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Author Topic: Junk Money Party will go on for 3 years  (Read 5357 times)
anu
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December 21, 2011, 08:57:41 AM
 #1

Mario Draghi (new #1 of the ECB) just handed the European banks an unlimited credit line for the next 3 years. This means that the party will go on for another 3 years or so and that the hangover will be much worse.

Incidentally, 3 years has been the amount of time the government needed to prepare for currency reform here in Germany in the past (introduction of the Deutschmark from 1945-1948 and introduction of the Euro 10 years ago).

Looks like the timing of Bitcoin is perfect. Another 3 years for ppl to realize that the time of fiat money is over before getting bitten once more.

http://www.taiwannews.com.tw/etn/news_content.php?id=1792434
http://www.spiegel.de/wirtschaft/unternehmen/0,1518,804969,00.html

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December 21, 2011, 11:07:50 AM
 #2

So true.
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December 22, 2011, 09:06:01 AM
 #3

As that article about FED pointed out, although central banks can print as much money as they will, it will only come out in loan's form, either a loan for the bank, or a loan for the government. And a loan means that you have to payback it some time, this is still something confusing

For example, on an island with only 2 people and one central bank, the central bank loan out 1 billion euro to A and 1 billion euro to B, both A and B will have some cash to spend, and when the loan matures, they both need to payback 1 billion euro. But the total amount of euro on the island is only 2 billion euro, no matter what they do with their money, they can't payback the loan with extra interest, the interest must come from some where else...


ThomasV
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December 22, 2011, 09:15:33 AM
 #4

the interest must come from some where else...

not true. the interest comes from other loans made in the meantime.
central banks never stop loaning money

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December 22, 2011, 09:51:09 AM
 #5

For example, on an island with only 2 people and one central bank, the central bank loan out 1 billion euro to A and 1 billion euro to B, both A and B will have some cash to spend, and when the loan matures, they both need to payback 1 billion euro. But the total amount of euro on the island is only 2 billion euro, no matter what they do with their money, they can't payback the loan with extra interest, the interest must come from some where else...

A and B could help to clean the floors in the bank and get paid (with money from their earlier loan repayments). A and B can therefore use this newly earned money to pay the interest.

I'm not saying that the current monetary system is sound, but those "2 people on an island" examples are a bit oversimplified IMHO.
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December 22, 2011, 12:24:02 PM
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For example, on an island with only 2 people and one central bank, the central bank loan out 1 billion euro to A and 1 billion euro to B, both A and B will have some cash to spend, and when the loan matures, they both need to payback 1 billion euro. But the total amount of euro on the island is only 2 billion euro, no matter what they do with their money, they can't payback the loan with extra interest, the interest must come from some where else...

A and B could help to clean the floors in the bank and get paid (with money from their earlier loan repayments). A and B can therefore use this newly earned money to pay the interest.

I'm not saying that the current monetary system is sound, but those "2 people on an island" examples are a bit oversimplified IMHO.

It's indeed very simple from central bank point of view, but they could not use that money to buy any products or service, this is essential in current fiat money system, I think ThomasV have a good point

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December 22, 2011, 12:36:11 PM
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And interest rate is always in some percentage of loaned money, so volume of loaned money has to grow exponentially. When it can't (unsustainable debt, limited resources), the system is broken and we need a reset. It's unavoidable!
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December 22, 2011, 12:39:53 PM
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A and B could create (using the capital supplied by the bank) something that the bank wants.  Then when the bank wants to purchase that something, A and B could negotiate a reduction in the debt in exchange.

The money on the island would still be 2 million euros, but the debt would be less than 2 million euros.  Ta, da; welcome to capitalism functioning as it should.

One might even argue that the 2 million euros are then worth more than they were -- forcing other prices on the island lower.

"Aghhhhh, no, no, deflationary spiral.  Things are cheaper!"

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December 22, 2011, 12:55:16 PM
 #9

the interest must come from some where else...

not true. the interest comes from other loans made in the meantime.
central banks never stop loaning money

Good point, I think this is typical refinancing, and that is exactly what banks are doing now: Borrowing new money from central bank to payback the interest of the old loans and debts

Suppose interest rate is 1%, A and B each borrowed 1 billion euro first year. Next year, they have to borrow 1.01 billion euro each to do the same business and 0.01 billion euro is used to payback the interest. Therefore, the amount of money supply is expanding in 1% per year although the whole economy scale keeps the same

Sounds quite reasonable and consistent

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December 22, 2011, 01:13:02 PM
 #10

And interest rate is always in some percentage of loaned money, so volume of loaned money has to grow exponentially. When it can't (unsustainable debt, limited resources), the system is broken and we need a reset. It's unavoidable!

