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Why do governments borrow money?
Much of the global debt is in the form of governement debt - and this essentially is tax payer's debt.
Governments borrow money from banks who create that money out of thin air and charge the government interest on that loan. These banks are private banks and make huge profits for lending out something they basically create on a computer screen. If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? This would save tax payers $Trillions in servicing that debt. The only reason they do this (that I can think of) is to remove money and power from tax payers and transfer it to the big banks. After all, the big banks and bankers are more powerful than governments. |
Re: Why do governments borrow money?
I think you left out the part where the magic pixies come in. [img]/images/graemlins/wink.gif[/img]
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Re: Why do governments borrow money?
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If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? [/ QUOTE ] Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread? |
Re: Why do governments borrow money?
[ QUOTE ]
[ QUOTE ] If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? [/ QUOTE ] Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread? [/ QUOTE ] How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest? Same result, cheaper method. |
Re: Why do governments borrow money?
The government sells bonds to whoever wants to buy them, and they need to get paid for the bonds. You can buy bonds, China probably have tons of them, so does lots of local and foreign governments, insurance companies, pension funds and so on. The banks who buys those bonds need to have the money to buy them, pretty sure they are not getting them without paying.
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Re: Why do governments borrow money?
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The government sells bonds to whoever wants to buy them and then they do steroids and hit a lot of homeruns. [/ QUOTE ] |
Re: Why do governments borrow money?
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[ QUOTE ] The government sells bonds to whoever wants to buy them and then they do steroids and hit a lot of homeruns. [/ QUOTE ] [/ QUOTE ] Lol? |
Re: Why do governments borrow money?
Bonds.. Barry Bonds.. Get it now?
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Re: Why do governments borrow money?
I understood the Barry Bonds-reference, I just failed to see how it could be considered funny.
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Re: Why do governments borrow money?
Man, can I get a little sense of humor on these political forums? I certainly chuckled at it.
But since I must: Irony, noun - the use of words to express something other than and especially the opposite of the literal meaning Here, 'bonds' are being referenced, but it's humorous because, though the original reference was talking about government bonds, he uses the word to reference a baseball player. Now, to me, the idea of the government selling a baseball player, in and of itself, is pretty chuckle worthy. That it was the same player who has so much controversy surrounding steroid use was just the icing on the cake. Or you could go the other way with it and imagine a government bond, all bulked out from steroid use, ala Barry Bonds, and hitting loads of dingers. While not as funny, to me at least, still of the humorous slant. Do you see now how it could be considered funny? Or is it just that you don't think it's funny? |
Re: Why do governments borrow money?
The bonds FYP was Hilarious, ESP considering that the OP demonstrates a less than serious understanding of basic global finance.
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Re: Why do governments borrow money?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? [/ QUOTE ] Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread? [/ QUOTE ] How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest? Same result, cheaper method. [/ QUOTE ] kimchi, you wouldn't have faith in somebody who only answered to themselves would you? by answering to the markets, a necessary mechanism of restraint and trust is established. Barron |
Re: Why do governments borrow money?
LOL, maybe you should learn macroeconomics (and not from a community college).
In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future. |
Re: Why do governments borrow money?
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LOL, maybe you should learn macroeconomics (and not from a community college). [/ QUOTE ] why are people ragging on kimchi like this?? he's a really smart guy, far smarter in trading than almost anybody on this forum. he's asking about an area in which he doesn't have as solid an understanding. [ QUOTE ] In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future. [/ QUOTE ] gov't debt grows now from 2 sources. 1) in response to federal spending deficits/promises/commitments etc. 2) holding the deficit growth constant, govt debt grows on itself to finance previous borrowing the consumption being financed is a result of the US consumption of foreign goods. the rate at which the government can borrow was artificially pushed down by the chinese pegging their currency to ours. we'd have been paying a higher rate for our govt debt if china didn't buy some $1trillion of that debt. i don't know to what extent our trading partners are financing our consumption (i.e. comparing % exports for us vs. trading partner vs. % of debt held by that trading partner) but i'm sure it is a lot. the main point here is that i don't think phrasing it like "they are giving us goods for a promise of something greater in the future" is the best way to say it or how it plays out. they get something NOW from this. they (the countries from which we net import) get higher growth now than they would not have gotten otherwise (if we didn't net consume so much). and the financing doesn't have to come from those countries as a proportion of the net amount we import. it just has to come from somewhere. foreign central banks are the main holders with china being FAR out in the lead. Barron |
Re: Why do governments borrow money?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? [/ QUOTE ] Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread? [/ QUOTE ] How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest? Same result, cheaper method. [/ QUOTE ] kimchi, you wouldn't have faith in somebody who only answered to themselves would you? by answering to the markets, a necessary mechanism of restraint and trust is established. Barron [/ QUOTE ] I just posted this in BFI, but is relevant here as well. web page |
Re: Why do governments borrow money?
