Why Government Debt? And What Are The Alternatives?

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#1 AnssiH

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Posted 30 November 2014 - 10:37 AM

I'm sure many of you have wondered what's this deal with ballooning government debts all over the world.

Here you can see the last 10 years;
http://www.economist...obal_debt_clock

Or longer timespan of US debt;
http://thf_media.s3....t-1_HIGHRES.jpg

I find it peculiar that people defend ballooning government debts as normal order of business, even though it is quite recent development. I also find it peculiar that the defenses I can find never really touch the real problem behind government debts. It seems to be that everyone defending the debt system is only focused onto the business of their own country, and not thinking about this phenomena as a global issue.

It's pretty simple when you look at this from a game theoretical point of view; where each member in the game is looking for nothing but an increase in its own rewards. There seems to be a pretty obvious prisoner's dilemma that no one has control over.

First, we have a currency that is not based on any resource. Instead, the amount of currency in the economy can be freely adjusted, so to adjust the prices of services and goods. At least that's the principle.

To simplify the mechanism, imagine two countries and one bank operating with this currency. The governments are locked into a trade competition. They are both building and maintaining their infrastructure by collecting taxes, and the faster their development is, the more they can increase their own competitive edge. So, if the average tax rate of the country is 25%, that means that on average every working citizen is working for building the infrastructure three months of each year. The tax rate can of course only be so much, before it becomes detrimental to the development of the country.

However, the bank is allowed to push as much money into the system as the governments want to borrow, since the currency is not based on anything. So the bank just borrows as much as it wants or dares, with any interest rate it sees fit.

Let's say government A decides to borrow some money. For that government this is effectively just a contract where it promises future tax revenue for the bank; it promises its own citizens will work for the bank such and such periods of time.

The increased money pool will affect the prices, but more importantly now government A holds a larger percentage of the entire money pool, and it can buy more services and goods than government B. In other words, government B cannot operate as effectively anymore, unless it also borrows money from the bank.

Under normal operations, the benefits gained this way may not be large enough to throw the system off balance, but it is notable that during wartime the benefits are massive, and in that circumstance countries are typically forced to deal with massive debts, also placing pressure to all the other countries to borrow after the war.

Add more countries into the same game, and you can see each one is on its own forced to borrow money, to stay afloat in the economy, especially during war efforts. Plus then you get into a situation where poor countries get poorer because they cannot borrow as cheaply as the rich ones, which is also merely created by the fact that multiple banks can borrow money to a single country, making defaults possible, and creating a risk for the banks.

Everybody defends government debt by focusing onto one country; on the fact that they have to borrow money in order to operate effectively. Forgetting that they were forced to borrow the money because other players in the game have pushed the prices up with debt also; it has been in their own best interest to do so. Especially if there has been war efforts.

When the debts are payed back, the original money disappears, but the interests are pocketed as profit by the owners of the bank. When every country is forced to operate with debt with interest, it just means higher and higher percentage of the whole economy is drifting into the pockets of the private owners of the banks, meaning everyone else just keeps losing their purchasing power.

I find it extremely remarkable that we are now locked into a system where entire countries are running the risk of defaulting to privately held banks. These banks effectively control the interest rate of a country, in a way where raising interests can cause the entire infrastructure of the country to be taken away from the citizens, and handed over to private owners. And at the same time, as what happened in Greece, all the other governments in the same trade economy are pushed to bail out the troubled government, by borrowing more money... ...from the very same banks.

Is there any reasonable defense to keeping up this type of system, or is it being ran just because of short-sightedness of all the players in the game?

And more importantly, what are the alternatives? What kinds of mechanisms could keep up trade in fair manner? It would be interesting to hear if there are any thoughts on this issue.

#2 Buffy

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Posted 30 November 2014 - 05:17 PM

Hi Anssi!

There are a whole lot of issues brought up in your post, some of which indicate the answers to others, but need to be taken in the context of feedback mechanisms that you're not really bringing to light.

At the top level, the real reason for Government's taking on debt is to spend money on projects that will support the common good.

When you think about it a bit, does it make sense for a government to save up enough money in advance in order to pay for these things? That would be taking useful cash out of circulation and depress the economy (more about what "cash" means later), so in fact the only really sane way for government's to operate is to borrow money when they need it and pay things off out of operational income.

Now this is not at all a new phenomenon. A lot of the instability of Europe during the middle ages was due to various powers racking up debt usually in pursuit of offensive or defensive wars, and the "borrowing" not being done through banks, but through payments owed by the king to his warriors who would go off to war "on the king's credit."

As banks developed, they became a source for cash to pay the troops or workers during their campaigns or projects (e.g. road building, fortress/city protection building etc.)

As for this being a new phenomenon, well, ask George Washington, John Adams and Thomas Jefferson who depended on borrowing cash from the French and Dutch to finance a standing army for the Revolutionary War in America.

Now one of the interesting things you present as a "problem" is your first graph:

I'm sure many of you have wondered what's this deal with ballooning government debts all over the world.

Here you can see the last 10 years;
http://www.economist...obal_debt_clock

What you'll notice from this picture is, of course first, the "shocking" level of "high debt" across the world. But what do you notice about *which* countries have the highest amount of debt? They're all the very largest economies with very strong GDPs.

That's simply showing that the more you earn, the more people are willing to lend to you.

Now the fact is that there are exceptions to this general rule in the graph, and there are countries shown like Greece who have far more debt than they ought to, and this brings up a key thesis in your post:

However, the bank is allowed to push as much money into the system as the governments want to borrow, since the currency is not based on anything. So the bank just borrows as much as it wants or dares, with any interest rate it sees fit.

This ignores the realities of what banks will do, and how much risk they are willing to take on, and the fact that the interest rate it charges is basically fixed by the money market. There is a direct correlation between what the *market*--not the bank--perceives as risk, and that the government debt they are buying (by lending to the government) is an open market subject to arbitrage. Banks that "charge" significantly out of market will simply be squeezed out either by those willing to lend for less or having their own investors start to flee because the bank is leaving money on the table in it's deals.

Now this is principally true of strong economies. The US sells government bonds at a rate it sets itself, so the debt from the government's point of view is fixed in its risk. When the government issues the debt, it has to set a rate that is competitive in the market, but it is still a take it or leave it proposition. Arbitrage then proceeds by investors/banks trading those debts on the open market at a premium or loss (perceived only!), that does not affect the cost of the debt to the government directly, but does dictate what it can set as a yield on future debt.

The long term effect of this debt though is on the strength of the currency on the world market, and the profligacy or frugality of the government in managing its debt relative to their GDP--and therefore their ability to pay those bonds promptly--has a huge effect on the *value* of the currency relative to other countries, and that in turn has a huge effect on the perceived risk that the banks will use to judge creditworthiness.

What is happening in Greece however is not a normal situation, since the EU does not give Greece much freedom in borrowing precisely because of the fact that it cannot let it's currency be devalued, because it uses the Euro, any more than Mississippi can take on gobs of debt in the US. This is precisely why in the US states can borrow, but they need to fully balance their budgets in the long run or their perceived risk (interest rates) goes up. Europe's weaker economies are suffering because of the strange--and many, especially the UK-based Economist magazine argue--unsustainable stradle between independently operating governments and a single currency without a strong central government.

So, using Greece as an example of why governments shouldn't borrow isn't a strong example to rely upon, but it is a central premise of your assumptions here, which presuppose a situation where two countries are using the same currency, and I'll argue that what you're showing is mostly an issue of the demented structure of the EU and the Euro:

It's pretty simple when you look at this from a game theoretical point of view; where each member in the game is looking for nothing but an increase in its own rewards. There seems to be a pretty obvious prisoner's dilemma that no one has control over.

First, we have a currency that is not based on any resource. Instead, the amount of currency in the economy can be freely adjusted, so to adjust the prices of services and goods. At least that's the principle.

