphasizes tolerance and open-mindedness.

[jafs]

Banks can't print dollar bills or mint coins, so at that level the money has to exist already.  As we move farther away from concrete forms of money, this may be less true, but as long as I can go to a bank and withdraw concrete dollar bills/coins, they have to come from somewhere.

Well, then the bank just asks of the Fed for the dollar bills or coins needed to satisfy the withdrawer (from which the Fed directs the Bureau of Engraving and Printing to print up or coin).  It's a way of making the "internal" credit money that banks create at POS tangible and "external".  Hence the current drive by the transnational elites to outlaw such external cash so that there is no loophole to escape negative interest rates.

If that's true, then the banks aren't creating money out of thin air, they're getting it from the Fed.

Maybe the Fed can create money from nothing, I don't know about that.

[barrett]

He's just old, stubborn and probably a liberal.

Wait, are you guys talking about me???

Seriously, I enjoy a lot of the back and forth with jafs. As one who is not directly involved in a lot of those conversations, I find that he sometimes takes the discussion in a different direction or forces folks to dig deeper.

[jafs]

I usually ignore these little personal taunts, but enough is enough.

You don't know me well enough to know anything about my "self image", and I find it tiring that when frustrated you often turn to condescending remarks.

I'm reminded of the lengthy debate about minimum wages, and how I was told to "read an econ 101" book.  At least that ended when someone posted a chart that undermined his claim and supported mine.

[jafs]

He's just old, stubborn and probably a liberal.

Wait, are you guys talking about me???

Seriously, I enjoy a lot of the back and forth with jafs. As one who is not directly involved in a lot of those conversations, I find that he sometimes takes the discussion in a different direction or forces folks to dig deeper.

Thanks for the support.

Forcing people to dig deeper would be something I'd be glad to be doing.

[MachineGhost]

All three, in fact. Not that there's really anything intrinsically wrong with this, but I always find it amusing that some of the most closed-minded people I meet have a self-image that heavily emphasizes tolerance and open-mindedness.

Well, that's probably because those "virtures" were in-group dogma and not deeply-held core values specifically choosen by deliberate and rational thought.  It's very easy to stand up forcefully and emotionally for something you think you "really believe in" (not without good reason as say, the "Black Lives Matter" movement), but it is likely just going through the motions of cognitive and behaviorial biases (which are unconscious by the unaware).

I'm really glad people have come to be more aware, skeptical and open-minded as a result of their participation in this here forum.  I've never really thought about it before, but I would say that is my zeal for posting.  Having lived (and believed) through what seems like endless amounts of B.S., its relatively easier for me to perceive thus and want to inform others about it.

I know not many people have visited The Tax History Museum because of the boring subject, but it's been illuminating in providing a much broader emotional content to our Western political history than just reducing the matter to a bunch of taxes.  Reality is never as simple or as black and white as political polarization oversimplyfies.  If there is one flaw the USA seems to exhibit, its the perverse Anglo-Saxon obsession with reducing everything and everyone to Homo Economicus as if that was the only entirety of the explaining variable.

I think I'm actually bucking the trend of becoming more conservative as I get older.  Figures.

[jafs]

Of course - that's why I said as our system becomes more abstract, ie. electronic stuff/banking instead of cash, it changes things.

So when we have our paycheck automatically deposited into the checking account, no actual money transfers, it's just some numbers on account balances, or something like that.

But ultimately, all of that is convertible to cash if we want to take it out, so that cash has to come from somewhere.

Also, a quick search about the Fed and this stuff seems to show that the Fed creates money and puts it into bank reserves.  But those reserves aren't lent out, by definition.  So that wouldn't explain where the money comes from, really.  If the bank just holds the reserves, then money given out must come from somewhere else.

It's possible that some time in the future, we might not have any concrete forms of money at all, and everything would be electronic.  Then there'd be no need for any cash.  I hope that doesn't happen in my lifetime, because I like cash - when you use cash, you know how much you have, how much you spend, and how much you have left.

[MachineGhost]

If that's true, then the banks aren't creating money out of thin air, they're getting it from the Fed.

Maybe the Fed can create money from nothing, I don't know about that.