Exactly, loaned money will grow exponentially, but that do not necessarily cause problem, as long as A and B can borrow money to payback their debt, they do not need to worry about the debt, it is almost free, since those money are produced almost without any cost

The only problem is fairness, because we all know only banks and government can get these free loans. The result is, those who do not have such privilege get kicked out from their home and those who have the privilege get year-end-bonus

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December 22, 2011, 01:32:25 PM
 #11

A and B could create (using the capital supplied by the bank) something that the bank wants.  Then when the bank wants to purchase that something, A and B could negotiate a reduction in the debt in exchange.

The money on the island would still be 2 million euros, but the debt would be less than 2 million euros.  Ta, da; welcome to capitalism functioning as it should.

One might even argue that the 2 million euros are then worth more than they were -- forcing other prices on the island lower.

"Aghhhhh, no, no, deflationary spiral.  Things are cheaper!"

Well, let's suppose central bank on the island is just a machine Cool

Actually in real world, people seldom can impress central bank, since those bankers already have everything they want, and there are only a handful of central bankers, they would never create enough consumption for the whole economy

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December 22, 2011, 01:45:28 PM
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And interest rate is always in some percentage of loaned money, so volume of loaned money has to grow exponentially. When it can't (unsustainable debt, limited resources), the system is broken and we need a reset. It's unavoidable!

Exactly, loaned money will grow exponentially, but that do not necessarily cause problem, as long as A and B can borrow money to payback their debt, they do not need to worry about the debt, it is almost free, since those money are produced almost without any cost

In the real world, money-creating is money-stealing-from-savers. When savers loose confidence and start dumping money, the cycle is broken. A and B can borrow and repay, but the value behind will be lost. Borrowing and repaying worthless paper. Not entirely worthless though, you can burn it or use as a toilet paper.
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December 22, 2011, 02:38:34 PM
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And interest rate is always in some percentage of loaned money, so volume of loaned money has to grow exponentially. When it can't (unsustainable debt, limited resources), the system is broken and we need a reset. It's unavoidable!

Exactly, loaned money will grow exponentially, but that do not necessarily cause problem, as long as A and B can borrow money to payback their debt, they do not need to worry about the debt, it is almost free, since those money are produced almost without any cost

In the real world, money-creating is money-stealing-from-savers. When savers loose confidence and start dumping money, the cycle is broken. A and B can borrow and repay, but the value behind will be lost. Borrowing and repaying worthless paper. Not entirely worthless though, you can burn it or use as a toilet paper.

Sounds crazy, but borrowing and repaying worthless paper is what those banks doing daily, even worse, only numbers on the account. But, if you have ever played <fallout 3> or any kind of similar RPG game with merchants who have limited amount of coin, you will understand if a merchant are running out of coin, then most of the business activities will come to a halt if you do not have the item that specific merchant wants

In an island with only 2 people, it is easy to see that both A and B could not have any savings (Their loan must be paid back, if one of them get more than 1 billion euro thus save the extra money, then the other one can not pay back the loan)

This is actually what happened in reality: While some people managed to get some saving, other people will accumulate debt. Of course there is a belief that those who save the money will eventually spend their saving at a later time, thus bring the system back into balance some time in the future

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December 30, 2011, 04:28:52 PM
 #14

I'm in china for vacation and studying their way of spending "Junk Money"

They put 20% increase each year for income for government employee and retirees (with government debt which is financed through central bank),  thus increase the general purchasing power of these people

Their purchasing power changed the pattern of consumption: Many of these people could have 3-4 babysitters to take care of their baby, those babysitters typically are private service provider without government background and earn 1/10th of income compared with those government employee

I don't know how well this scheme works in long run, but in china, government is above central bank, so it is only accountable for itself, they could keep spending junk money as long as there are enough production/service made by the lower income class

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December 30, 2011, 05:44:16 PM
 #15