This is a major fallacy that is the central point of most arguments trying to justify tying currencies to gold or silver or Big Mac's (as The Economist is wont to do). Although obviously you aren't making *that* argument here, you are relying upon it's fallacy that if you don't tie a currency to a hard commodity, that it's value can be "freely adjusted" implying that the government can directly control that value.

In fact governments only indirectly control this through their own actions when affect the perceived risk to their economies. The government can take actions that change this perception, but it is the "money changers" who determine the actual relative exchange rates. There are (mostly( poor economies that try to peg their currency to some other currency, but what happens then is either there is a black market exchange with a radically different price (Iran), or there is an entirely separate economy conducted in some foreign currency (Cuba).

As a practical matter there is a significant amount of what economists call "Friction" in any economy which makes adjustment in prices a painful affair, and most governments see rapid moves in currency value as being a bigger problem than the change in the future value of their debt, and thus cannot be discounted as an issue in floating currencies. In countries with hyperinflation, although the rapidly dropping value of long-term assets is painful, the real pain is in getting paid today in currency that was only adequate the previous day.

To simplify the mechanism, imagine two countries and one bank operating with this currency. The governments are locked into a trade competition. They are both building and maintaining their infrastructure by collecting taxes, and the faster their development is, the more they can increase their own competitive edge. So, if the average tax rate of the country is 25%, that means that on average every working citizen is working for building the infrastructure three months of each year. The tax rate can of course only be so much, before it becomes detrimental to the development of the country.

However, the bank is allowed to push as much money into the system as the governments want to borrow, since the currency is not based on anything. So the bank just borrows as much as it wants or dares, with any interest rate it sees fit.

This is in essence what is going on in the EU: You have most of the European economies loosely banded together (a Confederacy by most measures, but in many ways weaker than any Confederacy has ever been), tied together by a single currency, the Euro. Now the key problem with the Euro is that it encompasses both the strongest Economies in the world (Germany, France), as well as some of the weakest (Greece, and shockingly, Ireland), but at the same time, each of these countries is pretty much free to do whatever they want with their economies, with the horrible, constraining exception of the fact that they have to live with the European Central Bank as the central controller of their currency and is solely in charge of monetary policy.Because of that restriction, and the fact that the ECB is basically controlled by the "responsible" members like France and the incredibly penurious conservative German bankers, Greece and the other weak countries have been subjected to the latest fad in Economics known as "austerity" which argues much as you have here, that borrowing is bad and should be punished severely when it gets out of hand. Rather than seeing the obvious benefits of helping the weaker economies in the group recover, the ECB has been in a frenzy of austerity: because the banks actually do NOT want to lend to Greece because of the risk, the ECB has decided to put together a cartel of banks who will all share the risk of loans to Greece (the right thing) but as a price, forcing their government to raise taxes and lower spending no matter how much risk that puts the economy in of just accelerating its death-spiral.

In fact what has happened has been that austerity has simply kept these poor economies poor by destroying their ability to borrow to prime their economies and get them going again.

So the key points here are that:
• Banks need to have confidence (whether direct or provided by proxy from a super entity like the ECB or the US Federal Government) before they will lend.
• Most banks are actually extremely risk averse.
• Countries don't have much freedom to operate outside of what the market thinks in the best case (the US can't put any price they want on a bond they put up for sale).
• In structurally pathological situations like the EU/Euro, outside markets can force governments to do things that are bad for them.
Now none of this is to say that governments don't from time to time get out ahead of their headlights, and don't suffer occasionally from incompetence or at least misguided judgement, they certainly do, but then the economies suffer, and because there really isn't control only by the government because the market really dictates what the effects are, no one is free to do anything they want, and rarely is there motivation to do really stupid stuff for very long.

Under normal operations, the benefits gained this way may not be large enough to throw the system off balance, but it is notable that during wartime the benefits are massive, and in that circumstance countries are typically forced to deal with massive debts, also placing pressure to all the other countries to borrow after the war.

Well, as you point out, wartime borrowing leads to massive debt, but the other effect is because an enormous amount of the demand disappears because so many industries suddenly do not have to produce tanks and bombers, and it takes so long for the industries to retool for other things and hopefully gainfully keep everyone employed that lost their jobs (soldiers, tank builders), post-war economies go into painful recessions, and because those economies have to go for a while without the exports of the non-warring countries, those countries go into recession too.

The recession after WWII in the US was extremely severe, one of the worst since the Depression, but the advantage for the US was that they did not have to rebuild bombed cities, although much of that was "squandered" through the Marshall Plan, which took that economic advantage and gave it away to the poorer European countries.

Sad that the ECB can't see the parallels there with regards to Greece and Ireland.

Add more countries into the same game, and you can see each one is on its own forced to borrow money, to stay afloat in the economy, especially during war efforts. Plus then you get into a situation where poor countries get poorer because they cannot borrow as cheaply as the rich ones, which is also merely created by the fact that multiple banks can borrow money to a single country, making defaults possible, and creating a risk for the banks.

This argument goes off into the weeds a bit with a "keeping up with the Joneses'" argument that assumes all countries can't possibly stand to be less successful than their next door neighbor and will do anything no matter how illogical to attain it, and also that the world economy is a zero-sum game where losers can't win except at the expense of winners, who will do anything to prevent them from doing so.

In fact the most amazing thing about the world economy is that it can expand and winners can come out of nowhere.

Mostly by intelligent borrowing.

So,

Everybody defends government debt by focusing onto one country; on the fact that they have to borrow money in order to operate effectively. Forgetting that they were forced to borrow the money because other players in the game have pushed the prices up with debt also; it has been in their own best interest to do so. Especially if there has been war efforts.

...no, because of post war recessions, wars do not overheat the economy. Even after attaining equilibrium again, there will be increased demand, but due to the costs of friction, it's in everyone's interest to try to keep prices stable.

This also brings up the issue of inflation, and Austerity is principally driven by an almost irrational fear of it. Inflation is actually not bad, what it is in it's stable state is a measure of the *growth* of the economy (more people, more demand, more dollars moving around). What you want to avoid is *excess* inflation that cannot be anticipated and therefore worked by the market into assumptions about changes in prices.

Thus the real danger with prices is that changes in them are *unanticipated* resulting in frictional drags on the economy.

When the debts are payed back, the original money disappears, but the interests are pocketed as profit by the owners of the bank. When every country is forced to operate with debt with interest, it just means higher and higher percentage of the whole economy is drifting into the pockets of the private owners of the banks, meaning everyone else just keeps losing their purchasing power.

Now you're bringing up income inequality, and you'll find no one more rabid about its ills than I.

We are indeed suffering from the effects of having an ever smaller number of gigantic multinational banks, but their lending to governments is a small fraction of the real problem compared to their insistence on taking a 5% cut of every exchange of money no matter what it is as a "convenience fee," along with usurious interest rates for individuals and small (powerless) businesses, where there is little or no competition. This obviously argues strongly for re-regulation of the banks along with internationally based trust-busting to create more efficient markets (you can always spot a pseudo-capitalist because they're always arguing that governments should allow all mergers which reduce competition in markets for the sake of "economies of scale.")

But again, this has little or nothing to do with lending to *governments* where the size of the loans basically prohibits banks from being able to create loans "out of thin air" as they are able to do with tiny loans to individuals or even decent sized businesses (see "Fractional-reserve banking"). The "fraction" of their reserves that gets lent can be so huge that it runs afoul of virtually every reserve requirement they have.

I find it extremely remarkable that we are now locked into a system where entire countries are running the risk of defaulting to privately held banks. These banks effectively control the interest rate of a country, in a way where raising interests can cause the entire infrastructure of the country to be taken away from the citizens, and handed over to private owners. And at the same time, as what happened in Greece, all the other governments in the same trade economy are pushed to bail out the troubled government, by borrowing more money... ...from the very same banks.

The thing to realize here is that the country itself is not put up as collateral for the loan, in fact in most cases government loans are entirely unsecured. The perverse thing that has happened in the Euro-market is that the "loan deals" I mentioned above do provide some security against losses guaranteed by the central bank, with the idea being that with such large sums of money involved, that a default would cause the banks themselves to become insolvent which in turn would cause the larger economy to crash.