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[ QUOTE ] LOL, maybe you should learn macroeconomics (and not from a community college). [/ QUOTE ] why are people ragging on kimchi like this?? he's a really smart guy, far smarter in trading than almost anybody on this forum. he's asking about an area in which he doesn't have as solid an understanding. [ QUOTE ] In all seriousness, the Gov't debt is indirectly financing our consumption. The biggest owners of our debt are our trade partners. They are giving us their goods for a promise that we will have something worth giving to them in the future. [/ QUOTE ] gov't debt grows now from 2 sources. 1) in response to federal spending deficits/promises/commitments etc. 2) holding the deficit growth constant, govt debt grows on itself to finance previous borrowing the consumption being financed is a result of the US consumption of foreign goods. the rate at which the government can borrow was artificially pushed down by the chinese pegging their currency to ours. we'd have been paying a higher rate for our govt debt if china didn't buy some $1trillion of that debt. i don't know to what extent our trading partners are financing our consumption (i.e. comparing % exports for us vs. trading partner vs. % of debt held by that trading partner) but i'm sure it is a lot. the main point here is that i don't think phrasing it like "they are giving us goods for a promise of something greater in the future" is the best way to say it or how it plays out. they get something NOW from this. they (the countries from which we net import) get higher growth now than they would not have gotten otherwise (if we didn't net consume so much). and the financing doesn't have to come from those countries as a proportion of the net amount we import. it just has to come from somewhere. foreign central banks are the main holders with china being FAR out in the lead. Barron [/ QUOTE ] Sorry, smugness traveled from NVG. But, I'd say to really get at his question, he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down. This can take a while to explain properly, that's why I tried to keep an explaination simplistic. FWIW, When you say 'rate' I want to make it clear you mean 'interest rate' or cost of borrowing fell was pushed down, not that level of debt issued decelerated. Simple? China/Jap are our largest trade partners. When we give them dollars for goods, a dollar excess is created on the currency markets. It is in the hands of people who want to covert it to back to goods and services. The more $ the spend, the less they can buy (reduced purchasing power for every dollar spent). A fall in the dollar's value reduce the value of these exporters work. When they get paid less, they work less = Bad for China's growth. China preserves their purchasing power, by making sure that there are fewer dollars on the market. They can do this by purchasing us bonds. Eventually this dollar propping won't be sustainable (not gonna get into why now). Basically, China has given us a cheap line of credit so that we buy their goods and help their econ grow, and it would be stupid/ economically harmful for us not to use it. Now projects that would be -EV at one interest rate are +EV at a lower rate = Our econ grows. However, because the line of credit has to go through our treasury, the Gov't decides what to do with it first. The same credit china is giving us could be used by private businesses, and they would have more debt. However, the obligation to china is held at the govt level, then spent (poorly) on US private business (Blackwater, Raytheon, and other pork, private hospitals via medicare, etc). |
Re: Why do governments borrow money?
