Gyroscopic Investing

MediumTex wrote:

Gumby wrote: Various member countries were given the authority to print up billions of Euro notes and coins, and people stood in line to exchange their old currencies for Euros. Old cash was handed over and new cash was handed out.

That's what I'm getting at.

The government just printed up the euros out of thin air.

If the government hadn't printed them up in the first place, there wouldn't have been any way to get them into circulation.

What sort of governmental liability was triggered by the printing of these euros?  Presumably it was some sort of debt, right?

If Germany had a completely balanced budget and no government debt when the euro was issued, what would the books of the German government have looked like after the issuance of the euro?  Would it have had new debt?  Who would this debt have been owed to?

I'm no expert on this matter, but it sounds like Germany's electronic Deutsche Mark-denominated debt was all converted to electronic Euro-denominated debt before the first bills were printed.

Yes...

The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the Eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new notes and coins were introduced on 1 January 2002. Beginning on 1 January 1999, all bonds and other forms of government debt by Eurozone nations were denominated in euros.
Source: http://en.wikipedia.org/wiki/History_of_the_euro#Launch

Euros and Euro denominated debt was electronically converted into existence before physical notes/coins were swapped into existence.

Gumby wrote: Euros and Euro denominated debt was electronically converted into existence before physical notes/coins were swapped into existence.

Would the euro have been possible had the governments of the euro all had balanced budgets and no government debt?

MediumTex wrote:

Gumby wrote: Euros and Euro denominated debt was electronically converted into existence before physical notes/coins were swapped into existence.

Would the euro have been possible had the governments of the euro all had balanced budgets and no government debt?

Well... I don't think their old fiat currencies would have existed without debt. I'm pretty sure that all of the European countries used their own government debt to back their fiat base currencies before the Euro.

http://en.wikipedia.org/wiki/Debt-based_monetary_system

The Sovereignty Party of Australia has a good explanation of the difference between "money as debt" and "debt-free money":

Question: What does "debt-free money" mean?

Answer:

In order to understand "debt-free money" it is important to understand what type of monetary system we currently have. Our current system is a "money as debt" system.

• Money as debt - means that all the money that exists (be it in your wallet or your bank account) only came into existence because either you or somebody went to a bank and borrowed it. Even if you earned that money (and didn't borrow it) - someone else borrowed that money from the bank, and still needs to "return it" with interest to the bank. This means that all the money in our economy actually belongs to the banks - and that we merely rent it from them, and pay them interest for the privilege of using it. Collectively - we as Australians do NOT own our money - it is all borrowed as has to be returned.

•  Debt-free money - is the goal of the Australian Sovereignty Party. In such a system, the government will create money, but only introduce it into the economy by buying or paying for infrastructure that will belong to the people. The person who gets paid by the government for building the infrastructure has rightfully earned such money - and it does not have to be returned to the government. It is for this simple reason that we say that such money is "debt-free" - it does not have to be repaid to the entity that created it. It was earned into existence (and not borrowed into existence), and the person who earned it, owns it.

It may be difficult to grasp the concepts above - but once you do, it becomes very obvious what the consequences are for each type of system. In a "money as debt" system, our collective debt to the banks (relative to the amount of money that was borrowed from them and is now circulating in the economy) will keep increasing with the passing of time. This is the effect of interest. Mathematically, our collective debt is always larger than the money we have with which to repay the debt - and interest keeps making the problem worse.

With a "debt-free money" system, money will be introduced into the economy without debt, i.e. it will be earned into existence and not borrowed into existence. This makes all the difference in the world. Two of the biggest expenditures in government can thus be eliminated, namely debt repayments and interest on debt (with an equal reduction in taxes).

The ASP believes that it is the sovereign right of a nation to create the money its economy needs, and not to borrow such money from someone else who creates it and then lends it out at a cost to the nation.
Source: http://www.sovereigntyparty.org.au/faq/ ... money.html

The explanation, above, doesn't get into the nitty-gritty details of how government debt is used to back base money...which in turn backs bank credit. But, the gist of it is that the only way for a fiat government itself to be "debt free" is if that government is issuing "debt-free" base money and not debt-based base money.

So that means that as an economy generates more economic growth, it might be necessary for the government to run up larger and larger debt loads in order to facilitate the economy's need for new money?

If a nation's money supply is nothing but a form of government debt, wouldn't a more prosperous economy require larger and larger levels of government debt?

Is it possible that the "Clinton surplus" actually set the stage for the weak economic performance of the 2000-present period, since a government surplus in a debt-based monetary system necessarily means that a lot of money is being sucked out of the system?

