11 ms·

Where has all the money in the world gone?

448 points by stevenj 14y ago

bokonist 14y ago
The fundamental problem is that the monetary systems of the modern world are all designed on the Wile E. Coyote principle. As long as you never look down, the system works. In the U.S. there is ~$14 trillion in government debt. There exists tens of trillion more in private debt. But only $2 trillion exists in bonafide, actual, real honest-to-goodness dollars (I'm including in that count accounts at the federal reserve, not just paper money). How is this system sustainable? How can any of this debt ever be repaid? Well, since everyone knows the government can print money, most people do not worry about the government being insolvent. A dollar T-Bill is as good as a dollar green bill, both are backed by the full faith and credit of the USG. If the government needs to, it can always print money to redeem mature treasury debt. Since no one worries about insolvency, most people would rather have treasury bills (or a deposit account or CD backed by TBills) because they pay interest. So the $14 trillion rolls over in perpetuity. In reality, $14 trillion is not really debt, since it is nonsensical to speak of debt that one owes oneself and can negate by printing paper. The $14 trillion is the money supply - T-Bills are just a dividend paying form of money. However, the situation in Europe is much more sticky. Europe runs the same type of monetary system. There are tens of trillions in Euro denominated debt, but only $1.3 trillion in actual bonafide Euros. However - unlike with the dollar - the countries that created this debt do not have the power to create Euros. So as suddenly as markets lose confidence in the debt, it becomes impossible to roll over the debt and pay it off. There simply are not enough Euros in the world to pay off even a small amount of debt. Every single country in Europe would be insolvent if investors look down and lose confidence. Even Germany could not pay its debt if investors demanded redemption at maturity The European Union government could order the european central bank to print money to buy out the debt, but this creates all sorts of political conflict as it results in transferring real wealth from country A to country B. So that's why Europe is stuck. It adopted a monetary system that works when the government controls the currency, and adopted it in a situation where governments cannot print money. No one in Europe has the brains or authority to actually refactor and re-architect the system, so they are just muddling around, following the path of least resistance and putting in stop-gap measures. My own pet solution is on my blog: http://intellectual-detox.com/europes-crisis/ http://intellectual-detox.com/europes-crisis/ If anybody from the ECB reads Hacker News, I am available for hire as a consultant at the low, low fee of 1 ounce of gold an hour :-)
- bgilroy26 14y ago
  I thought US debt was backed by the military? The debt represents faith in the United States and the world-system as a whole. I think the only way this could collapse Wile E. Coyote style was if the trade routes in the Atlantic and the Pacific developed a huge problem with highwaymen and the US military couldn't lock it down.
  - gaius 14y ago
    Well yes and no. The way you establish a currency is as follows, traditionally: you assume political control over some area of land, and all political power is backed ultimately by military power (tho' cushioned by laws, courts, police, etc internally). Then you declare that everyone living on this land must pay taxes, and they must pay these taxes in... Seashells, or gold doubloons, or tons of flax, or whatever. Hey presto, you have a currency! Later on for convenience sake you can keep all your seashells in a vault and use paper tokens instead. The thing is tho', you want other countries to accept seashells too, places where you have no political or military control. The way this happens is that those seashells can be exchanged for goods and services provided by your citizens, who need seashells anyway to pay their taxes, so might as well use them for everything else too. Therefore the value of a seashell on the currency market (i.e. outside your borders) is backed by the industrial power of your country. So to sum up, a military backs a currency only in the sense that the military holds borders in which industry can operate safely - and not in the sense of military as ultimate debt collectors. At least, the Greeks better hope not.
  - calibraxis 14y ago
    Yeah, no country's going to compel the US to pay back its debt, given that the US probably spends about as much on the military as the rest of the world combined. Instead, they simply roll over the debt by buying more US Treasury IOUs. It looks far more like tribute to the military superpower, than the usual creditor-debtor relationship where the creditor dominates the debtor. Of course, weak countries must pay their debts (even when a military dictatorship racks up odious debt), which is a lever to force them to ruin their societies through austerity programs.
xtiy 14y ago
Watch Zeitgeist Moving Forward and you'd understand.
- xtiy 14y ago
  The government can not print money, every dollar printed has to be borrowed into existence via debt. If the government could print, then there'd be no need for tax. Watch the Moving forward movie for more revelations.
  - adventureful 14y ago
    Our government can print, the Treasury has the legal ability to do so at any time. The Federal Reserve however owns the Federal Reserve Notes (aka the 'dollar'), and they own the US Government accordingly. Our government would both print and tax, as many other governments throughout history with an abusive printing press have done. Just because a government has a printing press, they never stop taxing. Governments print and tax because they can, it slows down the rate of inflationary pressure that printing would generate if that's all you did. As it is, they like to keep inflation hidden as much as possible by keeping it moderately low so you don't notice it year to year. The whole point is to boil the frog without the frog jumping out of the pot.
- swalsh 14y ago
  It is so easy to find just plain wrong information on the internet these days. The problem is people don't know what they can and cannot trust, so it continues to perpetuate itself even amongst more intelligent people.
  - verra 14y ago
    Why don't you address the points in the movie instead of starting a personal attack?
wavephorm 14y ago
When you learn how money really works, you begin to understand just how diabolical our entire socio-economic system is. Inflation, recessions, boom-bust, the stock market, fractional reserve banking, interest rates... it's all rigged, a giant shell game, and it boils down to an invisible whip that the rich use to keep people working for things they don't really need and to pay taxes for the sole purpose of perpetuating a perverted economic system.
- grourk 14y ago
  Huh? I've learned a bit about money, and this comment strikes me as conspiracy theory having nothing to do with "how money really works".
- sirclueless 14y ago
  I don't know about you, but I have had down periods in my life, when I wasn't actually producing anything of value. If we actually used a barter economy then I would starve, or be reduced to sweating in a field growing plants. But since we live in a world where money is transferrable and credit is obtainable, I can weather those periods just fine and live in a decent house with air conditioning in the summer and heating in the winter. The best evidence that people really like to have transferrable currencies is that they develop independently in just about every market in the world. For example, ancient Africans used Cowry shells. Players of the videogame Diablo 2 used a particular ring, the Stone of Jordan. While there's certainly fraud and even systemic failure at times, it's hard not to appreciate all that liberal economics has done for our quality of life.
