Article: Europe's pain is coming America's way

[Gumby]

Well said, moda. You're right. A lot of my own personal research into this was to figure out why HB thought so highly of Treasuries — particularly when everyone was raving about how terrible they were. What I discovered was that in a debt-based world, you absolutely need assets with virtually no credit-risk to keep your assets safe from credit events (gold included).

I think it's especially confusing for most people — economists included — since the monetary system changed so much after the 1970/71 Nixon Shock. So, if you were an expert in economics in 1969, your mind would have exploded if you tried to comprehend the ramifications of floating all of the exchange rates of the world and having no convertibility to gold. And even if you were born after 1970, your economics teacher (and your economics textbook) was still applying pre-1970 models to everything. So, it's unlikely that anyone would have been taught this stuff.

And it doesn't help that politicians were just used to arguing specific agendas that were based on those pre-1970 ideologies — and the media reporting on those arguments. Even those politicians who figured out the ramifications of a post-1970 world found it easier to use the pre-1970 stump speeches to rile up the population. So, it's no wonder everyone is so confused. This is complex material! If it takes thousands of words to explain the general concepts of a debt-based fiat monetary system, then there's very little hope for most people to even begin to take the time to understand it.

[murphy_p_t]

did HB weigh in specifically on MMT...other than perhaps by including T-bills & T bonds in the PP?

[Gumby]

did HB weigh in specifically on MMT...other than perhaps by including T-bills & T bonds in the PP?

Not that I'm aware of. He was a politician after all. Not sure it would make sense for him to comment on it. But, even if someone you might respect (say Krugman, for instance), were to weigh in on MMT it's unlikely that they ever take more than a few minutes of their time to try and digest it. Most critics of MMT/MMR tend to mischaracterize it. Krugman calls it the "deficits don't matter camp" — which isn't true. For someone like Krugman to actually admit that MMT/MMR is correct would require him to discredit much of his career's work. So, I wouldn't ever expect Krugman to come out and say that MMT/MMR does a good job of describing our monetary system. It's not going to happen.

So, instead, you find people like Buffet and Krugman who start borrowing ideas from MMT/MMR and making them their own — which has been happening all the time lately.

[moda0306]

I'm amazed he was so confident about this.  I mean nowhere does he mention "keep half of your cash physically to avoid default risk," or anything like that.  He just looked at the system, accepted it, and moved on to equating T-Bills as cash.  That's a pretty ballsy move with effectively 50% of the portolio.  He didn't suggest one ounce of diversification outside of US treasury bonds.

murphy,

I don't think HB specifically went into any MMR/MMT stuff, and I still think he saw "printing money" as inherantly inflationary as most Austrians, and he probably saw the national debt as some big overhang and a big risk, but considering where economics was in the 1980's, to stake half your portfolio on the idea that the U.S. can't under any circumstances default (unless it tries), is really ballsy, and is one of the main things to understand about MMR/MMR.  Once you're over the "US is sovereign in its own money and inflation is the main concern" hump, you've absorbed a pretty significant pillar of MMT/MMR.  We use this lingo about credit risk around pretty loosely now, but only because others have taken a magnifying glass to fed/treasury operations have done a ton of homework... plus we've had a few decades to steep within the current system and not scare people with unimagineable, unprovable assertions.  The whole treasury-bond-performance-during-the-debt-ceiling-crisis experience should have a lot of people reexamining wtf is going on here, but few are, I fear.  Just when I feel like MMT/MMR is catching on or is at least hitting the ears of the public, I see a truckload of statements about our fiscal/monetary situation that simply do not apply, and with confidence that I don't think will be easily pierced.

Not only is that a ballsy call to make in the mid-80's, it's entirely unintuitive for an Austrian-biased libertarian.  He focused in on credit risk and completely nailed the call on treasuries... even if he's wrong on macroeconomics and politics (IMO) he definitely had a knack for seeing through all the BS and drilling to the core of certain issues.