MediumTex wrote: So that means that as an economy generates more economic growth, it might be necessary for the government to run up larger and larger debt loads in order to facilitate the economy's need for new money?

Yes. Also, the fractional-reserve banking system requires interest to be paid, often with money that does not yet exist in the private sector — which also increases the need for more base money and more government debt.

MediumTex wrote:If a nation's money supply is nothing but a form of government debt, wouldn't a more prosperous economy require larger and larger levels of government debt?

Yes. More debt and more private credit (which is often backed by leveraged government debt).

MediumTex wrote:Is it possible that the "Clinton surplus" actually set the stage for the weak economic performance of the 2000-present period, since a government surplus in a debt-based monetary system necessarily means that a lot of money is being sucked out of the system?

Yes. Exactly. Warren Mosler talked about this in his book, Seven Deadly Innocent Frauds of Economic Policy.

Al Gore

Early in 2000, in a private home in Boca Raton, FL, I was seated next to then-Presidential Candidate Al Gore at a fundraiser/dinner to discuss the economy. The first thing he asked was how I thought the next president should spend the coming $5.6 trillion surplus that was forecasted for the next 10 years. I explained that there wasn't going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non-government savings of financial assets, which was a ridiculous proposition. At the time, the private sector didn't even have that much in savings to be taxed away by the government, and the latest surplus of several hundred billion dollars had already removed more than enough private savings to turn the Clinton boom into the soon-to-come bust.

I pointed out to Candidate Gore that the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history. Also, I mentioned that the coming bust would be due to allowing the budget to go into surplus and drain our savings, resulting in a recession that would not end until the deficit got high enough to add back our lost income and savings and deliver the aggregate demand needed to restore output and employment. I suggested that the $5.6 trillion surplus which was forecasted for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.

That is pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his massive deficit spending in 2003. But after that, and before we had had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again. And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances.

For the current level of government spending, we are being over-taxed and we don't have enough after-tax income to buy what's for sale in that big department store called the economy.

Anyway, Al was a good student, went over all the details, agreeing that it made sense and was indeed what might happen. However, he said he couldn't "go there." I told him that I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.

Source: Seven Deadly Innocent Frauds of Economic Policy

Most people make the mistake of assuming that bank/private credit — which forms the bulk of all bank accounts — can be used to pay the government. It's not true. You can only pay the Treasury with base money. So, the private sector literally didn't have enough base money — or savings, represented as Treasury Bonds — to sustain the economy and create a government surplus. As base money left the private sector, it actually drove many people into riskier Ponzi-like private credit.

The Fed, of course, could swap Treasuries for base money, if necessary. But, Mosler's point is that the government was literally asking the private sector to hand over its savings. Treasuries represent the private sector's savings.

It actually makes no sense for a debt-based fiat government to continuously run a surplus. The government uses its debt to issue its base currency. The only way to get around that is to change the laws to issue debt-free money (i.e. issue large-denominated debt-free platinum coins (see "31 USC § 5112 - DENOMINATIONS, SPECIFICATIONS, AND DESIGN OF COINS"), or change the law to issue debt-free base money that isn't offset by government bonds).

Gumby,

Why do you think that virtually no one understands what you have written above?

It seems that what many people believe to be true is the exact opposite of what is actually true.  That's a strange state of affairs.

Gumby,

Thank you for your patience and detailed answers. Forgive the simplicity of this observation. Given that debt has not been the magic elixir to prosperity in most countries, like those in Africa, might these observations be due to an effect, and not a cause? That a nation's ability to have a successful debt based economy is due not to the debt itself, but rather the underlying societal structure, demographics, and natural resources that makes its debt desirable to own? This seems like a fundamental chicken and egg issue that I am having a hard time getting my head around.

6 Iron,

What you point out is exactly right.  All this talk about the details of money can leave people thinking that MT, Gumby and myself are saying that simply creating enough money makes things work right.

You need an educated, "socially-harmonious" populace, respect for private property (or at least enough of it to function well), a vibrant private sector, etc.... what some people try to point out, is that for all the flaws in the US of A, we have an amazing system that con produce a ton of real wealth, if given the right inputs... one big one, at this point, is money.  Money that results from investment will not occur without demand, and demand is low because our balance sheets suck.  We need to run big deficits to repair our financial balance sheets.  Allowing nebulous paper constraints to keep us from developing real wealth and economic growth is not good policy.

It can also be hard to believe that the lack of deficits is the problem when we've been running big ones since 2001 or so, but one very eye opening analysis for me came when the MMRists started describing our deficits in contexts of our TRADE deficits.  From 1997 through 2008, our trade deficits were quite a bit larger than our fiscal deficits.  This means, if you can visualize it, that we were "exporting" more of our base currency than we were creating for ourselves.

