Money Money Money Money............................ Money

coastline

Most of the emphasis has been placed on public debt...and all nations are attempting to reduce budgets to 3% of GDP...well not the USA as they are having a convenient election first before they get started. ..;)
Once they get somewhere near a balanced budget they will borrow more I think....and so it goes on..
What about all the private debt...not just household...big business...is there no governing body overseeing all that ..?

Thrugelmir

coastline wrote: »

Most of the emphasis has been placed on public debt...and all nations are attempting to reduce budgets to 3% of GDP...well not the USA as they are having a convenient election first before they get started. ..;)
Once they get somewhere near a balanced budget they will borrow more I think....and so it goes on..

That's why the G20 deferred the tighter banking solvency rules. There was no way both Governments could introduce austerity measures and raise taxes to balance their books while Banks deleveraged their balance sheets.

The change is seismic. That's what people are unable to grasp. No one knows the impact that ultimately the combined measures will have.

Generali

michaels wrote: »

One bit I don't get - it is suggested that payments on debt 'sucks money out of the economy'.....

To be simplistic, if you believe that fractional reserve banking creates money via the credit system why would you not believe that the repayment of that credit can destroy money?

michaels wrote: »

...but surely such payments are merely transfers between borrowers and lenders (with a cut going to bank employees and shareholders)?

Again to simplify (mostly because my accountancy is poor) AIUI, a bank books most of the profit on a loan when it is written so that is when the cut is paid to employees and shareholders.

When a loan is repaid, the money sits idly in the 'bank vault' until it can be lent again. At present, the banks either can't or won't re-lend the money so it sits idle and unused in the 'vault'. While it is sitting there it isn't being used to buy things and services or pay taxes.

We can see the impact that lending or not lending has on the supply of money by looking at the M4 measure of money supply. In the boom years when lending was high it was rising by over 20% at times. Over the last year it has fallen by over 3% in nominal terms and with inflation included the buying power of that money has fallen by about 7%.

DaddyBear

HAMISH_MCTAVISH wrote: »

The money supply is mostly created through fractional reserve banking, which relies on debt to create money.

And a number of posters here desire lower levels of debt in general, and expect this to lead to greater levels of money to spend in the economy.

Yet those same posters seemingly fail to understand that less debt equals less money in the system to go around, as when debt is repaid to banks without being lent out again an equivalent amount of money ceases to exist.

So their desire is an impossibility.

Discuss.....

We're long past the point where further debt adds to the economy.

Generali

michaels wrote: »

I'm not sure I am entirely convinced by the 'bringing forward consumption' argument. On a global scale I don't see how the monetary system can alter the balance between production and consumption although I guess there is some choice between producing 'capital goods' and 'consumption goods'. Obviously between any subgroups there can be an agreement for one to consume sooner and another later.

TBH, this is something that I am sort of making up as I go along with plenty of input from what I see and read so I apologise for any inconsistencies.

It is only a theory and one that needs a lot of work.

In the case of a borrower defaulting there is a pretty clear shift in consumption. You save money for later use, I borrow it and then fail to repay. If the cash is sat in a bank then you normally get your money back as you have deposit insurance and reserves. If however you hold ABS or MBS or CDOs in your pension as most people do if they have any sort of fixed income fund then the default comes out of your future retirement income: the money you have saved has been taken by someone else and spent today!

Generali

Thrugelmir wrote: »

Capital repayment (i.e. debt reduction) is not income. So there's no distribution to shareholders , employees etc.

When debt is repaid its effectively being cancelled. Reducing the amount of money in circulation.

That is similar to what I understand. Are you an accountant by any chance or is there an accountant on here that can confirm?

Linton

Thrugelmir wrote: »

Capital repayment (i.e. debt reduction) is not income. So there's no distribution to shareholders , employees etc.

When debt is repaid its effectively being cancelled. Reducing the amount of money in circulation.

Read Niall Fergusons "Ascent of Money". A good laymans read and will explain the topic to you.

Aren't the repayments largely being used to increase banks' reserves? If this wasnt happening the repaid cash could simply be lent out again.

Thrugelmir

Generali wrote: »

That is similar to what I understand. Are you an accountant by any chance or is there an accountant on here that can confirm?

Worked in finance all my life.

Thrugelmir

Linton wrote: »

Aren't the repayments largely being used to increase banks' reserves? If this wasnt happening the repaid cash could simply be lent out again.

I will answer later.

HAMISH_MCTAVISH

homelessskilledworker wrote: »

I partially agree with what you are saying, but the massive difference between us is that you see debt as wealth and I see it as the complete opposite.

I don't see debt as wealth.

I see debt as a large component of the money supply.

And both the quantity and velocity of money in circulation directly affects economic activity, and thus the wealth of us all.

Example:

Bob walks into his bank and deposits £100 from earned income. The bank holds back 10% (fractional reserve banking), and lends £90 to John as credit on his credit card.

John spends the £90 buying an hour's worth of "personal services" from Jill. Jill takes the £90 and deposits it with her bank. Who withhold 10% (fractional reserve banking) and lend out the remaining £81 to Dave on his credit card.

Dave spends the £81 buying a meal from Jack's restaurant, and Jack deposits the £81 with his bank. Who hold back 10% (fractional reserve banking), and lend the remaining £72.90 to Ben.

Ben takes the £72.90 and uses it to buy flyers from Tom's Printing company to promote his new business. Tom takes the money and deposits in his bank, who hold back 10% and..... you get the idea.

For every £100 created by the central bank, fractional reserve banking adds almost another £1900 to the system at a reserve rate of 10%.

So there is now £2000 in circulation.

And this is the important part.....

If we as a society determine that we want to increase the reserve rate to say 20% instead of 10%, then the supply of money in the system decreases from £2000 to just £500.

Because a 20% reserve rate only allows £400 of money to be created for every £100 of central bank money.

So the chain as above, now looks like this....

Bob walks into his bank and deposits £100 from earned income. The bank holds back 20% (fractional reserve banking), and lends £80 to John as credit on his credit card.

John spends the £80 buying an hour's worth of "personal services" from Jill. Jill gets a bit peeved that her punters can now only afford £80, but takes the £80 and deposits it with her bank. Who withhold 20% (fractional reserve banking) and lend out the remaining £64 to Dave on his credit card.

Dave spends the £64 buying a meal from Jack's restaurant, but can now only afford 2 courses instead of three, and Jack deposits the £64 with his bank after laying off a staff member as he now doesn't sell enough 3 course meals to justify keeping them all on. The bank holds back 20% (fractional reserve banking), and lends the remaining £51.20 to Ben.

Ben takes the £51.20 and now can't afford to buy flyers from Tom's Printing Company, so he buys a poster instead. Tom then doesn't need to order as much paper or ink from his supplier, and takes the £51.20 to his bank, who hold back 20% and..... again, you get the idea.

Debt is not wealth, in the way that internet posters sneer about.

But debt is part of the money supply, and thus part of the economy.

And if debt can create money, and the velocity of money can create wealth, then a reduction in debt can destroy wealth.

Which is a big part of the problems we face today....