[Gumby]

Yes. It really was an amazing call. And for the mid-80s, that's true, I didn't think of it that way. He put politics aside and nailed the fundamentals. It really is astonishing. Very few people have the ability to do that. For example, Bill Gross, Jim Rogers, and many others, totally failed in that regard in 2011 when they shorted Treasuries.

http://www.bloomberg.com/news/2011-03-1 ... s-end.html

[Gosso]

If it makes any difference, I did scour google to find a good explanation of how printing money worked, and how the fed worked, and how the treasury worked, and how the U.S. dollar worked, and until I came upon Cullen Roche's "Understanding the Modern Monetary System" (http://monetaryrealism.com/understanding-mmr/) I felt like I was getting half-baked or politically charged answers everywhere else.

Just finished reading through that link, and I gotta say this MMT/MMR is helping me make sense of the fiat currency world.  There are still a lot of holes that I need to fill in my understanding, but I think I have the basics.

Here are a few more comments/questions:

- Are interest paying bonds really a relic of the gold standard era?  And the only reason why we have bonds with 5, 10, 30 year duration and pay interest is because Congress thinks we should?  Could we actually build the same fiat system with 0% interest rates?

- Is it correct to assume that debt/reserves is to fiat, as gold is to the gold standard?  Therefore paying off the debt would be the equivalent of removing gold from our reserves and destroying it.  On the other hand creating too much debt is the same as mining too much gold, which would decrease the value of gold and result in inflation.

[hoost]

I'm working on sorting through all of this as well.  I've watched the videos from Monetary Realism (http://monetaryrealism.com/understandin ... beginners/) and read some of their primer but I'm not convinced by what I've read so far.  I'll have more thoughts on that to come.

My question for now is does the Treasury pay interest to the Fed on the Treasury Issues (Bonds/Bills/Notes) the fed holds?  I think I recall reading somewhere, possibly on the Fed website, that any profits less expenses are returned to the treasury, so I assume this means yes, but only enough interest to fund the Fed's operations.  Anyone know any more on that?

[Gumby]

- Are interest paying bonds really a relic of the gold standard era?  And the only reason why we have bonds with 5, 10, 30 year duration and pay interest is because Congress thinks we should?  Could we actually build the same fiat system with 0% interest rates?

They are relics in the sense that the auctions for those bonds don't "fund" our government. The government really just uses bond auctions to help drain excess reserves and set interest rates.

You might want to read Waren Mosler's Seven Deadly Innocent Frauds of Economic Policy when you have a chance:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

With respect to interest rates, Mosler recommends that the Treasury simply stop issuing longer Treasuries, letting them mature into obsolescence...

Interest Rates and Monetary Policy

It is the realm of the Federal Reserve to decide the nation's interest rates. I see every reason to keep the "risk free" interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.

I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor is it the cause of currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more dollars saved than borrowed. Lower interest rates mean lower interest income for the non-government sector. Thus, it is only if the borrower's propensity to consume is substantially higher than that of savers does the effect of lower interest rates become expansionary in any undesirable way. And history has shown this never to be the case. Lower long term rates support investment, which encourages productivity and growth. High risk-free interest rates support those living off of interest payments (called rentiers), thereby reducing the size of the labor force and consequently reducing real national output.

The Role of Government Securities

It is clear that government securities are not needed to "fund" expenditures, as all spending is but the process of crediting a private bank account at the Fed. Nor does the selling of government securities remove wealth, as someone buying them takes funds from his bank account (which is a U.S. financial asset) to pay for them, and receives a government security (which is also a U.S. financial asset). Your net wealth is the same whether you have $1 million in a bank account or a $1 million Treasury security. In fact, a Treasury security is functionally nothing more than a time deposit at the Fed.

Nearly 20 years ago, Soft Currency Economics was written to reveal that government securities function to support interest rates, and not to fund expenditures as generally perceived. It goes through the debits and credits of reserve accounting in detail, including an explanation of how government, when the Fed and Treasury are considered together, is best thought of as spending first, and then offering securities for sale. Government spending adds funds to member bank reserve accounts. If Govt. securities are not offered for sale, it's not that government checks would bounce, but that interest rates would remain at the interest rate paid on those reserve balances.

In the real world, we know this must be true. Look at how Turkey functioned for over a decade - quadrillions of liras of deficit spending, interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation and no confidence whatsoever. Yet government "finance" in lira was never an issue. Government lira checks never bounced. If they had been relying on borrowing from the markets to sustain spending, as the mainstream presumed they did, they would have been shut down long ago. Same with Japan – over 200% total government debt to GDP, 7% annual deficits, downgraded below Botswana, and yet government yen checks never bounced, and 3-month government securities fund near 0%. Again, clearly, funding is not the imperative.