This is how we came into the housing crisis with an aggregate savings rate that was so pathetic.  This exacerbated the crisis and made it spread throughout the whole economy (along with other factors, of course).  We were taxing too much and spending too little (in fact, I'll give the right the benefit of the doubt and say that we were simply taxing too much, and withdraw from suggesting spending increases during that time).

This is the issue a reserve currency issuer is going to have to face... they have to "manufacture" enough base currency for both the world to use as they demand, AND for the domestic economy to remain healthy.  It's like if our gov't ordered $300 billion in arms built per year, but then sold $500 billion per year.  One person might look at this and say we're building up our military well-beyond our means... others might look and notice we're actually losing military prowess every year we sell more than we buy to others.

MediumTex wrote: Gumby,

Why do you think that virtually no one understands what you have written above?

It seems that what many people believe to be true is the exact opposite of what is actually true.  That's a strange state of affairs.

Well, first of all, it's very complicated and going off of the convertibility to gold only made it more confusing for people. Also I believe the confusion is somewhat intentional. It works in scenarios like this...

1) Politicians do not fully understand the monetary system
2) These politicians unknowingly make false statements about debt and taxes to further their agendas
3) The media "reports" on what the politician said by simply repeating it to the population.
4) Politician-to-Populace myths eventually become "facts" in people's heads.

...or...

1) Some politicians do understand the monetary system.
2) These politicians lie about the effects of taxes and debt to further their agendas.
3) The media unknowingly echoes these lies to the population.
4) Politician-to-Populace lies eventually become "facts" in people's heads.

I think the second scenario is perhaps less likely. But, I think I can provide one example...

Think about Dick Cheyney. He told us "deficits don't matter" when he was in charge. Actually, he was right. Other than inflationary pressures, deficits don't matter from a matter of solvency for a fiat government. In fact, deficits are necessary in a debt-based monetary system. But, that won't stop Dick Cheyney from complaining that Obama is spending too much and running up large deficits. This is what politicians do. They confuse the population into supporting certain ideals.

The system somewhat depends on people not understanding how it works. One half of the government will typically use the debt as a reason to cut taxes and not to spend — thus allowing those at the top to keep a larger share of the nation's wealth. The other half of government will use spending as a reason to help those who don't have much income generation and raise taxes to take money away from the top earners. In reality, both are using taxes and spending as a way to move money into different classes without causing inflationary pressures. It's class warfare, but most people don't realize they are being lied to.

If people fully understood the ramifications of "money as debt" they would likely demand reforms to the debt-based and credit-based monetary system, since 90% of the population is really a slave to private credit.

And it's far easier for a population to imagine that our government runs its budget like a household. That's what makes sense to most people. And politicians will use that to their advantage to further their agendas.

However, it's worth noting that the debt can be useful for government oversight as the obsolete laws are already in place to allow Congress to control the amount of spending the nation allows itself to do. And risk-free government bonds — when issued in moderation — have a useful place in the monetary system and Permanent Portfolios.

At least, that's how I see it.

I literally think that most people haven't sufficiently pontificated or visualized what the true meaning of the following terms are:

Money
Wealth
Saving
Savings
Investment
Financial Assets
Debt

I still feel like I'm learning.  The clarification of what a "financial asset" truly is was huge.  Dollars and contracts to pay dollars are what people so often view as "wealth," but they don't really know why.  It's just how they measure a huge part of their net worth.  Money is such an abstract thing.  Human motivations are somewhat intuitive to understand, so pretty early on people get the idea that being in debt is stressful and getting out feels good, paying taxes sucks, not being able to save doesn't feel good, and having things get more expensive faster than your savings rises .  It's so easy to project those values onto government and expect that to releive those stresses on yourself, because we're not really realizing that our government issues our currency, and therefore the currency wouldn't even exist without their debt... and that includes the entity (fed) that buys that debt out of the economy using reserves to make the whole system work to begin with.  I'd add that, as gumby did, as part of the confusion.  Our system is designed to look like we're currency users who are counterfeiting money, not currency issuers, and that confuses everyone.

MediumTex wrote: Here is an interesting question: Does anyone think that yields on treasuries could rise if the Fed was committed to keeping them low?

The Fed can create new base money based on previously existing reserves first issued by the Treasury.  The collective size of that is dwarfed by the real economy and other forms of credit, however.  If the market decides that the interest risk premium is too low or the Fed isn't reducing its base money fast enough vs decreasing demand for money thus sparking higher expected inflation, there is not a damn thing the Fed can do about it.  This presupposes the Fed is not in the early stages where monetary velocity is low, of course.  I'd say we are in the 4th inning.