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[ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] If it is the government who give banks permission to do this, then why don't they just give themselves permission to do it, create the money themselves, and not pay interest? [/ QUOTE ] Is that what Germany did after WWI with such great success that in the end you needed a wheelbarrow full of money to buy a loaf of bread? [/ QUOTE ] How is it different if the governement borrows created money from banks and pays interest instead of money it creates itself and doesn't pay interest? Same result, cheaper method. [/ QUOTE ] kimchi, you wouldn't have faith in somebody who only answered to themselves would you? by answering to the markets, a necessary mechanism of restraint and trust is established. Barron [/ QUOTE ] I just posted this in BFI, but is relevant here as well. web page [/ QUOTE ] you have to excuse me tol, i just have such little tolerance for articles from mises. it just rubs me the wrong way. i'm sure alot of the analysis is good, but there are SOOO many words in these articles and the tone makes me uncomfortable. things like this is where i stopped reading: [ QUOTE ] There was a century of sound money. During one hundred years preceding World War I, government touched money hardly more than to establish standards of weight and measure, to lay down the laws of liability and to license bankers. . In that century the wealth of the world increased more than in all preceding time of economic man. [/ QUOTE ] here he is trying to assert that the speed of the increase in wealth duringg the 100 years of untouched sound money is (by implication) caused by said sound money. what about the industrial revolution? unheardof increases in productivity due to massive inventions like the steam engine, the locamotive etc. etc. is he saying sound money did that or had a huge part in it? there were also many banking crises (i.e. the failing of a bank...something like over a thousand) in that hundred years (far more in proportion than there were in teh following hundred years) finally, the amt of wealth created during the NEXT 100 years far surpassed that created during that 1800-1900 period. i dunno, maybe i'm hugely biased for the govt or just an idiot or an [censored], but i have virtually no tolerance for that type of prose and by extension for links from mises. i asked borodog to link me to research to back his points NOT from mises and he has yet to do it in ANY other case than with the monopoly discussion (in which he linked non-mises links within minutes of me asking whereas when i asked for non-mises research for other discussion he never responded). anyways, enough of my ranting. Barron |
Re: Why do governments borrow money?
Thanks for the useful (and not so useful) replies.
[ QUOTE ] the OP demonstrates a less than serious understanding of basic global finance.....LOL, maybe you should learn macroeconomics (and not from a community college). [/ QUOTE ] Both statements are probably true. My original question was more about why governments pay interest to private banks on something the banks don't have. [ QUOTE ] The banks who buys those bonds need to have the money to buy them, pretty sure they are not getting them without paying. [/ QUOTE ] My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying. [ QUOTE ] he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down [/ QUOTE ] Without taking a course in IEcon. Here are my assumptions regarding money: 1-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest. 2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit. 3-most money is created by banks in the form of debt – not the government. 4-This created money is convertible to government-issued fiat money, which is legal tender and thus we are forced to use it to settle debts. 5-The (defunct?) fractional reserve system allowed 9:1 ratio of lending against a real money (eg-gold). This borrowed money can then be deposited and used again as ‘fractional reserve’ by the bank as this money is loaned against the new borrowers promise to pay it back. The new borrowers’ loan agreements are essentially acting as the new ‘reserve’. 6-the method outlined in #5 can be repeated until the bank is effectively utilizing approx 90:1 lending ratio. 7-banks earn interest on all the money loaned in #6 even though most of it was created by them. They are lending (and receiving interest on) something they don’t have. So back to my original question – Why would governments pay interest on created money from bansk, when they can create their own money interest-free? Sorry if that question has been answered, but if the above assumption are correct, the rationale behind government’s decisions to borrow from banks doesn’t make sense. Go easy on me ladies [img]/images/graemlins/frown.gif[/img] |
Re: Why do governments borrow money?
"-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest.
2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit. 3-most money is created by banks in the form of debt – not the government." -Money, at least in the US is made by the government, and its value is backed up by faith in the governemnts will and ability to honor the stated value of the money. -Banks cannot suddenly say "wow, looks like we have 20 billion dollars suddenly", just by typing in "20,000,000,000$" on a computer-screen. Banks borrow money from government, they borrow money from people, and they lend it out to government and people and corporations and so on. When the government borrows money from a bank its not enough that the bak says "sure, here is 10 billion, have a nice day", they must actually transfer money to the government. -Any bank that is willing to lendmoney to the government or yourself must be able to get those money from somewhere, they have to balance it. If they lend out 10 billion they either need to have that capital themselves or raise it somewhere else, its not like they can magically make them appear. The only real value of the dollar is in the faith that the government promises to to honor the said value of the dollar, the governments ability to collect taxes play an important role in this. You seem to be under the misconseption that banks are somehow able to produce money at will with no security behind it or with out it representing any true value. If that was the case the economy of this country and the rest of the world would be in total chaos and any sane person would trade his dollars for minerals or land or animals or properties. |
Re: Why do governments borrow money?