The U.S. is often labeled "the world's largest debtor." But what does it actually owe? For example, assume the U.S. government bought a foreign car for $50,000. The government has the car, and a non-resident has a U.S. dollar bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non-resident now decides that instead of the non-interest bearing demand deposit, he'd rather have a $50,000 Treasury security, which he buys from the government. Bottom line: the US government gets the car and the non-resident holds the government security. Now what exactly does the U.S. government owe? When the $50,000 security matures, all the government has promised is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non-interest bearing asset. That is the ENTIRE obligation of the U.S. government regarding its securities. That's why debt outstanding in a government's currency of issue is never a solvency issue.

Source: Seven Deadly Innocent Frauds of Economic Policy

- Is it correct to assume that debt/reserves is to fiat, as gold is to the gold standard?  Therefore paying off the debt would be the equivalent of removing gold from our reserves and destroying it.  On the other hand creating too much debt is the same as mining too much gold, which would decrease the value of gold and result in inflation.

More like debt/reserves is to debt-based fiat as gold is to the gold standard. It's possible to just have a pure fiat monetary system without it being debt-based. Lincon's Greenbacks were issued to fund the Civil War and were debt-free fiat money (simply printed into existence with no issuance of bonds). From what I've read on that so far, the bankers didn't like the government issuing debt-free money, and they did everything they could to stop it. Having a debt-based and credit-based monetary system constantly brings more and more money into the private financial sector (since that's where all the interest payments wind up), so bankers want the system to be debt-based.

If you want to learn about the history of debt-based money watch Bill Still's Secret of Oz.

Watch it here: http://youtu.be/swkq2E8mswI

The movie makes a few common errors about the role of the Fed and Treasuries, but it does an excellent job explaining why our debt-based monetary system came to be this way. Debt-based money dates back to 1694 when the Bank of England invented the fractional reserve system as a way to enslave the population with debt. Debt isn't necessary, but Still argues that debt-based money is the foundation of a plutocracy. Marx made a similar observation in Capital Vol 1.

[moda0306]

Regarding interest, it seems inherently unnatural on a sovereign fiat currency... Especially when it's mostly banks receiving the interest.... As a bribe to not loan it to the private sector no less.  That said, I think there should be I-bond-esque savings instrument for the middle class, but if our bonds serve the main purpose of being a bribe to banks not to lend, I have trouble seeing them as appropriate.  At the very least they should get rid of the necessity of issuing bonds to spend.

Regarding lending and gold, I see gold as fundamentally different than fiat money, simply because of the fed/bank relationship I mentioned before... Though, for a chilling take on banking of the 1800s, see gumby's documentary on the history of money.  I tend to wonder whether the corruption of the gold standard by banks is similar to what we see today.

Another thing I'll mention, is that it's really difficult for me to visualize inflationary vs deflationary forces when the very interest paid to people & banks for holding their money risk-free is actually increasing the base fiat money supply.  Normally, higher interest rates game inflation in terms of lending and velocity.  However, those interest payments are technically adding to the base money supply.

[Lone Wolf]

...nothing on my 1920's analysis?

FYI, I hadn't checked back on the thread.  My point was that there are examples that show you can greatly reduce budgets even as a very ugly recession takes hold and still experience an out-and-out boom.

Your point is that the enormous spending of World War I left all the breathing room to do this.  That's quite valid (although it's difficult to tell whether such conditions are "helpful" or "crucial".)

If I understand your theories correctly, such a harsh reduction in spending while a bad recession had taken root must cause a further spiral into recession.  This didn't happen.  In fact, the opposite happened.  That's interesting.

To put it in WWI terms, I feel like I just beat an Austrian army in battle .

  It's nice to hear that you impressed yourself.

I'm a recovered Keynesian but I don't fly any particular economic flag -- I just find MMT to be a particularly unconvincing school of thought.

[Gumby]

I just find MMT to be a particularly unconvincing school of thought.

Perhaps you just want to believe that Treasury bonds and taxes "fund" our government — when reality of a debt-based monetary system shows this just isn't the case, since all our money (except coins) comes from public debt or private credit.