I'm in china for vacation and studying their way of spending "Junk Money"

They put 20% increase each year for income for government employee and retirees (with government debt which is financed through central bank),  thus increase the general purchasing power of these people

Their purchasing power changed the pattern of consumption: Many of these people could have 3-4 babysitters to take care of their baby, those babysitters typically are private service provider without government background and earn 1/10th of income compared with those government employee

I don't know how well this scheme works in long run, but in china, government is above central bank, so it is only accountable for itself, they could keep spending junk money as long as there are enough production/service made by the lower income class

China can afford such mistakes for now because they can always compensate with economic growth. There is still a large number of ppl outside the real economy. They can grow by simply including them.

As you are there, let me ask OT: Is the lack of young women from selective abortion really so extreme that many angry young men may disrupt society?

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December 30, 2011, 10:53:18 PM
 #16

A and B could create (using the capital supplied by the bank) something that the bank wants.  Then when the bank wants to purchase that something, A and B could negotiate a reduction in the debt in exchange.

The money on the island would still be 2 million euros, but the debt would be less than 2 million euros.  Ta, da; welcome to capitalism functioning as it should.

One might even argue that the 2 million euros are then worth more than they were -- forcing other prices on the island lower.

"Aghhhhh, no, no, deflationary spiral.  Things are cheaper!"

What happens in reality is that now both A and B owe money with interest, and they devote their lives to "succeeding" - meaning, A tries to exploit B, and B hopes to get rich fast by screwing A up. One of them succeeds, pays back that old loan with interest, the other one is screwed and bankrupt. Bankers are happy. They were sitting on their asses, and got the money for nothing. More loans at interest are given in the meantime.

Ta, da; welcome to capitalism functioning as it should.


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December 31, 2011, 01:26:53 PM
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You can't have capitalism with fiat money. Capitalism assumes ownership and individual rights, not theft and monopoly control of power through exploitation of the monetary system.

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December 31, 2011, 03:55:39 PM
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As that article about FED pointed out, although central banks can print as much money as they will, it will only come out in loan's form, either a loan for the bank, or a loan for the government. And a loan means that you have to payback it some time, this is still something confusing

For example, on an island with only 2 people and one central bank, the central bank loan out 1 billion euro to A and 1 billion euro to B, both A and B will have some cash to spend, and when the loan matures, they both need to payback 1 billion euro. But the total amount of euro on the island is only 2 billion euro, no matter what they do with their money, they can't payback the loan with extra interest, the interest must come from some where else...



Aye, that's where a sane person goes 'what the buck?'

The tl;dr of it is that additional loans they continue to hand out means there will always be more money in the system to pay the orginal loans. The problem with that is, they need larger and larger loans to cover the interests from the earlier loans. Its an excellent system when used in conjunction with some level of deflation, so less money is needed to pay back the orginal 'value'. This rarely happens though, as the rate of inflation form new money is greater than the ability of the system to deflate. Which I suspect would not be as big of an issue if they stoped giving 0% to large banks and stoped financial institutions from creating junk assets, credit swapping and defaulting without penalty..  Let a citizen try any of those things and they would find themselves behind bars for a long, long time.

cheers

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January 01, 2012, 02:37:11 PM
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You can't have capitalism with fiat money. Capitalism assumes ownership and individual rights, not theft and monopoly control of power through exploitation of the monetary system.

Fiat money itself is not the problem, it's the way it is created ...as Debt.

A non debt fiat system would be much better in my opinion, or perhaps a Hybrid.
Let's say the ruling party decided how much money to print and spend directly to purchase labour etc.
If inflation goes through the roof you know who NOT to vote for next time.

Who voted for the leaders of the central banks?
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January 01, 2012, 04:06:44 PM
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Who voted for the leaders of the central banks?


This a trick question? They are on a 10year(cit?) rotation and appointed by the Board of Directors.

Honestly I can't quote it from memory. You can however read how them and the Board of Governors that controls the fed are appointed from the Federal Reserve site.
Without reading it; President appoints to FR Board of Governors. Board of Governors appoints to Board of Directors for the FR Banks and branches. Board of Directors appoints the 12 FR Bank presidents.
I can't recall what all the term lengths are off hand.

Here we are, this publication should have everything one could care less to know in it.
http://www.federalreserve.gov/pf/pf.htm

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