Of course its true, but I think you're confusing "value" with "money".  "Money" is just a tokenized medium-of-exchange that never keeps its value because its eroded by inflation or debasement over time or vis a vis other assets.  Hence, we all exchange "money" for return-bearing (or protective in case of gold) assets.  Under the present system, only literal zero-duration Federal Reserve Notes and coins are "money" in the old way of thinking.

The Fed does create bank reserves out of thin air internally in bookeeping accounting just as banks create loans out of thin air at POS (technically its an exchange for the borrower's promissary note).  But, you're assuming there is a transmission mechanism from the Fed to the real economy in terms of the "value" created that was created out of thin air.  That just isn't the case.  Otherwise we would undoubtedly have had raging inflation or hyperinflation because there is no worse time to "print money" in face of declining or collapsing productivity.

[Xan]

I usually ignore these little personal taunts, but enough is enough.

You don't know me well enough to know anything about my "self image", and I find it tiring that when frustrated you often turn to condescending remarks.

I'm reminded of the lengthy debate about minimum wages, and how I was told to "read an econ 101" book.  At least that ended when someone posted a chart that undermined his claim and supported mine.

To be fair, there was some baffling ignorance on display there.

[MachineGhost]

Of course - that's why I said as our system becomes more abstract, ie. electronic stuff/banking instead of cash, it changes things.

So when we have our paycheck automatically deposited into the checking account, no actual money transfers, it's just some numbers on account balances, or something like that.

But ultimately, all of that is convertible to cash if we want to take it out, so that cash has to come from somewhere.

"Money" is also anything that others will accept as a transfer of value, and that does include credit card, checkbook balances, airline mileage points, etc. (as well as girls/women, cattle, tally sticks, shells, etc.)

All "money" is ultimately backed by an intrinsic value of some kind.  Whether that is the labor required to dig supernova waste out of the Earth or taxation on income.  It's a metaphysical concept whether or not it is tangible.

[MachineGhost]

Also, a quick search about the Fed and this stuff seems to show that the Fed creates money and puts it into bank reserves.  But those reserves aren't lent out, by definition.  So that wouldn't explain where the money comes from, really.  If the bank just holds the reserves, then money given out must come from somewhere else.

Money or value?  Don't conflate the two.  When a borrower goes to a bank they give a promissary note that becomes the liability of the bank and they corresponding credit your checking account with funds as an asset.  The balance is the money but the value is in your creditworthyness.  If you want that money to be transferrable value outside of the financial system, ask for currency/coins or exchange it for a real asset.

It's possible that some time in the future, we might not have any concrete forms of money at all, and everything would be electronic.  Then there'd be no need for any cash.  I hope that doesn't happen in my lifetime, because I like cash - when you use cash, you know how much you have, how much you spend, and how much you have left.

It's definitely about an issue of control ("the power to control is the power to tax; the power to tax is the power to destroy"), but the Millennials disagree with you.

[Pointedstick]

I think I see your problem, jafs. You're focusing on cash, and yes, cash is physical and has to come from somewhere. Banks don't have printing presses in the back room. That's true.

But cash makes up only a very small slice of the economy. The vast, overwhelming majority of transactions involve checks, credit or debit cards, wire transfers, ACH transfers, or some other form of purely electronic money.

You personally can go to the bank and withdraw some of the virtual money in your account and turn it into physical cash, but if everyone did that, the whole system would come crashing down because the amount of cash that the banks have on hand is only a small fraction of the total deposits people have made to them. The banks would close until the drama had been ended, probably with Fed trucks full of dollar bills being dispatched throughout the country. People can only withdraw cash as long as not too many people do it at once. This is what fractional reserve banking is, and it's why there's the FDIC, Federal Reserve, etc. These institutions exist to protect banks, the banking system, and depositors from the systemic danger of running out of money in the case of a run on physical cash, as well as other problems unique to fractional reserve banking.

The other piece of the puzzle that you're missing is that bank loans generally do not involve cash. If I get a mortgage for $200,000, the bank doesn't need to find two hundred thousand one dollar bills in its vault. It simply credits the account of whoever is selling the house by $200k and creates a corresponding liability in mine. No dollar bills need to be created or even involved at all; the money in the seller's account is simply brought into existence by virtue of receiving that credit. Accounting-wise, the money and the liability cancel out, but the money is created in the present, while my new liability stretches on into the future according to the terms of the mortgage. Even if the bank's vault were completely empty and they had no dollar bills or even no depositors yet, they would still have the power to credit the seller's account. Again, this is simply what fractional reserve banking is. Loans that create electronic/virtual money do not require deposits. If every person whose account was credited due to one of these loans being made went out and tried to withdraw the newly-created money as cash, then boom, you'd have a bank run, because no new dollar bills had been created to back the new electronic money from the loans.

