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Very good explanation. Thank you! > Its easy to say "we should just get rid of debt", but the issue there is that we know debt works, when used well, even over

by NTDF9 8y ago

Very good explanation. Thank you! > Its easy to say "we should just get rid of debt", but the issue there is that we know debt works, when used well, even over the long run. Think about it: If I want to open a business, there's no way I can afford that without Debt. So I take out $100k. In five years, lets say I've made $500k total This is the part where I fumble. In a society with 2 citizens and one bank, if citizen 1 borrows $100k, the maximum profit they can make = money borrowed by citizen 2. Three cases in the above example with 10% interest: 1. Citizen 2 doesn't borrow but instead just lives by hunting deer. Citizen 1 and the bank will go bust 2.Citizen 2 borrows 200k and spends 100k on something citizen 1 provides. Citizen 1 makes 100k profit and repays the loan with interest, say total 110k. Now citizen 2 is still on the hook for 220k. How will Citizen 2 get 220k if he has only 100k left and the other citizen has only 90k left? The only way I see it is they produce another kid who takes another loan. 3. Citizen 1 takes 100k loan, Citizen 2 takes 5k loan. Citizen 2 pays 5k to Citizen 1. Citizen 1 did not make enough to repay the 10% interest. So bank sucks it up and gets back 105k. Citizen 2 absolutely doesn't have any money to repay that 5k loan they took. So both Citizen 1 and 2 are busted. What now? They have to take more loans infinitely? (Short of producing other citizens who take loans) I would really appreciate your views.

013a 8y ago
I think, in that example, the bank wouldn't loan the money in the first place. This sounds like a cheat, but banks do this every day; if you ask for money and their analysis concludes that its unlikely they'll get it back, they're not going to loan it out. But, reality isn't as simple as that example. The biggest thing that's missing there is Collateral. Lending isn't about just dollars; a bank is happy to loan you $100k if you've got $100k, or even say $50k, in assets to write on there. Because if you declare bankruptcy they can send their goons to your house and take everything you own. Another way to think about collateral could be something like "intrinsic productivity"; its the things you own due to your own work and brain, not because a bank bought it for you. Everyone has something like this. Even back in 1200 BC, you were cutting down forests (with your hands) using an axe (which you built) to make a farm (which you run). That's collateral; it has value because human nature gives it value, not because it has a dollar sign attached to it. The bank can recognize that and assign a dollar sign to it. Hell, in civilizations past, you could be collateral; if you default, you get sold into slavery. Another more minor thing that's missing is that the number of dollars in the world isn't a zero sum game. The fed is constantly printing more dollars. That's a job of a central bank. And its not just to replace bad ripped up dollars; they often increase the total amount of dollars in the world. When they want to put more money out there, the Fed buys assets from the public using money that didn't even exist before the purchase. That right there is the power of the Central Bank. Normally this takes the form of buying Treasury Bonds back from the public, but I don't want to get too deep into the weeds of "where did these bonds come from in the first place"; conceptually they can buy any asset, and because the money they just bought it with didn't exist until right now, they've added dollars to the system without impacting the "net value" of goods in the world. Then in the future, if they feel there are too many dollars, they can sell those assets back to the public.
- NTDF9 8y ago
  Thanks for the details again! The phrase "selling your soul" has a new meaning to it now :) > Normally this takes the form of buying Treasury Bonds back from the public This is the scary part though. The major way "new money" comes into existence is by the pledge of the government (and thus citizens) to pay the Fed back. Extrapolating my earlier example, If citizen 1 is US Treasury and citizen 2 is a real person, the only way citizen 1's (US treasury) debt can be repaid is if citizen 2 (real person with no assets besides intrinsic productivity) borrows at least as much and pays to citizen 1 or produces a child who also takes a loan and pays to citizen 1(setting the debt into perpetuity for all US citizens). The alternative to paying US dollar denominated debt seems to be taking all US citizens' intrinsic productivity (assuming all collateral is already taken away) Is there any money that is not debt to the Fed? I'm not saying Fed is evil but I don't see the sustainability of this system unless there is a "constantly increasing supply" (not gold, land which are limited) of wealth that is not debt or falling back to some form of slavery. Another way to look at this is: Even if I am prudent and don't take on any debt but bootstrapped myself into wealth, I'm subject to debt to the Fed simply because the treasury owes money to the Fed, simply because that's how money was created in the first place.
  - 013a 8y ago
    I don't believe the situation you outline is the case in reality. Dollars are not, in a sense, "debt" to the Fed. I don't owe the Fed a dollar because I have a dollar (you could make an argument that inflation actually makes this statement false, but that's a different argument outside the realm of Debt). A Treasury Bond is more the opposite; its a debt where the treasury is the borrower. The simple goal of T-Bonds is such that the government makes an assumption: the rate of GDP growth (and thus taxes) will outpace the rate at which they have to pay back their interest. This has almost always been the case, including today. > I don't see the sustainability of this system unless there is a "constantly increasing supply" of wealth There is a constantly increasing supply of wealth (lets call it by its real term: Productivity). Our population is increasing. And we're getting better at building technology. These are the two primary sources of increased productivity. When Productivity goes up, GDP goes up, and taxes go up. Debts get repaid. Maybe this isn't sustainable over the long term. But nothing is sustainable over the long term. That's not the point of an economy. If you like toilets, and iPhones, and $5 shirts from H&M, and HackerNews, then you have to respect that it works for us. And it'll probably work for our children too, because as long as we keep having children Productivity will increase. Here's another way to think about it: We are on this planet for 80 years. That's it. We need to engineer systems that maximize those 80 years for every interval of 80 years every person has. That's why we have Debt; otherwise our only Wealth would come from (1) inheritances, and (2) our intrinsic Productivity. That doesn't sound like a great system to me.

