Debt/money system - thoughts on this?

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There seems to be an argument nowadays that debt is a permanent an inescapable thing in our current system, because the banks create money out of debt, through loans, which has to be payed back at interest, with only the loan money actually existing it all, meaning the interest doesn't exist in the money supply and therefore there will always be more debt than money in existence. Foreclosures and defaults are therefore built into the system and is an inescapable thing no matter how hard working and productive the populous is.

A few videos to watch on this subject are:

Money as Debt:



Money as Debt II:



The Money Masters (warning: 3 hours long!): http://video.google.com/videoplay?docid=-515319560256183936

Overall worldwide productivity has vastly increased, and yet paradoxically, so has debt. I've asked a few friends of mine who have degrees in economics if the facts of the case being made are valid, and they have all agreed that they were (though some defend the banks as an important entity, and I say it is but it could be better in a new system).

I'm not quite sure of my opinion on this yet, so I was wondering if anybody here who was knowledgeable about this subject could shed some light on it.

 

I have to work for a living so I will never have the time to watch those videos, sorry.

Of course, that doesn't mean I'm not going to comment.

Yes, the world economy needs debt and the banks that loan the money to function. Without it businesses wouldn't be able to expand or in many cases fund their operations. Individuals wouldn't be able to make home or even auto purchases.

The same argument can be made for the stock exchanges.

 

On the mark for businesses, but not true for individuals. It's really rather simple actually. We would be able to afford anything. We would just have to save first. Which means living with Mommy and Daddy for a couple of years out of college before purchasing your home instead of signing loans for hundreds of thousands of dollars and floundering roung to find ways to pay it.

 

Well, if you ever get the chance, I would recommend watching them. It seems like it represents a fatal flaw in the world economy.

What's interesting about their loans to businesses and individuals is that when they create the money out of thin air, as long as you go and deposit it into a bank or the person you buy something off of deposits it, the banks apparently only exchange promises to pay and no money ever changes hands. It's like funding without funds: you take the loan, the bank creates the money it loaned you by the stroke of a pen, you deposit it into another bank, and the promise to pay is exchanged instead of real money. The only reason why banks ever "go broke" is because they put the loan contract (principal plus interest) on the asset side of the ledger, with the "money" they put into the borrowers account as a liability. So if a person defaults on the loan, the bank seizes the asset bought with the money. If the market for the asset declines, like with housing, the value of the asset doesn't cover the "liability" but forth by the banks.

But with there being more debt than money in existence, with seized assets being an absolute certainty, anytime things like housing and car value go down a banking crises is almost certain to happen. Constant government bailouts, anyone?

Also, the spontaneous increase in the supply of money also creates inflation, since the creation of money has nothing to do with the available goods and services, which apparently also serves the banks.

"The decrease in purchasing power incurred by holders of money due to inflation imparts gains on the issuers on money"
St. Louis Federal Reserve Bank, review, Nov. 1975, p.22

This system, if accurately described, technically violates a basic law of contracts, namely each party putting up some form of consideration. You put your assets up from consideration when you accept the loan, but all that the banks put up is theoretical liability which was only created at the time of the contract, and even if the contract is fulfilled nothing of real value is ever at risk from the banks.

Do we need loans and capital investments? Of course. Do we need them in such a way where it creates a literally impossible situation for all the recipients of a loan to ever pay them back, while banks continually collect interest on money they never really had in the first place? Of course not.

Interesting side note: Apparently Dennis Kucinich is a big fan of the Money as Debt series.

---------- Added 3 hours, 34 minutes and 44 seconds later... ----------

You can find a more concise (but less detailed in it's mechanics and social cost) version of this issue here: http://www.globalresearch.ca/index.php?context=va&aid=11600

 

I work at a bank and I can say that we have never created any money out of thin air. Every dollar we lend to someone has had to be out of money that someone else has lent to us.

