Deflation arrives in the EU.

[twolifeinexile]

Do not understand why you say "interest money is not destroyed when a debt is repaid" that "balance the equation", it looks like exactly the problem, interest money is not created by need to be repaid, so it has to be from the principle from some other debt. (Unless banks spend the interest ahead of the interest repaid, and that is how I see could balance the equation and which itself is awkward, since you spend ahead of getting paid, so bank itself is taking debt, which comes back to creating more debt to satisfying old debt).

Assume i take out a loan to start a business. The interest on the loan represents a portion of the profits I expect to make from the loan. The interest money isnt created when i take the loan, but neither is it destroyed when I pay back the loan. Instead it will just be transferred from my customers to me and then back to the bank, its shareholders or deposito holders where it will remain even after my debt money is destroyed. The net result is no new debt whatsoever, just a transfer of existing money/debt from my customers to the people who bankrolled my enterprise.

Here you are just thinking you as a individual, not the whole system, the customer's money is also someone's debt (principle)

[1715093234]

1715093234

[1715093234]

1715093234

[Puppet]

Here you are just thinking you as a individual, not the whole system, the customer's money is also someone's debt (principle)

So ? money=debt and trade obviously results in debt changing hands. What on earth is wrong with that? If i buy your car with fiat money, it also means you get someone else's debt. Is that somehow bad? I could also give you nothing and owe you, so you would have my debt. Its the same thing.

Obviously this isnt a problem, but our youtube cartoon believer was misled in to thinking that with each loan additional debt (interest) was created that could never be paid back and therefore fiat money is like a pyramid scheme that has to collapse some time. Its nonsense. The only reason all debt cant be paid back is because we would no longer have either trade or money, but that doesnt mean the books arent in balance, because they are.

[Wekkel]

The only reason all debt cant be paid back is because we would no longer have either trade or money, but that doesnt mean the books arent in balance, because they are.

I still don't understand how the 5% interest can be paid back without a default, if only the principal (100) of the loan was initially created (to take a simple example).

[sublime5447]

Im not sucking anything and Im not even aware Krugman ever commented on these cartoons, did he? You brought him up, I didnt.
Perhaps unlike you,  I like to think for myself rather than being spoon fed disinformation by anyone.
But since you brought up Krugman, Im just pointing out he has at least a tiny bit more credibility then your hillbilly cartoonist. Maybe next time you can point me to a simpsons clip to prove your point.

BTW, ROFL to that link. You call it a debate, but Krugman isnt even on it. And that guy that was on there, had already received a thorough trashing by some other guy who's clip you linked earlier. Seems like you cant make up your mind who to believe, i guess anyone is  credible as long as he rants against NCE. Even though no two of your hero's seem to agree on much amongst themselves. Why dont you try understanding the issues and make up your own mind?

http://www.dailykos.com/story/2012/06/11/1098890/-Krugman-vs-Keen-Rhetoric-vs-Reality    There is no contradiction between anything I have posted no one has given steve a trashing. They cant he is correct.  You are the one who needs to educate themselves you are mistaken and dont understand the issue.

[twolifeinexile]

Here you are just thinking you as a individual, not the whole system, the customer's money is also someone's debt (principle)

So ? money=debt and trade obviously results in debt changing hands. What on earth is wrong with that? If i buy your car with fiat money, it also means you get someone else's debt. Is that somehow bad? I could also give you nothing and owe you, so you would have my debt. Its the same thing.

Obviously this isnt a problem, but our youtube cartoon believer was misled in to thinking that with each loan additional debt (interest) was created that could never be paid back and therefore fiat money is like a pyramid scheme that has to collapse some time. Its nonsense. The only reason all debt cant be paid back is because we would no longer have either trade or money, but that doesnt mean the books arent in balance, because they are.

That is totally not the point, the point is the system could not balance itself at any moment( here balance denote clearance of unsettled obligations) ( not the balance in the sense that if I owe you ¥5, then you own ¥5 credit and I have ¥5debt as you described). So at any moment new debt is created- people think only when new loan is issued then there is new debt - NO, it is increasing at every second- since the interest is accrued.even you may not require to pay now, your debt balance increased.