[ QUOTE ]
Thanks for the useful (and not so useful) replies. [ QUOTE ] the OP demonstrates a less than serious understanding of basic global finance.....LOL, maybe you should learn macroeconomics (and not from a community college). [/ QUOTE ] Both statements are probably true. My original question was more about why governments pay interest to private banks on something the banks don't have. [ QUOTE ] The banks who buys those bonds need to have the money to buy them, pretty sure they are not getting them without paying. [/ QUOTE ] My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying. [ QUOTE ] he'd need a pretty solid course in IEcon, just to get basic theory / assumptions down [/ QUOTE ] Without taking a course in IEcon. Here are my assumptions regarding money: 1-Money is someone else's liability and was created by banks against the obligation of the borrowers' promise to pay it back + interest. 2-Every time someone takes out a loan (government, corporate, mortgages etc) new money is created by the bank in the form of credit. 3-most money is created by banks in the form of debt – not the government. 4-This created money is convertible to government-issued fiat money, which is legal tender and thus we are forced to use it to settle debts. 5-The (defunct?) fractional reserve system allowed 9:1 ratio of lending against a real money (eg-gold). This borrowed money can then be deposited and used again as ‘fractional reserve’ by the bank as this money is loaned against the new borrowers promise to pay it back. The new borrowers’ loan agreements are essentially acting as the new ‘reserve’. 6-the method outlined in #5 can be repeated until the bank is effectively utilizing approx 90:1 lending ratio. 7-banks earn interest on all the money loaned in #6 even though most of it was created by them. They are lending (and receiving interest on) something they don’t have. So back to my original question – Why would governments pay interest on created money from bansk, when they can create their own money interest-free? Sorry if that question has been answered, but if the above assumption are correct, the rationale behind government’s decisions to borrow from banks doesn’t make sense. Go easy on me ladies [img]/images/graemlins/frown.gif[/img] [/ QUOTE ] There isnt a single one of your assumptions that is entirely correct, and the intial ones are entirely wrong. |
Re: Why do governments borrow money?
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There isnt a single one of your assumptions that is entirely correct, and the intial ones are entirely wrong. [/ QUOTE ] Could you correct my assumptions? I remember reading an article discussing the assumptions I made in my previous post. At the time it seemed so absurd as to be untrue. I just did some googling: [ QUOTE ] MAJOR L .L. B. ANGUS: "The modern Banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint and unmint the modern ledger-entry currency". [/ QUOTE ] [ QUOTE ] RALPH M. HAWTREY (Former Secretary of the British Treasury): "Banks lend by creating credit. They create the means of payment out of nothing". [/ QUOTE ] [ QUOTE ] Richard Duncan: "In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy – remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created ¥35 trillion. To put that into perspective, ¥35 trillion is approximately 1% of the world's annual economic output. It is roughly the size of Japan's annual tax revenue base or nearly as large as the loan book of UFJ, one of Japan's four largest banks. ¥35 trillion amounts to the equivalent of $2,500 for every person in Japan and, in fact, would amount to $50 per person if distributed equally among the entire population of the planet. In short, it was money creation on a scale never before attempted during peacetime." [/ QUOTE ] It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution. |
Re: Why do governments borrow money?
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It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution. [/ QUOTE ] To claim that is not a governmental institution is far from correct, even though parts of the supply/distribution mechanics of the Federal Reserve System are done by private banks. You should really read more about it here, maybe you understand the complexity better http://en.wikipedia.org/wiki/Federal_Reserve_System |
Re: Why do governments borrow money?
Oh wait, I've got a good one!
[ QUOTE ] Why do governments borrow money? [/ QUOTE ] Because they never learned how to handle money when they were younger. |
Re: Why do governments borrow money?
Barry Bonds
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Re: Why do governments borrow money?
No individual Bank can just "create" money, but the banking system as a whole can.