  - calibraxis 14y ago
    It actually turns out that barter is one of the founding myths of modern economics. Notice that economics books always have these invented stories of quaint towns (or savage tribes) of people in the same community bartering; they don't actually offer historical evidence. Turns out there is none. When people trade in a community, credit systems predate currencies, which predates barter. This is the opposite of the usual myth (where everyone barters like fools, then they use currency, then they tech up to credit). And they also make the strange assumption they'd be engaging in the "spot trade," which also is ahistorical. It's not like you'd come to me with shoes and I'd hand over a sack of potatoes. If we're neighbors, our relationship wouldn't be about market transactions (unless I suppose we're hostile and untrusting, so we'd better trade simultaneously so we don't rip each other off). I think Graeber's _Debt: The First 5,000 Years_ is the most illuminating source on the subject. (http://www.amazon.com/Debt-The-First-000-Years/dp/1933633867 http://www.amazon.com/Debt-The-First-000-Years/dp/1933633867)
wissler 14y ago
Corral everyone into centralized monetary dictatorships, and this is what happens. What did you expect? It doesn't matter how you design the monetary system, what matters is that it's centralized -- a mandated system backed by SWAT teams. Create that, and you've just created a system that will inevitably result in sweeping financial destruction throughout the economy. What we need is the diversification a free market money system would provide.
- colanderman 14y ago
  It doesn't matter how you design the monetary system, what matters is that it's centralized -- a mandated system backed by SWAT teams. Create that, and you've just created a system that will inevitably result in sweeping financial destruction throughout the economy. I don't follow. Can you elucidate how the first sentence leads to the second?
  - wissler 14y ago
    https://docs.google.com/file/d/0ByyIBJqJ0pDBZDAyY2FhODUtYTY0NC00ODk5LTg5ODctMjA2OGUxOWRiZjRm/edit?pli=1 https://docs.google.com/file/d/0ByyIBJqJ0pDBZDAyY2FhODUtYTY0...
    - colanderman 14y ago
      That entire article is moot because (a) we're not on the gold standard and (b) it fails to account for risk. But I'll humor you and prove the article illogical two different ways. Assume we were on the gold standard. The amount of gold in the world is limited. Most importantly, it does not grow exponentially with our economy (which is in fact the product of two exponentials -- population growth and technology growth). A gold standard is therefore deflationary in nature, meaning that the value of 1 oz of gold grows over time. This means that on the gold standard, interest rates would be FAR lower (probably even 0%) due to the inherent "interest" built into gold. However the article assumes both a gold standard (in the first paragraph), and moderate interest rates (5%). Therefore the article is inconsistent and illogical. Let us instead limit our scope to risk-free loans (e.g. T-bonds). Take risk out of the equation and interest rates simply counteract inflation, meaning that the buying power of your loaned money remains constant. However, the article assumes both risk-free loans (since it does not account for losses due to defaults), and that one can purchase absurd quantities of goods with interest compounded over several years (which is not true if buying power remains constant). Therefore the article is inconsistent and illogical. Furthermore, you did not state how this relates to the first half of what I quoted -- something about SWAT-team enforced standards. I am still utterly in the dark about the relevance of this to monetary policy. (Wouldn't any policy, e.g. gold standard, require some form of law enforcement to keep people from robbing each other?)
raheemm 14y ago
Khan Academy should hire that person.
ricardobeat 14y ago
If you have fun reading crazy whack conspiratorial blogs, this thread lead to a couple great ones: - http://www.divinecosmos.com/start-here/davids-blog/995-lawsuit-end-tyranny http://www.divinecosmos.com/start-here/davids-blog/995-lawsu... - http://benjaminfulford.net/ http://benjaminfulford.net/ I liked the two whackos interviewing one another: BF: They offered me at one point the job of Finance Minister of Japan. DW: Finance minister of Japan. Right. BF: They also, believe it or not, offered me General Electric and General Motors. DW: Like you would be the CEO, or something? BF: Yeah, and I guess the chief shareholder. The problem, of course, is I had to go along with their plan to kill four billion people. It’s the classic “sell your soul to the devil” situation.
- tempuser008 14y ago
  Wow, that's some very crazy shit right there. Too bad it takes time to check exactly what level of lunacy is involved. (Time is very expensive these days, that's why I throw away so much of it, filtering bullshit from crazy bullshit on the internets)
orijing 14y ago
Here is an answer from Quora that really resonated with me: http://www.quora.com/In-recent-days-trillions-of-dollars-of-wealth-has-been-wiped-off-global-stock-markets-Where-has-it-all-gone/answer/Ben-Golub http://www.quora.com/In-recent-days-trillions-of-dollars-of-... Basically, these wealth were expectations.
- jvm 14y ago
  That guy is talking about stock value, not money itself.
kylebrown 14y ago
A possibly relevant, interesting wiki I ran across recently: http://en.wikipedia.org/wiki/Endogenous_money http://en.wikipedia.org/wiki/Endogenous_money
jfoster 14y ago
The money-go-round slowed down a bit.
guynamedloren 14y ago
Very interesting explanation, but unless I missed something, the concluding statement is simply incorrect, which makes the whole thing wrong. > So now you're still growing apples, but instead of trading them for deer-haunches and shoes, you trade them for Loddars. So far, so good. Once again, you want some meat, except harvest time hasn't come yet so you don't have any Loddars to buy meat with. You call me up (cellphones have been invented in this newly-efficient economy), "Hey otherwiseyep, any chance you could kill me a deer and I'll give you ten Loddars for it at harvest-time?" I say, "Jeez, I'd love to, but I really need all the cash I can get for every deer right now: my kid is out-growing shoes like crazy. Tell you what: if you can write me a promise to pay twelve Loddars in October, I can give that to the shoe-maker." You groan about the "interest rate" but agree. Did a lightbulb just go off? You and I have once again created Money. Twelve loddars now exist in the town economy that have not been printed by the central bank. Counting all the money trading hands in the village, there are now (a) all the loddars that have ever been printed, plus (b) twelve more that you have promised to produce. "Loddars" are essentially dollars, a physical form of currency. The apple farmer does not have any loddars, but he promises to give twelve loddars to the hunter at harvest-time. The loddars come from people purchasing his apples, which have already been printed, thus are already in the system. Since loddars have been standardized by the central bank by this point, an apple farmer cannot simply 'create loddars' out of thin air. He can promise loddars, but that's very different than actually creating loddars. New money has not entered the economy.
- gaius 14y ago
  Well yes and no. You should read up on the different kinds of "money supply", referred to by pundits as M1, M2, etc etc.
- mmaunder 14y ago
  You wouldn't have been able to create Loddars if you said "Well the value of an IOU from the apple farmer has been established at this point so you can't just create a Loddar". But Loddars were created because money is an IOU for anything. And so you can create new money by creating a new IOU even though Loddars exist.