This is the source of the dictum, "if you owe the bank $100, the bank owns you. If you owe the bank$1,000,000, you own the bank."

The key thing to recognize here is that it's not really the bank being bailed out, it's the bank's *investors* who in many cases are simply investment groups representing millions of individuals. So this really isn't transfer to the greedy banks, it's keeping mom and pop who have their life savings at Morgan Stanley from losing their nest egg.

But to reiterate my main point here, the notion that the banks control the interest rate has no basis in fact: they really cannot dictate interest rates, they're set by the markets, which are still diversified enough with enough active arbitrage to cancel out any "mis-set" rates (at least insofar as we're talking about governments and not individuals).

And in addition, there are an awful lot of checks and balances to keep countries from going too far out on a limb. The number of completely out-of-whack economies has really dropped since the 70s and 80s where everyone in the world started practicing rational economic and fiscal policies, due to the integration of the world-wide economy.

That's not to say there aren't risks of conflagration--mostly I argue due to the whack jobs at the ECB and among conservative economists who insist on Austerity and that we live in a "post-Keynesian" world, for which there is now endless data from the world economic performance over the last 2 decades to show is pure bunk (read just about anything by Paul Krugman in the last 5 years for more info).

Is there any reasonable defense to keeping up this type of system, or is it being ran just because of short-sightedness of all the players in the game?

And more importantly, what are the alternatives? What kinds of mechanisms could keep up trade in fair manner? It would be interesting to hear if there are any thoughts on this issue.

Since I'm arguing with your premise that what you've described is the current "type of system," I'd say that you're right there's no reason to "keep" it, although I'd argue we're not in a position to "keep" it because it doesn't exist.

The alternative is the system we have now, with adjustments for getting rid of the silly Austerity kick and a lot of anti-trust legislation, and world-wide cooperation of governments--protecting the interests of the *individuals* in their societies--to provide a fuller regulatory counter-weight to increasingly unregulated multinational firms (not just banks).

Now I’m not saying that Keynes was right about everything, that we should treat The General Theory as a sort of secular bible - the way that Marxists treat Das Kapital. But the essential truth of Keynes’s big idea - that even the most productive economy can fail if consumers and investors spend too little, that the pursuit of sound money and balanced budgets is sometimes (not always!) folly rather than wisdom - is as evident in today’s world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy’s peril,

Buffy

#3 CraigD

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Posted 30 November 2014 - 06:59 PM

Is there any reasonable defense to keeping up this type of system, or is it being ran just because of short-sightedness of all the players in the game?

I believe there are strong, far-sighted financial reasons for the US continuing to have a large Debt.

From 1991 to 1992, Philadelphia Inquirer journalists Donald Barlett and James Steele wrote the series “America: What Went Wrong?”. It analyzed and proposed many causes for the decline of the American middle class, among them the large, continuing Federal debt. I was strongly influenced by it, and continue to find its analysis of the debt illuminating.

The essence of its analysis is that most – in 1991, about 80% – of the nation debt is held by US citizens, in the form of Treasury bonds. Although the effective interest rate – the yield – of these instruments is lower than many commercial ones, they are very low risk, so attractive to investors.

Because poorer people are less likely than richer people to invest in Treasury bonds or other instruments, the Dept thus effective makes the Federal Income tax a regressive tax, the tax payments of people who don’t have bonds being transferred to people who do.

Like many middle aged (54 years old) professionals, about 33% of my effective income comes from managed investment account. Mine, which I elected follow a lower yield, lower risk investment strategy, gets about 75% of its gains from Treasury Bonds. I’m thus, without having intended to be, a beneficiary of this regressive tax - the growth of my retirement savings due the Debt is greater than my Federal tax payment.

I’m a fairly typical member of the American upper middle class (or, if you follow the convention of considering the middle class extinct, the lower upper class). People much richer than me tend to get a higher fraction of their income from investments than I do, so benefit more from the Debt-driven regressive tax flow.

Not in Barlett and James Steele’s articles is that, since 1990, many countries, especially China, have seen great increases in the incomes of many of their workers with less increase in their expenses, so have seen great increases in their savings rate. In many of these countries, such as China, nearly all of these savings are deposited with a central national bank. Banks like China’s central bank have thus had a lot growth in the rate of savings deposits. Some of it has enabled them to provide loans to manufacturers and service businesses, increasing their hiring and the wages they pay workers, which increases their savings rate, and so on, in a positive feedback loop, but they are unable to use all of their saving-driven income for this, so need large, low-risk investments. As with richer Americans, the US dept is attractive to these central banks.

There are many policies of the US and other government, many going back to the 1970s and earlier (see, for example “Nixon shock”), that further make investment in the US debt attractive to US and foreign investors, but these are complicated, and I don’t understand them as well as the flows of money I describe above.

The most important effect of the large US Debt is, I think “the rich getting richer while the poor get poorer”. Although I personally benefit from this effect, I don’t like its effect on the people of the US and other countries. Because many of the richest people who most benefit from it are or are advised by politically and economically knowledgeable an powerful people, and because even simplified explanation of the effect such as those I understand are complicated and not understood by the majority of people, I’m pessimistic about what can be done to end it.

And more importantly, what are the alternatives? What kinds of mechanisms could keep up trade in fair manner?

Although many of the national policies that promote a continuing large US Dept relate to trade which do effect the amount and fairness of international trade, especially US- China, I don’t think the existence or size of the Debt itself has a strong effect on the amount of fairness of international trade.

The greatest promoter of fair international trade, I think, are policies that make the incomes of people in different countries more similar.

I know too little about monetary policy to have any confident suggestions on what such policies could be.

#4 AnssiH

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Posted 02 December 2014 - 01:00 PM

Hello guys, thanks for juicy responses.

Hi Anssi!

There are a whole lot of issues brought up in your post, some of which indicate the answers to others, but need to be taken in the context of feedback mechanisms that you're not really bringing to light.

At the top level, the real reason for Government's taking on debt is to spend money on projects that will support the common good.

When you think about it a bit, does it make sense for a government to save up enough money in advance in order to pay for these things? That would be taking useful cash out of circulation and depress the economy (more about what "cash" means later), so in fact the only really sane way for government's to operate is to borrow money when they need it and pay things off out of operational income.

The thesis of the OP is exactly that it is sane from the perspective of each government, but globally there's a pretty obvious prisoner's dilemma going on.

Now this is not at all a new phenomenon. A lot of the instability of Europe during the middle ages was due to various powers racking up debt usually in pursuit of offensive or defensive wars, and the "borrowing" not being done through banks, but through payments owed by the king to his warriors who would go off to war "on the king's credit."

As banks developed, they became a source for cash to pay the troops or workers during their campaigns or projects (e.g. road building, fortress/city protection building etc.)

In addition to that, it's also interesting fact that the first instance of government debt was indeed a war effort; England creating government debt to finance its war against France.

It's very important to keep in mind that the people and resources to build a new navy existed inside England all the time; they did not build the ships out of cash, nor did the workers need to eat cash. It is misleading to say "England financed it war efforts", as what they did was just a solution to a political problem, of not being able to direct resources into the war effort. Offering government bonds to the people was just a way to create a contract the people trusted would pay off. It's perfectly valid to see those bonds as a contract where the government promises to share some amount of tangible resources with you in the future; the resources it has via taxation.

As for this being a new phenomenon, well, ask George Washington, John Adams and Thomas Jefferson who depended on borrowing cash from the French and Dutch to finance a standing army for the Revolutionary War in America.

What I mean by a new phenomenon is that we have global private institutions that, through government debt, practically own entire nations. This is simply because the debt race has gone so far. We are talking about a whole new scale of banking, when the risks are not just losing your house, the risk is losing the entire infrastructure of your country. That is very serious business and it is happening in the poor countries at an alarming rate, and now even the "middle class" countries are running at a serious risk.