This "change to become more abstract" happened generations ago. It was in full swing by the time of the great depression, for example. Money is already mostly "virtual" and has been for a long time. Conceptualizing the banking system as built around physical cash is a mistake.

[jafs]

I usually ignore these little personal taunts, but enough is enough.

You don't know me well enough to know anything about my "self image", and I find it tiring that when frustrated you often turn to condescending remarks.

I'm reminded of the lengthy debate about minimum wages, and how I was told to "read an econ 101" book.  At least that ended when someone posted a chart that undermined his claim and supported mine.

To be fair, there was some baffling ignorance on display there.

Not on my part, that's for sure.

I love it when somebody posts some data to support their claim, and it instead undermines it - they're doing my work for me!

[jafs]

If that's true, then the banks aren't creating money out of thin air, they're getting it from the Fed.

Maybe the Fed can create money from nothing, I don't know about that.

Of course its true, but I think you're confusing "value" with "money".  "Money" is just a tokenized medium-of-exchange that never keeps its value because its eroded by inflation or debasement over time or vis a vis other assets.  Hence, we all exchange "money" for return-bearing (or protective in case of gold) assets.  Under the present system, only literal zero-duration Federal Reserve Notes and coins are "money" in the old way of thinking.

The Fed does create bank reserves out of thin air internally in bookeeping accounting just as banks create loans out of thin air at POS (technically its an exchange for the borrower's promissary note).  But, you're assuming there is a transmission mechanism from the Fed to the real economy in terms of the "value" created that was created out of thin air.  That just isn't the case.  Otherwise we would undoubtedly have had raging inflation or hyperinflation because there is no worse time to "print money" in face of declining or collapsing productivity.

The most likely reason that the Fed activity hasn't created inflation is because banks don't lend out the reserves, and that's where the Fed-created money goes.

[jafs]

I think I see your problem, jafs. You're focusing on cash, and yes, cash is physical and has to come from somewhere. Banks don't have printing presses in the back room. That's true.

But cash makes up only a very small slice of the economy. The vast, overwhelming majority of transactions involve checks, credit or debit cards, wire transfers, ACH transfers, or some other form of purely electronic money.

You personally can go to the bank and withdraw some of the virtual money in your account and turn it into physical cash, but if everyone did that, the whole system would come crashing down because the amount of cash that the banks have on hand is only a small fraction of the total deposits people have made to them. The banks would close until the drama had been ended, probably with Fed trucks full of dollar bills being dispatched throughout the country. People can only withdraw cash as long as not too many people do it at once. This is what fractional reserve banking is, and it's why there's the FDIC, Federal Reserve, etc. These institutions exist to protect banks, the banking system, and depositors from the systemic danger of running out of money in the case of a run on physical cash, as well as other problems unique to fractional reserve banking.

The other piece of the puzzle that you're missing is that bank loans generally do not involve cash. If I get a mortgage for $200,000, the bank doesn't need to find two hundred thousand one dollar bills in its vault. It simply credits the account of whoever is selling the house by $200k and creates a corresponding liability in mine. No dollar bills need to be created or even involved at all; the money in the seller's account is simply brought into existence by virtue of receiving that credit. Accounting-wise, the money and the liability cancel out, but the money is created in the present, while my new liability stretches on into the future according to the terms of the mortgage. Even if the bank's vault were completely empty and they had no dollar bills or even no depositors yet, they would still have the power to credit the seller's account. Again, this is simply what fractional reserve banking is. Loans that create electronic/virtual money do not require deposits. If every person whose account was credited due to one of these loans being made went out and tried to withdraw the newly-created money as cash, then boom, you'd have a bank run, because no new dollar bills had been created to back the new electronic money from the loans.

This "change to become more abstract" happened generations ago. It was in full swing by the time of the great depression, for example. Money is already mostly "virtual" and has been for a long time. Conceptualizing the banking system as built around physical cash is a mistake.

I understand all of that.

