How many of you people actually know for every $1 there is $1 of debt?

Every dollar is backed by debt, and then interest is charged on that debt.

Doesn't matter if you're a capitalist, communist, or a national socialist. Can anyone defend this monetary system?

 

What happens to GDP when 'dollar backed by debt' is used to invest in physical or human capital?

Of course there are elements of spending that can be reduced. Perhaps folk can tell the Donald of the folly of further military expenditure?

 

How does training people fix $1 = $1 of debt + interest?

 

Human capital creates growth in the economy, thus creating a bigger cake. To treat the economy in the same way as your wallet is just 'innocent' of basic economics.

 

Actually there are 2 cakes. And the interest/debt cake will always outpace the other cake.

 

exactly we don't need a huge new military star wars system to defend against Korean nukes we can let the Girl Scouts handle it!!

 

If you think you're spending according to public good then you're having a giraffe. Without the inefficiently high military expenditure, mind you, you would need civilian sector expenditures. Technically that's an improvement in Keynesian demand-management

 

This is indeed mostly true (but not completely or necessarily true). This is how regular banks work, but a small portion of the Reserve Assets held by the Fed Reserve Bank do not consist of debt.

Just so people understand, even if hypothetically the Fed had decided not to hold any Reserve Assets on their books in the form of some type of debt, the majority of money in bank accounts would still represent debt, because banks have more money held in accounts than actual paper dollars, since they take your money and lend it out to someone else.

It's interesting to think about what would happen if everyone tried to pay off their debts at the same time. There'd be a sudden contraction in the money supply.
That wouldn't inherently result in deflation, but in practice it would because the ratio of labor to consumption would suddenly be altered.

It would start to get more and more difficult for people to try to pay off debt, and there'd be many people forced into bankruptcy. But eventually it's possible.

 

What this basically represents are obligations. I fix your sprinkler system and you promise to promise to pay me 30 dollars, so you write me an "I owe you" note. Later you feel uneasy about the fact you owe someone else so you come back to me and I tell you I'll give you back your "I owe you" note if you trade me an "I owe you" note from someone else. So now you have to find someone else who wants you to do work for them.

Now, I might be "rich" and have lots of "I owe you" notes, but all this wealth represents obligations from other people. They're going to have to figure out how to work for me to get the "I owe you" notes back. (Either that or figure out a way to come up with the money)

 

OP

My son tried to explain to me how Federal Reserve Banking works, but I never did understand it. All I do know is that it works in Zeigeist.

https://en.wikipedia.org/wiki/Zeitgeist_(film_series)

 

The core of it isn't too complicated. They basically have assets and then use those assets to back notes. In this case those notes are Federal Reserve Bank notes, also called U.S. dollars.
This isn't so strange. Lots of big private banks used to issue their own bank notes in the past. It might say something like "the bearer of this note is entitled to 1 ounce of gold".
However, Federal Reserve Bank notes don't work quite like that. Commercial banks still need Federal Reserve notes though to meet their reserve requirement, which is required by law.

Right now more than half of the "assets" being held by Federal Reserve are U.S. debt. The majority of the remainder consists of mortgages packed into bundles by banks. In other words, the dollar is basically backed by debt.

 

All I understood of it (I think?) is that the Fed bank issues bonds which are bought by investors (including other banks and loans companies) who can cash them in at any time. But what I couldn't understand is that at no time is actual money involved, it's money only in theory.

'Commercial banks still need Federal Reserve notes though to meet their reserve requirement, which is required by law.'

Yes, I remember him saying exactly that.

 

The bonds sold by the Federal Reserve Bank are only on behalf of the U.S. Treasury, which is a separate and distinct entity. The Federal Reserve does not issue any bonds itself.

However, the Fed buys a large share of these bonds itself. To do so, it just issues new bank notes and then adds the bonds to it's Reserve Assets on its balance sheet. Confusingly, these bank notes are actually printed by the U.S. Treasury. So the U.S. Treasury is actually printing the money that they are borrowing. But the U.S. dollars are not issued by the U.S. Treasury and are not printed in their name.

