4 ms·

Can you explain the "money from the future" thing? The only money that I know is a) a metal coin and b) a contract. Now, the contract naturally deals with futu

Can you explain the "money from the future" thing? The only money that I know is a) a metal coin and b) a contract. Now, the contract naturally deals with future expectations as does the stock market. The stock market, however, does not create money. It distributes money. One problem that arises in this regard is making contracts about money (which is other contracts). When the expectations fail, the contracts fail and if the contract was used to create money, you now have a problem. The money supply ultimately shrinks and the contracts about money start to fail. This is usually the point where the government announces big spending programs to lessen the pain. You may ask where does the government get that money? There are two fundamentally different methods. 1) from people who accumulated money. They give it to the government and the government spends it. In turn the government needs more money to pay those people back. Does the money supply increase this way? Kind of, but not really. It just helps to bring existing money back into circulation but does not create new money. It is therefore only a temporary fix. One day the government will stop paying those people back. 2) The government just creates new money. They can do this if they control the currency (sorry, Greece). The dangerous part about this is that it is so easy to create new money once the dam has been broken and this new money isn't backed up with value. When this goes out of hand it leads to hyperinflation (as in Germany 1920s) where the currency is devalued. By having a really strong and reasonable government, you can force 1) at low cost and control 2) without going overboard. China might be in a position where they can do that for a long time.

ChuckMcM 11y ago
"Money from the future" is a way of describing using future GDP to pay for current goods. Its a bet that what ever you are using the money for will result in a way to pay it back in the future while still benefiting from the investment. Simple example: I borrow $50,000 from a bank to open a restaurant. Lets split that into two bets: First, I bet that from my future revenue, I'll be able to pay back the bank and keep operating my restaurant. So in my own time line if you will I am taking money I'll be earning from paying customers in the future and using it in the present to actually build my restaurant. The way I do this is with a bank. Second, the bank kind of believes and kind of doesn't believe that I can pay it back. So it says "we'll take some money we have laying about and give it to you to open a restaurant, but you have to pay it all back to us in 10 years and every year we want an additional 7.2% from you. What that means is that after 10 years you will have paid them back double the amount of money you borrowed. So I've taken $50,000 of my future revenue, and turned it into a monthly obligation to the bank of $834. So if I sell my pies for $8.34, the first 100 pies of every month end up having all that money going to the bank which loaned me the money. So in my "present" money is going to pay off my "past" borrowing. Had I not taken the loan that $834 would go right into my pocket. In a Macro Economic sense, if you take on debt, and invest the capital represented by that debt to grow the economy, then in the future the larger economy, some of the GDP is going to servicing (or paying off) that debt rather than additional growth. If your economy cannot sustain that drag (debt service) then it tends to contract, which makes it even less able to support that drag. If you read George Soros he will tell you that any day now the entire world is going to implode in just that fashion :-). The careful thing you have to watch out for is talking about "money" which everyone thinks of as bills and coins or balances in a bank account, and "GDP" which is essentially the "value" created by all of the economic activity in an economy. Governments try to manage their economy to grow its GDP, and because transactions in the economy are often (but not always!) transacted using the national currency, economic figures are often reported in terms of dollars or yuan or yen or what have you. But you have to remember that you can have an economy that doubles in size, the the size of the monetary denominational transactions might be the same, more (inflation), or less (deflation). China is in the situation of trying to show the world a growing GDP (their economy). They have a spotty track record when it comes to how accurately they compute that :-) but fundamentally if they cannot actually grow it, then the debt they hold which they created in order to grow, will not be serviceable without shrinking the size of their economy. The traditional "fix" for that is that the exchange rate between economic value and currency changes so that the numbers match. China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value. But what that really means is you aren't selling enough pizzas so you start charging $834 per pizza and just by selling one a month you can meet your monthly debt payment. And the citizen says "Gee, remember when you could get a nice pizza for less than $10? I miss those days."
- abc_lisper 11y ago
  Very nicely explained. Now on to George Soros ... :)
- static_noise 11y ago
  Thanks for the explanation. I see your point: "Taking money from the future." is a figurative term for "Promising money to someone at a future point of time." Another thing is unclear now: > China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value. What do you mean with "allow to inflate"? Inflation is growth of the amount of money == new debt needs to be created. How is this done? Who takes on new debt?
  - meric 11y ago
    Imagine if you set aside a retirement fund. One day, you get a pay cut of 20%, and you choose to stay in your job. You don't have enough income to cover your expenses. So you make a deal with yourself to borrow from your retirement fund, at 5% interest. You tell yourself you will pay it back eventually. Month after month, you borrow from your retirement fund, which dwindles slowly. Your retirement fund's balance sheet looks fine, because you're still accumulating assets, like the loan it made to you, which is growing in value by 5% per year. You are also accruing a lot of debt to yourself, in the meantime. One day, you find yourself having so much debt to yourself, you can't service the 5% interest rate. That's when you face the music and realise you've spent all your capital away. That's what "Taking money from the future" means. That's what's happening when a country lends lots of money to itself, and eventually has a debt problem. It's also what's happening when Social Security is "investing" in government bonds, investing in a government that's never repaying it's loans. Where did that spent capital go in China? Concrete buildings.
    - iofj 11y ago
      And if you're a country you keep going : 5% turns out to be too much -> you lower it to 4%. You simply legislate this. You loan more. Until 4% is too much as well ... 4% too much ... 3% ... 2% ... 1.5% Once you go below a reasonable chance of non-repayment (countries have survived on average ~60 years, because a lot were "interrupted" or ... during WWII and a lot of debt was "forgiven" at the point of a gun) Now you're a country ... so you legislate that people loan you money, making it sound vaguely reasonable by saying that's what they're paying for FDIC insurance (or equivalent, in Europe). Of course you don't have the money, nor the ability to borrow the money, that you'd need to actually satisfy a "real" FDIC incident (one component of "too big to fail" banks). The banks realize that you've done this, so what do they do ? They borrow massive amounts of money to one another. Why does this help ? Well it guarantees that anyone who's done this borrowing of large amounts of money can't be thrown under the bus. Why not ? Because if one of them goes down, it will take down others (by not repaying the loan). So the government is forced to save even the ones where the FDIC reserves might actually suffice. Also, you pay out this loan to your shareholders and management (to yourself, essentially). 1.5% ... 1% ... 0.5% The banks are losing money, because they can't convince investors their loans are probably backed. But you're a government ... you simply legislate that these companies that loan you lots of money exist, and you save them. And then they take more risk, and more risk, and fuck up, and get bailed out, and take yet more risk, maybe get bailed out a bit more. Your interest rate devaluations let you borrow more, but you have to use it to save the "too big to fail" banks/companies. Note that the government is not innocent in the risk taking : because the government is effectively taxing loans (by making sure they can't get a proper risk premium, and have to loan to the government -> other parts of the bank need to make enough profit to make up). And of course you're still borrowing money for the reasons you started to borrow money. 0.5 ... 0.25 ... 0 ... -0.05 ... -0.3% Now you're having the problem that these banks are bleeding money - fast. And they can't charge their customers, because they can simply withdraw money and keep it in their mattress. So you ... well this is where we are today ... what's next ? Outlawing cash, gold, a lot of types of stock, and directly taxing all bank deposits is the obvious answer. And the only other option is to lower global government expenses by ~12%. Essentially a wealth tax. There is of course another option: if they don't make a choice there is one other solution : having 10%+ inflation in Europe and America. All mortgages at 15% for a year or two and just deal with the miser that'll cause. This is what will happen "by default": if the central banks fail to agree on a course of action.