But if you went to your bank and tried to withdraw some money, and were told that you couldn't because it's not a real thing, it's just numbers on a page, you'd be very upset.  If the home seller couldn't withdraw the money they got from the bank, they'd be upset.  If anybody can't convert the numbers in their bank account to cash if they want to, they'll be upset.

Thinking about cash is just a way to make the ideas concrete, which is useful.

The FDIC stuff is to preserve people's confidence in the system, and is also largely symbolic, as the FDIC doesn't have anywhere near enough to cover all of the deposits, even just up to $250K or whatever the limit is currently.

Not only do banks not have printing presses, they don't have the legal right to print or coin money.

[Pointedstick]

But if you went to your bank and tried to withdraw some money, and were told that you couldn't because it's not a real thing, it's just numbers on a page, you'd be very upset.  If the home seller couldn't withdraw the money they got from the bank, they'd be upset.  If anybody can't convert the numbers in their bank account to cash if they want to, they'll be upset.

Indeed, and the last time this very thing happened, it became known as "The Great Depression."

Thinking about cash is just a way to make the ideas concrete, which is useful.

Only if it doesn't mislead you. Loans that involve no cash are difficult to conceptualize in a model that thinks of money as cash. Again, when a loan is made, the money supply i.e. expanded by the balance of the loan, but the cash supply does not change. A coordinated attempt by loan money recipients to turn their payments into cash would squeeze the supply of physical cash and could provoke a crisis.

Not only do banks not have printing presses, they don't have the legal right to print or coin money.

Right, but as I have said, only a small fraction of monetary transactions involve physical cash. It isn't that significant.

[Xan]

I usually ignore these little personal taunts, but enough is enough.

You don't know me well enough to know anything about my "self image", and I find it tiring that when frustrated you often turn to condescending remarks.

I'm reminded of the lengthy debate about minimum wages, and how I was told to "read an econ 101" book.  At least that ended when someone posted a chart that undermined his claim and supported mine.

To be fair, there was some baffling ignorance on display there.

Not on my part, that's for sure.

I love it when somebody posts some data to support their claim, and it instead undermines it - they're doing my work for me!

I don't know what data you're talking about, but I do recall you going on and on about how people who are hired to do a job don't actually have to contribute anything, and that we (many of whom have actually hired employees) have a completely wrong understanding of what decisions go into hiring employees.

[MachineGhost]

The most likely reason that the Fed activity hasn't created inflation is because banks don't lend out the reserves, and that's where the Fed-created money goes.

Which is what I said?  There is no direct transmission mechanism from the Fed out to the real economy.  All that can be hoped for under the Law of Equilibrium is to drive yields down on all other financial assets to the same level of the Federal Funds Rate, since the bank reserves are "null value" in a competitive sense even if it doesn't circulate as "money".  Hence, yield chasing behavior.

[jafs]

To be fair, there was some baffling ignorance on display there.

Not on my part, that's for sure.

I love it when somebody posts some data to support their claim, and it instead undermines it - they're doing my work for me!

I don't know what data you're talking about, but I do recall you going on and on about how people who are hired to do a job don't actually have to contribute anything, and that we (many of whom have actually hired employees) have a completely wrong understanding of what decisions go into hiring employees.

That's a completely bizarre version of what I said, and has nothing to do with what I said or think on the subject.

From some of my earliest posts on here, it's been clear that you don't like me, which is fine, but I find your almost continual attempts to engage me in a fight strange.  If you keep doing it, I'll have to stop responding to your posts.

[Xan]

That's a completely bizarre version of what I said, and has nothing to do with what I said or think on the subject.

From some of my earliest posts on here, it's been clear that you don't like me, which is fine, but I find your almost continual attempts to engage me in a fight strange.  If you keep doing it, I'll have to stop responding to your posts.

I probably have been overly quarrelsome, sorry about that.

I did feel like I had to pipe up here after you complained about your mistreatment in the other thread, though.  You complain that it was suggested that you bone up on Econ 101.  What's frustrating is that (and I'm honestly not being snarky here!) you really DO need to read up on some very basic economics.  But you have no interest in doing so.  It makes it hard to have a conversation.

