Apologies to Dan40 - Taxes can pay off the Debt! But it destroys our Equity!!

Alright, as I always say... all I do is care about the truth. And today I learned that I have been telling some fraudulent lies just like are right wing counterparts!!

Taxes can in fact be used to pay off the debt!!

Where I went wrong was forgetting that the Treasury can in fact create reserves in the system by creating deposits. So as long as the Fed has securities to back up the deposits in the system, then the Treasury can replace T-Deposits with Reserves. How can I miss that???

BUT, paying off the debt still decreases the net equity of the private sector and in fact makes everyone poorer. Let's dive in to the world of how I came to this conclusion. Now this might jiggle people's light bulbs. You notice that the country has to be in debt in order for money to be created?

Alright, let's take a hypothetical approach of what it would be like to start a fiat driven economy like America's system. Fiat money has to be "created" out of nothing. So pretend you and I were in the country and we had a hypothetical Government.

The Government wants to pay us to start building roads. Now we have to introduce fiat money in to the system.

So there are two ways a fiat money system can work. The Government can just credit our accounts and take seigniorage over the currency or, we can do it how we do it, in which the Government introduces the currency via debt.

So in our hypothetical country... the country wants to pay us $1000 a piece to build some roads. They issue $2000 in debt. But no one has $2000 to lend them.

Soooo... we go to Bank A, who says alright we will lend you $2000 in exchange for an account with the Treasury. So bank A's balance sheet looks like

A | L
Treasuries $2000 | TT&L Account $2000 (Money the treasury can spend)

So now there is no real money in the economy. Just paper being exchanged. So the chicken and the egg approach would need the Federal Reserve.

So now the Federal Reserve pays the bank $2000 for Bank A's Treasuries. This is how reserves are created. But you notice that the Federal Reserve didn't create any real $.

Bank A's new balance sheet
A | L
Reserves $2000 | TT&L Account $2000

Now the Federal Reserve has
A | L
Treasuries $2000 | Reserves $2000

Now the Government wants to give you and I $1000 a piece, so they spend the $2000 from the TT&L Account. Bank A now looks like

A | L
Reserves $2000 | Deposits $2000

Notice how we have $2000 and the Government is $2000 in debt. The country has to create the fiat money before anyone has the money in which to pay taxes or purchase debt from the secondary market.

Now the Fed's issue $1000 in currency so that the banks can lend us some money

Fed balance sheet
A | L
Treasuries $2000 | Reserves $1000 + Currency $1000

A year goes by and the Government issues out $5000 in debt and once again Bank A lends money to the Govt for them. Now what happens?

Bank A
A | L
Reserves $2000 | Deposits $2000
Treasuries $5000 | TT&L Account $5000

Now what does the Country's balance sheet look like?
United States of America
A | L
Negative Equity - $2000 | Treasuries $7000
TT&L Account - $5000

So now the Government pays us $5000 total.
Bank A
A | L
Reserves $2000 | Deposits $7000
Treasuries $5000

Once again, the Government is now $7000 in debt, yet we have $7000 in our accounts. Now say that you purchase the $5000 of Treasuries on the secondary market from Bank A. Watch the magic that happens
Bank A
A | L
Reserves $2000 | Deposits $2000

Now the private sector (aka you and I) have a balance sheet like this
A | L
Deposits $2000 | Equity $7000
Treasuries $5000

So now, the Government taxes $2000
Bank A
A | L
Reserves $0 | Deposits $0

Federal Reserve
A | L
Treasuries $2000 | TT&L Account $2000

Private Sector
A | L
Deposits $0 | Equity $5000
Treasuries $5000

Now, if the Treasury used their TT&L Account to pay off the $2000 of maturing debt... what would happen?
Bank A
A | L
Reserves $2000 | Deposits $2000

Private Sector
A | L
Deposits $2000 | Equity $5000
Treasuries $3000 |

Federal Reserve
A | L
Treasuries $2000 | Reserves $2000

Country
A | L
Neg Equity $5000 | Treasuries $5000

As you can see though, the destruction of debt, destroys the equity of the private sector. The creation of debt increases the equity.

So I was very wrong about the taxation issue, but I'm still correct about debt being the basis for money creation. The fact of the matter is, paying off the national debt would drain all money out of the economy.

 

You're wrong again. There is no reason that the federal government must incur debt for the money supply to increase. The supply of money is controlled by the Federal Reserve. The Fed uses fractional banking, interest rates, and open market operations to accomplish this. You are very confused.