lifeisstillgood 14y ago
Can I just ask a question we produce money as a form of IOU against the future production of the economy, (apples). This debt is really an increase in the money supply each year the government borrows some more - increasing the supply by hopefully an accurate guess of future production if it's a bridge I get it. Gov borrows 1 bn, builds a bridge, there is a new billion dollars worth of value in the economy but apples? If I eat an apple and throw away the core do we then have to reduce the money supply by the price of an apple? When and how is this done? I can see some of the value of the IOU I used to buy the apple hanging around in forms of greengrocer shops, farm worker jobs etc. But some of it really is now, gone maybe I should have listened more carefully in economics lectures.
- d4nt 14y ago
  I think the apple was only ever valuable in the sense that it had some calories and could keep you alive a bit longer, long enough to keep on working a bit more and generating other forms of value for others. Value is a very strange concept, if there were no people then apples would be of no value. If there were people but they all agreed they didn't want apples and weren't prepared to work for them then they wouldn't have any value. They value of apples is defined by how many other people want them and how hard they are prepared to work in return for them. When you eat an apple you stay alive and thereby increase the value of all future apples.
dimitar 14y ago
The question is wrong - the assumption is that the quantity of money has decreased, while purchases ("Aggregate demand") are the same. If fact its exactly the other way around. Anyone who misses this fact is very unlikely to give a correct explanation. And the explanation is in an Econ 101 course.
- jvm 14y ago
  I agree with you technically speaking, but another way of thinking about it is that cashflow is really what we think of when we think "quantity of money" (Adam Smith, a gold piece that sits in a chest is realy not part of the money supply, yaddayadda). Cashflow (aka NGDP) is actually way down: http://marketmonetarist.com/2012/06/19/guest-post-measuring-the-stance-of-monetary-policy-through-ngdp-and-prices-by-integral/ http://marketmonetarist.com/2012/06/19/guest-post-measuring-... ...it looks like this is the distinction you're making when you say Aggregate demand, I'm really just adding this comment to help other people better understand your comment.
opminion 14y ago
The answer by Redditor otherwiseyep is really, really good as a quick public forum answer. Definitely worth reading for those of us five-year-old-equivalents in terms of knowledge of macroeconomics.
adamt 14y ago
Tycho 14y ago
Money is debt, but on a more fundamental level it's a combination of trust and confidence. Those things are necessary for doing business, and they can be destroyed.
ap22213 14y ago
I just finished David Graeber's "Debt", and it really enlightened me on this subject more than anything in that reddit thread. It's one of the most scholarly, informative, provocative books I've read in a very long time. I'm actually reading it a second time through, just to make sure I understand it all.
- planetguy 14y ago
  I've been reading large chunks of that and it's both good and bad. The good parts are where he sticks to his core strength of anthropology -- it's filled with fascinating descriptions of how commerce and law worked in various societies, ancient and modern, from the Irish monks who sat down and figured out the precise compensation that you need to pay if one of your bee stings another man [the regular price of the sting minus the cost of the bee] to the spear/cloth bartering festival slash orgies of some Aboriginal tribe. Lots of fascinating stuff there. He is on much shakier territory when he starts to enter into the economists' domain. He's probably correct when he declares that the inefficient pre-money "barter economy" has never actually existed, but then he breaks his arm patting himself on the back to say he's smarter than all the economists who always use this as an example when explaining why we have money. When it comes time to actually try to explain debt itself, he's really lost. He starts the book by posing a question: how is it that the language of debt got so wound up in the language of morality; by extension, why do we think it's immoral to not pay our debts? He never seems to come around to the obvious answer: that a debt is a promise, a promise of money later in exchange for money now, and that breaking your promises is seen as immoral because it breaks the reciprocity that underlies almost all human interactions. He seems to have a mental image of "debt" as something that a loan shark puts you in so that he can break your legs afterwards, rather than the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties. Anyway, I'd say Graeber's "Debt: The First 5000 Years" has some interesting bits but a bunch of flaws. And this comment is only this long because I don't have an account on Amazon.
  - _delirium 14y ago
    > the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties. This is the part where I think he actually is on pretty solid historical ground. Almost every society in history has had significant problems with, and a backlash against, at least certain kinds of debt, where it didn't really seem to be in the interest of both parties. They don't really seem like outlier cases. Most societies seem to have dealt with it by deciding that it's not actually good to require repayment in every circumstance, especially if the debt persists for a while. That's why you have things like the biblical Jubilee---periodic cancellation of all debts---in many societies.
Keyframe 14y ago
this is essentially described in "Money as debt" http://video.google.com/videoplay?docid=-2550156453790090544 http://video.google.com/videoplay?docid=-2550156453790090544 If you ignore really low production value, it's a really informative piece on how modern money works.
tubbo 14y ago
"E.g., a new farmer with no track-record might have to promise me twice as many potatoes in exchange for a deer haunch, due to the risk that I might never see any potatoes at all." This part of our system doesn't make any sense to me. What makes you think someone's gonna have more incentive to "pay up" if they now have to work twice as hard?
- Tycho 14y ago
  It's set by supply and demand, not by logical inference. Low risk investments are more in demand, driving their price up and thus lessening their return. High risk investments are in less demand, so their price falls, making the return higher.
Porter_423 14y ago
Keep in mind this is a great primer on macroeconomics, or how the economies and money supplies of societies as a whole work. It's equally fascinating and important to learn about the basics of microeconomics, the other side of that coin (pun intended), or how individual people and businesses make decisions about production and consumption. You've probably heard of the laws of supply and demand which are really important for understanding things like how and why prices change and why some businesses and industries are more successful than others.
jvm 14y ago