For what it's worth, I don't support MMT — since you have to believe in the Job Guarantee to be an MMTer. But, I do enjoy learning about MMR, since it focusses on the operational aspects of the Treasury/Fed. Far better than believing myths about the Fed and Treasury perpetuated by politicians and the media.

[moda0306]

LW,

Well I guess I see there being a lot of other factors than looking at Year 1922 spending vs 1921 spending to see whether gov't spending leads to recovery.  I don't think most Keynesians/MMT would claim that looking at that alone will give you anything close to a proper picture of what the economy needs.  Most of the best arguments I've heard for spending now point out that we'd been losing our base-money to our trade deficit since 1997-2008... all those years of draining base money from our economy resulted in a fragile banking/investment/monetary situation in the US (not under-stating the importance of the malinvesment in housing here... malinvestment will signficantly weaken horizontal money attached to it).  We simply had a vastly different situation in 1920, where domestic balance sheets were relatively flush with net-savings from wartime gov't spending.  I have no doubt that you could build a strong economy out of that through supply-side efforts as you try to get investment retooled to private production, and as I've mentioned you have plenty of base money in the private sector to prevent weakness.  All in all, yes, I felt pretty good about debunking a period Austrians often use to try to prove their point, though once timing and other considerations are looked it, it resembles nothing like what we see today, nor what Austrians imply.  You've pared back the assertion a lot.. which is good.  Regarding MMT, I think you'd appreciate the points MMR makes against MMT.  It sounds like a lot of the points that you were trying to make regarding saving.  Not saying you'd jump fully on board, but as I was reading their arguments I almost felt like the spirit of LW was there.

I'll add that I don't necessarily think the massive NFA's created by the war were "good," and the war itself was definitely an utterly BAD thing, but it did put us in a position where we had the monetary tools necessary for recovery going forward.... plus, I do have to reiterate, that this boom time had spending as a percentage of GDP at much higher rates than did the pre-war 19-teens.  

One thing you've mentioned in the past that I thought was valid was that we've been running deficits for a decade now, how can that be the answer to economic recovery?  Well basically MMR has answered this for me, finally, and if you look at the trade deficit during that time (as well as today... about $500 Billion per year), and the fact that this is essentially us "exporting" our currency to foreign nations, one realizes that the world's reserve currency issuer is in a position where large deficits must be run to meet their domestic monetary needs.  This doesn't mean we don't have competitiveness issues, but you can't export your currency without running bigger deficits and expect a stable system.

[Gumby]

My question for now is does the Treasury pay interest to the Fed on the Treasury Issues (Bonds/Bills/Notes) the fed holds?  I think I recall reading somewhere, possibly on the Fed website, that any profits less expenses are returned to the treasury, so I assume this means yes, but only enough interest to fund the Fed's operations.  Anyone know any more on that?

That's correct.

See: http://pragcap.com/the-worlds-most-prosperous-bank

Also, when the Fed acquires Treasuries from the private sector, it obviously affects interest rates, but it's also physically removing future interest payments from the private sector (since the purchased Treasury bonds are no longer spewing interest into the private sector). In a sense, this actually removes some measurable amount of future base money from the private sector over time.

[Gosso]

I just finished watching The Secret of Oz, which was quite interesting.  But doesn't the interest on the debt simply help the base money keep pace with inflation.  So the bankers are making some money on the real interest, but not as bad as it appears.  Also the interest that the bankers charge the public is used to create their profit AND cover their losses when someone defaults on the loan.  So again it is not quite as bad.  I don't have a problem with the bankers making a few percentage points off of what they lend since they need to pay their own bills and make a profit.

Also doesn't the public pretty much own the banks through our stock holdings?

What am I missing?

[Gumby]

I just finished watching The Secret of Oz, which was quite interesting.  But doesn't the interest on the debt simply help the base money keep pace with inflation.

The point is that the banks become the final destination for all of the interest payments (both public and private) in a debt-based society. If the government gives you $100 in interest, where does it go? Well, it has to go into a bank, since the government doesn't hand out cash. So, on a Macro level, the payments just enlarge the reserves of the banking system, and makes bankers richer. In general, the larger the reserves are for a bank, the richer the bankers managing that bank become. There's a reason why bankers want our money to be debt-based. It's no accident. Over time, this produces a society of have and have-nots since one class is always in debt, and the other is getting richer. A plutocracy (see below). Again, this is looking at it from a Macro level. Additionally, most people have a savings account, and the bank invests those savings in Treasuries and other forms of credit. So, the bank usually pocket a spread on the population's interest.