And system do collapse, actually many many times - in lieu of 2008, it is the US government take more debt to balance the equation. The mountainous debt is the result of anti-collapsing measures employed by United States.

[sublime5447]

  @Puppet     If you really want to understand the issue read chapter 4 (The Quantity Theory of Credit) of Richard Duncan's The New Depression

[Puppet]

The only reason all debt cant be paid back is because we would no longer have either trade or money, but that doesnt mean the books arent in balance, because they are.

I still don't understand how the 5% interest can be paid back without a default, if only the principal (100) of the loan was initially created (to take a simple example).

Okay.. To prove my point, lets assume there are only two people on the planet, the banker and me. And only 1 gold dollar exists as reserve money at the bank.
I loan 1 dollar from the bank and owe 10 dollar interest on top.
So I owe the bank the 1 gold dollar that exists and another 10  interest money that doesnt exist. Impossible? Hardly
I buy clay from the banker for the 1 dollar.
With the clay I make a dozen pots.
I sell half of those pots  to the bank for 10 dollar. The bank doesnt have 10 dollar either, so buys it on credit.
The bank only has 1 dollar, so the bank does a 1 dollar payment to me for its debt to me for the pots.
I return the 1 dollar to the bank to repay my loan.
Bank does another 1 dollar payment to me for the pots, I return the 1 dollar for my interest debt.
Rince repeat 10x until neither the bank nor I have any debt.

In the end the bank has its dollar back, we both paid our debts, I have some spare clay and we both have some clay pots.
No on defaulted.

[Puppet]

 @Puppet     If you really want to understand the issue read chapter 4 (The Quantity Theory of Credit) of Richard Duncan's The New Depression

So if Richard Duncan is your hero, why did you link to an interview (that you called debate) with Keene to supposedly prove Krugman wrong? Dont you realize Duncan also ridiculed Keene's theory in the very clip you linked earlier. This is your link:
http://www.youtube.com/watch?v=iquemUNNYY8
Fast forward to 23:15
So who should we believe then?

BTW, I tend to agree with most of what I heard of Duncan so far. But are you really sure you do to? I havent read his book, but in the interview you linked he proposed to get out of the current mess by massive government spending in energy and infrastructure. Is that what you believe too? because its pretty much what krugman is advocating for as well.
And where  exactly is he agreeing with your youtube cartoon or suggesting we should move away from fractional reserve banking?

[sublime5447]

Duncan and Keen both see the problem and have differing suggestions oh how to fix it. I don't agree with either of them, both are just trying to prop up the old failed system. In your above example yes it is possible to pay back a loan when the payments on principle are made back available to the debtor as wages, but that is not what happens in real life.
In the movie "money as debt" they say that the problem is the P< P+I which is not exactly correct because as you point out you can pay back P+I with the same dollars. If you read the rebuttal by that "hillbilly economist" he talks about that and I would like to point out that hillbilly correctly identifies the underlying problem in the global economy where your Nobel prize winner is clueless. Keen focuses on the aspect of leveraged speculation as the main culprit and Duncan focus is on the Quantity theory of money and trade deficits but all three recognize that our monetary system relies on ever expanding debt.         

[Puppet]

So you are saying I should really read Duncan's books  because he truly understands the issue, but I shouldnt read too far and at some point  completely disregard what he says or suggests as solution  (which is basically the same solution  just about any living nobel laureate in economy favors, including Krugman)  and instead we should apply some vague, radical solution proposed by an artschool dropout cartoonist who clearly does not understand the issue? 

really?

Dont get me wrong; our current system is not without its flaws. But its like democracy, its the worst possible solution except for everything else we have tried so far. And we've definitely tried using scarce commodities as currency. In case you missed it, the free market deemed it unsuitable and invented fractional reserve banking to make it more suitable for commerce.

[Puppet]

The mountainous debt is the result of anti-collapsing measures employed by United States.