 

I'm not sure about this, but I think the Federal Reserve can issue bank notes that are not printed. It would basically just be in their computer systems. I'd imagine only large banks would have an account with the Federal Reserve. More convenient than having to move a bunch of paper dollars around. These accounts would count as part of their reserve requirement.

So basically the U.S. Treasury sells bonds to the Fed, the U.S. Treasury then has "money" on account with the Fed, the U.S. Treasury then trades this money with a bank, and now the U.S. Treasury has an account with the bank while the bank has an account with the Fed. Then if the U.S. Treasury needs to pay somebody, they just have the money moved from one account at that bank to another account. No paper money would actually move.

 

You're a smart cookie because everything you're saying is coming back to me now, and I'm remembering it more and more. He said it isn't real money, but that would be the same as your 'notes that are not printed'. and ''No paper money would actually move.' And he specialises in corporate investments and contract law, so take a bow? lol

 

If a large commercial bank wanted to pay their taxes, they could just tell the Federal Reserve to move the Federal Reserve notes in their account to the U.S. Treasury, and the Treasury could, if they wanted to, use those Federal Reserve notes to pay off some of their bonds (bonds they had previously sold to the Fed).

Probably even most business PhDs don't really understand how the Federal Reserve system works.

Another thing a lot of people don't realize, when the Fed has investments on its balance sheets, it has to draw a rate of return from those investments equal to the going market rate. If it doesn't, that will lead to inflation. You see whenever the Fed buys an asset from someone it has to pay a premium on that asset because the seller knows the Federal Reserve notes they're getting do not bear a rate of return. Even if they trade those notes back a year later for the asset they sold, there's still a lost opportunity cost.

(when I say "the going market rate" I mean the rate at which the market would be if the Fed was not trying to manipulate interest rates)

If the Fed overpays for an asset, that also causes inflation, because it dilutes the value of everyone else's notes relative the value of assets on the balance sheet.
This is why when the Fed chooses to buy U.S. debt that no one else wants to buy, it ends up causing inflation. This is what they mean by "the government printing money".
The Fed does this to subsidize the cost of the U.S. government borrowing money, and to attempt to keep interest rates down in the economy. (or it would be more accurate to say, to try to keep the massive level of U.S. debt from causing interest rates in the economy to rise too much, because when one entity borrows that much money it drives up interest rates)

 

Entitlements and debt service are about 70% of the budget and the main drivers of debt spending. Debt service itself is about 6%.

Ever hear of the Pareto principle? Tackle the largest problem first the gain the largest return.

If entitlements are not addressed then military spending reductions will only be eclipsed by debt service increases especially if interest rates rise.

 

some money is created out of thin air, printed by corps, stocks can go up, and down.... that is virtual money

 

our two ten year wars, and the huge tax cuts for the rich
combined with foreign outsourcing and foreign imports are the problem

when most of our jobs and money go overseas... that is not gonna work for long

 

I take it you are not aware of the elephant in the room.

 

Only about 6 percent of the budget goes to what you would call "welfare" (non-working poor/disabled).

That 6 percent is a misleading number. It's only low because interest rates right now are at historical lows. That number could easily turn into 12 or 18% in the future.

 

Welfare is an entitlement.

 

Yup, by the simple fact that it works.

You live and work in a market-economy. You are paid in dollars and you spend in dollars.

So, just what is bothering you?

Not enough money? Not enough political transparency? Too much political manipulation?

All are standard complaints, but rarely enough to abandon our capitalist monetary-system. (Of course, we could go back to barter, but that's cumbersome.)

So? So we fix the capitalist monetary-system by what is called a Social Democracy - defined as:

 

Nope, it is a subvention.

Subvention = a grant of money, as by a government or some other authority, in aid or support of some institution or undertaking, especially in connection with science or the arts. Also, the furnishing of aid or relief to parts of a population in need.

Now, tell me what's wrong with that. Given that the DoD-budget might also be considered a subvention of companies in the Defense Industry. After all, if there were a long-time peace, what would our military do to amuse itself without the newest Army/Navy/Air Force thingamajig ... ?

 

SS, Medicare, Medicaid, Welfare are all entitlements. Your attempt to redefine that is a FAIL.