Also a secondary effect in the debt race between nations is created by the fact that you can get ahead by betting the borrowed money back into the marketplace, even though that marketplace often operates with "greater fool" principles. That is what also backfired in Greece for instance. And if you don't play, you will also fall behind.

Who benefits from that global casino? It's easy to blame "mistakes" by whomever loses, but the fact is that someone will always lose. Except the bank always wins...

What you'll notice from this picture is, of course first, the "shocking" level of "high debt" across the world. But what do you notice about *which* countries have the highest amount of debt? They're all the very largest economies with very strong GDPs.

That's simply showing that the more you earn, the more people are willing to lend to you.

Now the fact is that there are exceptions to this general rule in the graph, and there are countries shown like Greece who have far more debt than they ought to, and this brings up a key thesis in your post:

There's a nice sortable chart of debt as % of GDP at;
http://en.wikipedia...._by_public_debt

One thing to notice is that there are quite a few exceptions, and there should be none. Each one represents a poor nation suckered into a deal that is incredibly detrimental to their development.

Second thing to notice is that each country with large GDP gets cheaper debt, that is why their equilibrium in the debt race implies larger debts as % of GDP. The poorer the country, the more expensive the debt, and the less competitive they can be globally.

However, the bank is allowed to push as much money into the system as the governments want to borrow, since the currency is not based on anything. So the bank just borrows as much as it wants or dares, with any interest rate it sees fit.

This ignores the realities of what banks will do, and how much risk they are willing to take on, and the fact that the interest rate it charges is basically fixed by the money market.

Actually, by "bank" I was drawing an analogy to the entire moneytary system, where "bank" is a central bank that creates all the money in circulation by borrowing it to the government at the get-go. Whether or not this is distributed via fractional reserve banking or not is not really relevant; what's relevant is that the currency is pure fiat currency, and creation of new money is merely a political control mechanism. For instance, when US government and FED strike a deal to create new money, they do so for their own interest, not for the interest of all the other countries who happen to be also using dollars because of petrodollar monopoly.

To simplify the relevant game rules, when you have a collection of countries operating with fiat currency, more of which can be injected into the system when any of the countries borrows from a bank, then each country is inevitable locked into a debt race where each will try to promise more of its future value to the bank, because doing so is beneficial to them. These benefits you guys seem to understand well. But the system also means there's a steady flow of value back into the bank, and when one of the countries topples over, it can be privatized to the bank.

So that's the prisoner's dilemma. If there was a different way to direct the resources of the country into a common good, without using a mechanism which sucks value into the bank, that would be good for every country. But not to the bank.

It is perhaps a good idea to also point out at this junction that, for instance the US federal reserve system was entirely created, in secrecy, by the very bankers who run it.

What is happening in Greece however is not a normal situation, since the EU does not give Greece much freedom in borrowing precisely because of the fact that it cannot let it's currency be devalued...

...So, using Greece as an example of why governments shouldn't borrow isn't a strong example to rely upon,

I think Greece is an excellent example because it's a "middle-class" country that went belly up because of the risks inherent in the debt system. It could not borrow more because the global banks would not borrow more. And it needed more debt, because it lost a lot of borrowed money in the global casino; what the defenders of the debt system simply consider "mistakes".

If everybody are locked into a debt race, there actually are quite simple positive feedback mechanisms that will create a constant risk of entire countries toppling over.

All kinds of things do happen in real world that cause instabilities, and if you are running a system where instabilities can create ripple effects on a global scale, then I would not blame the individual instabilities, I would rather look into creating a system that can actually absorb instabilities, rather than amplify them.

This is a major fallacy that is the central point of most arguments trying to justify tying currencies to gold or silver or Big Mac's (as The Economist is wont to do). Although obviously you aren't making *that* argument here, you are relying upon it's fallacy that if you don't tie a currency to a hard commodity, that it's value can be "freely adjusted" implying that the government can directly control that value.

Well I don't know if tying to hard commodity is the best option either. I think it's an interesting problem to think about what would work.

This is in essence what is going on in the EU: You have most of the European economies loosely banded together (a Confederacy by most measures, but in many ways weaker than any Confederacy has ever been), tied together by a single currency, the Euro. Now the key problem with the Euro is that it encompasses both the strongest Economies in the world (Germany, France), as well as some of the weakest (Greece, and shockingly, Ireland),

uuuum, well I object here. Greece and Ireland are not some of the weakest economies in the world, if it wasn't for the fact that the debt system made it so... I think it's a bit weird to think that Greece and Ireland were the problem, not the betting game they lost in. It's like saying that illegal drugs should stay illegal because they create crime.

There are many economies in Africa that just aren't producing anything but tribal wars. Greece and Ireland were doing just fine before they gut mucked by a modern government debt system.

but at the same time, each of these countries is pretty much free to do whatever they want with their economies, with the horrible, constraining exception of the fact that they have to live with the European Central Bank as the central controller of their currency and is solely in charge of monetary policy.Because of that restriction, and the fact that the ECB is basically controlled by the "responsible" members like France and the incredibly penurious conservative German bankers, Greece and the other weak countries have been subjected to the latest fad in Economics known as "austerity" which argues much as you have here, that borrowing is bad and should be punished severely when it gets out of hand. Rather than seeing the obvious benefits of helping the weaker economies in the group recover, the ECB has been in a frenzy of austerity: because the banks actually do NOT want to lend to Greece because of the risk, the ECB has decided to put together a cartel of banks who will all share the risk of loans to Greece (the right thing) but as a price, forcing their government to raise taxes and lower spending no matter how much risk that puts the economy in of just accelerating its death-spiral.

Yeah the austerity stuff is exactly one of the positive feedback loops I alluded to earlier, and it is exactly one of the problems I think the current system has. The country is placed into a situation where they don't have any good mechanisms to direct their resources into common good. The factories and workers in Greece have not disappeared. They have everything they had before, that would allow them to be productive. But the debt system won't allow them, because they can't default (if they did, they could not get back into the debt race), and also they can't pay back even the interests of their loans... ...largely to private banks!

So... I'd call that a bad system to begin with.

So the key points here are that:

• Banks need to have confidence (whether direct or provided by proxy from a super entity like the ECB or the US Federal Government) before they will lend.
• Most banks are actually extremely risk averse.
• Countries don't have much freedom to operate outside of what the market thinks in the best case (the US can't put any price they want on a bond they put up for sale).
• In structurally pathological situations like the EU/Euro, outside markets can force governments to do things that are bad for them.

But, on the last point the most notable little detail is that, the governments are all locked into the same debt race; any government that is not borrowing is losing the value of what it owns faster than other governments borrow. It's like bunch of people buying and selling houses, where their ever increasing debts also drive the prices up, so everyone are forced to increase their debts.

So now they are all forced to do things that are potentially bad for them, in order to stay afloat. Inevitably, someone will fall.

Now none of this is to say that governments don't from time to time get out ahead of their headlights, and don't suffer occasionally from incompetence or at least misguided judgement, they certainly do, but then the economies suffer, and because there really isn't control only by the government because the market really dictates what the effects are, no one is free to do anything they want, and rarely is there motivation to do really stupid stuff for very long.

I think it's important to recognize that, while it is easy to point out various mistakes done by whomever will fall behind, it is also inevitable that someone will fall behind sooner or later. I think it is kind of avoiding to think about the root problem, when people try to explain Greece's failure as mistakes done in the game.

Well, as you point out, wartime borrowing leads to massive debt, but the other effect is because an enormous amount of the demand disappears because so many industries suddenly do not have to produce tanks and bombers, and it takes so long for the industries to retool for other things and hopefully gainfully keep everyone employed that lost their jobs (soldiers, tank builders), post-war economies go into painful recessions, and because those economies have to go for a while without the exports of the non-warring countries, those countries go into recession too.

The recession after WWII in the US was extremely severe, one of the worst since the Depression, but the advantage for the US was that they did not have to rebuild bombed cities, although much of that was "squandered" through the Marshall Plan, which took that economic advantage and gave it away to the poorer European countries.