So the bankers are making some money on the real interest, but not as bad as it appears.

That's because you're not looking at it from a Macro perspective. The banks are generally receiving all of the money on the interest — across the entire population. In order to receive the payment from the Treasury, you have to deposit it in a bank — which enlarges the reserves of your bank. You as a bank account holder just get a statement that says the money is in your account. But, in reality, the money stays in your bank's reserve account at the Fed until you withdraw it or transfer it to another bank's reserve account. The bank gets to leverage it. In the meantime, you are really just sharing those reserves with every other customer and debtor with the bank. Until you move the money to another destination, the bank owns the reserves and can leverage them however they please — making them more credit-based money, which makes the population even more in debt to the banks.

On a Micro level, you can see that "smart" and "prepared" individuals can "save" their money and earn some interest. This is true for certain individuals. But, if you were to zoom out and look at the entire population, you would find that — on a Macro level — the entire population (as a whole) is in debt to creditors. And the interest on private debt can never be paid back unless new money enters the private sector, from the government — which only serves to enlarge bank reserves and make bankers richer.

Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. Critics find it problematic that banks "create money out of nothing."

One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent. This was the argument of the Social Credit movement of the 1930s, who proposed to remove the job of money creation from banks and give it to governments.
Source: http://en.wikipedia.org/wiki/Criticism_ ... ve_banking

Also the interest that the bankers charge the public is used to create their profit AND cover their losses when someone defaults on the loan.

I don't think anyone wants to prevent banks from making a profit for providing a loan. The movie is simply suggesting that the population ("We the people") should be able to create debt-free money to compete with banks for certain types of loans or government handouts.

For instance, do you think that there needs to be $1 Trillion in outstanding student loan debt in the private sector? Why saddle the future workforce with unnecessary debt before they even begin their careers? It's just a form of tribute — to enslave the masses and make the rich even richer. It's a plutocracy.

So again it is not quite as bad.  I don't have a problem with the bankers making a few percentage points off of what they lend since they need to pay their own bills and make a profit.

So, let me get this straight. You think that ever dollar that's created in our entire money supply should have a tax tacked on to it, where all of the profit goes to private bank reserves? Seems like a bad idea to me.

Also doesn't the public pretty much own the banks through our stock holdings?

Are you suggesting that bank shares are evenly split amongst the public? That's not how it works. The largest distribution of shares are allocated to the rich. There's a reason why the top 0.001% prefer a debt-based society.

What am I missing?

Thomas Edison and Henry Ford saw it differently...

"Make it perfectly clear that I'm not advocating any changes in banks and banking. Banks are a might good thing. They are essential to the commerve of the country. It is the money broker, the money profiteer, the private banker, that I oppose. They gain their power through a fictitous and false value given to gold.

"Gold is a relic of Julius Caesar and interest is an invention of Satan. Gold is intrinsical of less utility than most metals. The probable reason why it is retained as the basis of money is that it is easy to control. And it is the control money that is the root of all evil.

...

"...Under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent to the stated cost.

"But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good, also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who directly contribute...in some meaningful way.

...

"It is absurd to say that our country can issue $30,000,000 in currency in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.

"Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the government who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency...instead of the bankers receiving the benefit of the people's credit in interest-bearing bonds?"

"The people must pay any way; why should they be compelled to pay twice, as the bond system compells them to pay? The people of the United States always accept their Government's currency. If the United States Government will adopt this policy if increasing its national wealth without contributing to the interest collector — for the whole national debt is made up of interest charges — then you will see an era of progress and prosperity in this country such as could never have come otherwise."

...

"I am just expressing my opionion as a citizen. Ford's idea is flawless. They won't like it. They will fight it, but the people of this country ought to take it up and think about it. I believe it points the way to many reforms and achievements which cannot come under the old system."

— Thomas Edison, quoted in NY Times, Dec. 6, 1921

What you're missing is that a debt-based monetary system was set up as a foundation for a plutocracy. It's designed this way on purpose — to have all money lent from the rich to the poor on a Macro level.