 

Dan40 is a smart guy. Don't ever doubt his knowledge.

 

And yet with taxes at the lowest point in American history our poor are at 1920s levels of poor. We've gone backwards almost 100 years.

Plus there are plenty of stable countries with high taxes that are faring this recession wonderfully WITHOUT making everyone poor as heck which disproves you. Denmark has some of the highest taxes in the world and the LEAST amount of poor and on top of that is literally the happiest place on Earth .

 

Wow... such faith.

 

You've confused faith with support.

 

Ok. Call it what you wish.

 

You lost me at T-deposits.

So does the government create money by going into debt or not?

 

Lol, I just showed you exactly how the system works. You are incredibly confused if you still do not get it. And yes, the Govt does need to incur debt in order to spend. And yes the Govt needs to spend in order for the Fed to manipulate reserves.

 

Yes, Treasury Deposits is how it is all done.

When the Primary Dealers purchase Govt debt directly from the Treasury, they get a Treasury as their asset and they get a TT&L (Treasury Account) as a liability.

So yes, the Government does create money/assets by going into debt. It is the only way it can work in our fiat system.

 

Lol, he got lucky on this one, he still has no effing clue what he's talking about.

 

Don't Playa Hate.

 

This is an outright lie! When we have people scraping the wheat stubble from the Dust Bowl then you can talk in such terms. The poor live clean, decent lives with health care, housing and food subsidies. WTF??

WHEN THOSE (*)(*)(*)(*)ING COUNTRIES REACH 310 MILLION and are responsible for the security and stability of the entire global economic apparatus YOU LET ME KNOW. Until then they don't count.

I could build a town in central indiana based on socialist principles, doesn't mean they can be applied to the entire country!

 

"You notice that the country has to be in debt in order for money to be created"

This statement is false. You simply showed how government debt increases the money supply. How did you even attempt to show this is the only way to increase the money supply? You didn't.

What you are attempting to explain here, and misunderstanding completely, is the the mandrake mechanism. Money supply is expanded by debt or borrowing and decreases by retiring debt. When the private sector borrows more money in response to among other things Federal Reserve stimulus, the money supply goes up. Same goes for Government debt.

But in no way shape or form is it neccesary for the government to do the borrowing for the money supply to increase. You are confused. I think I have now demonstrated that.

I think it's time for another mea culpa moment.

 

akphidelt, according to your analysis you and these Obama supporters are absolutely correct!

The government can just print money, give it to us, we will all be rich and we will never have to pay back anything to anyone! We can create prosperity for everyone with nothing more than a printing press! … With this kind of thinking, no wonder our country and our economy are in so much trouble!

The Obama Stash of Stimulus Cash -- Dolla Dolla Bills, Y'all!!

^

[ame="http://www.youtube.com/watch?v=19v5Kjmc8FI&feature=related"]The Obama Stash of Stimulus Cash -- Dolla Dolla Bills, Y'all!! - YouTube[/ame]

 

This article fully explains what akphidelt is so poorly trying to explain. He is right about one thing. We really do need to understand these things. We are being led to the slaughter by the Federal Reserve and Government spending.

I think akphidelt is simply uneducated about these matters. Others understand full well and are intentionally destroying the country.

PART 1

THE MANDRAKE
MECHANISM


The Method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax called inflation; the way in which the Fed creates boom-bust cycles.


In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out of nothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process to be described in this section should be named in his honor.

In the previous chapters, we examined the technique developed by the political and monetary scientists to create money out of nothing for the purpose of lending. This is not an entirely accurate description because it implies that money is created first and then waits for someone to borrow it. On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because it implies that debt exists first and then is converted into money. In truth, money is not created until the instant it is borrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish.1 There is no short phrase that perfectly describes that process. So, until one is invented along the way, we shall continue using the phrase "create money out of nothing" and occasionally add "for the purpose of lending" where necessary to further clarify the meaning.

So, let us now...see just how far this money/debt-creation process has been carried -- and how it works.

The first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. The fraction is not 54% nor 15%. It is 0%. It has traveled the path of all previous fractional money in history and already has degenerated into pure fiat money. The fact that most of it is in the form of checkbook balances rather than paper currency is a mere technicality; and the fact that bankers speak about "reserve ratios" is eye wash. The so-called reserves to which they refer are, in fact, Treasury bonds and other certificates of debt. Our money is pure fiat through and through.

