Hidden Secrets of Money

[BlockChainLottery]

The other day I saw this video.
And I came across many more videos saying more or less the same.
It is very clear that the people behind such videos are against the current system.
That makes the message that they are spreading and explaining a bit colored.
Now, I'm not an economist. I really don't know how much of it is true (maybe all, I don't know).
I'm hoping that there are people roaming these forums that have more understanding of the subject, and would take some time to explain some stuff.
Because I'm thinking that every system has its flaws, but our current system can't be all bad, right?
I suspect some nuances can be made regarding this subject.

Here are some questions that I have about this video:

• Does it really work as the video claims it to be?
• Does the same yield for the Euro or Yen for example?
• Would a gold standard really solve all our problems, or would it create others?
• Why would a sovereign country give the right to make money to a private corporation with stockholders, so that they can collect interest? They could just do it themselves without having to pay interest.
• Does it really only work if the system collapses every 150 years or so, which would be the logical future as pictured by the video?
• If the current system only works if new debt is created to pay the interest on the principle, why aren't a lot of economists rebelling against it?

[odolvlobo]

Here are some questions that I have about this video:

• Does it really work as the video claims it to be? -- Fundamentally yes, but the debt paradox is not true, so many of the conclusions are wrong.
• Does the same yield for the Euro or Yen for example? -- Yes
• Would a gold standard really solve all our problems, or would it create others? -- A gold standard does not prevent fractional reserve banking, but it does prevent governments from using inflation to postpone default.
• Why would a sovereign country give the right to make money to a private corporation with stockholders, so that they can collect interest? They could just do it themselves without having to pay interest. -- The Federal Reserve was originally created under a gold standard, but it changed as a result of leaving the gold standard. The original idea was that an independent agency would manage the money supply without being controlled by politicians. This has had only limited success.
• Does it really only work if the system collapses every 150 years or so, which would be the logical future as pictured by the video? -- A collapse is the result of excessive deficit spending by the government, and not some flaw in the system.
• If the current system only works if new debt is created to pay the interest on the principle, why aren't a lot of economists rebelling against it? -- Interest can be paid without creating new debt.

An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.

Likewise, the dollar will eventually collapse if the U.S. government continues to create money to pay the interest on the debt. The problem is not using debt as currency. The problem is going deeper into debt.

[BlockChainLottery]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

[odolvlobo]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

[arepo]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

but by the logic of the debt paradox, since 95%+ of the money supply is debt money that is collecting interest, even if the currency that is involved to pay off your own interest is reused, it itself has associated interest due of some third party not mentioned in your example. if the total amount of debt is greater than the total amount of currency in circulation, then does it matter how much the actual total value of goods in the economy grows (e.g. catching additional loads of fish)?

[odolvlobo]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

but by the logic of the debt paradox, since 95%+ of the money supply is debt money that is collecting interest, even if the currency that is involved to pay off your own interest is reused, it itself has associated interest due of some third party not mentioned in your example. if the total amount of debt is greater than the total amount of currency in circulation, then does it matter how much the actual total value of goods in the economy grows (e.g. catching additional loads of fish)?

In my example, I am the issuer of the currency. Perhaps the example was not clear. The point is that debt-based currency does not have to be created to pay interest. Interest can be paid with production. The paradox becomes real when the interest exceeds production because then the excess interest can only be paid by new debt, and a collapse is inevitable.

