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#1
10-04-2007, 11:45 AM
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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. 
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#2
10-04-2007, 01:46 PM
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Re: Why do governments borrow money?
[ 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
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#3
10-04-2007, 02:43 PM
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Re: Why do governments borrow money?
[ QUOTE ]
[ 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).
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#4
10-17-2007, 12:55 AM
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Re: Why do governments borrow money?
[ QUOTE ]
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. [/ QUOTE ] Our trade deficit is the difference between exports and imports and is not something which needs to be financed. A trade deficit is simply offset by a capital surplus. We give currency for foreign goods, we have trade deficit and they have capital surplus. The fact that they choose to invest that capital surplus in our government bonds means that they find that the most attractive use of those funds. They could just as easily buy real estate, stocks or any other goods and services those dollars will buy. Governments borrow money to pay for services they provide its citizen's like national defense, trips to the moon, highways, roads and bridges to name a few. Bonds are sold through investment banks that collect a fee like they do on any underwriting. Money is created when the FED buys bonds on the open market from member banks and gives them a book keeping credit in exchange for the bonds. Because of fractional reserve requirements this credit is multiplied throughout the banking system Money is a medium of exchange and has no real value. Its value is that others will accept it as trade for real goods and services. Inflation erodes the value and confidence in money and gives some restraint to FED policies.
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#5
10-06-2007, 06:15 AM
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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.
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#6
10-07-2007, 02:42 AM
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Re: Why do governments borrow money?
[ 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.
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#7
10-07-2007, 09:27 AM
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Re: Why do governments borrow money?
[ QUOTE ]
[ 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
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#9
10-09-2007, 09:32 PM
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Re: Why do governments borrow money?
[ QUOTE ]
Why do governments borrow money? [/ QUOTE ] If you could borrow money knowing you'd never pay it off and that some random people you don't care about in the future would have to pay it instead (and assuming you're not, you know, a good person), wouldn't you?
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#10
10-10-2007, 12:21 PM
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Re: Why do governments borrow money?
[ QUOTE ]
[ QUOTE ] Why do governments borrow money? [/ QUOTE ] If you could borrow money knowing you'd never pay it off and that some random people you don't care about in the future would have to pay it instead (and assuming you're not, you know, a good person), wouldn't you? [/ QUOTE ] This is a silly response. Did you mean it to be? See my second post for those that want a real answer.
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