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Yes. Hard to over-emphasize how important this point is. For the longest time I also incorrectly understood the money system because I watched videos (DVDs back

Yes. Hard to over-emphasize how important this point is. For the longest time I also incorrectly understood the money system because I watched videos (DVDs back then) that claimed there wasn't enough money to pay back all the debt, and I believed them. The simplest way to understand why this isn't true is to consider the following thought experiment. 1. Alice has $100. This is the only money that exists in the world. She loans it to Bob at a rate of 10% interest. 2. Bob receives the money and immediately hands it back to Alice in order to purchase supplies to set up his new business. Alice now has $100 again, and Bob owes $110. Note: total debt > money supply. 3. Bob creates his business and finds a customer - Alice again, who lent money to Bob because she needed his business services. 4. Alice pays Bob $20 for a widget he made. 5. Bob now has $20, Alice has $80. 6. Bob uses that $20 to pay off part of his loan to Alice. He gives it right back to her, which clears both his interest payment and part of the principal. Alice now has $100 again, and Bob has nothing, but Bob now owes Alice only $90. 7. Go to Step 4 and repeat until Bob's debt is reduced to zero. In this scenario Bob will eventually pay off his debt even though there apparently isn't enough money to do so. The reason is the difference between stocks and flows, as neilwilson points out. Debt is cancelled by a flow of capital, but money circulates and as it moves it creates flows. The less money you have the faster it needs to move to cancel a debt in unit time.

marapuru 4y ago
Very well explained. Thank you for this.
nine_zeros 4y ago
I don't think that when people talk about money being debt, they are denying that the flow will not destroy the debt. The flow surely will destroy the loan. But when the first loan was made, $10 was given to Bob. But Alice also saw the same $10 as an asset. This created more money in the system, as in, suddenly both Bob and Alice were rich. And when the debt was finally paid off by Bob, Bob is poor again. The only way more money can come into the system, and Bob can have money again, is if another loan is made. So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression.
- origin_path 4y ago
  No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. "And when the debt was finally paid off by Bob, Bob is poor again." Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. "So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression." You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
  - nine_zeros 4y ago
    I see where you are coming from but I can also see you are missing the point. > No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. Creation of money is an abstraction. When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit. Alice sees the same thing as her asset as Bob sees as his liability. However, both can trade the asset/liability for goods and services. This is creation of money, via fractional reserve, since both the lender and borrower can trade goods with the same base money. > Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. And that is the point. Bob can pay off his debt by selling goods to others. But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars. It was all created via a loan on some balance sheet and the human simply acquired it via trading of their work. > You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed. Wealth obviously was destroyed. At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk. Wealth was created with the new business but wealth was also destroyed with the asset/liability draw eliminated to zero. What helps really understanding this wealth effect via fractional reserve is scaling your example to the entire dollar economy. By your example the total amount of money in the system effectively is zero because ultimately it is all two sides of the balance sheet. Yet, wealth is still measured in assets whose value goes up by that asset being more valuable through others spending money that was created via debt.

marapuru 4y ago

Very well explained. Thank you for this.

nine_zeros 4y ago

I don't think that when people talk about money being debt, they are denying that the flow will not destroy the debt. The flow surely will destroy the loan. But when the first loan was made, $10 was given to Bob. But Alice also saw the same $10 as an asset. This created more money in the system, as in, suddenly both Bob and Alice were rich. And when the debt was finally paid off by Bob, Bob is poor again. The only way more money can come into the system, and Bob can have money again, is if another loan is made. So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression.

origin_path 4y ago
No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. "And when the debt was finally paid off by Bob, Bob is poor again." Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. "So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression." You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
- nine_zeros 4y ago
  I see where you are coming from but I can also see you are missing the point. > No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. Creation of money is an abstraction. When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit. Alice sees the same thing as her asset as Bob sees as his liability. However, both can trade the asset/liability for goods and services. This is creation of money, via fractional reserve, since both the lender and borrower can trade goods with the same base money. > Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. And that is the point. Bob can pay off his debt by selling goods to others. But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars. It was all created via a loan on some balance sheet and the human simply acquired it via trading of their work. > You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed. Wealth obviously was destroyed. At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk. Wealth was created with the new business but wealth was also destroyed with the asset/liability draw eliminated to zero. What helps really understanding this wealth effect via fractional reserve is scaling your example to the entire dollar economy. By your example the total amount of money in the system effectively is zero because ultimately it is all two sides of the balance sheet. Yet, wealth is still measured in assets whose value goes up by that asset being more valuable through others spending money that was created via debt.