This can be easily evinced by looking at the following example: Suppose that any one bank can lend 90% of its deposits. Now imagine that 10K is deposited at Bank A which then lends 9K, that is deposited at bank B which then lends 8100K which is then deposited at bank C which lends 7290 and so on. 10000> 9000 9000 > 8100 8100 > 7290 7290 > 6561 6561 > 5904 5904 > 5314 5314 > 4782 4682 > 4304 4304 > 3874 3874 > 3486 So you can see how from an original deposit of only 10K over 55K of loans can originate through the banking system, but at the same time each component will be able to show that deposits>loans or assets>liabilities. The banking system can create debt backed by debt backed by debt and thus create money and in fact manages a currency system whereby debt=money. The sleight of hand of the system is achieved by fostering the illusion that all the components are independent, therefore money can leave the doors of one bank as a liability and then arrive through the doors of another bank as an asset, where as in reality that money has just passed through components of a unified system. It is this alchemy of transforming liability into asset upon which are whole financial system depends. |
Re: Why do governments borrow money?
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Oh wait, I've got a good one! [ QUOTE ] Why do governments borrow money? [/ QUOTE ] Because they never learned how to handle money when they were younger. [/ QUOTE ] Yes. Very droll. So, without reference to baseball, if you've ever taken out a bank loan, mortgage or credit card, could you explain where the money the bank gives you comes from? |
Re: Why do governments borrow money?
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[ QUOTE ] It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution. [/ QUOTE ] To claim that is not a governmental institution is far from correct, even though parts of the supply/distribution mechanics of the Federal Reserve System are done by private banks. You should really read more about it here, maybe you understand the complexity better http://en.wikipedia.org/wiki/Federal_Reserve_System [/ QUOTE ] [ QUOTE ] "Some people think the Federal Reserve Banks are the United States government's institutions. They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers" -- Congressional Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932 [/ QUOTE ] |
Re: Why do governments borrow money?
Perhaps an 85 year old quote from a politician with an agenda is not the best rebuttal to a previous poster's statement of fact. If he's wrong, I bet you can come up with something more authoritative than that. If, as I suspect, the truth of the matter is somewhat ambivalent, a realistic appraisal of the situation should reflect that.
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Re: Why do governments borrow money?
[ QUOTE ]
[ QUOTE ] Oh wait, I've got a good one! [ QUOTE ] Why do governments borrow money? [/ QUOTE ] Because they never learned how to handle money when they were younger. [/ QUOTE ] Yes. Very droll. So, without reference to baseball, if you've ever taken out a bank loan, mortgage or credit card, could you explain where the money the bank gives you comes from? [/ QUOTE ] China? |
Re: Why do governments borrow money?
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My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying. [/ QUOTE ] kimchi. just because banks can create money doesnt mean that money doesn't exist or isn't usable. here's an example. when you engage in a repurchase agreement, you are only given a loan on some % of the value of your collateral. call that % Y. X=1-Y is the haircut. in many cases the haircut is likt 5% or something. at this rate, if you maxed it out (i.e. repo'd a bond for cash, bought another bond, repo'd that etc. etc.) you'd have 1/.05=20 times the exposure to the security you repo'd. if sh*t went bad, you'd be on the line for a ton. similarly, the reserve requirement is like the haircut. the money that is "created" is on the banks' books. there are assets and liabilities. the government can't just borrow from itself b/c that just wouldn't fly. you need the market mechanism i mentioned in the first place in place to get the trust of the market...otherwise, nobody would want to do business with you further, banks aren't the only holders of govt debt. and those that are, aren't eh same banks that create the US money. look at china's central bank. they don't have the same free money creation thing we have goin on here and they are one fo the biggest holders of US govt. debt. their money comes from foreign exchange reserves from borrowing from their citizens (mandatory) and selling those yuan in the mkt to maintain a peg to the dollar. those dollars are then invested in govt agency and treasury securities. so US banks aren't the only holders though they are probably the largest (not sure on that, have to check it up). hope this helps...lemme know where ic an be clearer. Barron |
Re: Why do governments borrow money?
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"Some people think the Federal Reserve Banks are the United States government's institutions. They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers" -- Congressional Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932 [/ QUOTE ] Louis T. McFadden was openly antisemetic, claimed that the Jews controlled the American economy; and said "in the United States today, the Gentiles have the slips of paper while the Jews have the lawful money." So yeah, he played the good old jew-card. He also claimed that Wall Street bankers funded the Bolshevik Revolution through the Federal Reserve banks, as well as claiming that the Federal Reserve deliberatly caused the Great Depression. Im not sure if McFadden is suitable as a character witness when it comes to the Federal Reserve System. |
Re: Why do governments borrow money?