[zimmah]

Here are some questions that I have about this video:

• Does it really work as the video claims it to be? -- Fundamentally yes, but the debt paradox is not true, so many of the conclusions are wrong.
• Does the same yield for the Euro or Yen for example? -- Yes
• Would a gold standard really solve all our problems, or would it create others? -- A gold standard does not prevent fractional reserve banking, but it does prevent governments from using inflation to postpone default.
• Why would a sovereign country give the right to make money to a private corporation with stockholders, so that they can collect interest? They could just do it themselves without having to pay interest. -- The Federal Reserve was originally created under a gold standard, but it changed as a result of leaving the gold standard. The original idea was that an independent agency would manage the money supply without being controlled by politicians. This has had only limited success. Of course, because now it's the other way around, the politicians are now controlled by the independent agency which controls the money supply. Capitalism basically means whoever controls the money supply, controls the country
• Does it really only work if the system collapses every 150 years or so, which would be the logical future as pictured by the video? -- A collapse is the result of excessive deficit spending by the government, and not some flaw in the system.Also the fact that they lend money that doesn't exist, and expect the borrower to pay it back, with interest.
• If the current system only works if new debt is created to pay the interest on the principle, why aren't a lot of economists rebelling against it? -- Interest can be paid without creating new debt.

An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.

Likewise, the dollar will eventually collapse if the U.S. government continues to create money to pay the interest on the debt. The problem is not using debt as currency. The problem is going deeper into debt.

Maybe so, but it's still a scam because the richest persons in the world are mostly rich just because they gain huge sums of interest on money they themselves printed. That's the whole reason i use bitcoin, I don't want to depend on monopoly money.

[Cameltoemcgee]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

but by the logic of the debt paradox, since 95%+ of the money supply is debt money that is collecting interest, even if the currency that is involved to pay off your own interest is reused, it itself has associated interest due of some third party not mentioned in your example. if the total amount of debt is greater than the total amount of currency in circulation, then does it matter how much the actual total value of goods in the economy grows (e.g. catching additional loads of fish)?

In my example, I am the issuer of the currency. Perhaps the example was not clear. The point is that debt-based currency does not have to be created to pay interest. Interest can be paid with production. The paradox becomes real when the interest exceeds production because then the excess interest can only be paid by new debt, and a collapse is inevitable.

Why does interest have to be paid at all if the debt is based off the produce of the same people the money is supposed to go to?

[BlockChainLottery]

First of all, thank for all the replies. Not everybody agrees with each other.
I hope we can come at some fundamentally objective understanding of the subject.

The federal reserve creates checks that the banks get in return for bonds.
At that moment new money is created. But the checks aren't backed by anything,
whereas in the days of the gold standard it was backed by gold.
The federal reserve asks interest, so essentially they earn money without risking anything.
With the gold standard they couldn't increase the money supply without boundaries.
Can they do that now? Is making it bigger good for them, what feed back mechanism is in place to control it?

Another two questions about the debt paradox.

• Does the example of odolvlobo represent the actual situation?
• Is debt already larger than all money in existence? I.e., is the system already doomed to collapse?

[Carlton Banks]

...
An example of how the debt paradox is wrong: Suppose I am a fisherman and I create IOUs to buy a boat and those IOUs are used as currency. The IOUs are debt, just like the dollar, and they have interest payments. I don't have to create more debt to pay the interest because I can pay the interest with fish (or IOUs gained by selling the fish). Everything is ok as long as I don't go so far into debt that I can't pay the interest with fish. If I have to continually create more debt to pay the interest (as the U.S. is currently doing) then eventually the system will collapse.
...

I see what you're doing there, but interest (I) and the load (L) have to be paid in dollars, not something else.
I have to take that out of the total money supply (S), where every dollar bears interest (apparently, don't know if this is true).
S = L < L + I
So where does the interest has to come from? Or is this way too simplistic?

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

but by the logic of the debt paradox, since 95%+ of the money supply is debt money that is collecting interest, even if the currency that is involved to pay off your own interest is reused, it itself has associated interest due of some third party not mentioned in your example. if the total amount of debt is greater than the total amount of currency in circulation, then does it matter how much the actual total value of goods in the economy grows (e.g. catching additional loads of fish)?

In my example, I am the issuer of the currency. Perhaps the example was not clear. The point is that debt-based currency does not have to be created to pay interest. Interest can be paid with production. The paradox becomes real when the interest exceeds production because then the excess interest can only be paid by new debt, and a collapse is inevitable.