To solve a problem you must first understand it. You are saying our society has too much debt. Debt as a person is usually a bad thing, but its completely different from collective debt of a society.  A society owes itself that debt, and that  is just as big a problem as me writing myself a check for 1 trillion dollar. Guess what, it isnt a problem, its just a number. Money is debt, and the opposite is usually also true. One person's debt is another person's wealth. Are you saying we have too much wealth?

So if its not collective debt, then what is the real problem? What most economists agree on, including everyone quoted in this thread, not too mention myself, is that (too) cheap credit has led to overinvestment resulting in production overcapacity. This capacity is created based on debt, and much of that debt may have to be defaulted on,  which is why was some say “we have too much (bad) debt";  what they really should say is we have industrial (/agricultural and other) over capacity, or if you prefer, not enough demand.  Unlike the trillion dollar check to myself, over capacity truly is a problem, because empty factories  cost money and resources and that goes to waste and will cause default and unemployment when they cant be used.

So how do we solve it? On one hand, you have the teaparty and libertarians who say we should just unwind the debt, close the factories, default on the loans, become unemployed and suffer until it gets better.

Some of that may be unavoidable, but I think thats silly as a strategy. I think its even silly to say we have overcapacity once you realize we have a significant portion of our own population that owns virtually nothing and more than a billion people living in abject poverty. How can we have too much steel and cement production when millions in our country are homeless? Too much food production while millions die of starvation?  How can it be that our economy would be so inefficient that we would have to close house building companies and lay off construction workers and pay them for unemployment while at the same time,  so many people are homeless?

IMO the real cause of our current industrial overcapacity is not so much that we had cheap credit, its the increasing under capacity of too many people to pay for these goods and services. Its not like they dont want it. The word no one here wants to use: we have too much inequality. We have this within our own countries, were the rich can only consume so much and the poor cant afford enough to keep the factories humming, and we have this across borders, you can only export so much to a country which is bankrupt and who's citizens earn $50 per month on average.  So when you say "we have too much debt", my response is that a society cant have too much debt to itself, but our debt is far too concentrated.

We have already tried getting everyone deeper in to debt with virtually free credit, in an attempt to stimulate demand and keep our factories open-   and that is the real reason, not our fractional reserve  system, but that we didnt want to tackle the root problem and instead deliberately inflated the credit bubble, making the rich richer, and the poor poorer. Free credit will help for a bit, allowing the poor to buy stuff and thus to keep factories open , but of course doesnt solve the real issue as unlike societies, individuals (and nations, if its to other nations) can get and did get  too deep in to debt. And thats what we have too much of now: too many people carrying the debt which is owned by too few.

In that context, this is a chart worth looking at:



Note how major crisises (aside from the oil crises which made everyone suffer "equally") in the last century correspond pretty well with when inequality reached  its peak, and we had the golden years when it was at its lowest.  Its my conviction inequality isnt a result of financial crisis, its a root cause of it. And its completely logical that its so. How can car manufacturers flourish when most people can no longer afford  a new car? If you are in the business of selling cars, imagine how you would prefer to see wealth distributed among your customers. Would you prefer to sell one or two  $1M cars to Warren Buffet, or would you prefer his fortune was spread out over 50000 potential customer that could then all afford a new midrange car?

Once you understand that, then you can begin to think about policies to fix it. Rather than closing perfectly fine and competitive factories, rather than keeping educated, capable and willing workers at home unemployed, we should focus on ways to create demand to make use of the investments and assets we already have anyway. Not demand from free credit, but we have a massive potential for new demand from the poor if only we could make them a tiny bit less poor.  Now there is no easy fix, particularly not for inequality across borders, and  Im not suggesting we just hand money to the poor just because Im a bleeding heart Samaritan, but from a purely economic POV it makes complete sense to try and lift people out of poverty and in to the middle class so that our human capital, our workforce, our  production capacity, and the money invested in it can actually be used much more efficiently, rather than just defaulting on our debts, closing the factories, increase unemployment and cause a downward spiral until we hit some bottom.