See: Video: A Brief History of Plutocracy

And after 235 years, we have a top 1% that owns an enormous portion of our country. In a debt-based monetary system, wealth concentrates with the wealthy more and more over time.

[Lone Wolf]

Thomas Edison and Henry Ford saw it differently...

While I enjoy a good needling of the fractional reserve system, Edison's gold-hate isn't very coherent.

Does this sound like a man in possession of a rich and nuanced understanding of why gold has served so well as money for thousands of years?

only a few days ago a scientist developed that lead, one of the basic metals, and heretofore an element by itself, is actually a compound.  We do not know how near we are from finding that gold, too, is a compound.  All the wealth in the world, according to our present standards, may be rendered worthless by the discovery that gold can be made synthetically.

And am I reading the later stuff right that he thinks the government ought to literally print up a bunch of money and lend it to Henry Ford interest-free?  Wow.  This sounds like a still-unvisited level of crony capitalism.

[Gosso]

Gumby,

Thanks for your reply.  Now I agree that the interest on credit cards is complete usury, but then again how many people default on their credit cards?

But I cannot shake the idea that inflation is the reason why interest must be charged on loans.  And then on top of that the bank needs to compensate for other people defaulting, pay their bills, and earn a profit.

So lets take a 10 year $100,000 loan as an example.  Now the bank won't want $100,000 returned to them after ten years, they need to have $100,000 plus the cost of inflation.  The bank also needs to earn extra interest because of defaults, paying the bills, and earning a profit.

So the micro seems to work in my mind. 

But the macro is where I get all screwed up.  I assume it's the same as micro, but you're saying it's not.  Couldn't we just drop interest rates to 0% or possibly even negative, similar to what Japan has done.  This would mean the money supply could only expand from deficit spending from the government, and would prevent the banks from receiving free money.  This would also mean there would be no inflation or maybe even minor deflation.

[moda0306]

LW,

Gold is great held by individuals as a store of value and gov't-free savings instrument.  I don't think his hatred of gold was in the metal itself, as much the way banks used it to control the economy.

As soon as the government dictates that gold is legal tender (and the only form, at that), you're talking about something else entirely than suggesting people own gold personally.  You're also giving banks & the gold industry massive control over our country.

I think gold standard and gold ownership are almost entirely different issues.  In fact, the success of gold that you mention is probably most often best exemplified by actual physical ownership of it than trusting a government to stick to its convertibility promise.  Gold has proven a great asset.  Gold standard currencies have not proven great policy... or at least that's my take.

[moda0306]

LW,

Maybe this is a better description of my beliefs on gold:

Gold Standard is to personal Gold ownership as an overzealous police officer is to a personal firearm & training.

[MediumTex]

It's interesting that the 20th century wound up being the greatest period of prosperity overall in the history of the world, and it coincided with bankers and other financial interests basically getting their way with respect to control over the currency and expansion of credit.

In other words, many of the bad things that people say about the current system in many ways don't seem to have actually occurred in the last hundred years or so.  Yes, there has been steady inflation in all currencies, but there has also been a lot of prosperity as well.  The worst thing has probably been the ease with whcih wars can be financed today, which predictably translated into the 20th century being more or less one long period of war, war and more war.

I agree that the financial sector wants everyone to be as deeply in debt as possible, but then I look at the way a person in the U.S. making minimum wage lives compared to the way people at the subsistence level live in the developing world, and for all its flaws the current system does seem to be working reasonably well, even if we could each come up with countless ways in which we might improve it if given the chance.

Any society in which obesity is a bigger problem that starvation is probably better off than it realizes.

I fully agree, though, that bankers are mostly a parasitic presence in society.  I understand why so many people dislike them so much.

[Gumby]

Does this sound like a man in possession of a rich and nuanced understanding of why gold has served so well as money for thousands of years

I think you're judging him a bit harshly. During the 1920s there was a fair amount of alchemical interest. It was pretty common for people to think that gold might one day be synthesized with advances in technology.

Ultimately his point was that the gold is too easily manipulated for it to be the foundation of the money supply. And many people in the heartland of America during the late 1800s did not think that gold was some wonderful metal that made the money supply stable. They hated it. There wasn't nearly enough liquidity for everyone at the time.

And am I reading the later stuff right that he thinks the government ought to literally print up a bunch of money and lend it to Henry Ford interest-free?  Wow.  This sounds like a still-unvisited level of crony capitalism.