I think what he means is that the debt has two tiers, one at the issuance level and another at the level of economic actors. Your scenario takes place at the level of the economic actors, where debts and/or the interest on them can indeed be repaid in kind. The government is liable for the debt created at the issuance level (sovereign bonds), and both principle and interest can only be repaid in the currency they were issued in (not including fish).

[Dr.Zaius]

Currency is reused. Suppose my interest payment to the lender is the value of a load of fish. So I go fishing and I get a load of fish. The lender (for example) buys the load with some currency and I make the interest payment with that same currency. I could potentially do this forever and there is no need for additional currency to make interest payments.

There are 2 types of credit. Self liquidating and none liquidating. You are describing self liquidating credit, where the fisherman's IOU's get extinguished when he delivers the fish. This type of credit is usually short term, and has specific terms outlined for its repayment. This is also referred to as real bills, discount bills etc. Notice how in this scenario only a producer can issue IOU's because only a producer is capable of extinguishing them(repaying).

The present financial system is made up of entirely credit that cannot be liquidated. The dollar is a debt instrument that has no terms outlined in its redemption. This means it cannot be extinguished. New debt MUST be created to repay old debt under this mechanism. Eventually the system implodes as we have come close to in 2008. None liquidating debt must DEFAULT. The question is just when.

What the US federal reserve is doing is equivalent to check kiting. They are crediting government accounts via QE with money that does not exist. Imagine buying stuff with bad checks. Every fed reserve dollar is backed by a US gov bond which specifies repayment in those exact dollars that are being lent. Do you see the circular problem here? Commercial banks do the exact same thing. Every dollar they lend, requires more borrowing to make up for the interest. This system requires perpetual debt creation(which is impossible) to continue functioning. Since every loan must be collateralized by something, it requires a constantly "expanding" economy. Modern economists believe an economy can grow at the same rate or faster then COMPOUNDING debt. Hence 2% GDP growth every year is compound growth. Anyone with a calculator knows this is impossible. As real assets do not grow as fast as compound debt, we get inflation from more counterfeit credit chasing fewer goods. Inflation in modern terms is the expansion of counterfeit credit.

The entire role of gold was not "price stability" which is not desired, but interest rate stability. The gold standard tended to have a low and stable interest rate. The other important aspect of gold was its ability to extinguish debt. Under the fiat system we have had interest rates go well into double digits, and back down again. This has caused immense bond speculation, and enormous damage to capital of financial institutions(insolvency).

[odolvlobo]

The present financial system is made up of entirely credit that cannot be liquidated. The dollar is a debt instrument that has no terms outlined in its redemption. This means it cannot be extinguished. New debt MUST be created to repay old debt under this mechanism. Eventually the system implodes as we have come close to in 2008. None liquidating debt must DEFAULT. The question is just when.

I don't accept your concept of non-liquidating debt.

I don't see why the current debt cannot be extinguished. The Fed has a balance sheet, and debt (the Fed's liabilities) can be extinguished by trading it for its assets. For example, if the Fed wants to remove $1 million from the money supply it simply sells or redeems $1 million worth of assets (bonds) and the dollars that it receives are gone.

[Dr.Zaius]

The present financial system is made up of entirely credit that cannot be liquidated. The dollar is a debt instrument that has no terms outlined in its redemption. This means it cannot be extinguished. New debt MUST be created to repay old debt under this mechanism. Eventually the system implodes as we have come close to in 2008. None liquidating debt must DEFAULT. The question is just when.

I don't accept your concept of non-liquidating debt.

I don't see why the current debt cannot be extinguished. The Fed has a balance sheet, and debt (the Fed's liabilities) can be extinguished by trading it for its assets. For example, if the Fed wants to remove $1 million from the money supply it simply sells or redeems $1 million worth of assets (bonds) and the dollars that it receives are gone.

Your logic is circular. How can the fed extinguish it's liability with someone else's liability(US government)?