In short: replacing fiat currency with some inflexible commodity currency isnt a solution and artificially low interest rates and a resulting credit bubble arent the root problem,  it was a flawed attempt to overcome the discrepancy between production capacity and demand, which is the root problem. The only real lasting solution is to reduce inequality and shift more of the tax burden from the poor to the rich so we can better leverage our already existing capacity to create wealth, rather than destroying it through bankruptcies and unemployment. I know raising taxes, even if its on the rich is a  hugely "popular"  thing to say here, but in the long run, Im convinced its even in the (collective) interest of the rich, and its definitely in the interest of society at large. If Warren Buffet asks to be taxed more heavily, Im sure he knows well enough why.

[sublime5447]

So you are saying I should really read Duncan's books  because he truly understands the issue, but I shouldnt read too far and at some point  completely disregard what he says or suggests as solution  (which is basically the same solution  just about any living nobel laureate in economy favors, including Krugman)  and instead we should apply some vague, radical solution proposed by an artschool dropout cartoonist who clearly does not understand the issue? 

really?

Dont get me wrong; our current system is not without its flaws. But its like democracy, its the worst possible solution except for everything else we have tried so far. And we've definitely tried using scarce commodities as currency. In case you missed it, the free market deemed it unsuitable and invented fractional reserve banking to make it more suitable for commerce.

I am pretty bored of this post about now. I never said to implement any of the policy suggestions put forth. I say let it all collapse, the sooner the better in my opinion. The Answer to the money question is to return the money power to the people. The only reason it ever left was because of the feedback issue. As civilization grew people no longer knew the reputation of counter parties to trade, so institutions fulfilled that role. We now have a method of preserving and accessing reputation. So financial institutions are no longer needed the sooner people realize that the better.     

[twolifeinexile]

The only reason all debt cant be paid back is because we would no longer have either trade or money, but that doesnt mean the books arent in balance, because they are.

I still don't understand how the 5% interest can be paid back without a default, if only the principal (100) of the loan was initially created (to take a simple example).

Okay.. To prove my point, lets assume there are only two people on the planet, the banker and me. And only 1 gold dollar exists as reserve money at the bank.
I loan 1 dollar from the bank and owe 10 dollar interest on top.
So I owe the bank the 1 gold dollar that exists and another 10  interest money that doesnt exist. Impossible? Hardly
I buy clay from the banker for the 1 dollar.
With the clay I make a dozen pots.
I sell half of those pots  to the bank for 10 dollar. The bank doesnt have 10 dollar either, so buys it on credit.
The bank only has 1 dollar, so the bank does a 1 dollar payment to me for its debt to me for the pots.
I return the 1 dollar to the bank to repay my loan.
Bank does another 1 dollar payment to me for the pots, I return the 1 dollar for my interest debt.
Rince repeat 10x until neither the bank nor I have any debt.
In the end the bank has its dollar back, we both paid our debts, I have some spare clay and we both have some clay pots.
No on defaulted.

You point is well understood and there isn't anything you said above is incorrect, but if you re-think about your example, you will notice
First, there is credit creation step: " The bank doesn't have 10 dollar either, so buys it on credit", and I will point out the way you describe is NOT what modern financial system do: during the whole steps that you are returning your loans and bank's step by step payment to pots , you didn't charge interest, When you create debt, you didn't make a token asset to represent it and use that token asset to earn more, but if it were modern financial system created the credit, they would debt bank 9 dollars and credit bank 9 dollars, then bank pay you using 10 dollars to get pot and you deposit that 10 dollars. so at the end of your trade, in modern financial system sense, you have 10 dollars and now can pay debt, next you are left with 1 dollar debt, the bank left with 9 dollar principle debt + Interest debt  + plus 1 dollar asset (that you own him) + plus on dollar cash 10 = Interest Debt. On net, you guys need to borrow another round to make the game going .
second, why should they do what you described? they can do it totally another way:the bank do not buy your pots, they just wait, till you payment time comes and you default or you borrow more from them, this time, loan is collateralize by your pots, if you can not pay, oops, give the pot back to them and now you still owe them. It is you who need money to pay the bank by obligation, they do not have obligation to buy,only option to buy.  You were assuming financial system counter-parties are cooperative, they are not.
Third: Here when you say one dollar (gold dollar), it is more like federal reserve fund, mondern financial system use all bank debt as money.(credit)

[marcus_of_augustus]

So the "Puppet" wants more taxes to fix up all the problems caused by too much debt (which isn't really a problem cause we all just owe it to ourselves anyway).