[MachineGhost]

I did feel like I had to pipe up here after you complained about your mistreatment in the other thread, though.  You complain that it was suggested that you bone up on Econ 101.  What's frustrating is that (and I'm honestly not being snarky here!) you really DO need to read up on some very basic economics.  But you have no interest in doing so.  It makes it hard to have a conversation.

I'll help jafs out!  Here's Economics in One Lesson by Henry Hazlitt, a classic from 1948 about economic and public policy fallacies.  The core ideas is the "invisible hand" as well as "unintended consequences": http://www.hacer.org/pdf/Hazlitt00.pdf

[mortalpawn]

The debt bomb is a big problem, but it pales in size to the derivatives market.  Global debt is about 200 trillion against a world GDP of around 60 trillion.  So yes it global debt is unsustainable and will never be paid back.  Ultimately it will be printed or defaulted away at some point.

However global debt is nothing compared to the global derivatives market which is estimated at between 600 and 700 trillion dollars (conservatively).  If the global debt bomb is a serious problem, derivatives are the financial nuclear weapons that could lead to global collapse.  The US derivatives share is owned by the 5 largest wall street banks (a paltry 250 trillion or so), and these banks are truly "to big to fail".

Here's a graphic illustrating the value of derivatives vs all the money in the world:
  http://www.zerohedge.com/news/2015-12-1 ... ualization

These derivatives are essentially inter-bank bets about interest rates, currency exchange rates, debt, mortgages, commodities, etc...backed by your money.  Wild swings in any of these markets could kick off a cascading derivatives failure that could literally wipe out many trillions in a single day.

Also due to a 2005 change in the US bankruptcy law, derivatives are paid off first, before other lien holders, in the event of a bank failure.  So if the derivative bomb ever explodes it means millions of account holders could be left with nothing.  While FDIC bank holders might get their insurance money on checking and saving accounts freshly printed from the Fed, it is not likely the private investment insurance would be solvent enough to cover investment account holders, and who knows what a dollar might be worth in the face of a global derivative failure.

So yes, I'm worried about the global debt bomb, but only because it could kick off the "big one" in derivatives.

[MachineGhost]

So yes, I'm worried about the global debt bomb, but only because it could kick off the "big one" in derivatives.

You mean another "big one" since the subprime crisis involved unregulated, OTC derivatives.  These boom-bust cycles seem to be a normal part of human behavior and aren't going away anytime soon.  After the subprime crisis, OTC derivatives were forced onto regulated exchanges by the Dodd-Frank reforms.

Derivatives were exempted from the automatic stay in bankruptcy because the intention was to reduce systemic risk after the LTCM fiasco.  That's more of a concern with unregulated, OTC derivatives which is traded at the wholesale level, not regulated retail derivatives backed by clearinghouses.  I don't know what the current percentage makeup of each is.

[Libertarian666]

The debt bomb is a big problem, but it pales in size to the derivatives market.  Global debt is about 200 trillion against a world GDP of around 60 trillion.  So yes it global debt is unsustainable and will never be paid back.  Ultimately it will be printed or defaulted away at some point.

However global debt is nothing compared to the global derivatives market which is estimated at between 600 and 700 trillion dollars (conservatively).  If the global debt bomb is a serious problem, derivatives are the financial nuclear weapons that could lead to global collapse.  The US derivatives share is owned by the 5 largest wall street banks (a paltry 250 trillion or so), and these banks are truly "to big to fail".

Here's a graphic illustrating the value of derivatives vs all the money in the world:
  http://www.zerohedge.com/news/2015-12-1 ... ualization

These derivatives are essentially inter-bank bets about interest rates, currency exchange rates, debt, mortgages, commodities, etc...backed by your money.  Wild swings in any of these markets could kick off a cascading derivatives failure that could literally wipe out many trillions in a single day.

Also due to a 2005 change in the US bankruptcy law, derivatives are paid off first, before other lien holders, in the event of a bank failure.  So if the derivative bomb ever explodes it means millions of account holders could be left with nothing.  While FDIC bank holders might get their insurance money on checking and saving accounts freshly printed from the Fed, it is not likely the private investment insurance would be solvent enough to cover investment account holders, and who knows what a dollar might be worth in the face of a global derivative failure.

So yes, I'm worried about the global debt bomb, but only because it could kick off the "big one" in derivatives.

And of course even having gold won't protect you against such a catastrophe because the Fed could print gold and make it worthless!