Here's my attempt, without talking about apples or anything: Essentially, the 'money supply' is determined by the central bank, since they are the issuers of money. You can read on your US dollars that they are issued by the federal reserve. An excellent measure of the money supply is NGDP, since this is the number of dollars traded every year (that sort of quantifies how many dollars are available to be captured by working, trade, etc.). Unfortunately, in 2008, the US Fed decided to adopt an ultra-tight monetary policy, resulting in a severe drop-off in NGDP relative to previous trend (the worst since the Great Depression, graphs here: http://marketmonetarist.com/2012/06/19/guest-post-measuring-the-stance-of-monetary-policy-through-ngdp-and-prices-by-integral/ http://marketmonetarist.com/2012/06/19/guest-post-measuring-...) It does not look like it will ever recover to the previous trend, so the money supply is much smaller than people would have expected before 2008. In theory, the nominal value of money shouldn't matter in the long run. However, since people before 2008 signed contracts (read, 30-year mortgages) anticipating a much higher aggregate money supply, this has triggered a shortfall in demand ever since, which has left our economy in the tank.
- nhaehnle 14y ago
  Essentially, the 'money supply' is determined by the central bank, since they are the issuers of money. It's not as simple as that. The amount of money in public circulation is largely determined by banks, because every loan given increases the amount of (electronic) money in circulation. The central bank then adjusts the amount of central bank money (reserves) by open market operations, but it does so defensively, to defend its interest rate target. So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation. Modern Monetary Theory contains probably the best summaries of how this works.
  - jvm 14y ago
    They may target interest rates, but they are perfectly welcome to target the money supply, they just choose not to.
  - jvm 14y ago
    > So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation. Sorry just noticed this. This is a common misperception. They have been using QE to create more money in public circulation now that interest rates are 0, and there's nothing ineffectual about that. To see why this is possible, just consider the question, could the Fed create inflation at the 0-lower-bound by saying they will print money until they get it? The answer is clearly yes. Actually the Bank of Switzerland did that recently to set a Euro peg.
Androsynth 14y ago
One of the best explanations about all of this is in the book How an Economy Grows and Why it Doesn't by Irwin Schiff http://freedom-school.com/money/how-an-economy-grows.pdf http://freedom-school.com/money/how-an-economy-grows.pdf It seems this explanation is somewhat of a rehash of that book. The book is relatively short and well worth your time if you found this reddit answer interesting.
cs702 14y ago
The so-called “fiat money” (i.e., money not backed by a commodity) used by modern economies is controlled by a central bank whose overriding goal is maintaining monetary and financial stability. Only the central bank can issue new money or take it out of circulation. Note that this is just a political arrangement that prevents the parts of a government that spend money from conjuring it out of thin air. For example, in the U.S., President Obama can’t just call Ben Bernanke and demand that the Federal Reserve issue more money to pay for the federal government’s expenditures; instead, the federal government must either collect additional taxes or borrow funds from investors, and the Federal Reserve independently gets to decide if, how, and when to issue new money (or take it out of circulation) to fulfill its dual objectives of monetary and financial stability. Typically, central banks like the Federal Reserve issue money (or take it out of circulation) via two mechanisms: (1) The central bank can buy and sell government bonds to expand or contract the amount of money in circulation and/or push interest rates up or down. When a central bank buys such bonds, it pays with newly issued money, thereby replacing one government obligation (bonds) with another (money) of equal present value; and when the central bank sells any government bonds it holds, the money it receives is taken out of circulation (i.e., destroyed). (2) Certain private-sector financial firms can borrow directly from the central bank, which lends them newly issued money, thus acquiring a new financial instrument (a loan to a private-sector entity) and issuing a new obligation (money) of equal magnitude; when the loan is repaid, the central bank takes the money out of circulation, reducing government claims and obligations by the same magnitude. The money issued by a central bank, which is held only by depositary institutions like banks, is called “reserves.” The aggregate of all bank reserves (plus all paper currency in circulation, to be precise) is called the “monetary base.” In normal times, whenever bank reserves grow beyond required legal minimums, banks supposedly make more loans, thereby increasing the amount of money flowing through the economy and promoting economic growth. In other words, an increase in the monetary base is supposed to result in an increase in the money supply. However, at present, for whatever reasons (and there is much debate among professional economists as to what those reasons might be), the monetary base has grown immensely[1], but banks are not making the expected additional loans, so the amount of money flowing through the economy is not growing as economists would expect in normal times.[2] “Money velocity” (a measure of the number of times money gets turned over in the economy) has collapsed.[3] So, that’s the answer to the question, “where has all the money gone?” -- [1] You can see the incredible growth in the U.S. monetary base here: http://research.stlouisfed.org/fred2/series/BASE/ http://research.stlouisfed.org/fred2/series/BASE/ [2] You can see the incredible growth in excess reserves in the U.S. banking system here: http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123 http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123 [3] You can see the dramatic drop in U.S. money velocity here: http://research.stlouisfed.org/fred2/series/M2V?cid=32242 http://research.stlouisfed.org/fred2/series/M2V?cid=32242
davvid 14y ago
It is mathematically impossible for all of the debt in the world to be repaid (without more debt, and it's this way by design). Money is debt, and debt is slavery. Shhh! You're not supposed to look behind the curtain.
- rapala 14y ago
  If you red the reddit answer carefully, you would know that there never was enough money to pay the dept in the first place. That is the whole point of dept. You don't have enough money for something at the moment, so you borrow it and pay it back when you have accumulated the money.
kalininalex 14y ago
I recommend watching Money as Debt (http://video.google.com/videoplay?docid=-2550156453790090544 http://video.google.com/videoplay?docid=-2550156453790090544). This fascinating video explains the roots and consequences of the crisis in the very visual way. For a more scientific approach take a look at The Debt Deflation Theory (http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf).
zerop 14y ago
Swiss Banks....
nradov 14y ago
A lot of the money essentially evaporated when borrowers defaulted on bank loans. Banks have the ability to temporarily create new money (subject to reserve requirements) by issuing a loan, and then that extra money is gradually retired as the borrower repays with interest. But when the borrower defaults the created money goes away all at once and reduces the bank's capital reserves, which in turn reduces the amount the bank can lend in the future.
jackfoxy 14y ago
It's been a long time since I read it, but the top reply on Reddit reminds me of Human Action http://en.wikipedia.org/wiki/Human_Action http://en.wikipedia.org/wiki/Human_Action (the wiki synopsis doesn't remind me at all of the book I read) by Ludwig von Mises http://en.wikipedia.org/wiki/Ludwig_von_Mises http://en.wikipedia.org/wiki/Ludwig_von_Mises. Once somewhat influential I think the book has fallen into obscurity. My memory is von Mises constructed a rational economic system using a bottom up approach starting with human action, rather like the the Reddit poster attempts.