The main reason banks go broke is when they borrow at short terms and lend out at long terms so run out of liquid assets if the person they borrowed off at short terms wants their money back before the long term borrower has repaid.

 

It's actually a pretty well known fact that they do indeed create money through loan contracts. The term is called "fractional reserve lending" and it's practiced worldwide.

http://dallasfed.org/educate/everyday/ev9.html

http://ingrimayne.com/econ/Banking/Overview10ma.html

http://www.tradingstocks.net/html/banks_create_money.html



Sure, there are obviously multiple ways for banks to fail, I was just giving an example that had to do with the recent housing and banking crisis. Forgive me for saying "only way".

 

Oh come on now Blades. Unless you get one hell of a job straight out of college, there's no conceivable way you could save "hundreds of thousands of dollars" by "living with Mommy and Daddy for a couple of years out of college".

Sheesh. My brother just graduated for college. He cannot find a job that pays more than 30K a year to start. He'd have to live at home for a decade to save enough to buy a house.

 

Aldeth, your are joking, right?

Let's take a common home here in Rockford, IL for example. My neighbors 3 bedroom rancher w/ seperare 2 car garage on 7/8 acre just sold for under 40k. Yep, that's right. It sold for 39, 800. Another neighbor of mine bought it for their son who is graduating college this year. But lets say it could of sold for 110k before the mortgae crisis. Working full time, even at 40k/yr which can be low for a college grad, living with mommy and daddy will allow you to save, unless you buy frivilous crap because you are an ass who thinks mom & dad will float you forever. It won't take long to save up 110k. But if you sign that mortgage, that 110k just becamne what? Around 180k-220k with interest over 30 years? (That is what my hundreds of thousands of dollar reference was referring to btw..)Think about it. Living w/ Mom & Dad for a few years will allow you to own your home. The reasoning is in the math. I am not the first to think of this or to implement the plan. The problem is most of us want everything now, now, now! So we throw common sense to the wind and sign the mortgage deal with the bank and give the bank a ton of free money.

 

OK, where I live, you cannot sniff a home for under $250K. If you want a decent sized, single family home, you're looking more like $350K. You can't even get a one bedroom townhouse with an on-street parking spot for $40K. So for where I live, no I wasn't joking.

The one thing I think you're overestimating is what a typical college grad can expect to command on the job market right now. I'm shocked at the pay rates for the positions my youngest brother is interviewing for. They are pretty much what I was making when I entered the labor force a decade ago. (I lived at home until I was 26, but most of that time I was still in school. I didn't finish school until I was 25.) But let's go with your figure of $40K for argument's sake.

So yeah, if you can get into a house for $100K as opposed to $250K, that makes a huge difference in how long it's going to take to save the money. In fact, I'd say it would take 2.5 to 3.5 times as long, which brings me back to living at home for a decade to save the money.

 

The problem here as I understand it is that for each dollar the banks actually have in capital, they are allowed to loan out nine times that amount, thus allowing the banks to create the ability to pay for goods and services (through their loans, created by simply typing that amount into a borrower's account) without actually having anything to back that up. Thus, they create electronic money. That's why it is called "fractional reserve", because the banks only have a fraction of the money they lend out as a reserve to back it up. And since 95% of the U.S money supply is this loan money that is created because there is 1/10th of the ability to pay for it, and loaned to America at interest (with no interest money actually existing), if everyone withdrew their money at ATM's at the same time only 5% of the people who withdrew would actually get anything back.

Also, since the amount of loans being distributed doesn't have an iron clad correlation with the amount of goods and services available in the economy, it is inherently inflationary. So the need for loans ultimately hurts the economy since every loan created devalues the dollar, making the need for loans even greater. Not only that, but it only functions insofar as people have faith in it. When people went on bank runs at the start of the Great Depression, the system failed because it never does have the capital to pay for all of the deposits that it insures. Thus the banks are inherently insolvent, and yet get to seize countless assets whenever they decide to do a "credit crunch".