You're reading it wrong. Ford had a plan for America to break free from greedy bankers. It had nothing to do with his own business.

LW, I find it a bit odd that you think of the 1920s as some wonderful show of strength in America's finances. When we were paying off the debt in the 1920s, all that did was force the private sector to seek out more risky forms of private credit (since the government was sucking base money out of the private sector). And when the private sector became leveraged to the hilt, it was already house of cards waiting to fall when the Fed tried to stop all of the leveraging. Clearly America's finances weren't in great shape at the end of the 1920s. If they were, it wouldn't have fallen down like the private credit ponzi scheme that it was.

[Gumby]

Thanks for your reply.  Now I agree that the interest on credit cards is complete usury, but then again how many people default on their credit cards?

This isn't about credit cards. This is about every single dollar in the entire monetary system needing to come from public or private debt. It's literally a tax on what should be the public creation of all money.

Let's think of it this way. If I told you that every single dollar in the world could only be created if a tax were levied on each dollar, you'd say that was crazy since it would require an exponential growth of public and private money to keep paying the tax. Well, that's basically the idea behind a debt-based monetary system. Except the people who gather all of the tax payments are the bankers, not the government.

But I cannot shake the idea that inflation is the reason why interest must be charged on loans.  And then on top of that the bank needs to compensate for other people defaulting, pay their bills, and earn a profit.

So lets take a 10 year $100,000 loan as an example.  Now the bank won't want $100,000 returned to them after ten years, they need to have $100,000 plus the cost of inflation.  The bank also needs to earn extra interest because of defaults, paying the bills, and earning a profit.

That's fair. Waren Mosler has suggested that the government discontinue Treasuries and just have a simple savings instrument that pays a safe return. A Government CD, for instance. The money would be paid to the CD holders with debt-free printed money. Far better than requiring the interest to be paid with an infinite loop of Treasury debt.

So the micro seems to work in my mind. 

But the macro is where I get all screwed up.  I assume it's the same as micro, but you're saying it's not.

If you watch the video of the hippie professor (the link is under the long Edison quote, above) he explains the difference between the Macro and Micro.

Couldn't we just drop interest rates to 0% or possibly even negative, similar to what Japan has done.  This would mean the money supply could only expand from deficit spending from the government, and would prevent the banks from receiving free money.  This would also mean there would be no inflation or maybe even minor deflation.

Yes, Warren Mosler has suggested something very similar to this. If I understand it correctly, his idea (posted above, a few pages back) is to stop issuing longer-dated Treasuries — allowing the nation's Treasury portfolio to dwindle down over time to Treasuries shorter than 90 days. Then he'd instruct the Fed to floor Treasury interest rates down to zero — effectively killing the debt and giving all private loans a foundation of a 0% interest rate for AAA rated credit, and allowing the private banks to take on higher risk with higher interest rates however they deem appropriate.

[Gumby]

It's interesting that the 20th century wound up being the greatest period of prosperity overall in the history of the world, and it coincided with bankers and other financial interests basically getting their way with respect to control over the currency and expansion of credit.

In other words, many of the bad things that people say about the current system in many ways don't seem to have actually occurred in the last hundred years or so.  Yes, there has been steady inflation in all currencies, but there has also been a lot of prosperity as well.

You're right. Except debt-based money has caused the wealth and income gap to widen considerably over time. You can exacerbate this by having the wealthy receive the end benefits of deficit spending and tax cuts, while requiring the majority of the population to pay a higher rate of taxes. And debt-based money, along with wages that don't keep up with inflation, has caused the debt to personal income ratio to grow considerably over time. And now graduating students can barely afford to pay down their college tuition or their healthcare or even think of acquiring a home... The wider the gap becomes, the more private debt that is racked up. The longer it goes on, the longer the "American Dream" dies. I'm over-simplifying it, but you get the picture. Over time, debt-based money tends to make things tougher on the lower half.

I agree that the financial sector wants everyone to be as deeply in debt as possible, but then I look at the way a person in the U.S. making minimum wage lives compared to the way people at the subsistence level live in the developing world, and for all its flaws the current system does seem to be working reasonably well, even if we could each come up with countless ways in which we might improve it if given the chance.

Any society in which obesity is a bigger problem that starvation is probably better off than it realizes.