448 points by stevenj 14y ago

The fundamental problem is that the monetary systems of the modern world are all designed on the Wile E. Coyote principle. As long as you never look down, the system works. In the U.S. there is ~$14 trillion in government debt. There exists tens of trillion more in private debt. But only $2 trillion exists in bonafide, actual, real honest-to-goodness dollars (I'm including in that count accounts at the federal reserve, not just paper money). How is this system sustainable? How can any of this debt ever be repaid? Well, since everyone knows the government can print money, most people do not worry about the government being insolvent. A dollar T-Bill is as good as a dollar green bill, both are backed by the full faith and credit of the USG. If the government needs to, it can always print money to redeem mature treasury debt. Since no one worries about insolvency, most people would rather have treasury bills (or a deposit account or CD backed by TBills) because they pay interest. So the $14 trillion rolls over in perpetuity. In reality, $14 trillion is not really debt, since it is nonsensical to speak of debt that one owes oneself and can negate by printing paper. The $14 trillion is the money supply - T-Bills are just a dividend paying form of money. However, the situation in Europe is much more sticky. Europe runs the same type of monetary system. There are tens of trillions in Euro denominated debt, but only $1.3 trillion in actual bonafide Euros. However - unlike with the dollar - the countries that created this debt do not have the power to create Euros. So as suddenly as markets lose confidence in the debt, it becomes impossible to roll over the debt and pay it off. There simply are not enough Euros in the world to pay off even a small amount of debt. Every single country in Europe would be insolvent if investors look down and lose confidence. Even Germany could not pay its debt if investors demanded redemption at maturity The European Union government could order the european central bank to print money to buy out the debt, but this creates all sorts of political conflict as it results in transferring real wealth from country A to country B. So that's why Europe is stuck. It adopted a monetary system that works when the government controls the currency, and adopted it in a situation where governments cannot print money. No one in Europe has the brains or authority to actually refactor and re-architect the system, so they are just muddling around, following the path of least resistance and putting in stop-gap measures. My own pet solution is on my blog: http://intellectual-detox.com/europes-crisis/ http://intellectual-detox.com/europes-crisis/ If anybody from the ECB reads Hacker News, I am available for hire as a consultant at the low, low fee of 1 ounce of gold an hour :-)

bgilroy26 14y ago
I thought US debt was backed by the military? The debt represents faith in the United States and the world-system as a whole. I think the only way this could collapse Wile E. Coyote style was if the trade routes in the Atlantic and the Pacific developed a huge problem with highwaymen and the US military couldn't lock it down.
- gaius 14y ago
  Well yes and no. The way you establish a currency is as follows, traditionally: you assume political control over some area of land, and all political power is backed ultimately by military power (tho' cushioned by laws, courts, police, etc internally). Then you declare that everyone living on this land must pay taxes, and they must pay these taxes in... Seashells, or gold doubloons, or tons of flax, or whatever. Hey presto, you have a currency! Later on for convenience sake you can keep all your seashells in a vault and use paper tokens instead. The thing is tho', you want other countries to accept seashells too, places where you have no political or military control. The way this happens is that those seashells can be exchanged for goods and services provided by your citizens, who need seashells anyway to pay their taxes, so might as well use them for everything else too. Therefore the value of a seashell on the currency market (i.e. outside your borders) is backed by the industrial power of your country. So to sum up, a military backs a currency only in the sense that the military holds borders in which industry can operate safely - and not in the sense of military as ultimate debt collectors. At least, the Greeks better hope not.
- calibraxis 14y ago
  Yeah, no country's going to compel the US to pay back its debt, given that the US probably spends about as much on the military as the rest of the world combined. Instead, they simply roll over the debt by buying more US Treasury IOUs. It looks far more like tribute to the military superpower, than the usual creditor-debtor relationship where the creditor dominates the debtor. Of course, weak countries must pay their debts (even when a military dictatorship racks up odious debt), which is a lever to force them to ruin their societies through austerity programs.

xtiy 14y ago

Watch Zeitgeist Moving Forward and you'd understand.

xtiy 14y ago
The government can not print money, every dollar printed has to be borrowed into existence via debt. If the government could print, then there'd be no need for tax. Watch the Moving forward movie for more revelations.
- adventureful 14y ago
  Our government can print, the Treasury has the legal ability to do so at any time. The Federal Reserve however owns the Federal Reserve Notes (aka the 'dollar'), and they own the US Government accordingly. Our government would both print and tax, as many other governments throughout history with an abusive printing press have done. Just because a government has a printing press, they never stop taxing. Governments print and tax because they can, it slows down the rate of inflationary pressure that printing would generate if that's all you did. As it is, they like to keep inflation hidden as much as possible by keeping it moderately low so you don't notice it year to year. The whole point is to boil the frog without the frog jumping out of the pot.
swalsh 14y ago
It is so easy to find just plain wrong information on the internet these days. The problem is people don't know what they can and cannot trust, so it continues to perpetuate itself even amongst more intelligent people.
- verra 14y ago
  Why don't you address the points in the movie instead of starting a personal attack?

wavephorm 14y ago

When you learn how money really works, you begin to understand just how diabolical our entire socio-economic system is. Inflation, recessions, boom-bust, the stock market, fractional reserve banking, interest rates... it's all rigged, a giant shell game, and it boils down to an invisible whip that the rich use to keep people working for things they don't really need and to pay taxes for the sole purpose of perpetuating a perverted economic system.