by NTDF9 8y ago

013a 8y ago

I think, in that example, the bank wouldn't loan the money in the first place. This sounds like a cheat, but banks do this every day; if you ask for money and their analysis concludes that its unlikely they'll get it back, they're not going to loan it out. But, reality isn't as simple as that example. The biggest thing that's missing there is Collateral. Lending isn't about just dollars; a bank is happy to loan you $100k if you've got $100k, or even say $50k, in assets to write on there. Because if you declare bankruptcy they can send their goons to your house and take everything you own. Another way to think about collateral could be something like "intrinsic productivity"; its the things you own due to your own work and brain, not because a bank bought it for you. Everyone has something like this. Even back in 1200 BC, you were cutting down forests (with your hands) using an axe (which you built) to make a farm (which you run). That's collateral; it has value because human nature gives it value, not because it has a dollar sign attached to it. The bank can recognize that and assign a dollar sign to it. Hell, in civilizations past, you could be collateral; if you default, you get sold into slavery. Another more minor thing that's missing is that the number of dollars in the world isn't a zero sum game. The fed is constantly printing more dollars. That's a job of a central bank. And its not just to replace bad ripped up dollars; they often increase the total amount of dollars in the world. When they want to put more money out there, the Fed buys assets from the public using money that didn't even exist before the purchase. That right there is the power of the Central Bank. Normally this takes the form of buying Treasury Bonds back from the public, but I don't want to get too deep into the weeds of "where did these bonds come from in the first place"; conceptually they can buy any asset, and because the money they just bought it with didn't exist until right now, they've added dollars to the system without impacting the "net value" of goods in the world. Then in the future, if they feel there are too many dollars, they can sell those assets back to the public.

NTDF9 8y ago
Thanks for the details again! The phrase "selling your soul" has a new meaning to it now :) > Normally this takes the form of buying Treasury Bonds back from the public This is the scary part though. The major way "new money" comes into existence is by the pledge of the government (and thus citizens) to pay the Fed back. Extrapolating my earlier example, If citizen 1 is US Treasury and citizen 2 is a real person, the only way citizen 1's (US treasury) debt can be repaid is if citizen 2 (real person with no assets besides intrinsic productivity) borrows at least as much and pays to citizen 1 or produces a child who also takes a loan and pays to citizen 1(setting the debt into perpetuity for all US citizens). The alternative to paying US dollar denominated debt seems to be taking all US citizens' intrinsic productivity (assuming all collateral is already taken away) Is there any money that is not debt to the Fed? I'm not saying Fed is evil but I don't see the sustainability of this system unless there is a "constantly increasing supply" (not gold, land which are limited) of wealth that is not debt or falling back to some form of slavery. Another way to look at this is: Even if I am prudent and don't take on any debt but bootstrapped myself into wealth, I'm subject to debt to the Fed simply because the treasury owes money to the Fed, simply because that's how money was created in the first place.
- 013a 8y ago
  I don't believe the situation you outline is the case in reality. Dollars are not, in a sense, "debt" to the Fed. I don't owe the Fed a dollar because I have a dollar (you could make an argument that inflation actually makes this statement false, but that's a different argument outside the realm of Debt). A Treasury Bond is more the opposite; its a debt where the treasury is the borrower. The simple goal of T-Bonds is such that the government makes an assumption: the rate of GDP growth (and thus taxes) will outpace the rate at which they have to pay back their interest. This has almost always been the case, including today. > I don't see the sustainability of this system unless there is a "constantly increasing supply" of wealth There is a constantly increasing supply of wealth (lets call it by its real term: Productivity). Our population is increasing. And we're getting better at building technology. These are the two primary sources of increased productivity. When Productivity goes up, GDP goes up, and taxes go up. Debts get repaid. Maybe this isn't sustainable over the long term. But nothing is sustainable over the long term. That's not the point of an economy. If you like toilets, and iPhones, and $5 shirts from H&M, and HackerNews, then you have to respect that it works for us. And it'll probably work for our children too, because as long as we keep having children Productivity will increase. Here's another way to think about it: We are on this planet for 80 years. That's it. We need to engineer systems that maximize those 80 years for every interval of 80 years every person has. That's why we have Debt; otherwise our only Wealth would come from (1) inheritances, and (2) our intrinsic Productivity. That doesn't sound like a great system to me.