Again, you're right. I think the point is that the system could be more equitable for most of the population who are forced into a life of debt. It doesn't need to be that way.

[Gosso]

Gumby,

Okay, so I watched Gandhi give his presentation on money, but based on my limited and naive knowledge of the financial system I cannot say I agree.  Here is the way I see things:

1.  The US government creates a deficit and spends money into existence.
2.  This money is then placed into a bank by the public and businesses...likely into a savings account or CD's.
3.  The bank takes this money and buys US Bonds (lets ignore that the money can be lent back to the public and businesses).
4.  The US government then pays the bank the interest payments on the US Bonds.
5.  The bank then pays the majority of the interest payment back to the savings accounts held by their depositors (ie the public).  The bank keeps a small spread to cover its costs and make a small profit.

IMO the video misses the fact that the bank does not keep the interest but must use it to pay the interest on the savings accounts and CD's.  But if everyone only used simple checking accounts then I'd agree that the bank keeps the interest.  Personally I keep the minimum in my checking account of $1000 to avoid the monthly banking fees...the bank does this because it is keeping the interest on the $1000 and can therefore waive the fees (it works out to a 4.5% return on the $1000, so its a good deal for me).

So the interest on the debt is just another form of deficit spending that is used to increase the monetary base, and therefore inflation.

Edit: I'm not sure how fractional reserves play into this (or does MMT/MMR claims that this is not real ), or the leverage of money in the private sector.  That is currently outside of my financial literacy, so I'll have to read Warren Mosler's book.

[Gumby]

Gosso,

Once again, you are looking at this on a Micro level. Certainly there are some people who are earning interest (though, even their earned interest just serves to fatten bank reserves). But, the fact that the majority of the private sector's money comes from private credit (i.e. a public debt-based and a private credit-based/fractional-reserve monetary system) tells us that there are more people in the private sectors using forms of credit than there are people with real base money deposits under their name. This is just a symptom of fractional reserve and a credit-based monetary system.

Gosso... when a large corporate employer pays you your salary, or a client of yours pays your company, or your company pays bills, most of the time the money is coming from short term credit markets, corporate bonds, commercial paper, or agency debt — since there is only a limited supply of base money that we all share. The CDs at your local bank are often invested in these private credit markets. Most of the money in your bank account got there from someone else's private bank credit. When you deposit that money in the bank, you're just throwing it into a big pot (reserves) that everyone shares from. You are essentially sharing your money with everyone else who has a line of credit at the bank. The only time the money moves out of that big pot — and becomes accessible — is when you pay or transfer to another bank (another big pot) or withdraw the money. Otherwise, it's just a credit on your bank statement. As long as all of the customers don't try to withdraw all of the money at the same time, the bank is able to stay solvent. I'm oversimplifying it (the Fed can help with liquidity issues, etc) but that's the general idea.

So, to say that the majority of the private sector is earning this interest is false, since most of the interest payments amongst the private sector is just coming from other forms of credit. Since the private sector's credit-based monetary system, and shadow banking system, dwarfs the amount of base money in existence, the overwhelming majority of the private sector is comprised of private debt.

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M2 is mostly bank credit and other forms of private credit. And the shadow banking system is a lot larger than the traditional banking system.

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This means the overwhelming majority of the private sector is a slave to private credit. People taking out forms of credit to pay credit to pay credit. The credit markets keep the private sector running. And when I say "credit" I don't mean credit cards, per se. I mean bank loans, bank credit, agency debt, shadow banking, commercial paper, MBS, derivatives, and so on. It's ALL DEBT AND CREDIT — every dollar!

So, you really need to take a step back and look at the big picture. That's what the hippie professor is saying. The private sector can't escape its own web of private debt/credit because that's where most the private sector's money comes from! Only a small portion of the private sector's money is base money (which comes from public debt). The only debt-free money right now are coins, and they make up a very small percentage of the base money supply.

As MT pointed out... the system has produced an enormous amount of prosperity. And under this mountain of credit lies real goods and services. So, I'm not saying that it's entirely broken. What I'm saying is that the lower half of the private sector is getting buried under more and more debt as time goes on.

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EDIT: When you think about it, it's pretty amazing that 75% of the PP, by design, essentially bypasses the ponzi private credit markets. Pure genius.