Gee, I guess I didn't see that one coming from the name-caller economeister extraordinaire. More govt. spending, more taxes, more indebtedness, more money printing, more bankster bailouts, you really are truly a Puppet of epic proportions ... it's simple really. "Communism isn't so bad, just trust us."

Utterly, completely shameless and corrupted in thought. Keep going though, I want to see how red your underwear really is, as you are hoisted royally on your own petard.

[goxed]

So the "Puppet" wants more taxes to fix up all the problems caused by too much debt (which isn't really a problem cause we all just owe it to ourselves anyway).

Gee, I guess I didn't see that one coming form the name-caller economeister extraordinaire. More govt. spending, more taxes, more indebtedness, more money printing, more bankster bailouts, you really are truly a Puppet of epic proportions ... it's simple really. "Communism isn't so bad, just trust us."

Utterly, completely shameless and corrupted in thought. Keep going though, I want to see how red your underwear really is, as you are hoisted royally on your own petard.

Government debt should not be confused with personal debt. When govt has debt that usually means the people are profiting.

[Puppet]

You point is well understood and there isn't anything you said above is incorrect, but if you re-think about your example, you will notice
First, there is credit creation step: " The bank doesn't have 10 dollar either, so buys it on credit", and I will point out the way you describe is NOT what modern financial system do: during the whole steps that you are returning your loans and bank's step by step payment to pots , you didn't charge interest,

I tried keeping it as simple as possible. But if you prefer,you could  sell the pots for 5 dollar and charge 5 dollar interest. Doesnt change anything does it?

second, why should they do what you described? they can do it totally another way:the bank do not buy your pots, they just wait, till you payment time comes and you default.or you borrow more from them, this time, loan is collateralize by your pots, if you can not pay, oops, give the pot back to them and now you still owe them. It is you who need money to pay the bank by obligation, they do not have obligation to buy,only option to buy.

Doh. Yeah if I only have 1 potential customer on the planet because we are only a planet of 2, its rather likely my company will go bust if that sole customer decides not to buy my goods. Good point. I was just proving how interest gets repaid without being created with the loan. Interest just results in a transfer of debt or ultimately goods, it doesnt create some death spiral towards infinite debt.. And contrary to my example,  that transfer wont justbe  to the bank as much as it will be to deposito and share holders. After all banks are competing private companies.

Third: Here when you say one dollar (gold dollar), it is more like federal reserve fund, mondern financial system use all bank debt as money.(credit)

See 1. Makes no difference. But with no central bank, its hard to see were the bank would get its first credit money from on my imaginary planet.

[Puppet]

So the "Puppet" wants more taxes to fix up all the problems caused by too much debt (which isn't really a problem cause we all just owe it to ourselves anyway).

Gee, I guess I didn't see that one coming from the name-caller economeister extraordinaire. More govt. spending, more taxes, more indebtedness, more money printing, more bankster bailouts, you really are truly a Puppet of epic proportions ... it's simple really. "Communism isn't so bad, just trust us."

Utterly, completely shameless and corrupted in thought. Keep going though, I want to see how red your underwear really is, as you are hoisted royally on your own petard.

Yawn, how predictable and predictably void of arguments. Here is a question for you though; back in the 50s and 60s, did we live in a communist state? Or did we have a reasonably well working capitalist one? If you agree on the latter, you might want to look up tax rates from back then and compare it with what we have now. And since Im sure you are allergic to big government, pay close attention: its not even the overall height of the taxes that matters, overall taxes were arguably lower back then, its the distribution.