A quote to help explain this farther comes from the Federal Reserve's book "Modern Money Mechanics": “Of course they” (the banks) “do not really pay out loans for the money, they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes” (loan contracts) “in exchange for credits” (money) “to the borrowers transaction accounts.” In other words, the nine billion can be created out of nothing. Simply because there is a demand for such a loan, and that there is a 10 billion dollar deposit to satisfy the reserve requirements.

Any google search on the practice of fractional reserve lending shows almost nothing but criticism about it. It creates an impossible situation for societies and individuals, as one or the other must always be slaving away to pay off debt that can't be completely repaid even in theory. If a government goes out of debt, that means there is less money in existence for the people in the society to pay off their debts. Thus, one way or another, the people are enslaved to the banks who control to a large degree the amount of money in circulation, even though they don't have the reserves to back up the money they create anyways.

 

There are no houses for under 250k? Really? I grew up in Bucks County PA. It was considered a higher-end County. I have two particular friends who live there and own several homes(they are landlords). They buy ranchers for around 180k. I hear what you are saying Aldeth. It is one of the reason we moved to Rockford. The cost of living is so much cheaper. But anyone can still easily save up for a smaller home. It just takes a smidgoen of willpower.

There are higher paying jobs here in Rockford, which is considered poor compared to the East Coast. What type of field is our brother in? Teaching? A good example is my company. We are hiring Engineers almost weekly. The kids just out of school are making at least in the 50ks.

 

I watched the first video and read the article. Apologies as this will probably seem quite rambling but I'm picking apart an hour long video.

Fractional reserve banking does not compare to a Ponzi or pyramid scheme. A pyramid scheme will inevitably run into the problem that it cannot attract enough new entrants to pay the old ones. Fractional reserve banking will only fall apart if everyone looks for their money at once. If people have confidence that the bank is safe (or that the government will guarantee the money) then there is no reason for a bank run to form and so the fractional reserve system can keep on going.

I don't think there's enough focus on what money is. Essentially it's just an elaborate way of bartering real goods and services. It's not a thing of itself and changes in the amount of money just result in inflation or deflation as the amount of goods and services is constant.

The video posits the view that the only way of paying the interest on the loan is by the bank creating more money. This suggests money is something of itself but this is false. There are two ways of repaying a loan from a "goods and services" point of view. Firstly you can reduce future consumption, essentially saying that you will have five apples now but give up your right to six apples in the future. This can be a very rational decision in the case of something like a house, where getting the use out of it straight away is important. Or it could be more frivolous such as just wanting a shinier tv. But the principle is the same in either case.

The second way of repaying a loan and the interest is to invest it to create more goods, thus giving you the purchasing power to repay. A farmer could borrow €100 and €10 interest but use the money to grow €120 of apples or €150 of oranges. Again there is no problem. You have created value and are thus able to repay the interest.

The video falls into the trap of thinking that only making "real" goods is useful and that the banks are just a parasite leeching money without contributing anything. This is very false. Banks are the primary people who allocate capital in our economic system. To wit, they decide whether the €100 of seeds should go to the farmer who will grow €120 of apples, €150 of oranges or €90 of pears. This is an incredibly difficult and important task and is why banks are rewarded so well for doing it. The suggestion that governments should run the banks is a very poor one. It is very doubtful the government bureaucracy would run things as well as nimble incentivised private banks. Indeed the suggestion would be taking a big step towards the inefficient communist systems. Also, money is not necessarily a less worthy motivator than votes. If the pear farmer has a bigger extended family he'll probably get the loan as the politican will get the most votes that way. The fact he will end up not able to repay is secondary. Giving government control of the banks will mean loans are given according to pork barrel political patronage rather than the most worthy businesses.