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You seem to be under the misconseption that banks are somehow able to produce money at will with no security behind it or with out it representing any true value. If that was the case the economy of this country and the rest of the world would be in total chaos and any sane person would trade his dollars for minerals or land or animals or properties. [/ QUOTE ] Take a look at Zimbabwe if you want to see chaos caused by a central bank printing money out of thin air. |
Re: Why do governments borrow money?
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Re: Why do governments borrow money?
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-Money, at least in the US is made by the government, and its value is backed up by faith in the governemnts will and ability to honor the stated value of the money. ... The only real value of the dollar is in the faith that the government promises to to honor the said value of the dollar, the governments ability to collect taxes play an important role in this. [/ QUOTE ] What is the "stated value" of one dollar? |
Re: Why do governments borrow money?
The value stated; 1$. Money printed by Federal Reserve are legal tender and worth whatever amount they say. Its value compared to goods change day by day.
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Re: Why do governments borrow money?
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No individual Bank can just "create" money, but the banking system as a whole can. This can be easily evinced by looking at the following example: Suppose that any one bank can lend 90% of its deposits. Now imagine that 10K is deposited at Bank A which then lends 9K, that is deposited at bank B which then lends 8100K which is then deposited at bank C which lends 7290 and so on. 10000> 9000 9000 > 8100 8100 > 7290 7290 > 6561 6561 > 5904 5904 > 5314 5314 > 4782 4682 > 4304 4304 > 3874 3874 > 3486 So you can see how from an original deposit of only 10K over 55K of loans can originate through the banking system, but at the same time each component will be able to show that deposits>loans or assets>liabilities. The banking system can create debt backed by debt backed by debt and thus create money and in fact manages a currency system whereby debt=money. The sleight of hand of the system is achieved by fostering the illusion that all the components are independent, therefore money can leave the doors of one bank as a liability and then arrive through the doors of another bank as an asset, where as in reality that money has just passed through components of a unified system. It is this alchemy of transforming liability into asset upon which are whole financial system depends. [/ QUOTE ] But the original investors can deposit an initial reserve into the bank. If initial this reserve is $1000 and the required reserve ratio is 9:1, then the bank can lend $9000 on this initial high-powered money. This money is essentially new money created by the bank. This new commercial bank money can then be deposited at another bank and be used to create further credit by dividing it by the fractional reserve ratio, and not multiplying it. This process repeats: $1000 initial reserve deposit $9000 loan > $8100 $8100 > $7290 and so on as in your example. If repeated 50 times, this initial $1000 deposit can be used to create approximately $90000 - 90:1 ratio The banks can lend this money they have created at interest. Suppose all the money in this example were loaned out as a mortgage. The house buyer's signature on the mortgage agreement acts as a guarantee that he/she will pay back the loan (+ interest) or risk forfeiture of the property to the bank. If the home owner fails to meet their repayment obligations, then the bank can repossess their property. This means that banks can acquire assets using money they create themselves. It is inevitable that a certain proprtion of people will fail on their obligations to meet their loan agreements and lose the assets they bought to the bank since the only way they can pay back the principal plus the interest is by someone else taking out a loan and injecting further money into the economy. At the time the loan was initially issued, only the money needed to pay back the principal existed and the money needed to pay the interest had yet to be created by the bank. The time-lag between issuing the credit and the settlement of the debt (usually years) offers an opportunity for the banks to create the additional money needed to pay the interest. And so the cycle of exponentially increasing debt continues...but by definition - cannot continue for ever. |
Re: Why do governments borrow money?