The second fact that needs to be clearly understood is that, in spite of the technical jargon and seemingly complicated procedures, the actual mechanism by which the Federal Reserve creates money is quite simple. They do it exactly the same way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some precious metals in reserve, whereas the Fed has no such restriction.

the federal reserve is candid

The Federal Reserve itself is amazingly frank about this process. A booklet published by the Federal Reserve Bank of New York tells us: "Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. The question of just what assets 'back' Federal Reserve notes has little but bookkeeping significance."2

Elsewhere in the same publication we are told: "Banks are creating money based on a borrower's promise to pay (the IOU)...Banks create money by 'monetizing' the private debts of businesses and individuals."3

In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:


In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount.

What, then, makes these instruments -- checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated "legal tender" by the government -- that is, it must be accepted.4

In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis, we find this surprisingly candid explanation:


Modern monetary systems have a fiat base -- literally money by decree -- with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. The decree appears on the currency notes: "This note is legal tender for all debts, public and private." While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composed to thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federal government requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for the pure fiat dollars.5

money would vanish without debt

It is difficult for Americans to come to grips with the fact that their total money supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence. That's right, there would not be one penny in circulation -- all coins and all paper currency would be returned to bank vaults -- and there would be not one dollar in any one's checking account. In short, all money would disappear.

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933. This is the exchange that followed.


ECCLES: We created it.
PATMAN: Out of what?
ECCLES: Out of the right to issue credit money.
PATMAN: And there is nothing behind it, is there, except our government's credit?
ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

It must be realized that, while money may represent an asset to selected individuals, when it is considered as an aggregate of the total money supply, it is not an asset at all. A man who borrows $1,000 may think that he has increased his financial position by that amount but he has not. His $1,000 cash asset is offset by his $1,000 loan liability, and his net position is zero. Bank accounts are exactly the same on a larger scale. Add up all the bank accounts in the nation, and it would be easy to assume that all that money represents a gigantic pool of assets which support the economy. Yet, every bit of this money is owed by someone. Some will owe nothing. Others will owe many times what they possess. All added together, the national balance is zero. What we think is money is but a grand illusion. The reality is debt.

Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 100% Money, Hemphill said this:


If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is.6

With the knowledge that money in America is based on debt, it should not come as a surprise to learn that the Federal Reserve System is not the least interested in seeing a reduction in debt in this country, regardless of public utterances to the contrary. Here is the bottom line from the System's own publications. The Federal Reserve Bank of Philadelphia says: "A large and growing number of analysts, on the other hand, now regard the national debt as something useful, if not an actual blessing....[They believe] the national debt need not be reduced at all."7

The Federal Reserve Bank of Chicago adds: "Debt -- public and private -- is here to stay. It plays an essential role in economic processes.... What is required is not the abolition of debt, but its prudent use and intelligent management."8

 

Here is more on the subject. You can find the rest at.....

http://http://www.freerepublic.com/focus/f-news/888963/posts

Part 2

THE MANDRAKE
MECHANISM

what's wrong with a little debt?

There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, the appearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And, for the less academically minded, it offers the comfort of at least sounding moderate. After all, what's wrong with a little debt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honest transaction. There is plenty wrong with it if it is based upon fraud.

An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay "rent." If it is money, then the rent is called "interest." Either way, the concept is the same.

When we go to a lender -- either a bank or a private party -- and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money -- real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?

When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."9

third reason to abolish the system

Centuries ago, usury was defined as any interest charged for a loan. Modern usage has redefined it as excessive interest. Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a new definition. Usury: The charging of any interest on a loan of fiat money.

Let us, therefore, look at debt and interest in this light. Thomas Edison summed up the immorality of the system when he said:


People who will not turn a shovel of dirt on the project nor contribute a pound of materials will collect more money...than will the people who will supply all the materials and do all the work.10

Is that an exaggeration? Let us consider the purchase of a $100,000 home in which $30,000 represents the cost of the land, architect's fee, sales commissions, building permits, and that sort of thing and $70,000 is the cost of labor and building materials. If the home buyer puts up $30,000 as a down payment, then $70,000 must be borrowed. If the loan is issued at 11% over a 30-year period, the amount of interest paid will be $167,806. That means the amount paid to those who loan the money is about 2 1/2 times greater than paid to those who provide all the labor and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be justified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes the lender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction of someone else's house. What are we to think, however, about a lender who did nothing to earn the money, had not saved it, and, in fact, simply created it out of thin air? What is the time-value of nothing?