Fair point. Although I was rather thinking of war efforts like Iraq or Vietnam. Iraq in itself has increased dollar pool a lot through added government debt. The point being, you just have more pressure to get ahead in the debt game when you are running a war effort, and you are willing to take more risks, making the entire global system more unstable for everyone involved.

Also it's worth noting that, after a war, the economy has the potential to rise rapidly if human resources are well directed. Economy should be a measure of productivity, and you have potential to be very productive when you have an entire country to rebuild. However, after WW1 and to an extent WW2 a complete opposite occurred in many places because the moneytary politics did not work. I just point that as another failure of using debt-based money as resource direction mechanism. If you are forced to pay debts you can't pay, you also cannot direct your resources into common good very well.

This argument goes off into the weeds a bit with a "keeping up with the Joneses'" argument that assumes all countries can't possibly stand to be less successful than their next door neighbor and will do anything no matter how illogical to attain it, and also that the world economy is a zero-sum game where losers can't win except at the expense of winners, who will do anything to prevent them from doing so.

It shouldn't be so, but when you are involved in a debt race, doesn't that mean exactly that you have to keep up, or you lose your purchasing power. It is exactly the same mechanism how you lose in a ballooning housing market if you are not willing to take larger amount of debt.

In fact the most amazing thing about the world economy is that it can expand and winners can come out of nowhere.

In the case that someone manages to direct the productivity of its people very efficiently for whatever reason. It should not require taking massive debts from private banks.

So;

Mostly by intelligent borrowing.

this is true, and it is also the problem. It is not true because reality just is built that way. It's true because of how global economics are currently rigged. You have to borrow, and get a bit lucky in that casino, to get ahead of the game. Why should it be so?

Now you're bringing up income inequality, and you'll find no one more rabid about its ills than I.

We are indeed suffering from the effects of having an ever smaller number of gigantic multinational banks, but their lending to governments is a small fraction of the real problem compared to their insistence on taking a 5% cut of every exchange of money no matter what it is as a "convenience fee," along with usurious interest rates for individuals and small (powerless) businesses, where there is little or no competition. This obviously argues strongly for re-regulation of the banks along with internationally based trust-busting to create more efficient markets (you can always spot a pseudo-capitalist because they're always arguing that governments should allow all mergers which reduce competition in markets for the sake of "economies of scale.")

But again, this has little or nothing to do with lending to *governments* where the size of the loans basically prohibits banks from being able to create loans "out of thin air" as they are able to do with tiny loans to individuals or even decent sized businesses (see "Fractional-reserve banking"). The "fraction" of their reserves that gets lent can be so huge that it runs afoul of virtually every reserve requirement they have.

All of the reserves that the banks have have also been created as interest bound debt by the Fed, or whatever central banks are issuing the currency in question.

It is interesting to note that, since virtually all the currencies are fiat currencies, virtually the entire economy of the world are controlled by private banks now. Not elected officials. In the US Fed is protected by law from the interference of the government.

And furthermore, the value of the currencies is inflating via the continual debt race, so in that environment, an old-school resource base currency would be extremely powerful for the country using it. I personally find it very interesting that Gaddafi was killed as soon as he tried to create a resource based currency, considering that his creation would have had massive purchasing power against euro and dollar.

For many countries, there's virtually no reason to use US dollars, other than the fact that they have to use petrodollars to buy oil, and it is rather obvious it is held up with force when necessary. For instance, without Iraq invasion at 2003, Iraq would be trading oil in euros right now, as they switched off from dollar some time before the invasion.

If you doubt that the war efforts have anything to do with control of currency, just think about what would happen if the rest of the world stopped needing US dollars for their oil trade. US government and Fed together strike a deal about dollars, making it an sub-optimal for anyone else to hold onto dollars. If global institutions have better options, they use them. If global institutions opt to use other currencies, US citizens will also have massive incentive to switch over to something that isn't inflating in the rest of the world, creating hyperinflation also inside US.

I really don't think it would be in any shape or form possible to keep the US dollar up in the global game if it wasn't for the petrodollar. It was the original purpose why Nixon negotiated the usage of dollar with OPEC countries, to make sure dollar keeps its value. But I digress...

The thing to realize here is that the country itself is not put up as collateral for the loan, in fact in most cases government loans are entirely unsecured. The perverse thing that has happened in the Euro-market is that the "loan deals" I mentioned above do provide some security against losses guaranteed by the central bank, with the idea being that with such large sums of money involved, that a default would cause the banks themselves to become insolvent which in turn would cause the larger economy to crash.

The key thing to recognize here is that it's not really the bank being bailed out, it's the bank's *investors* who in many cases are simply investment groups representing millions of individuals. So this really isn't transfer to the greedy banks, it's keeping mom and pop who have their life savings at Morgan Stanley from losing their nest egg.

Yeah that is basically another game theoretical mechanism of the whole debt system. I think without this component it might have fell out of favor a long time ago. Now, the countries that did not topple over, can effectively borrow even more money from the bank, and give it as a lower interest rate loan to the country that fell. The details are not actually that interesting, the only interesting fact is that it is always possible to distribute more debt to other players of the game to keep everyone playing. Meaning, if the bank has got enough control, it can always adjust interest rate to a level where some countries stay afloat, and keep dragging the others behind them.

But to reiterate my main point here, the notion that the banks control the interest rate has no basis in fact: they really cannot dictate interest rates, they're set by the markets, which are still diversified enough with enough active arbitrage to cancel out any "mis-set" rates (at least insofar as we're talking about governments and not individuals).

This reminds me of another interesting point I wanted to make. The euribor interest rate has been abnormally low for a long time now. It's been less than 1% since 2012;
http://www.global-ra...-12-months.aspx

I think it may be indicative of the fact that the sum of money in the entire debt pool is so massive that it doesn't make sense to raise the rate anymore. The banks may well be worried that if they increase the interest rate, it can cause crashes and defaults all over Europe. So they are rather content of keeping it low, as they expect to be getting the best income that way (The rate is determined by the banks themselves).

The alternative is the system we have now, with adjustments for getting rid of the silly Austerity kick and a lot of anti-trust legislation, and world-wide cooperation of governments--protecting the interests of the *individuals* in their societies--to provide a fuller regulatory counter-weight to increasingly unregulated multinational firms (not just banks).

Well I agree that some legislation would help. There are too many mechanisms where completely free market can cause a lot of destruction. The biggest problem of no legislation is that you have private banks - that are required by law to maximize their profits - operating in a system where all of the currency is based on interest bound debt; so no matter how you play, the bank always wins more than everyone else together.

One more point I forgot to mention originally. One interesting component of the current system is that, there's no reason to assume that the amount of the money that's been created, is in its entirety setting the prices of goods. The debt-based economy creates a circumstance where, if you have a lot of money, the best thing you can do is enter it into funds, where it generates more money because it enters the debt circulation.

That means, the billionaires in the world are just sitting on their arses, watching their money spin around and around in the various funds, collecting more money that is constantly being created. That means there's always vast sums of money that don't in themselves ever really enter the marketplace.

In addition, after the creation of new money to save the US economy from crashing in 2008, Fed adopted a mechanism from European banks where they pay interest to the banks for holding excess reserves. The purpose of that is to keep the money from entering circulation, and the last time I checked there was some 3 trillion dollars being kept in banks that way. (Note that this means the private banks automatically get, risk free, tens of billions of dollars of your tax payers money as pure profit, just for sitting on top of money, but that's another story)

So, that's another pool of money that doesn't affect the prices of goods. The end result of this is that, all the money that has been created, with the current prices could buy the world over multiple times. Meaning, it can never enter the circulation without massive inflation.

I think you can see this already having an effect in that that corporations are operating in a completely different level of "value" on money than individual people are. Corporations and investors own a lot of that money pool that exists in the funds, and that money pool determines the cost of corporate purchases. That is why you are seeing small companies and IPs being purchased for billions of dollars now.