Let's use a simple example.

Fed loans US gov 1bil + 1% interest.

The US gov now has 1bil. Where does it get the 1% interest portion from to repay the debt? It has to be created first via someone else borrowing it into existence.

Now the US gov repays the fed, but what about the new borrower? Where do they get the funds from to repay their debt + interest.

Every new loan must be collateralized by something, hence if the economy does not expand fast enough to create new assets as collateral we get credit inflation. Existing assets must be artificially revalued higher in order to support new debt. Think of home prices, the underlying value of the home never changed. If you read the original Fed Reserve act, holding US government bonds was illegal. The fed could only lend against SHORT TERM self liquidating bills from the private sector. Ie The fisherman's IOU's would be the collateral for new fed credit. This was changed when they ammended the fed reserve act in the 1930's. Banks got in bed with the government and slowly Tier 1 capital assets became government bonds.

Gold's role was to extinguish debt. I bring a bank note(LIABILITY) and exchange it for Gold(Asset). Do you see the difference with your example? I am not extinguishing 1 form of debt(liability) with someone elses. Money is anything that extinguishes debt. It does not have to be gold, however ONLY production can repay debt. Everything else is merely a form of credit. We do not have "money" present in our system, it was removed in 1971.

A healthy bank backed its deposits by 2 things. Gold and real bills(self liquidating credit which matured into gold). This required trust, now trust requires prudence which is a virtue. You had to be sure the fisherman would make good. The economy could be expanded to the extent of your prudence. This is a functioning free market system. Money is backed by the productive capacity of your economy. We have nothing of the sort today, hence the boom(counterfeit credit) and bust nature of our system.

The reasoning behind gold was simple. Gold was and is the most saleabile ie liquid asset. You could get rid of large volumes of it without depressing the bid side. Real bills were the second most liquid credit instruments, since they matured in gold and were backed by real production.

http://research.stlouisfed.org/fred2/series/TCMDO

Basically they do not want this to stop. Ever.

[odolvlobo]

Let's use a simple example.
Fed loans US gov 1bil + 1% interest.
The US gov now has 1bil. Where does it get the 1% interest portion from to repay the debt? It has to be created first via someone else borrowing it into existence.

Assuming the U.S. tax base is productive enough, the 1% interest can be paid from production. It does not have to be paid though additional borrowing.

Now the US gov repays the fed, but what about the new borrower? Where do they get the funds from to repay their debt + interest.

I assume you are referring to the problem that if all U.S. debt is paid back, there would be no more dollars. That is only a problem if the new borrower's debt and interest must be paid with dollars, and that problem exists with any currency -- even a gold-backed dollars, since no dollars would exist that could be bought with gold.

Every new loan must be collateralized by something, hence if the economy does not expand fast enough to create new assets as collateral we get credit inflation. Existing assets must be artificially revalued higher in order to support new debt. Think of home prices, the underlying value of the home never changed. If you read the original Fed Reserve act, holding US government bonds was illegal. The fed could only lend against SHORT TERM self liquidating bills from the private sector. Ie The fisherman's IOU's would be the collateral for new fed credit. This was changed when they ammended the fed reserve act in the 1930's. Banks got in bed with the government and slowly Tier 1 capital assets became government bonds.

Gold's role was to extinguish debt. I bring a bank note(LIABILITY) and exchange it for Gold(Asset). Do you see the difference with your example? I am not extinguishing 1 form of debt(liability) with someone elses. Money is anything that extinguishes debt. It does not have to be gold, however ONLY production can repay debt. Everything else is merely a form of credit. We do not have "money" present in our system, it was removed in 1971.

A healthy bank backed its deposits by 2 things. Gold and real bills(self liquidating credit which matured into gold). This required trust, now trust requires prudence which is a virtue. You had to be sure the fisherman would make good. The economy could be expanded to the extent of your prudence. This is a functioning free market system. Money is backed by the productive capacity of your economy. We have nothing of the sort today, hence the boom(counterfeit credit) and bust nature of our system.