MG

Gumby wrote: • Money as debt - means that all the money that exists (be it in your wallet or your bank account) only came into existence because either you or somebody went to a bank and borrowed it. Even if you earned that money (and didn't borrow it) - someone else borrowed that money from the bank, and still needs to "return it" with interest to the bank. This means that all the money in our economy actually belongs to the banks - and that we merely rent it from them, and pay them interest for the privilege of using it. Collectively - we as Australians do NOT own our money - it is all borrowed as has to be returned.

Good stuff.  This is why we have "Federal Tax Returns".  We are "returning" to Ceasar what is his for the privilege of having used it for the previous year.  Though technically that privilege only extended out to Federal government employees, but that is another story for another day.

MG

MediumTex wrote: Gumby,

Why do you think that virtually no one understands what you have written above?

Because of this:

Gumby wrote: I explained that there wasn't going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non-government savings of financial assets, which was a ridiculous proposition.

It is very hard to understand that government debt basically equals money supply...at least, that's my pseudo understanding. 

The gold standard story doesn't help make it any more intuitive. 

i find it interesting to note that both Lincoln and JFK both issued *debt-free* currency...and they both met the same end.

murphy_p_t wrote: i find it interesting to note that both Lincoln and JFK both issued *debt-free* currency...and they both met the same end.

Wasn't Lincoln's secretary named Kennedy and Kennedy's secretary named Lincoln as well?

Gumby wrote:

MediumTex wrote:

Gumby wrote: Euros and Euro denominated debt was electronically converted into existence before physical notes/coins were swapped into existence.

Would the euro have been possible had the governments of the euro all had balanced budgets and no government debt?

Well... I don't think their old fiat currencies would have existed without debt. I'm pretty sure that all of the European countries used their own government debt to back their fiat base currencies before the Euro.

http://en.wikipedia.org/wiki/Debt-based_monetary_system

So if the Euro came from Deutsch-Marks (and other European currencies), where did the Deutsch Marks come from?

AdamA wrote:

MediumTex wrote: Gumby,

Why do you think that virtually no one understands what you have written above?

Because of this:

Gumby wrote: I explained that there wasn't going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non-government savings of financial assets, which was a ridiculous proposition.

It is very hard to understand that government debt basically equals money supply...at least, that's my pseudo understanding. 

The gold standard story doesn't help make it any more intuitive. 

I think it's instructive to look at the fed's balance sheet.  It becomes more clear, yet more foggy at the same time.

http://www.federalreserve.gov/releases/ ... nt/h41.htm

If you start by looking at Table 1, this contains the Fed's assets.  It has $2.8 trillion in assets.  $2.6 Trillion of that is "securities held outright", which are actually loans (bonds, debt).  Then there are several other entries that are also loans (debt).  Then gold stock (I think gold is carried at $44 an ounce; I'll see if I can find the reference).  I'm not sure what the last two entries are; I will look into it.  Notice how at least 98% of it's assets are debt in some form.

Moving down to the next table, which is still Table 1, these are liabilities.  Currency in circulation is $1.1 Trillion; these are actual federal reserve notes out on the streets.  There is some other misc. entries, then $1.4 Trillion in reserve balances.  These are the sum of the reserves that banks are required to hold at the fed; essentially federal reserve notes that aren't in circulation.

Now, banks are engaged in what is called Fractional Reserve Banking, which means they can lend out more money than what they have in reserves deposited at the fed.  http://www.federalreserve.gov/monetaryp ... rvereq.htm  Banks with over $71 million in transaction accounts must keep 10% reserves according to the linked page.  So for the $1.4 trillion held in reserves, another $12.6 trillion can be extended as credit by banks.

So if you think about the total money supply, you have the $1.1 Trillion in currency, plus $1.4 trillion times however much the banks are lending above their reserve requirements, up to $12.6 trillion.

There a lot of inferences and conclusions to make based on the balance sheet, reserve requirements, and how they have changed over time, etc. etc., but I think understanding the balance sheet and what's on it is a good place to start.

MediumTex wrote:

murphy_p_t wrote: i find it interesting to note that both Lincoln and JFK both issued *debt-free* currency...and they both met the same end.

Wasn't Lincoln's secretary named Kennedy and Kennedy's secretary named Lincoln as well?