#5 pgrmdave

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Posted 09 December 2014 - 10:11 AM

That means, the billionaires in the world are just sitting on their arses, watching their money spin around and around in the various funds, collecting more money that is constantly being created. That means there's always vast sums of money that don't in themselves ever really enter the marketplace.

Here's the thing though - inflation *hurts* investors and *helps* debtors.  Having higher nominal values doesn't matter if it doesn't let you purchase more things, so billionaires (and anybody else with invested wealth) are constantly having to find investments that will produce returns greater than inflation.  Debt, on the other hand, is reduced based on inflation - the same debt today that takes 100 bushels of apples to pay off will only take 97 next year, and just 42 in 30 years.  Given that people with less money are more likely to have significant debts, inflation helps people much more than it hurts them.

In addition, after the creation of new money to save the US economy from crashing in 2008, Fed adopted a mechanism from European banks where they pay interest to the banks for holding excess reserves. The purpose of that is to keep the money from entering circulation, and the last time I checked there was some 3 trillion dollars being kept in banks that way. (Note that this means the private banks automatically get, risk free, tens of billions of dollars of your tax payers money as pure profit, just for sitting on top of money, but that's another story)

You say that banks get "risk free" profits, but that's just in nominal dollars, not inflation adjusted dollars, which is where the risk comes from - they could instead dump those dollars into TIPS (or other nations' equivalents) and have that same "risk free" profit.  In fact, you could do the same thing (though I don't recommend it right now) and get the same risk free interest.  Assuming your numbers are right, and that "tens of billions" means "one hundred billion", then the banks are still only making 3% - pretty close to typical inflation rates, which means the banks aren't making any money on that - it's maintaining value, not making profit.  And if "tens of billions" means anything less than 100 billion then the banks are losing value on it - and that assumes that the money they make isn't taxed.

I think you can see this already having an effect in that that corporations are operating in a completely different level of "value" on money than individual people are. Corporations and investors own a lot of that money pool that exists in the funds, and that money pool determines the cost of corporate purchases. That is why you are seeing small companies and IPs being purchased for billions of dollars now.

The reason you're seeing companies bought for billions of dollars is mostly because nobody's sure how to value them perfectly - when Facebook bought Instagram they had to try to figure out the value of having the IP, the value of accessing the users, the value of having the engineers and hard assets, the value of removing a competitor, the value of getting all those things before another competitor got them, what income they might see from those things in the future for some reasonable timeline (5 years? 10 years? 30 years?) and compare that to the costs of allowing Instagram to remain either independent or be bought by a competitor.

#6 AnssiH

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Posted 13 December 2014 - 06:13 AM

I’m a fairly typical member of the American upper middle class (or, if you follow the convention of considering the middle class extinct, the lower upper class).

Btw, the destruction of the middle class in the  US brings up an interesting issue also worth thinking about. The middle class used to be built around the fact that running the factories and the infrastructure of the country required a lot of people. This is less true every day because of technological advancements. But the monetary policies are not accounting for this. People still believe there's such a thing as trickle down economy. I'm afraid things are becoming more and more trickle-up all the time.

The irony is that when the workers of factories are replaced by robotics and automatic processess, the society is creating more value (more potential for higher quality of life), but most of the people are unnecessary, and not receiving the benefits anymore.

I know for many people it sounds absurd to think of a society where you could get by without working at all, but with high enough technological level, you will need very few people to actually run the infrastructure of the country. In theory it should be entirely possible to create a system where basic standard of living is guaranteed by default, and then reaching anything higher is up to the people themselves getting involved with anything they think they can sell to other people.

#7 AnssiH

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Posted 13 December 2014 - 06:58 AM

Hey Pgrmdave,

Here's the thing though - inflation *hurts* investors and *helps* debtors.  Having higher nominal values doesn't matter if it doesn't let you purchase more things, so billionaires (and anybody else with invested wealth) are constantly having to find investments that will produce returns greater than inflation.

This is slightly focusing more onto individual players than on the system as a whole, but it is worth noting that the need to continuously seek new investments has created an entire new industry, that does nothing but rotates money around to create more money. That is to say, the wealthy people are not looking for things to invest to per se, they just use various services that push their money into funds. When you take that system as a whole, it guarantees money will pull in more money, because large portions of the money in the funds also serves as base for various mechanisms to create interest-bound debt.

Debt, on the other hand, is reduced based on inflation - the same debt today that takes 100 bushels of apples to pay off will only take 97 next year, and just 42 in 30 years.  Given that people with less money are more likely to have significant debts, inflation helps people much more than it hurts them.

That is never going to balance things out though, because the debts of the people are either bound to a floating interest rate which is guaranteed to be inflation corrected, or to a fixed rate which also takes an expected inflation rate into account (and thus is guaranteed to always be more expensive than the floating rate on a long enough time span).

Also the poor people generally have more expensive debts to begin with than the rich people...

You say that banks get "risk free" profits, but that's just in nominal dollars, not inflation adjusted dollars, which is where the risk comes from - they could instead dump those dollars into TIPS (or other nations' equivalents) and have that same "risk free" profit.  In fact, you could do the same thing (though I don't recommend it right now) and get the same risk free interest.  Assuming your numbers are right, and that "tens of billions" means "one hundred billion", then the banks are still only making 3% - pretty close to typical inflation rates, which means the banks aren't making any money on that - it's maintaining value, not making profit.  And if "tens of billions" means anything less than 100 billion then the banks are losing value on it - and that assumes that the money they make isn't taxed.

Well, first of all, the interest paid on excess reserves is a control mechanism, which had to be implemented after the bailout of 2008 to keep inflation from getting out of control. I.e. it's a way to keep the banks from borrowing the money out. Thus, the amount of money paid on the excess reserves is a function of what exactly the banks thinks is worth it to keep the excess reserves. So, it is, by definition and its function, always guaranteed to be a "risk free" profit making mechanism for the bank. The moment that inflation poses a risk to it, FED is forced to raise the interest rate.

About the numbers, let's google a bit and see how closely I remembered the figures...

http://research.stlo...eries/EXCSRESNS

It seems to have peaked at around 2,7 trillion dollars. Note that before 2008, there are also excess reserves but they are in comparison so small sum of money that it looks like a flat line. Hover your mouse over the flat line to see the numbers actually changing.

"Guess on the picture when did FED start to pay interest on excess reserves"

The interest rate FED pays right now is 0.25%
http://research.stlo.../series/INTEXC2

So on 2.7 trillion that "only" amounts to 6,75 billion dollars per year paid to banks.

According to this site;

http://www.bloomberg...of-the-day.html

by the summer 2013 FED had paid 13 billion dollars to the banks. Of course, the interest rate is a function of whatever is necessary to keep the money from flooding into the market, and according to that same site, the FED estimates range between $4.3 billion to$77.7 per year, paid to private banks.

On a related note, remember this interest was introduced to the US economy at 2008, and already you have banks acting as if it is their own lifeline when they perceive there's a danger FED stops paying that money;

What a bunch of crybabies.

#8 Racoon

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Posted 13 December 2014 - 07:14 PM

Heres what I've been trying o figure out.. All this debt... Almost every single country has some national debt.. Usually aLot of it.

Where does all the debt go??

You can explain all the economic theories, Blah blah blah...

Theres an international BlackHole of Debt that ends at Somebody's doorstep eventually....

Who's Doorstep is that? And Why?

Edited by Racoon, 13 December 2014 - 07:15 PM.

#9 CraigD

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Posted 13 December 2014 - 08:25 PM

Heres what I've been trying o figure out.. All this debt... Almost every single country has some national debt.. Usually aLot of it.

Where does all the debt go??

Debt isn’t a complicated or mysterious financial concept, whether small debts between individuals, or large debts of countries. Debt is simply borrowed money. Being a quantity, an entity’s debt doesn’t “go” anywhere – it increases, when that entity borrows more money, or decreases, when it pays down the debt, or has it forgiven (“written off”).