The video completely writes off the role of the government in supervising the banks which is nonsensical. Financial regulators can lay down very strict requirements to the banks to control their lending to stop them creating too much money and the government is free to come up with new laws if it deems the old ones inadequate in keeping the banks in line. And of course banks can be prudent and sensible in their lending even without the government's help. The financial crisis in the banks arose where there were imprudent banks and poor financial regulation. This did not occur everywhere and countries such as Canada did not have massive problems with their banks. I would argue that the present troubles are primarily a sign that better financial regulation is required to safeguard the fractional reserve system, not that the financial reserve system itself is inherently flawed.

 

For entry level housing there are places you can live for under $250K. They are tiny, they aren't in the best of areas, and if you have kids, you wouldn't even think about sending them to those school districts. I know, because I live in one of those houses. Moving somewhere else is a priority for me, because Jack goes to school next year, and if I don't move, he'll be going to private school.

That said, even though my neighborhood would definitely be considered entry level housing, my house would sell for about $180K. It's tiny. It's a 900 square feet townhouse. You can't get much smaller than that without it being an apartment. My wife and I bought that house 11 years ago, and we have certainly outgrown it at this point. It wasn't spacious when it was just the two of us, and as soon as we had a kid it became very cramped.

The larger point is, you need close to $200K to get anything around here. You mentioned a 3-bedroom rancher on nearly an acre of land. Something like that around here would be at a minimum $300K. If it's a bigger rancher, say 2500+ sq feet, more like $350K. Even if you live at home, it's not like you can save your entire salary. If you make $50K, you're going to lose at least $10K in taxes because you're single with no dependents, and by definition you don't have a mortgage and you're probably taking the standard deduction on your taxes.

Chances are you have a car, and even if you're driving a paid off beater, you still have car insurance, gas and general upkeep on it. Chances are you have a cell phone or some other mobile device. You most likely have student loan payments. Even if you're parents don't charge you rent and let you eat their food, you're still not walking away with a ton of money. With a $50K salary, you may be able to save up half of that - say $25K per year.

So it's going to take you the better part of a decade to save up enough money to buy a house free and clear. A much better strategy is to save up enough money to put a 20% down payment on your house - that's what my wife and I did. The 20% allows you to not carry mortgage insurance, and it comes with a much more workable total cost. Instead of needing close to $200K, you only need about $40K, and you CAN save that up between two people with two incomes in the course of a year or two.

He was a double major in college. Business - with a concentration in IT - and communications. He's currently working as a waiter. And it's not like he isn't trying - the kid has gone on numerous interviews, and is trying like hell to get a job. Even the jobs he does interview for have starting salaries of around $35K - which is what I started for 12 years ago - and he can't even get one of them.

The problem he's running into is that with unemployment still around 9%, it's hard to get a job in the field if you don't already have one, especially if you have no work experience beyond your college internship. People with experience are willing to accept lower paying jobs than they would normally command just because the job market is so weak.

 

Not true. Generally speaking, the cost of living (and the corresponding earnings needed to afford that cost of living) includes an amount for housing, whether rent or mortgage payments. So the assumption is that, if you're not paying rent, you're making mortgage payments. The problem is that a lot of people take on a bigger mortgage than they can reasonably afford.

And on the discussion regarding the cost of houses, here in Winnipeg, a starter home (30-40 years old, under 1,000 square feet) in a half-decent neighbourhood (not posh, but one where you can go out without being worried about getting mugged) will run you $200k. And that's cheap for major cities in Canada.

 

Blades you live in the black hole of the midwest. Rockford sucks and no one wants to live there (having the worst school district in the state could be seen as a liability to some). Same for Detroit where you can buy a house for under $20,000. If you don't care where you live, don't care about the schools, crime, or quality of life, then you can easily find a cheap place to live.