grourk 14y ago
Huh? I've learned a bit about money, and this comment strikes me as conspiracy theory having nothing to do with "how money really works".
sirclueless 14y ago
I don't know about you, but I have had down periods in my life, when I wasn't actually producing anything of value. If we actually used a barter economy then I would starve, or be reduced to sweating in a field growing plants. But since we live in a world where money is transferrable and credit is obtainable, I can weather those periods just fine and live in a decent house with air conditioning in the summer and heating in the winter. The best evidence that people really like to have transferrable currencies is that they develop independently in just about every market in the world. For example, ancient Africans used Cowry shells. Players of the videogame Diablo 2 used a particular ring, the Stone of Jordan. While there's certainly fraud and even systemic failure at times, it's hard not to appreciate all that liberal economics has done for our quality of life.
- calibraxis 14y ago
  It actually turns out that barter is one of the founding myths of modern economics. Notice that economics books always have these invented stories of quaint towns (or savage tribes) of people in the same community bartering; they don't actually offer historical evidence. Turns out there is none. When people trade in a community, credit systems predate currencies, which predates barter. This is the opposite of the usual myth (where everyone barters like fools, then they use currency, then they tech up to credit). And they also make the strange assumption they'd be engaging in the "spot trade," which also is ahistorical. It's not like you'd come to me with shoes and I'd hand over a sack of potatoes. If we're neighbors, our relationship wouldn't be about market transactions (unless I suppose we're hostile and untrusting, so we'd better trade simultaneously so we don't rip each other off). I think Graeber's _Debt: The First 5,000 Years_ is the most illuminating source on the subject. (http://www.amazon.com/Debt-The-First-000-Years/dp/1933633867 http://www.amazon.com/Debt-The-First-000-Years/dp/1933633867)

wissler 14y ago

Corral everyone into centralized monetary dictatorships, and this is what happens. What did you expect? It doesn't matter how you design the monetary system, what matters is that it's centralized -- a mandated system backed by SWAT teams. Create that, and you've just created a system that will inevitably result in sweeping financial destruction throughout the economy. What we need is the diversification a free market money system would provide.

colanderman 14y ago
It doesn't matter how you design the monetary system, what matters is that it's centralized -- a mandated system backed by SWAT teams. Create that, and you've just created a system that will inevitably result in sweeping financial destruction throughout the economy. I don't follow. Can you elucidate how the first sentence leads to the second?
- wissler 14y ago
  https://docs.google.com/file/d/0ByyIBJqJ0pDBZDAyY2FhODUtYTY0NC00ODk5LTg5ODctMjA2OGUxOWRiZjRm/edit?pli=1 https://docs.google.com/file/d/0ByyIBJqJ0pDBZDAyY2FhODUtYTY0...
  - colanderman 14y ago
    That entire article is moot because (a) we're not on the gold standard and (b) it fails to account for risk. But I'll humor you and prove the article illogical two different ways. Assume we were on the gold standard. The amount of gold in the world is limited. Most importantly, it does not grow exponentially with our economy (which is in fact the product of two exponentials -- population growth and technology growth). A gold standard is therefore deflationary in nature, meaning that the value of 1 oz of gold grows over time. This means that on the gold standard, interest rates would be FAR lower (probably even 0%) due to the inherent "interest" built into gold. However the article assumes both a gold standard (in the first paragraph), and moderate interest rates (5%). Therefore the article is inconsistent and illogical. Let us instead limit our scope to risk-free loans (e.g. T-bonds). Take risk out of the equation and interest rates simply counteract inflation, meaning that the buying power of your loaned money remains constant. However, the article assumes both risk-free loans (since it does not account for losses due to defaults), and that one can purchase absurd quantities of goods with interest compounded over several years (which is not true if buying power remains constant). Therefore the article is inconsistent and illogical. Furthermore, you did not state how this relates to the first half of what I quoted -- something about SWAT-team enforced standards. I am still utterly in the dark about the relevance of this to monetary policy. (Wouldn't any policy, e.g. gold standard, require some form of law enforcement to keep people from robbing each other?)

raheemm 14y ago

Khan Academy should hire that person.

ricardobeat 14y ago

If you have fun reading crazy whack conspiratorial blogs, this thread lead to a couple great ones: - http://www.divinecosmos.com/start-here/davids-blog/995-lawsuit-end-tyranny http://www.divinecosmos.com/start-here/davids-blog/995-lawsu... - http://benjaminfulford.net/ http://benjaminfulford.net/ I liked the two whackos interviewing one another: BF: They offered me at one point the job of Finance Minister of Japan. DW: Finance minister of Japan. Right. BF: They also, believe it or not, offered me General Electric and General Motors. DW: Like you would be the CEO, or something? BF: Yeah, and I guess the chief shareholder. The problem, of course, is I had to go along with their plan to kill four billion people. It’s the classic “sell your soul to the devil” situation.

tempuser008 14y ago
Wow, that's some very crazy shit right there. Too bad it takes time to check exactly what level of lunacy is involved. (Time is very expensive these days, that's why I throw away so much of it, filtering bullshit from crazy bullshit on the internets)

orijing 14y ago

Here is an answer from Quora that really resonated with me: http://www.quora.com/In-recent-days-trillions-of-dollars-of-wealth-has-been-wiped-off-global-stock-markets-Where-has-it-all-gone/answer/Ben-Golub http://www.quora.com/In-recent-days-trillions-of-dollars-of-... Basically, these wealth were expectations.

jvm 14y ago
That guy is talking about stock value, not money itself.

kylebrown 14y ago

A possibly relevant, interesting wiki I ran across recently: http://en.wikipedia.org/wiki/Endogenous_money http://en.wikipedia.org/wiki/Endogenous_money

jfoster 14y ago

The money-go-round slowed down a bit.

guynamedloren 14y ago

Very interesting explanation, but unless I missed something, the concluding statement is simply incorrect, which makes the whole thing wrong. > So now you're still growing apples, but instead of trading them for deer-haunches and shoes, you trade them for Loddars. So far, so good. Once again, you want some meat, except harvest time hasn't come yet so you don't have any Loddars to buy meat with. You call me up (cellphones have been invented in this newly-efficient economy), "Hey otherwiseyep, any chance you could kill me a deer and I'll give you ten Loddars for it at harvest-time?" I say, "Jeez, I'd love to, but I really need all the cash I can get for every deer right now: my kid is out-growing shoes like crazy. Tell you what: if you can write me a promise to pay twelve Loddars in October, I can give that to the shoe-maker." You groan about the "interest rate" but agree. Did a lightbulb just go off? You and I have once again created Money. Twelve loddars now exist in the town economy that have not been printed by the central bank. Counting all the money trading hands in the village, there are now (a) all the loddars that have ever been printed, plus (b) twelve more that you have promised to produce. "Loddars" are essentially dollars, a physical form of currency. The apple farmer does not have any loddars, but he promises to give twelve loddars to the hunter at harvest-time. The loddars come from people purchasing his apples, which have already been printed, thus are already in the system. Since loddars have been standardized by the central bank by this point, an apple farmer cannot simply 'create loddars' out of thin air. He can promise loddars, but that's very different than actually creating loddars. New money has not entered the economy.

