Article that Explains our Debt Trap

[Conspirator]

Yes, this is for you Cutlass and other establishmentarians.

http://wallstreetpit.com/16803-the-impossible-math-of-debt-backed-money

THE PROBLEM:
All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.
The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,

…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!

 

[Loppan Torkel]

A huge debt is bad

 

[Conspirator]

The problem is that the whole world economy is fundamentally built on debt.

For example, the UK wants to get out of both public and private debt. The government wants the citizens to pay off credit cards and they want to reduce government spending so that the deficit is halved in three years. This is because the cost of servicing all that debt (the interest every year) is growing to such a degree that once you 'go past the point of no return' an eventual default is unavoidable. (See Greece.)

So what's wrong with that the government wanting us to reduce debt, you might ask?

Well if we DO pay off our credit cards and reduce deficit spending, the amount of money circulating in the UK economy will fall. What this means is that there will not be the same amount of money circulating as before so inevitably a certain percentage of businesses will not have any money coming in to survive.

What is the UK's answer to this conundrum? (What I mean by this what is what is the ideal scenario that will allow the UK economy to get out of debt.)

Increasing exports. (aka copy China and Germany)

What does that mean?

Make another country borrow for us.

This is the problem we are in. The world is hoping that developing countries will basically start taking up the debt burden until a temporary equilibrium is established again in the international money supply.

 

[Cutlass]

Yes, this is for you Cutlass and other establishmentarians.

http://wallstreetpit.com/16803-the-impossible-math-of-debt-backed-money

THE PROBLEM:
All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.
The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,

…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!

That ridiculous "money is debt" crap has been demolished by every person who knows economics so frequently that there's no excuse for taking it seriously again. In the past 3 year here in OT I'm sure you could find 20 threads demolishing the idiocy if you bothered.

As for the debt, sound macro economic policy says to run deficits in bad times, balance the budget most other times, pay down the deficit in good times. Obama's problem is that the Republican orthodoxy reverses this and the Republicans believe in running deficits at all times that a Democrat wouldn't get credit for the results.

Just because the Republicans are utterly and completely fiscally irresponsible does not mean that other people are required to be also.

 

[Conspirator]

Money is backed by debt. That is how money is circulated into the economy. Through the issue of loans. Over 90% of all money in circulation in the Western world is money created and backed through the promise to work and pay it back - plus interest.

The only way to increase base money, not money created through debt, is through a central bank buying government bonds on the open market, essentially printed money, or quantitate easing. However this injection of cash is then used to make loans that eventually increase the initial injection of cash 10 fold (through the multiplier effect of fractional reserve banking).

How is it that you see money gets circulated into the economy, Cutlass, if it isn't by the way I just described above.

 

[Cutlass]

Money is backed by debt. That is how money is circulated into the economy. Through the issue of loans. Over 90% of all money in circulation in the Western world is money created and backed through the promise to work and pay it back - plus interest.

The only way to increase base money, not money created through debt, is through a central bank buying government bonds on the open market, essentially printed money, or quantitate easing. However this injection of cash is then used to make loans that eventually increase the initial injection of cash 10 fold (through the multiplier effect of fractional reserve banking).

How is it that you see money gets circulated into the economy, Cutlass, if it isn't by the way I just described above.

This "money is debt" conspiracy theory is, to be the most charitable, putting the cart before the horse. Of course, that's charity beyond anything that happens in the real world.

It isn't just that you have the understanding of money fundamentally reversed, it is that you have the implications of what you saying so bass ackward that it is essentially impossible to unravel.

Why don't you reread THE LAST THREAD YOU STARTED ON THE SUBJECT WHERE THE IDEA WAS EXAMINED IN DETAIL AND COMPLETELY DISCREDITED. It was only a few months ago. That would make much more sense than doing this over again.

 

[innonimatu]

This "money is debt" conspiracy theory is, to be the most charitable, putting the cart before the horse. Of course, that's charity beyond anything that happens in the real world.

It isn't just that you have the understanding of money fundamentally reversed, it is that you have the implications of what you saying so bass ackward that it is essentially impossible to unravel.

Why don't you reread THE LAST THREAD YOU STARTED ON THE SUBJECT WHERE THE IDEA WAS EXAMINED IN DETAIL AND COMPLETELY DISCREDITED. It was only a few months ago. That would make much more sense than doing this over again.

Sorry, but you are the one who is mistaken (or, at least, more mistaken - that initial link also leads to a very simplistic rant on debt). Most "money" in the broadest sense is created originally as debt. The standard explanation is that it happens the other way around (bank deposits enable debt) but the reality is that banks create deposits when they decide to lend, which means debt->deposits. Thus even reserve requirements are not an effective tool to fight the cyclic irrational debt bubbles. And, crucially, it's the private commercial banks that create these debt bubbles, not governments or central banks. Governments, like consumers, just hitch on for the ride on low-interest debt during bubble times.

I advise you to read through a few of Steve Keen's arguments about the role of debt in the economy. His explanation is far too long to quote here, but this is a good starting point.

 

[warpus]

Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,

Wait, the U.S. spends $700 billion a year on interest payments? I must have misread...