The reasoning behind gold was simple. Gold was and is the most saleabile ie liquid asset. You could get rid of large volumes of it without depressing the bid side. Real bills were the second most liquid credit instruments, since they matured in gold and were backed by real production.

I agree with you about the value of a gold-backed currency, but you lost me here. How does this relate to the belief that the principle plus interest exceeds the money supply and therefore can't be paid off?

[Robert Paulson]

The other day I saw this video.
And I came across many more videos saying more or less the same.
It is very clear that the people behind such videos are against the current system.
That makes the message that they are spreading and explaining a bit colored.
Now, I'm not an economist. I really don't know how much of it is true (maybe all, I don't know).
I'm hoping that there are people roaming these forums that have more understanding of the subject, and would take some time to explain some stuff.
Because I'm thinking that every system has its flaws, but our current system can't be all bad, right?
I suspect some nuances can be made regarding this subject.

Here are some questions that I have about this video:

• Does it really work as the video claims it to be?

yes, it does.

• Does the same yield for the Euro or Yen for example?

yes it does, there are no longer any national currencies that are not created by the debt system described in the video.

• Would a gold standard really solve all our problems, or would it create others?

gold would prevent the banks from printing money, it won't solve all our problems but it will improve the situation.

• Why would a sovereign country give the right to make money to a private corporation with stockholders, so that they can collect interest? They could just do it themselves without having to pay interest.

the bankers convinced the american government that its the right thing to do back in 1913 when the federal reserve was established.

• Does it really only work if the system collapses every 150 years or so, which would be the logical future as pictured by the video?

it never works for a long time. there is no example in history of paper money surviving it has always failed eventually. in comparison gold coins used by the romans more than 2000 years ago still have value today.

• If the current system only works if new debt is created to pay the interest on the principle, why aren't a lot of economists rebelling against it?

Alot of economists do rebel against it. unfortunately economists are not in control of banks nor government. the current system enriches the banks and the government at the expense of the general population and so they have a strong incentive to keep the system as it is.

[mirelo]

Please watch this video:

http://www.youtube.com/watch?v=04MPZgyhG5s

[CurbsideProphet]

The present financial system is made up of entirely credit that cannot be liquidated. The dollar is a debt instrument that has no terms outlined in its redemption. This means it cannot be extinguished. New debt MUST be created to repay old debt under this mechanism. Eventually the system implodes as we have come close to in 2008. None liquidating debt must DEFAULT. The question is just when.

I don't accept your concept of non-liquidating debt.

I don't see why the current debt cannot be extinguished. The Fed has a balance sheet, and debt (the Fed's liabilities) can be extinguished by trading it for its assets. For example, if the Fed wants to remove $1 million from the money supply it simply sells or redeems $1 million worth of assets (bonds) and the dollars that it receives are gone.

The problem is that for every seller, you need a buyer.  Now back in the 40's during WW2, debt was owned nearly 100% by US citizens (via war bonds).  That's no longer the case with China and Japan owning a significant amount.  So essentially you need to look at outside parties in order to sell any significant amount or try to inflate the debt away.

[Cameltoemcgee]

Just gonna leave this here. interesting to see a newspaper like the guardian reporting on this....

http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

[man-was-boy]

Everything is wrong. But we are too busy to stop and think about why all these happens.

[johnyj]

Most of the video (except the FRB part) is correct

The ultimate question is: Who get the ownership of originally created base money, and what have they done for gaining this ownership?

Under a gold standard, money is created by gold mining, which is no different than any other type of work in society, that gives money fair value. But after US removed gold standard, money is created and owned by FED who is doing nothing. So, in principle the fiat money should worth nothing because there is no production cost, but they are still used to purchase things because other people are accepting them. This lead to the result that those who are creating money out of nothing can legally claim other people's work without doing anything