What is this fixation with GDP?

If it were NDP (Net Domestic Product) I would be less concerned. But when you have companies like Ford Motor Company contributing hundreds of billions of dollars to the GDP, yet running at a net loss of tens of billions of dollars, that doesn't go very far towards fixing the debt problem.

Why would the average family care what the GDP is when, in the end, their grandchildren will be footing the $80,000+ bill that is their share of the debt?

If I were, say, a doctor running a clinic where my expenses (staff, rent, malpractice insurance, etc.) came to $350,000 a year, could I buy that new Cadillac because my Gross Income was a very healthy $325,000 a year?

Sure, our GDP is high, because we're doing it on borrowed money. We've lived high on the hog for decades on other people's money, and now it's time to pay the piper.

tanstaafl.

Oh, quite right. Not because it doesn't need to be done, but right now it would be impossible. The resources to do it simply do not exist.

The depressing part for me is that, should we somehow stumble our way out of this crisis it will just be business as usual, the debt will continue to mount until it becomes so overwhelming that the next crisis will have no possible solution at all.

I take it as a given that you cannot borrow your way to prosperity. I dunno... maybe I'm wrong. The world will be a lot better off if I am.

tanstaafl.

Because the GDP is a measure of the productivity of the national economy, from which their wages are ultimately paid, and it's what reassures them that a debt of just $80,000 per family, with an essentially unlimited time to pay it off through taxation, is nothing to lose sleep over.

Peter

Because that's $80,000 that the government owes them.

Okay, only a portion of that debt is owned by private US entities, but it's a large portion.

According to this article 45% of US Government debt (Treasuries) is owned by foreign countries. So the government owes us $44000 actually. The rest is owned by other countries. On the surface that is scary because if the countries sold their treasuries at the same time the US would probably have to default. But that won't happen, if it did the entire financial system would collapse.

I am similar - no savings (so I didn't lose anything), and the only debt I have is my mortgage, which thanks to my bank being sensible is at a really low interest rate. Plus business is way up - this is the busiest my team has been in 8 years.

I'm just working as usual, that's all normal folks can do and wait and see what the government/investment bankers/media foul up next :-)

It's not impossible. You're on the right track though.

It's impossible to do with the current monetary and financial system. If we reform the system, then we could pay off the national debt within a few years.

The problem now is that the dollar (as well as every other major world currency) is debt based. Every dollar created, is created out of debt. What do I mean by this?

Dollars are created in two ways. The first way is by government bonds being purchased by the Federal Reserve Bank. A trillion dollars worth of bonds can be bought at once, in one fell swoop, and POOF, our money supply is increased in size by a trillion dollars -- as well as our national debt. Congress will approve this when it needs money.

The second, and much larger, way is through fractional reserve banking. Fractional reserve banking (as opposed to full reserve) is the practice of maintaining small reserves in a bank while loaning out much more than exists. Every time money is lent out by a bank, that money has been created out of nothing.

For example, Person (A) deposits $100 into Bank XYZ. Bank XYZ loans out $90 to Person (B). Person (A) still has $100 in their checking account but now Person (B) has $90 in their checking account. Bank XYZ has $10 in reserves. Ninety percent of our inflation comes from fractional reserve banking.

It has its roots in the days when gold was traded for goods. People would deposit their gold in a goldsmith's vault for safe keeping. The goldsmith would give out a receipt for the gold deposited. People began using these receipts to trade for goods, since it was easier than retrieving their actual gold, so these receipts were used like paper money. Well, the goldsmiths soon realized that only a fraction of people ever retrieved their gold at any one time. They only needed to maintain enough gold reserves to cover the small fraction of people who wanted to retrieve their actual gold. So they began to print out more gold receipts than there was actual gold, and lent these receipts out at interest, thus increasing the size of the money supply and inflating everyone else's gold receipts. It's an ancient fraud that is still perpetuated today.

As you can see, every single dollar created in our fiat (ie., non-gold backed) dollar is created out of debt. Whether it be debt owed to the Federal Reserve Bank, or debt owed to a deposit bank, every dollar represents a loan that must be paid back -- plus interest. Unfortunately since every dollar must be paid back, there are no dollars left to pay the interest! Foreclosures and defaults are an inherent part of the system. We're running on a system of credit. When the credit lines stop, dollars begin to disappear and the dollar deflates, and people default on their loans.

So, to review, the dollar inflates when credit is easy and the dollar deflates when credit is hard to obtain. This is our boom and bust "business cycle". In actuality it is a calculatingly caused cycle, not a "natural" cycle of business.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

-Thomas Jefferson


Banks are in the business of dealing dollars. They want a deflated dollar because that means what they have the power to create is worth more. Unfortunately for them, every time they loan out new dollars, the money supply becomes more inflated. Thus it become necessary to conduct business for some period of time, all the while inflating the money supply. Then it becomes necessary to suddenly deflate the money supply to add value to the currency once again, while taking possession of actual wealth (eg., repossessions, foreclosures).