gaius 14y ago
Well yes and no. You should read up on the different kinds of "money supply", referred to by pundits as M1, M2, etc etc.
mmaunder 14y ago
You wouldn't have been able to create Loddars if you said "Well the value of an IOU from the apple farmer has been established at this point so you can't just create a Loddar". But Loddars were created because money is an IOU for anything. And so you can create new money by creating a new IOU even though Loddars exist.

lifeisstillgood 14y ago

Can I just ask a question we produce money as a form of IOU against the future production of the economy, (apples). This debt is really an increase in the money supply each year the government borrows some more - increasing the supply by hopefully an accurate guess of future production if it's a bridge I get it. Gov borrows 1 bn, builds a bridge, there is a new billion dollars worth of value in the economy but apples? If I eat an apple and throw away the core do we then have to reduce the money supply by the price of an apple? When and how is this done? I can see some of the value of the IOU I used to buy the apple hanging around in forms of greengrocer shops, farm worker jobs etc. But some of it really is now, gone maybe I should have listened more carefully in economics lectures.

d4nt 14y ago
I think the apple was only ever valuable in the sense that it had some calories and could keep you alive a bit longer, long enough to keep on working a bit more and generating other forms of value for others. Value is a very strange concept, if there were no people then apples would be of no value. If there were people but they all agreed they didn't want apples and weren't prepared to work for them then they wouldn't have any value. They value of apples is defined by how many other people want them and how hard they are prepared to work in return for them. When you eat an apple you stay alive and thereby increase the value of all future apples.

dimitar 14y ago

The question is wrong - the assumption is that the quantity of money has decreased, while purchases ("Aggregate demand") are the same. If fact its exactly the other way around. Anyone who misses this fact is very unlikely to give a correct explanation. And the explanation is in an Econ 101 course.

jvm 14y ago
I agree with you technically speaking, but another way of thinking about it is that cashflow is really what we think of when we think "quantity of money" (Adam Smith, a gold piece that sits in a chest is realy not part of the money supply, yaddayadda). Cashflow (aka NGDP) is actually way down: http://marketmonetarist.com/2012/06/19/guest-post-measuring-the-stance-of-monetary-policy-through-ngdp-and-prices-by-integral/ http://marketmonetarist.com/2012/06/19/guest-post-measuring-... ...it looks like this is the distinction you're making when you say Aggregate demand, I'm really just adding this comment to help other people better understand your comment.

opminion 14y ago

The answer by Redditor otherwiseyep is really, really good as a quick public forum answer. Definitely worth reading for those of us five-year-old-equivalents in terms of knowledge of macroeconomics.

adamt 14y ago

Tycho 14y ago

Money is debt, but on a more fundamental level it's a combination of trust and confidence. Those things are necessary for doing business, and they can be destroyed.

ap22213 14y ago

I just finished David Graeber's "Debt", and it really enlightened me on this subject more than anything in that reddit thread. It's one of the most scholarly, informative, provocative books I've read in a very long time. I'm actually reading it a second time through, just to make sure I understand it all.

planetguy 14y ago
I've been reading large chunks of that and it's both good and bad. The good parts are where he sticks to his core strength of anthropology -- it's filled with fascinating descriptions of how commerce and law worked in various societies, ancient and modern, from the Irish monks who sat down and figured out the precise compensation that you need to pay if one of your bee stings another man [the regular price of the sting minus the cost of the bee] to the spear/cloth bartering festival slash orgies of some Aboriginal tribe. Lots of fascinating stuff there. He is on much shakier territory when he starts to enter into the economists' domain. He's probably correct when he declares that the inefficient pre-money "barter economy" has never actually existed, but then he breaks his arm patting himself on the back to say he's smarter than all the economists who always use this as an example when explaining why we have money. When it comes time to actually try to explain debt itself, he's really lost. He starts the book by posing a question: how is it that the language of debt got so wound up in the language of morality; by extension, why do we think it's immoral to not pay our debts? He never seems to come around to the obvious answer: that a debt is a promise, a promise of money later in exchange for money now, and that breaking your promises is seen as immoral because it breaks the reciprocity that underlies almost all human interactions. He seems to have a mental image of "debt" as something that a loan shark puts you in so that he can break your legs afterwards, rather than the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties. Anyway, I'd say Graeber's "Debt: The First 5000 Years" has some interesting bits but a bunch of flaws. And this comment is only this long because I don't have an account on Amazon.
- _delirium 14y ago
  > the vast majority of the world's responsible debt arrangements which wind up beneficial to both parties. This is the part where I think he actually is on pretty solid historical ground. Almost every society in history has had significant problems with, and a backlash against, at least certain kinds of debt, where it didn't really seem to be in the interest of both parties. They don't really seem like outlier cases. Most societies seem to have dealt with it by deciding that it's not actually good to require repayment in every circumstance, especially if the debt persists for a while. That's why you have things like the biblical Jubilee---periodic cancellation of all debts---in many societies.

Keyframe 14y ago

this is essentially described in "Money as debt" http://video.google.com/videoplay?docid=-2550156453790090544 http://video.google.com/videoplay?docid=-2550156453790090544 If you ignore really low production value, it's a really informative piece on how modern money works.

tubbo 14y ago

"E.g., a new farmer with no track-record might have to promise me twice as many potatoes in exchange for a deer haunch, due to the risk that I might never see any potatoes at all." This part of our system doesn't make any sense to me. What makes you think someone's gonna have more incentive to "pay up" if they now have to work twice as hard?

Tycho 14y ago
It's set by supply and demand, not by logical inference. Low risk investments are more in demand, driving their price up and thus lessening their return. High risk investments are in less demand, so their price falls, making the return higher.