 

[Integral]

Wait, the U.S. spends $700 billion a year on interest payments? I must have misread...

No.

NO.

Read carefully.

Interest payments were $390bn last year.

If the government were paying 5% interest, it would have been around $700bn.
But nominal rates are very very low on government debt right now. Close to 0% on short-term notes and like 2-3% on long-term bonds. That keeps interest on debt fairly low.

Further, gov't receipts last year were $2.4 trillion last year, far in excess of $390bn or even $700bn.

In fairness, the OP quote is horribly worded and disingenuous.

--

Is money debt? Money is a medium of exchange and unit of account...

 

[warpus]

Wait, so it's not $700 but "only" $390?

That's still more than 50% of how much you guys spend on your military and 10-15% of your entire budget.

 

[Integral]

Wait, so it's not $700 but "only" $390?

That's still more than 50% of how much you guys spend on your military and 10-15% of your entire budget.

Yeah, interest on debt has about a 10% budget share. What is it in Europe? Or Canada/Australia/NZ? (I don't know these things. I probably should.)

 

[innonimatu]

Wait, so it's not $700 but "only" $390?

That's still more than 50% of how much you guys spend on your military and 10-15% of your entire budget.

Money lending has always been a very profitable "industry", are you surprised?

Also, the US has a crazy social security system which makes pensions basically depend on the success of the money-lenders ans stock-market speculators. So state-paid interest is also kind of a hidden subsidy for that... with a disproportionately big share of it going to the managers of the private funds holding this debt. A thoroughly irrational system for the interests of the vast majority of its citizens, but they cling to it because they don't know better.

 

[Cutlass]

Sorry, but you are the one who is mistaken (or, at least, more mistaken - that initial link also leads to a very simplistic rant on debt). Most "money" in the broadest sense is created originally as debt. The standard explanation is that it happens the other way around (bank deposits enable debt) but the reality is that banks create deposits when they decide to lend, which means debt->deposits. Thus even reserve requirements are not an effective tool to fight the cyclic irrational debt bubbles. And, crucially, it's the private commercial banks that create these debt bubbles, not governments or central banks. Governments, like consumers, just hitch on for the ride on low-interest debt during bubble times.

I advise you to read through a few of Steve Keen's arguments about the role of debt in the economy. His explanation is far too long to quote here, but this is a good starting point.

No. Read what Integral said. Money is accounting. Ultimately nothing more and nothing less. It serves no purpose other than to keep track of other things.

You can have money without the existence of debt. You can have debt without the existence of money. Neither needs the other, neither causes the other.

Now the other problem is the manipulation of semantics. You want to make the claim that money causes debt, what happens is that, even if you can make the argument that it is true in the narrowest technical sense, saying it in that manner fundamentally leads you to false conclusions.

 

[choxorn]

So, the monetary system is fundamentally based upon debt and compound interest, which grows exponentially, thus leading to ever higher debts and compound interest, to the point of "Debt so high nobody can ever pay it off" that we've reached.

And because it's exponential, it's only going to get higher and grow faster. I'm sure there's some kind of problem with this.

 

[Integral]

So, the monetary system is fundamentally based upon debt and compound interest, which grows exponentially, thus leading to ever higher debts and compound interest, to the point of "Debt so high nobody can ever pay it off" that we've reached.

And because it's exponential, it's only going to get higher and grow faster. I'm sure there's some kind of problem with this.

A friendly reminder:

Updated in real-time!

 

[Antilogic]

A friendly reminder:

Updated in real-time!

Thanks for posting this--people tend to forget that every person's debit is another's credit. Or debt/asset. Or seller/buyer.

 

[amadeus]

No. Read what Integral said. Money is accounting. Ultimately nothing more and nothing less. It serves no purpose other than to keep track of other things.

If you believe that, then why ever create more of it?

 

[AL_DA_GREAT]

There are several fundamental problems. First off there is more debt than money. If a hundred dollars is created a hundred dollars plus interest has to be paid back. Second there is a constant shift of wealth to the ones who lend.

 

[pi-r8]

A friendly reminder:

Updated in real-time!

Adding to this... Since the total debt is zero, and we want regular people to have positive savings, it's absolutely necessary that the government run a debt.

 

[Cheetah]

This "money is debt" conspiracy theory is, to be the most charitable, putting the cart before the horse. Of course, that's charity beyond anything that happens in the real world.

It isn't just that you have the understanding of money fundamentally reversed, it is that you have the implications of what you saying so bass ackward that it is essentially impossible to unravel.

Why don't you reread THE LAST THREAD YOU STARTED ON THE SUBJECT WHERE THE IDEA WAS EXAMINED IN DETAIL AND COMPLETELY DISCREDITED. It was only a few months ago. That would make much more sense than doing this over again.

I really want to wrap my head around this.

I went back to that old thread. Even though I had gone through the whole thread before.

And after eleven pages of studying, I finally achieved enlightenment! I feel a bit Zen-like now.

Thanks for not giving up on the explanations Cutlass (and the other guys who contributed - even those who questioned).