As we have already shown, every dollar that exists today, either in the form of currency, checkbook money, or even credit card money -- in other words, our entire money supply -- exists only because it was borrowed by someone; perhaps not you, but someone. That means all the American dollars in the entire world are earning daily and compounding interest for the banks which created them. A portion of every business venture, every investment, every profit, every transaction which involves money -- and that even includes losses and the payment of taxes -- a portion of all that is earmarked as payment to a bank. And what did the banks do to earn this perpetually flowing river of wealth? Did they lend out their own capital obtained through investment of stockholders? Did they lend out the hard-earned savings of their depositors? No, neither of these were their major source of income. They simply waved the magic wand called fiat money.

The flow of such unearned wealth under the guise of interest can only be viewed as usury of the highest magnitude. Even if there were no other reasons to abolish the Fed, the fact that it is the supreme instrument of usury would be more than sufficient by itself.

who creates the money to pay the interest?

One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you -- and all others with similar loans -- can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a neverending spiral leading inexorably to more and more debt.

This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job. The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and -- this is the point -- the money you receive is the same money which you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out of the revolving door as your wages, and then back into the bank as loan repayment.

It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.

understanding the illusion

That's really all one needs to know about the operation of the banking cartel under the protection of the Federal Reserve. But it would be a shame to stop here without taking a look at the actual cogs, mirrors, and pulleys that make the magical mechanism work. It is a truly fascinating engine of mystery and deception. Let us, therefore, turn our attention to the actual process by which the magicians create the illusion of modern money. First we shall stand back for a general view to see the overall action. Then we shall move in closer and examine each component in detail.

 

It is absolutely 100% necessary for the Government to go in to debt for the creation of fiat money in our system.

If there were no Government debt, there would be no money.

 

And whoever just read that ridiculous article cirussel posted, don't pay any attention to it.

There is no "illusion" to money.

It is very well tracked in terms of checks and balances.

It is right about one thing, but it has a weird fear of interest.

Interest in our system is no different than a teacher's salary. It either has to come from taxes or we have to create it.

But people have a misunderstanding of interest.

Banks don't take interest and go to their underground caves with it...
And the national debt interest is absolutely no different than a teacher's salary... in terms of how it is funded.

This fellow has a very poor understanding of our system.

 

Private debt creates currency as well you dolt!

 

This part of the article applies to you very well...

There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, the appearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And, for the less academically minded, it offers the comfort of at least sounding moderate. After all, what's wrong with a little debt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honest transaction. There is plenty wrong with it if it is based upon fraud

 

It creates loans/deposits. But the banks need reserves in order for fractional reserve banking to take place.

This discussion is on how base money is created, not how the banking system works. We all know banks create money through loans. The question is where do they get the reserves to leverage. And I showed you in this post how it goes down.

What you are trying to imply is a society that has no ownership in it's own currency that everything is created through the banking system.

That does not happen and would not work.

The Govt does in fact create the assets of this country by going in to debt.

 

Well it's not based on fraud. So you are saying our debt based monetary system is good?

 

You are very mistaken in your conclusions, akphidelt.

You are omitting from your very elementary analysis the interest expense we pay on the national debt.

Will you agree the interest rate we pay today on the national debt today is at an historic low?

The problem is if interest rates go up only slightly, the interest expense we pay on the national debt will easily go from 200 billion per year to over $500 billion per year.

We can buy a lot of health care and infrastructure repairs (roads, highways and bridges) for an extra $300 billion per year!

"Now even liberals are trying to put their finger on what is wrong with President Barack Obama. Does he lack leadership abilities or competence? Is he arrogant and out of touch with America? Is he a pleaser first and foremost, rather than someone who cares about getting the job done? Does he not understand how the economy works? “‘Yes, we can!’ has devolved into ‘Hey, we might,’” Maureen Dowd wrote in The New York Times."

Most of us just wish he would stay at his work station long enough to come up with a credible and workable plan to solve our lingering economic problems.



Mr. President, 408,000 more Americas are out of work this week than last week and our core inflation rate has unexpectedly risen to 2.0%. Why are you going on vacation? Please, please stay in Washington and work on our economy!

 

Once again, you are very mistaken. And your elementary rebuttal to my analysis once again exposes you for a fraudulent liar. Interest on the national debt has nothing to do with the conversation on how money in our system is created through debt.