Porter_423 14y ago

Keep in mind this is a great primer on macroeconomics, or how the economies and money supplies of societies as a whole work. It's equally fascinating and important to learn about the basics of microeconomics, the other side of that coin (pun intended), or how individual people and businesses make decisions about production and consumption. You've probably heard of the laws of supply and demand which are really important for understanding things like how and why prices change and why some businesses and industries are more successful than others.

jvm 14y ago

Here's my attempt, without talking about apples or anything: Essentially, the 'money supply' is determined by the central bank, since they are the issuers of money. You can read on your US dollars that they are issued by the federal reserve. An excellent measure of the money supply is NGDP, since this is the number of dollars traded every year (that sort of quantifies how many dollars are available to be captured by working, trade, etc.). Unfortunately, in 2008, the US Fed decided to adopt an ultra-tight monetary policy, resulting in a severe drop-off in NGDP relative to previous trend (the worst since the Great Depression, graphs here: http://marketmonetarist.com/2012/06/19/guest-post-measuring-the-stance-of-monetary-policy-through-ngdp-and-prices-by-integral/ http://marketmonetarist.com/2012/06/19/guest-post-measuring-...) It does not look like it will ever recover to the previous trend, so the money supply is much smaller than people would have expected before 2008. In theory, the nominal value of money shouldn't matter in the long run. However, since people before 2008 signed contracts (read, 30-year mortgages) anticipating a much higher aggregate money supply, this has triggered a shortfall in demand ever since, which has left our economy in the tank.

nhaehnle 14y ago
Essentially, the 'money supply' is determined by the central bank, since they are the issuers of money. It's not as simple as that. The amount of money in public circulation is largely determined by banks, because every loan given increases the amount of (electronic) money in circulation. The central bank then adjusts the amount of central bank money (reserves) by open market operations, but it does so defensively, to defend its interest rate target. So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation. Modern Monetary Theory contains probably the best summaries of how this works.
- jvm 14y ago
  They may target interest rates, but they are perfectly welcome to target the money supply, they just choose not to.
- jvm 14y ago
  > So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation. Sorry just noticed this. This is a common misperception. They have been using QE to create more money in public circulation now that interest rates are 0, and there's nothing ineffectual about that. To see why this is possible, just consider the question, could the Fed create inflation at the 0-lower-bound by saying they will print money until they get it? The answer is clearly yes. Actually the Bank of Switzerland did that recently to set a Euro peg.

Androsynth 14y ago

One of the best explanations about all of this is in the book How an Economy Grows and Why it Doesn't by Irwin Schiff http://freedom-school.com/money/how-an-economy-grows.pdf http://freedom-school.com/money/how-an-economy-grows.pdf It seems this explanation is somewhat of a rehash of that book. The book is relatively short and well worth your time if you found this reddit answer interesting.

cs702 14y ago

The so-called “fiat money” (i.e., money not backed by a commodity) used by modern economies is controlled by a central bank whose overriding goal is maintaining monetary and financial stability. Only the central bank can issue new money or take it out of circulation. Note that this is just a political arrangement that prevents the parts of a government that spend money from conjuring it out of thin air. For example, in the U.S., President Obama can’t just call Ben Bernanke and demand that the Federal Reserve issue more money to pay for the federal government’s expenditures; instead, the federal government must either collect additional taxes or borrow funds from investors, and the Federal Reserve independently gets to decide if, how, and when to issue new money (or take it out of circulation) to fulfill its dual objectives of monetary and financial stability. Typically, central banks like the Federal Reserve issue money (or take it out of circulation) via two mechanisms: (1) The central bank can buy and sell government bonds to expand or contract the amount of money in circulation and/or push interest rates up or down. When a central bank buys such bonds, it pays with newly issued money, thereby replacing one government obligation (bonds) with another (money) of equal present value; and when the central bank sells any government bonds it holds, the money it receives is taken out of circulation (i.e., destroyed). (2) Certain private-sector financial firms can borrow directly from the central bank, which lends them newly issued money, thus acquiring a new financial instrument (a loan to a private-sector entity) and issuing a new obligation (money) of equal magnitude; when the loan is repaid, the central bank takes the money out of circulation, reducing government claims and obligations by the same magnitude. The money issued by a central bank, which is held only by depositary institutions like banks, is called “reserves.” The aggregate of all bank reserves (plus all paper currency in circulation, to be precise) is called the “monetary base.” In normal times, whenever bank reserves grow beyond required legal minimums, banks supposedly make more loans, thereby increasing the amount of money flowing through the economy and promoting economic growth. In other words, an increase in the monetary base is supposed to result in an increase in the money supply. However, at present, for whatever reasons (and there is much debate among professional economists as to what those reasons might be), the monetary base has grown immensely[1], but banks are not making the expected additional loans, so the amount of money flowing through the economy is not growing as economists would expect in normal times.[2] “Money velocity” (a measure of the number of times money gets turned over in the economy) has collapsed.[3] So, that’s the answer to the question, “where has all the money gone?” -- [1] You can see the incredible growth in the U.S. monetary base here: http://research.stlouisfed.org/fred2/series/BASE/ http://research.stlouisfed.org/fred2/series/BASE/ [2] You can see the incredible growth in excess reserves in the U.S. banking system here: http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123 http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123 [3] You can see the dramatic drop in U.S. money velocity here: http://research.stlouisfed.org/fred2/series/M2V?cid=32242 http://research.stlouisfed.org/fred2/series/M2V?cid=32242

davvid 14y ago

It is mathematically impossible for all of the debt in the world to be repaid (without more debt, and it's this way by design). Money is debt, and debt is slavery. Shhh! You're not supposed to look behind the curtain.

rapala 14y ago
If you red the reddit answer carefully, you would know that there never was enough money to pay the dept in the first place. That is the whole point of dept. You don't have enough money for something at the moment, so you borrow it and pay it back when you have accumulated the money.

kalininalex 14y ago

I recommend watching Money as Debt (http://video.google.com/videoplay?docid=-2550156453790090544 http://video.google.com/videoplay?docid=-2550156453790090544). This fascinating video explains the roots and consequences of the crisis in the very visual way. For a more scientific approach take a look at The Debt Deflation Theory (http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf).

zerop 14y ago

Swiss Banks....

nradov 14y ago

A lot of the money essentially evaporated when borrowers defaulted on bank loans. Banks have the ability to temporarily create new money (subject to reserve requirements) by issuing a loan, and then that extra money is gradually retired as the borrower repays with interest. But when the borrower defaults the created money goes away all at once and reduces the bank's capital reserves, which in turn reduces the amount the bank can lend in the future.

jackfoxy 14y ago

It's been a long time since I read it, but the top reply on Reddit reminds me of Human Action http://en.wikipedia.org/wiki/Human_Action http://en.wikipedia.org/wiki/Human_Action (the wiki synopsis doesn't remind me at all of the book I read) by Ludwig von Mises http://en.wikipedia.org/wiki/Ludwig_von_Mises http://en.wikipedia.org/wiki/Ludwig_von_Mises. Once somewhat influential I think the book has fallen into obscurity. My memory is von Mises constructed a rational economic system using a bottom up approach starting with human action, rather like the the Reddit poster attempts.