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[ QUOTE ] No individual Bank can just "create" money, but the banking system as a whole can. This can be easily evinced by looking at the following example: Suppose that any one bank can lend 90% of its deposits. Now imagine that 10K is deposited at Bank A which then lends 9K, that is deposited at bank B which then lends 8100K which is then deposited at bank C which lends 7290 and so on. 10000> 9000 9000 > 8100 8100 > 7290 7290 > 6561 6561 > 5904 5904 > 5314 5314 > 4782 4682 > 4304 4304 > 3874 3874 > 3486 So you can see how from an original deposit of only 10K over 55K of loans can originate through the banking system, but at the same time each component will be able to show that deposits>loans or assets>liabilities. The banking system can create debt backed by debt backed by debt and thus create money and in fact manages a currency system whereby debt=money. The sleight of hand of the system is achieved by fostering the illusion that all the components are independent, therefore money can leave the doors of one bank as a liability and then arrive through the doors of another bank as an asset, where as in reality that money has just passed through components of a unified system. It is this alchemy of transforming liability into asset upon which are whole financial system depends. [/ QUOTE ] But the original investors can deposit an initial reserve into the bank. If initial this reserve is $1000 and the required reserve ratio is 9:1, then the bank can lend $9000 on this initial high-powered money. This money is essentially new money created by the bank. This new commercial bank money can then be deposited at another bank and be used to create further credit by dividing it by the fractional reserve ratio, and not multiplying it. This process repeats: $1000 initial reserve deposit $9000 loan > $8100 $8100 > $7290 and so on as in your example. If repeated 50 times, this initial $1000 deposit can be used to create approximately $90000 - 90:1 ratio The banks can lend this money they have created at interest. Suppose all the money in this example were loaned out as a mortgage. The house buyer's signature on the mortgage agreement acts as a guarantee that he/she will pay back the loan (+ interest) or risk forfeiture of the property to the bank. If the home owner fails to meet their repayment obligations, then the bank can repossess their property. This means that banks can acquire assets using money they create themselves. It is inevitable that a certain proprtion of people will fail on their obligations to meet their loan agreements and lose the assets they bought to the bank since the only way they can pay back the principal plus the interest is by someone else taking out a loan and injecting further money into the economy. At the time the loan was initially issued, only the money needed to pay back the principal existed and the money needed to pay the interest had yet to be created by the bank. The time-lag between issuing the credit and the settlement of the debt (usually years) offers an opportunity for the banks to create the additional money needed to pay the interest. And so the cycle of exponentially increasing debt continues...but by definition - cannot continue for ever. [/ QUOTE ] it can't go on forever, but it can go on for a long long long time. i'm currently building a dataset from which i expect to be able to get rudimentary predictions of GDP. from it i mostly hope to learn about the economy via time series analysis. in it, i will eventually get bank reserves, total credit outstanding (i have that already) and total money in the system. your hypothesis of "exponentially increasing credit" can then be tested. i don't think there will be an exponentially increasing credit as a % of GDP. the point is that you've made, again, some very strong simplifying assumptions and i'm not even sure what exactly you're saying about the money to pay interest not being created yet...b/c now we live in a time period prior to which the money was created and the system now functions on (relatively small) changes in the amount of money as a % of GDP out there. i just am commenting on the exponentially increasing credit hypothesis. Barron |
Re: Why do governments borrow money?
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Re: Why do governments borrow money?
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This may help.... http://www.slide.com/r/CdXBDkri7j_MZUOJFrXUYSGXMokyBdCq [/ QUOTE ] lol. - central bank prints currency - JP morgan created the banking panic of 1907. proof was given "a few years later" by a quote from a guy at life magazine that reads: [ QUOTE ] The Morgan interests took advantage...to precipitate [the panic] guiding it shrewdly as it progressed [/ QUOTE ] nice. - bankers wrote the federal reserve system at a meeting so secret and hidden from public knowledge, that the attendees hid their name en route to the island....yet not secret enough for this "documentarist" to get a hold of lol. - (this one is my 2nd favorite) a margin loan is callable at anytime. AND it was called in 1929 in order to purposefully initiate the great depression by the same few bankers. i swear, i could not make this up...this is right out of that "documentary" linked above. - (and this is my favorite) the fed, FOR THE PURPOSE OF RULING THE ENTIRE COUNTRY, contracted the money supply in 1930 precipitating the 2nd wave of the great depression. yes, sir...that link certainly helped a lot. it helped to show that internet documentaries are getting worse and worse at being honest. Barron |
Re: Why do governments borrow money?
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The value stated; 1$. Money printed by Federal Reserve are legal tender and worth whatever amount they say. Its value compared to goods change day by day. [/ QUOTE ] You said its value comes from their promise to honor its stated value, and that stated value is "whatever we say it is"? So what exactly are they promising to honor? "A dollar will always be worth one dollar" is a tautology, not a promise. |
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