The key feature of debt as it’s known in Western society (Judeo-Christian traditional – the Muslim debt tradition is different) is that the amount of money repaid is greater than the amount loaned, so loaning money is a way of gaining money (income).

So, in short, the income generated by debt of many kinds, including that of nations, goes to people with enough money to lend it. Very wealthy people get a lot of income from the repayment of loans. Less wealthy people get less. Poor people, who don’t have enough money to lend any, get none. People who borrow money lose money because the amount they repay is greater than that they borrow.

In even shorter, the main effect of debt is to transfer money from poor people to rich people.

I gave an example specific of how much I personally gain due to the US national debt in this post. Anyone can calculate the effect of various loans on themselves, and at least estimate it for other – whether they are net gaining or losing money due to debt – from tax records, investment document, and government accounting documents.

#10 pgrmdave

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Posted 15 December 2014 - 11:23 AM

Heres what I've been trying o figure out.. All this debt... Almost every single country has some national debt.. Usually aLot of it.

Where does all the debt go??

Debt is leverage.  Debt is always simply buying something now (so you get something of value) and paying for it later.  So where does the debt go?  Highways, military, social welfare, loans (yup - we borrow money to lend out money at higher interest rates).  The problem with national debt is that we don't see the corresponding national value.

When a business is millions of dollars in debt, you can look at their balance sheet and see how leveraged they are - you can see that they owe $10M, and that they've got assets of$90M.  With national debt, we don't see that the sum total of the government's value is far, far in excess of its debt.

#11 AnssiH

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Posted 17 December 2014 - 01:53 PM

Perhaps what Racoon was asking was, if the whole world is in debt to itself, where is all that money supposed to end up when it's paid back. I.e., who owns all the debt.

It's important to understand that by and large the governments of the world are in debt to private banks. In a modern system, the entire money supply is created as debt. That creation of the money supply is the most important part of the mechanisms I was talking about above.

For instance in the US the federal reserve is fully privately owned collection of banks. The moneytary policy is not controlled by publicly elected officials and they are not accountable to the government.

When a government wants to convert future taxes into money now, they can sell bonds to federal reserve. Federal reserve doesn't borrow the money from Mars, they just create new money by typing it into a computer, and that amount of money enters the sellers bank. And then fractional reserve lending moves it forward into the economy.

The federal reserve banks receive the interest payments from those bonds. So basically the government has authorized a private party to create money at will, and to borrow that money with interest to the government. It is pretty much exactly as absurd as it sounds.

The benefit for the government is that it has converted its future taxes into value now.

But it has also flooded more money into the system, inflating the prices. And it has increased its percentage-wise ownership of the money pool against the private citizens and the other governments; it has sucked wealth out of the pockets of the other players.

Inevitably this means the other governments find they simply don't have the money to compete anymore, thus they also must create value by accepting debt.

And now the governments are locked into a debt race, where the value from the economy is ultimately trickling into the banks as interests. Since private banks issue all of the money into the system to begin with, technically they can never be payed back.

If you check out the Federal Reserve website, you find them saying they are not a profit making organization. At the same time, they do pay 6% dividends annually, and they are owned by some of the largest financial institutions of the world.

In general, the banks are locked into a game where they want to maximize their profits, but not so much so to make the whole system collapse. So the system adjusts the interest rates according to what yields the highest profit without suffocating the system. As the amount of global debt rises, you should expect the interest rates to lower. I think you are seeing exactly this happening if you look at floating interest rate histories like Euribor.

However, this equilibrium doesn't guarantee that all governments stay afloat. If some end up borrowing too much money, the globally optimal interest rate will suffocate some parties, while keeping other governments afloat.

With more governments in the game, they are all forced to continue increasing their debts to stop the value from getting sucked out of their pockets to everyone else who are increasing the money supply.

The punchline is that when everyone are running their economy with a debt system, when someone starts to fall, everyone else are pushed to borrow money from the bank on behalf of the tripping party in order to save their own economy (i.e. think of your retirement savings that are really just tokens in a debt game now).

Isn't it interesting that if the tripping government were to default, the bank would lose a very lucrative revenue stream. But if the other governments come to rescue with more money, not only the bank gets to keep that lucrative revenue stream, but it will gain several more.

Cui bono?

#12 pgrmdave

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Posted 17 December 2014 - 03:22 PM

Perhaps what Racoon was asking was, if the whole world is in debt to itself, where is all that money supposed to end up when it's paid back. I.e., who owns all the debt.

It's important to understand that by and large the governments of the world are in debt to private banks.

Wrong - at least for the US. The bulk of US debt is owned by the US government (that is, the government is in debt to itself). The debts are largely to Social Security and pension funds, meaning it's mostly in debt to individual Americans. By and large, the US is not in debt to private banks.

#13 AnssiH

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Posted 18 December 2014 - 03:25 PM

Wrong - at least for the US. The bulk of US debt is owned by the US government (that is, the government is in debt to itself). The debts are largely to Social Security and pension funds, meaning it's mostly in debt to individual Americans. By and large, the US is not in debt to private banks.

Well when the entire money supply is created as debt from private banks, you can pretty much guarantee that "by and large" the governments using that money supply are in debt to private banks... Creating intragovernmental obligations doesn't really change that does it? No matter how many obligations government creates for itself, it doesn't reduce the sum of debt to private banks, and the original problem of value flowing to banks.

I mean, certainly you are right that large portion of the US national debt is intragovernmental;
http://www.fiscal.tr...tin/current.htm

Total debt 17,8 trillion, out of which 7,4 trillion is intragovernmental holdings, and pretty much the rest is privately held (It includes debt to federal reserve, and debts to open market global banks, and some amount of individual people, etc...)

I would also point out that the reason why intragovernmental debts are seen as debts is that they do in fact represent real obligations to pay them back. When taxation doesn't cover those obligations, these sums also do turn into a debt taken from private banks. Notice how the US intragovernmental debt has also ballooned over the last couple of years; it is very likely that some part of that debt must become private sooner or later.

But that's besides the original point, which is that world governments are locked into a pretty crazy debt race, and it really is the private global banks that are benefiting from it, and it really does hand over a lot of power and responsibility to those banks. That may not be a very great way to run things, when each bank is also locked into a profit race with each others.

Although, we all know that all money brokers are trustworthy and socially responsible people, am-I-rite?

#14 LaurieAG

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Posted 12 January 2015 - 08:40 PM

Although, we all know that all money brokers are trustworthy and socially responsible people, am-I-rite?

Now that the price of oil has dropped back to 1/2 to 1/3 of its peak price since the GFC it seems like they are only trustworthy and socially responsible when you don't give them public money.

#15 Buffy

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Posted 12 January 2015 - 11:09 PM

Well when the entire money supply is created as debt from private banks, you can pretty much guarantee that "by and large" the governments using that money supply are in debt to private banks...

That's at best a misrepresentation of what the money supply is. A somewhat fundamental assumption running through your arguments in this thread is that the "assets" of the banks are fully owned and controlled by them: "it's their money so they have the power/control" is what you seem to be saying. But the fact is that the vast majority of the funds they have are broadly held for individuals and corporations. Even the Walton family is spit in the ocean to the aggregated assets of the banks. Even if they were able to avoid government action against them to prevent them from taking actions detrimental to the government, they could easily see all of those assets (where they get their power from, right?) disappear overnight in a run on the bank due to some bad PR. That's exactly what made Lehman Brothers go "poof" in the matter of a week.

As a practical matter, the banks can't legally nor in a way to maintain a successful business do things to control the government. What they *have* been able to successfully do is *bribe* their way to getting legislation that's good for them passed, but that's hardly dictating what the government does, and is a situation that is one Teddy Roosevelt (Elizabeth Warren?) away from coming to a screeching halt.