ChuckMcM 11y ago

"Money from the future" is a way of describing using future GDP to pay for current goods. Its a bet that what ever you are using the money for will result in a way to pay it back in the future while still benefiting from the investment. Simple example: I borrow $50,000 from a bank to open a restaurant. Lets split that into two bets: First, I bet that from my future revenue, I'll be able to pay back the bank and keep operating my restaurant. So in my own time line if you will I am taking money I'll be earning from paying customers in the future and using it in the present to actually build my restaurant. The way I do this is with a bank. Second, the bank kind of believes and kind of doesn't believe that I can pay it back. So it says "we'll take some money we have laying about and give it to you to open a restaurant, but you have to pay it all back to us in 10 years and every year we want an additional 7.2% from you. What that means is that after 10 years you will have paid them back double the amount of money you borrowed. So I've taken $50,000 of my future revenue, and turned it into a monthly obligation to the bank of $834. So if I sell my pies for $8.34, the first 100 pies of every month end up having all that money going to the bank which loaned me the money. So in my "present" money is going to pay off my "past" borrowing. Had I not taken the loan that $834 would go right into my pocket. In a Macro Economic sense, if you take on debt, and invest the capital represented by that debt to grow the economy, then in the future the larger economy, some of the GDP is going to servicing (or paying off) that debt rather than additional growth. If your economy cannot sustain that drag (debt service) then it tends to contract, which makes it even less able to support that drag. If you read George Soros he will tell you that any day now the entire world is going to implode in just that fashion :-). The careful thing you have to watch out for is talking about "money" which everyone thinks of as bills and coins or balances in a bank account, and "GDP" which is essentially the "value" created by all of the economic activity in an economy. Governments try to manage their economy to grow its GDP, and because transactions in the economy are often (but not always!) transacted using the national currency, economic figures are often reported in terms of dollars or yuan or yen or what have you. But you have to remember that you can have an economy that doubles in size, the the size of the monetary denominational transactions might be the same, more (inflation), or less (deflation). China is in the situation of trying to show the world a growing GDP (their economy). They have a spotty track record when it comes to how accurately they compute that :-) but fundamentally if they cannot actually grow it, then the debt they hold which they created in order to grow, will not be serviceable without shrinking the size of their economy. The traditional "fix" for that is that the exchange rate between economic value and currency changes so that the numbers match. China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value. But what that really means is you aren't selling enough pizzas so you start charging $834 per pizza and just by selling one a month you can meet your monthly debt payment. And the citizen says "Gee, remember when you could get a nice pizza for less than $10? I miss those days."