BTW, if you had actually understood what I wrote, you would have noticed Im absolutely not advocating printing of money and giving it to the banks.  Printing of money is not a  solution by itself, though its defensible if used appropriately; but giving it to wallstreet accomplishes the exact opposite of what we need as its a transfer of wealth from the poor to the rich and is likely to cause even more excess capacity.  Im also not saying we need more government spending, you can argue that either way, what I am saying is we need to change how government collects its taxes and spends its money. That is far more important than how much it collects or how much it spends.

And then there is the (also predictable) communist stuff. Which is funny, because you have more in common with a communist than I have. Like most communist, libertarians  use moral arguments to defend an economic system thats demonstrably less efficient.

The communist will use the moral argument that all humans are equal and have equal rights to justify collectivism and then delude himself in to thinking its also a more efficient economic model. The libertarian will make the same mistake, just using the moral argument of individual freedom and property rights to justify any amount of economic inequality even if it results in inefficient distribution of capital or ultimately gets to the point where it turns in to financial slavery.

Im not an ideologue, i am not driven by the morality of wealth or poverty. If you want to argue morality of property rights versus poverty and starvation, then be my guest,  but realize two things:

1) I dont give a hoot either way. I have a degree in economics not moral philosophy so Im driven by pragmatism to strive towards a more efficient economy. If reaching that goal requires a large inequality and what a communist would consider gross economic injustice, then i have no problems with that. No more then i object to redistributing wealth and do what libertarians would consider theft if im convinced it would result in greater economic prosperity.

2) dont make the same mistake as communists by confusing your morality with economics.

[twolifeinexile]

You point is well understood and there isn't anything you said above is incorrect, but if you re-think about your example, you will notice
First, there is credit creation step: " The bank doesn't have 10 dollar either, so buys it on credit", and I will point out the way you describe is NOT what modern financial system do: during the whole steps that you are returning your loans and bank's step by step payment to pots , you didn't charge interest,

I tried keeping it as simple as possible. But if you prefer,you could  sell the pots for 5 dollar and charge 5 dollar interest. Doesnt change anything does it?

[/quote]
We are discussing Principle and Interest effect here and you are saying charge interest or not doesn't change anything? It is the whole difference, the interest you do not charged is acutally charged in real world and once your described cycle is done, there is unsettled obligations that need another round borrowing to go on. And borrowing going on and on is my point.

[sublime5447]

So the "Puppet" wants more taxes to fix up all the problems caused by too much debt (which isn't really a problem cause we all just owe it to ourselves anyway).

Gee, I guess I didn't see that one coming from the name-caller economeister extraordinaire. More govt. spending, more taxes, more indebtedness, more money printing, more bankster bailouts, you really are truly a Puppet of epic proportions ... it's simple really. "Communism isn't so bad, just trust us."

Utterly, completely shameless and corrupted in thought. Keep going though, I want to see how red your underwear really is, as you are hoisted royally on your own petard.

+100 bump bump bummp

This my favorite   "A society owes itself that debt"      "We owe it to ourselves" lacks a fundamental understanding of the definition of we, they, you, and I.

[Puppet]

I understand this discussion may be going over your head sublime, here is some study material thats perhaps more appropriate for you:
https://www.youtube.com/watch?v=5iRXZrFDFCA

Let me know if you have any questions.

We are discussing Principle and Interest effect here and you are saying charge interest or not doesn't change anything? It is the whole difference, the interest you do not charged is acutally charged in real world and once your described cycle is done, there is unsettled obligations that need another round borrowing to go on. And borrowing going on and on is my point.

Of course it doesnt work like that in the real world. When was the last time you bought clay from a banker?
You said you didnt understand how interest debt could be paid off if the money is never created. I told you how with a silly example, its because interest money doesnt get destroyed like debt money,  so the interest debt is repaid by transferring existing debt or actual wealth (which doesnt get destroyed with the loan either). Its completely logical and nothing like the spooky ever growing cartoon debt monster thats keeping sublime up at night.