I would also point out that the reason why intragovernmental debts are seen as debts is that they do in fact represent real obligations to pay them back. When taxation doesn't cover those obligations, these sums also do turn into a debt taken from private banks. Notice how the US intragovernmental debt has also ballooned over the last couple of years; it is very likely that some part of that debt must become private sooner or later.

You seem to be implying that there's somehow some kind of difference between the debt that's held intergovernmentally and that which is held privately. The thing that happens in big stable democracies though is that the government *dictates* the terms of the debt: there's no ability to "call in the debt" early or demand better terms or jack up rates at will because the market is so broad and the risk (beta) of the debt is so low, that demand keeps the rates the government sets on that debt low.

Now the thing that keeps that risk low is that the amount of debt is actually NOT ballooning if you measure it in the right way. The debt Cassandras always will show you the first graph shown here:

The first graph is the debt in dollars, adjusted for inflation, but even adjusted it indeed looks like it's going through the roof. The problem is that the government's debt relative to the overall growth of the economy--which translates directly into the amount of taxes it can levy to *pay* for that debt--shows no such problem as shown in the second graph which shows debt as a share of the Gross Domestic Product. Now that huge uptick at the end of that second graph is proof of the fact that the bizarre Republican theory that lowering tax rates will increase government revenues: a major initiative of the Bush Administration taken brilliantly at the same time that the country took on two wars and pumped the defense budget through the roof. Contrary of course to their predictions, Obama's tax increases on the rich have significantly lowered the government's annual deficit, which has contributed to an even stronger faith in the US government's debt, to the point that last year people were in essence paying the government for the privilege of holding their money (that is yields on US Treasuries went negative, paying \$0.9999 for every dollar invested for 3 months).

But that's besides the original point, which is that world governments are locked into a pretty crazy debt race, and it really is the private global banks that are benefiting from it, and it really does hand over a lot of power and responsibility to those banks. That may not be a very great way to run things, when each bank is also locked into a profit race with each others.

So, A) no there really isn't a debt "race" (strong economies are staying within normal debt-to-GDP ratios, and weak ones can't get the credit line to do so unless they get backing from other *governments* to guarantee the loans), B ) There's not a whole lot of renumeration from government debt, even from weak governments (because of diversified markets at one end and high risk tempered by governmental restrictions baked into loan guarantees), C) it's not like Jaime Dimon or Lloyd Blankfein personally control all that money like it's their own (there's a whole lot of individuals and mutual funds that can yank it away), and D) If they tried, they'd get burned at the stake (and I think they're getting closer due to their hubris).

It's unquestionably easy to be paranoid about this, and the risks actually are real, it's just that if there's a meltdown it's most likely going to be due to stupidity rather than conspiracy.

Combinations of wickedness would overwhelm the world by the advantage which licentious principles afford, did not those who have long practiced perfidy grow faithless to each other,

Buffy

#16 ErlyRisa

ErlyRisa

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Posted 15 January 2015 - 06:49 AM

Heres what I've been trying o figure out.. All this debt... Almost every single country has some national debt.. Usually aLot of it.

Where does all the debt go??

You can explain all the economic theories, Blah blah blah...

Theres an international BlackHole of Debt that ends at Somebody's doorstep eventually....

Who's Doorstep is that? And Why?

Surface Area. (Property specifically tailored for purpose)

-It used to be that if you ran out of surface area you built ships to explore new horizons.

The new horizon is now extraplanatery/extrasolar: Which means that the commodity of intelligence required as investment has gone up in qualtiy. For example the intelligence used tobe ocean going ship building, the ship building now has to be something more extravagant.

Putting satellites up seems to have worked to keep intelligence occupied, and by doing so more power has been placed in the espionage mechanics that move the world in the manner that suits their desire. Of course this is not a democracy, and countries/power houses play the game accordingly, sometimes to protect their own society/interests in the short term, but in many cases the protection is very far thought and planned and can include severing your own society in order to be placed correctly for future moves on the restricted surface that seems like an oversized chess game for the few bored elite (x Royalty and new Royalty). Note though that the elite are not vengeful or hateful, they truly want what is best...and it is advertised to the plebs that we are running out of energy and surface area: but thankfully we have iPads now. (or in old world terms, thankfully we have a constant supply of potatoes now)

In recent history (20-30yrs), most of the surface area has been procured from countries that had not evolved to a state of value-ing surface area as nothing more than farm land. In evolved states like NY the surface area has gone 3d and value is placed on how big a whine collection you have (b/c potatoes are in effect free). The automobile was also a big player in utilising surface area for the sake of occupying time in a land where food is abundant. Today the computer/internet/tv is taking over, in the sence that those many plebs that will/are unemployed, can be occupied and utilise as little surface area as possible. (ie. the days of the well trimmed lawn are being replaced by the well versed youtube event and space food)

...which brings up the topic of Bitcoin.

At first I thought the Euro was a good idea, but then I heard about bitcoin, and it occured to me...what will happen too the cash (Paper money and coins)? Some people like collecting stamps and coins(value in the occupation of time).

So as the elite have realised we are running out of surface area, AND we need to keep tabs on the populous (first wee need enough excuses to be able to implement full dystopian tabs of the people - introduce Terrorism)

We then need a method to be able to understand and predict the wants of the people: We can do this via credit card purchases...but it turns out alot of people actually survive quite handsomely with cash (which isn't as easy to track...the espionage people are getting lazy and just want full control via the internet) ...a great idea is making a new currency system which we can see at all times!!! - we need to make it interesting...use the poorish people by getting them to find prime numbers (meantime we sell cpu's too them) Those geeks promote that they become "rich" and then in effect instill the use of the currency amongst the populous. Now it is much easier to not only keep tabs on purchases, it is easier to move "money" around. It is also easier to trick people into what the perceived value of an exchange is, it is also easier to confuse more people into stranger/larger debts.

My recommendation to those born into the world today is to keep a minimalist and fake profile in life: b/c the future is full control of the individual to the extant that you can no longer perceive the difference between reality and being on a game show , and you will just be in effect a stooge placed their for the simple minded to either adore/hate/etc , and you won't be asked if you want to be a particular type of robot: you will be fashioned from birth to be that type of entity: Mostly for the sake of entertainment. eg. Can you imagine being fashioned into Jesus or Santa Clause? Santa Clause for example, if voted: would have properties including morbid obesity, and no reproductive system (b/c we wouldn't want the kids sitting on the lap feeling anything down their) Or how about a living replica of Hitler? - I know many a person that would pay to throw more than just tomatoes at him. ie. The commodity once food is available is control of the populous in a manner that allows for entertainment of the stupid. The strange part is , is that most of us would work ourselves to death if their was the promise of meeting Claudia Schiffer or George Clooney...we really are pathetic as humans go.

Bitcoin is an attempt at making all of these exchanges easier to control, and more profitable for the controler.

somehow all of these exchanges will be profitable via the internet?

ie. First you need to brainwash the young girls into accepting getting posters of their pop star on their desktop rather than in print at the shops. It didn't take long, and many a magazine vendor is struggling. As all those individual media entities slowly dissapear, the entire system becomes monopolised and the only people that are incontrol are those that have access to the electronic empires top level abilities.

Once full control is achieved: The predictability of all entities will become more and more precise to the point that the empire is doing nothing more than living out "personas planted into humanoid bags of meat", and the real intelligence and creativity will be a very hot cpu, deceiving the point to existence in the first place.

The surface area of the CPU will be the defining commodity (sort of like, how smart a human is with the mushy material they are working with at the moment) Of course all notions of enjoyment as the commodity will be lost, in what will be an ever increasing rate of change that engulfs all surfaces.

Really nothing has change: It just won't be human anymore.

#17 Buffy

Buffy

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Posted 15 January 2015 - 01:34 PM

Did someone say something?

Huh, I guess not.

The Toothbrush mustache was first introduced in Germany by Americans, who turned up with it at the end of the 19th century the way Americans would turn up with ducktails in the 1950s. It was a bit of modern efficiency, an answer to the ornate mustaches of Europe - pop effluvia that fell into the grip of a bad, bad man,
Buffy