 

OK. it doesn't matter if you are buying a home for 100k or 250K. It s still possible to save, depending upon your income. I know, tough family situations make that hard to do or not an option. Mortgages or renting becomes your choices. But my point still stands. Mortgages are not a necessity, just an option. I know several people who I grew up who did exactly what I explained above. They lived with Mom & Dad after college for only a few/2-4 years and then bought there own home, with cash. It is really the most sensible way to go, unless of course you are in a relationship and you think your privacy is more important than giving a bank 100K+ in interest. If you live in an area where houses are 250K+, bite the bullet and buy a home where you can actualy afford it. You have at lest 5 more years from the time you start your family until your first born is in a school system, that gives you five more years of saving to move into a bigger/nicer home in a better area.

 

While what Blades is saying makes a lot of sense for many people it is basically impossible. There are plenty of other factors to consider. The one that I see quite often is the amount of debt students graduating college have accumulated via credit cards and student loans. Considering a state university can run you 20K per year, if the student was paying there tuition the number of people who graduated in four years would plummet. You also have to factor in the "tax" factor of income. Someone making $50K per year does not have $50K go into their bank account. They have far less. The IRS alone will take $6,343.75 of income taxes and $3,825 of social security and medicare taxes. I'm sure the state and maybe even the locals will want a piece of that action also. Working isn't cheap as the employee has to pay for commuting costs, lunch, and probably work cloths. I would also think it would be the proper thing to do, to kick back some money to mom and dad as they are getting older and need to save for retirement so you should expect to pay them some sort of rent for your room and board.

I would be stunned if someone making $50,000 a year could manage to save $25K a year. I like Aldeth live in a part of the country that you couldn't even sniff a house for under $250K. That is a long time to live under the good graces of your parents. Now of course the money you saved should earn something (that is unless Damedog views the investment as speculative ) so that could help the cause a little bit, but it just isn't reasonable to pay cash for many large purchases.

 

What I don't get is this. Some of you are saying that you live in an area where 250K is the bottom line? I beleive it as I used to live in the same subarban settings of the east. BUT, no matter where you are living, you can easily travel an hour away and find much cheaper housing. Possibly except in extreme cases. And no, I am not talking aout ghettos of the cities. There are cheap houses in the cities, the prices gradually rise as you hit suburbia and then decline as you move away from the cities.

 

Yes, I might be able to get some cheap property if I wanted a two hour commute each way to work everyday. Of course that raises its own problems as now you need to get cars more often and that commute would eventually kill most people. On the coasts the cheap land is really far away from the cities, and the only cheap parts of the cities are parts that I would probably get killed in.

 

Hey, someone that actually looked into what it was! Like I said in my original post, i'm not quite sure where I stand on this as I had just heard of it, but there are a few minor things I disagree with you on.

The first part is where you say that it repaying the interest on loans is a real and possible thing, and you most certainly are right...to a point. Some people and governments can repay their debts, but everyone can't- not even a majority. This is one of the major points that really blew my mind about this subject- a bank will aquire ten billion dollars, put one billion in reserves, and then you would think that they loan out the other nine billion right? No, what apparently happens is that they simply create another nine billion on top of the existing nine by the creation of loan contracts, with interest attached of course. The Federal Reserve completely acknowledges this in their book "Modern Money mechanics".

Also, about government not being able to run banks efficiently, the Bank of North Dakota is a state owned bank and is highly successful and has been for quite a while. No politician influences it, and as far as I know it was relatively unaffected by the banking crises. State run enterprises aren't always a complete flop like some free-marketeers would have you believe. Some may scream "socialism!", but I think there should be a lot more public options in sectors of buisness, or major tax breaks for businesses who follow the workers co-op style.

You make a decent point about regulation and government-funded backup making the system more stable, but there are two constants in the system that I think need to be addressed. Perpetual and unpayable debt, brought on by the fact that 95% of the money supply is loaned money created with unpayable interest attached, and perpetual inflation, bought on by the fact that loans are constantly granted without regard to the amount of goods and services available in the economy. Those two things lead me to the conclusion that our banking system and monetary policy need a major reform.