Yes - the similarities between Lincoln's and Kennedy's assassinations is eerie.  Lincoln was elected in 1860; Kennedy in 1960.  Lincoln's secretary named Kennedy advised him against going to Ford's Theater.  Kennedy's secretary, Evelyn Lincoln, advised him about not going to Dallas.  They were both shot on a Friday in the presence of their wives.  Both had a VP with the last name of Johnson.  Andrew Johnson born 1808; Lyndon Johnson born 1908. Both VPs were originally southerners.  Both of the accused assassins, John Wilkes Booth and Lee Harvey Oswald were killed before they could be brought to trial. Both John Wilkes Booth and Lee Harvey Oswald went by their 3 names and the total numbers in each man's name totals 15.  Both of the accused assassins held ideas that were opposed to the federal government.  Both Lincoln's and Kennedy's last names had seven letters.  Both Lincoln and Kennedy had premonitions about their upcoming deaths. 

There are several other similarities that I can't remember off the top of my head. 

Maybe someone else on the board remembers what those other similarities might be.

Bob

murphy_p_t wrote: i find it interesting to note that both Lincoln and JFK both issued *debt-free* currency...and they both met the same end.

people have been killed for much less than to protect a massive money-printing machine

hoost wrote: There a lot of inferences and conclusions to make based on the balance sheet, reserve requirements, and how they have changed over time, etc. etc., but I think understanding the balance sheet and what's on it is a good place to start.

For the reading impaired, here's a pretty chart of the same data:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=8

MG

hoost wrote:So if the Euro came from Deutsch-Marks (and other European currencies), where did the Deutsch Marks come from?

They came from "Bunds" — which is the equivalent of Treasuries. Remember, countries used to have gold-backed money, so they would issue Treasuries — or in Germany's case, Bunds — whenever they didn't have enough gold in their vaults. Now, countries just issue government bonds whenever they want to spend since all of these debt laws are already in place and worked pretty well in the past.

All of this "money as debt" idea dates back to 1694 when the Bank of England was formed. Bankers figured out they could lend gold (and paper gold) out to governments and charge everybody interest on loaned fractional reserves. That's when the first "national debt" started, and there has always been national debts ever since.

MediumTex wrote: Gumby,

Why do you think that virtually no one understands what you have written above?

It seems that what many people believe to be true is the exact opposite of what is actually true.  That's a strange state of affairs.

Another reason I can think of is that some people's career depend on them rejecting the operational realities of fiat money.

For instance, Keynesian economists believe that a nation must save its money, as a surplus, during good times in order to be able to spend, as a deficit, during bad times. Keynesian economics is an obsolete economic model. It made sense when our government was reserve constrained. But, of course, it makes no sense when you have a fiat debt-based monetary system, since a fiat government can't meaningfully "save" its money. That would be like a stadium "saving" up points for the big game.

So, a tenured Keynesian economist professor will never admit that MMR has validity — to do so would to invalidate their life's work. MMRists see this all the time with Paul Krugman. Over the past few months he's been borrowing ideas from MMR and MMT. But, when he talks about MMR/MMT, he grossly mis-represents it. It's not clear if this is intentional or not, but I wouldn't ever expect him to agree with MMR/MMT. He'd have to return his Nobel Prize if he did.

Now imagine inflationista or doomsdayer pundits. These guys get paid to present a certain narrative. What are the chances of any of them seeing things differently?

Gumby wrote:

hoost wrote:So if the Euro came from Deutsch-Marks (and other European currencies), where did the Deutsch Marks come from?

They came from "Bunds" — which is the equivalent of Treasuries. Remember, countries used to have gold-backed money, so they would issue Treasuries — or in Germany's case, Bunds — whenever they didn't have enough gold in their vaults. Now, countries just issue government bonds whenever they want to spend since all of these debt laws are already in place and worked pretty well in the past.

All of this "money as debt" idea dates back to 1694 when the Bank of England was formed. Bankers figured out they could lend gold (and paper gold) out to governments and charge everybody interest on loaned fractional reserves. That's when the first "national debt" started, and there has always been national debts ever since.

It appears the Deutsche Mark traces back through several other currencies, but eventually goes back to silver coins called the Vereinsthaler whose value was their weight (16 2/3 g) in silver.

The point I'm working toward making (haven't done all the research, thus the questions) is that every fiat currency I've researched at some point originated as either gold or silver money.  Through a string of deception and fraud by governments and banks, that money is exchanged for paper currency and then devalued to the point where they have to exchange the old worthless currency for new soon to be worthless currency.

Also, to say that these currencies have worked well in the past depends on your perspective.  They've worked well for whom?  They've certainly worked well for governments and banks, but I'd argue they've been horrible for the average people who've seen their live savings become worthless over and over as these currencies are inflated and then collapse.