As you can see, the problem with inflation is not that "we're printing too much money." (Only about 5% of our money supply is printed on paper anyway) The problem is with the system. And not just the system, but those who control it. The wealth of our nation (and the world) does not simply vanish over night. (One must distinguish between wealth and money, which are direct opposites.) Wealth is transferred in such cases; not destroyed. Through a massive deflationary action (not a stock market crash), the Great Depression came about and the financial elite of western civilization gained possession of property and businesses for pennies on the dollar.

Who controls the value of money? The monetary authority -- in our case, the Federal Reserve Bank. (In the UK, the Bank of England. For the euro, the European Central Bank.) These are all privately owned banks. They all provide for an illusion of government control.

What is the solution?

a) Repeal the Federal Reserve Act.

b) Abolish fractional reserve banking.

As Thomas Jefferson (and many others) said, Congress should be in control of the money supply (and the people should be in control of Congress).

It's no coincidence that the Federal Reserve and the Income Tax were created in the same year (1913). The debt service on the national debt is the third largest budget item, after social security and defense.

The national debt can be paid off with debt-free dollars. (eg., newly created debt-free dollars, instead of Federal Reserve Notes. The operative word there is "notes", as in promissory notes.)

Congress will no longer need to borrow money from the privately-owned Fed, nor will they need to tax us nearly as much. Congress, being the monetary authority, can simply create new dollars to spend into the economy. This will serve to abolish (or significantly decrease) income taxes as well as increase the money supply at a healthy rate, such as 3% per year.

Commercial/deposit banks will no longer add to the money supply through fractional reserve banking. When Person (A) deposits $100 in Bank XYZ, then Person (B) borrows $90 from Person (A) then Person (A) will have $10 and will be owed $90.

We will no longer have outrageous inflation and taxes, and Congress will slowly inflate the money supply at a healthy rate by spending into the economy.

I was going to write a bit more, but I lost my train of thought because I helped the girlfriend with groceries and she dropped a jar of grape jelly.

For those of you who doubt the contents of this post, try reading (an easy read) Modern Money Mechanics, a document once circulated by the Federal Reserve Bank of Chicago.
http://landru.i-link-2.net/monques/mmm2.html

For a more in depth history, try Tragedy and Hope: A History of the World in Our Time, which is a 1350 page book published in 1966 and written by Carrol Quigley, a history professor at Princeton, Harvard, and Georgetown for over 30 years.

For a good online documentary video, try The Money Masters, produced by Bill Still circa 1995.

-Mojo

Hi. Fascinating reading. Who are you, again?

Again? That says "Posts: 1".

But I can answer your question: a Libertarian loon.

He'll go on and on about fiat currency, but even begin to suggest that gold is also a fiat currency (albeit one harder to produce more of), and he'll go off his rocker.

I don't really have a dog in this fight, but there is an opposing view.

I agree that gold has no utility (historically, except in modern electronics). I support a fiat currency. Colonial Scrip used by the American colonies is an excellent example, as are the Greenbacks created by Lincoln. Tally sticks were used in England for 700 years.

Reverting to a gold-backed currency will not fix the problems of fractional reserve lending practices and a privately-owned central bank.

In some cases a non-fiat currency can have devastating effects.

Don't get me wrong. I'm not advocating switching to gold. Note how the goldsmiths I mentioned were able to practice fractional reserve lending.

Hi, thanks. I'm Mojo!

So you think that we should switch to fee-based banking? Why would people want to put money in the bank? It would save them money to keep it under the mattress. Paying for the convenience of instant access to your money is reasonable, though.

But how would people borrow money? Or should they just save up in order to buy a home?

You realize that's a joke, right?

Prisoners have since adopted the mackerel standard.

Because everyone one knows, mackerel is the real prison currency.

Oh, goodie. When can I expect my check?

tanstaafl.

Heather! It's been a long time since we've heard from you. I'm glad to see that you're still around. We've missed you!

tanstaafl.

We should switch to full-reserve banking instead of fractional-reserve banking. Since banks will no longer be able to create money, their services might involve housing funds for a fee, or brokering loans between entities.

People will still be able to buy a house with credit. Their borrowed funds will come from individuals or entities with actual funds, as opposed to borrowing from a bank that creates the funds out of thin air.

Overall, we will have a more stable money supply and economy.



Well it's not as much fun if you point it out.

I don't understand. The basic premise of fractional-reserve banking is that a bank accepts deposits from customers and then uses those funds to invest with. Limit "invest with" to "offer mortgages" (as with S&Ls pre-1980-ish), and we have what you just described.

Bitt, I appreciate this extenuation....

...but thanks for the setup!

Check's in the mail!