abc_lisper 11y ago
Very nicely explained. Now on to George Soros ... :)
static_noise 11y ago
Thanks for the explanation. I see your point: "Taking money from the future." is a figurative term for "Promising money to someone at a future point of time." Another thing is unclear now: > China allows the Yuan to "inflate" to 10x its current value, and then services the debt with this inflated value. What do you mean with "allow to inflate"? Inflation is growth of the amount of money == new debt needs to be created. How is this done? Who takes on new debt?
- meric 11y ago
  Imagine if you set aside a retirement fund. One day, you get a pay cut of 20%, and you choose to stay in your job. You don't have enough income to cover your expenses. So you make a deal with yourself to borrow from your retirement fund, at 5% interest. You tell yourself you will pay it back eventually. Month after month, you borrow from your retirement fund, which dwindles slowly. Your retirement fund's balance sheet looks fine, because you're still accumulating assets, like the loan it made to you, which is growing in value by 5% per year. You are also accruing a lot of debt to yourself, in the meantime. One day, you find yourself having so much debt to yourself, you can't service the 5% interest rate. That's when you face the music and realise you've spent all your capital away. That's what "Taking money from the future" means. That's what's happening when a country lends lots of money to itself, and eventually has a debt problem. It's also what's happening when Social Security is "investing" in government bonds, investing in a government that's never repaying it's loans. Where did that spent capital go in China? Concrete buildings.
  - iofj 11y ago
    And if you're a country you keep going : 5% turns out to be too much -> you lower it to 4%. You simply legislate this. You loan more. Until 4% is too much as well ... 4% too much ... 3% ... 2% ... 1.5% Once you go below a reasonable chance of non-repayment (countries have survived on average ~60 years, because a lot were "interrupted" or ... during WWII and a lot of debt was "forgiven" at the point of a gun) Now you're a country ... so you legislate that people loan you money, making it sound vaguely reasonable by saying that's what they're paying for FDIC insurance (or equivalent, in Europe). Of course you don't have the money, nor the ability to borrow the money, that you'd need to actually satisfy a "real" FDIC incident (one component of "too big to fail" banks). The banks realize that you've done this, so what do they do ? They borrow massive amounts of money to one another. Why does this help ? Well it guarantees that anyone who's done this borrowing of large amounts of money can't be thrown under the bus. Why not ? Because if one of them goes down, it will take down others (by not repaying the loan). So the government is forced to save even the ones where the FDIC reserves might actually suffice. Also, you pay out this loan to your shareholders and management (to yourself, essentially). 1.5% ... 1% ... 0.5% The banks are losing money, because they can't convince investors their loans are probably backed. But you're a government ... you simply legislate that these companies that loan you lots of money exist, and you save them. And then they take more risk, and more risk, and fuck up, and get bailed out, and take yet more risk, maybe get bailed out a bit more. Your interest rate devaluations let you borrow more, but you have to use it to save the "too big to fail" banks/companies. Note that the government is not innocent in the risk taking : because the government is effectively taxing loans (by making sure they can't get a proper risk premium, and have to loan to the government -> other parts of the bank need to make enough profit to make up). And of course you're still borrowing money for the reasons you started to borrow money. 0.5 ... 0.25 ... 0 ... -0.05 ... -0.3% Now you're having the problem that these banks are bleeding money - fast. And they can't charge their customers, because they can simply withdraw money and keep it in their mattress. So you ... well this is where we are today ... what's next ? Outlawing cash, gold, a lot of types of stock, and directly taxing all bank deposits is the obvious answer. And the only other option is to lower global government expenses by ~12%. Essentially a wealth tax. There is of course another option: if they don't make a choice there is one other solution : having 10%+ inflation in Europe and America. All mortgages at 15% for a year or two and just deal with the miser that'll cause. This is what will happen "by default": if the central banks fail to agree on a course of action.