So if I understand you correctly you're suggesting that no-one can borrow money unless that loan is 100% covered by deposits ?

So bank A has 100 customers each depositing $10 into savings (and presumably they would have to keep additional funds for their daily needs which can not be lent out). 5 people come along and each borrow $200 to buy a house.

Where does the sixth person go for their mortgage ? Where does the local storekeeper go to get his trade financing ? Oh look, here comes Intel who wants to borrow $2000 to build a semiconductor plant, which they will pay for out of future cashflows. Guess they will just have to go offshore to a sensible banking system and take those jobs with them.

Seems like a good way to derail an economy.

I think I finally deciphered what you're getting at. The problem is that the problem you're describing is not fractional-reserve banking. It's excessive leverage.

If a bank accepts $100 in deposits and loans $90 of it, and accepts interest on that loan, it is not "creating" money. It is performing fractional-reserve banking.

However, if a bank accepts $100 in deposits and loans $110 of it, it is "creating" money. But that's not a feature of fractional-reserve banking. This is only really possible when trading debt directly, because if you were required to purchase a commodity, a payment is required. (Think of a mortgage. The bank loans you money and they give you, or, really, the seller, actual dollars. Yeah, it's usually a check, but you could go trade that for real greenbacks.)

But fractional-reserve banking is irrelevant to that. In fact, banking is irrelevant to that. Microsoft could, for example, decide to start making loans out of its cash reserves, and end up loaning more than it really has, but in no way is it a bank.

This is really the commercial equivalent of "You know I'm good for it." Yeah, an institution might have enough money to cover that individual debt, but you don't know how many other debts they owe, nor the likelihood of them getting returns from those debts.

This isn't a fractional-reserve banking problem, it's a regulation problem. If all loaning institutions were required to detail all of their loans, then there would be no opaqueness that prevents entities from seeing the risks involved. But the government continually removed transparency from the banking industry over the last 15 years or so, to the point where there were certain markets that couldn't be viewed at all, like the credit default swap market.

So I agree with you that this sort of supremely risky loaning should be curtailed. I totally disagree with your conclusion that the Federal Reserve Act and fractional-reserve banking have anything to do with it.

Bitt,

I don't think this impacts the point you were trying to make here.
But since no one has mentioned it yet, I wanted to remind everyone of the multiplier effect inherent in fractional reserve banking.

If someone deposits $100, the banking system doesn't loan out $90, it loans out $900 with a reserve requirement of 10%
and it loans out ("creates") $1900 with a reserve requirement of 5%.

(A disguised but quick digression on convergent infinite series.)
Person A deposits $100 in Bank A.
Bank A loans out $90 to Person B.
If Person B sticks the money in a sock and buries it in his back yard (as we all are often wont to do), then that's the end of the story.

Otherwise:
Person B deposits the $90 in Bank B.
Bank B loans out $81 (90% of $90) to Person C.
Person C deposits the $81 in Bank C
which then proceeds to lend out $72.90, etc. etc.

Converging to $1000 "existing" from the original $100 deposit.
Of which $900 has been "created" by the fractional reserve system.
(or $1900 created in a 5% reserve system!)


Also, Bank A, B, and C are allowed to be one and the same bank.

I think most people vaguely recall hearing about this in school,
so pardon the posting space for reiterating this.
I just wanted to bring it up since no one else has mentioned it yet.

But fractional reserve banking inherently creates money.
And tweaking the reserve requirement is one tool that is used to alter the money supply.

Yeah, that was all in Economics 101 when I studied it back in 1983.

Cheers

Yeah, but real people don't take out a loan to put the money in the bank; it's a losing proposition. Only banks do that, and it's that sort of opaqueness that needs to be regulated.

No, they take out a loan to pay someone else. And that person puts the money in the bank.

Exactly, music.

Bitt, I refer you to Modern Money Mechanics.
http://landru.i-link-2.net/monques/mmm2.html

This document was written by the Federal Reserve Bank of Chicago. Check out the sections "Who Creates Money", "What Limits the Amount of Money Banks Can Create?", and "Bank Deposits - How They Expand or Contract".

Here's an excerpt from the section "How Much Can Deposits Expand in the Banking System?"



We need a debt-free dollar. We've had it before, and we need it again.

This is what I have been pontificating for years with my Cassandra-like whining, but you state the case much more authoritatively and with better referrals than I. All I have to rely on is my intuition, you seem to actually have some education in the matter.

As I said earlier (in this very thread, actually) I feel (yes, intuitively, not from any real study of the situation) that our problems are compounded, possibly beyond the point of solvability without enormous world-wide suffering, by the fact that most of the "wealth" of humanity is/was illusory and it isn't likely that anybody is in any better shape than we are to bail us out of our (or their own) trouble.

Some interesting reading here that is an elaboration of the point that Music made earlier.

tanstaafl.