If Greece's currency colaspes

Hmm, on one hand the Netherlands and the UK could veto Iceland's EU membership, and the Dutch government has repeatedly stated it would do so. Now that may not be a major issue; in my opinion the negotiations are likely to fail anyway, primarily because of the fisheries dispute. But there is another problem that Iceland's government cannot simply ignore - the opinion of the EFTA Surveillance Agency http://www.eftasurv.int/press--publications/press-releases/internal-market/nr/1463 for example, and ultimately the EFTA Court. Guess that the three countries will ultimately have to come to some agreement that more than one party can live with ...

Christian

 

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This is repeated so often that people sometimes begin to believe it. But let's look at the facts. In the case of Social Security, the tax receipts on a cumulative basis have exceeded the disbursements. So SS has actually DECREASED the national debt, not contributed to it.

http://www.nasi.org/research/2010/social-security-finances-findings-2010-trustees-report

Now, if you want to argue that SS will begin to contribute to the national debt a couple of decades in the future, then I will agree and say that something will have to be done. But no part of the $14+ trillion curren federal deficit is due to social security because life to date receipts have exceeded life to date disbursements.

I think it's pretty "disney" to believe that versions of the corruption that has gone on in third world countries has not driven up the debt here. The military industrial complex is the likely cause since there is almost no time anymore when the US isn't deployed to fight someone somewhere, and the bankers are more than happy to fund these conflicts so that various international corporations can feed off of it and send the bill to the American people.

 

But the total amount of FRNs in existence is a bit under $1T. So the vast majority of that $14T GDP, and that $20T floating around offshore, must consist of some form of dollars other than FRNs.

You're confusing "currency" in its abstract sense (the U.S. dollar) with "currency" in the sense of physical money (the FRN). These days, all *paper* U.S. dollars are FRNs; but most U.S. dollars aren't paper. A fairly small fraction of U.S. dollars exist as coins (which, by the way, *are* still obligations of the Treasury, not the Federal Reserve). And as you mentioned above, some $14T worth of U.S. dollars exist in the form of Treasury debt--Treasury bonds, bills, and notes, which of course are also direct obligations of the Treasury, not the Federal Reserve.

But another large source of U.S. dollars is lending by private banks. As others have mentioned in this thread, whenever a bank loans out money deposited by its customers (fractional reserve banking), it's increasing the total number of dollars in existence. In the olden days, those privately-created dollars were backed solely by the private bank that originated the loan. Nowadays, what with FDIC guarantees and such, most (though not all) such dollars do end up being backed by the Treasury in a roundabout way--but again, it's the Treasury that's on the hook for FDIC bailouts, not the Fed. If for some reason there were a large number of failures of FDIC-insured banks, the Treasury (not the Fed) would be obligated to take on additional debt in order to repay the depositors.

So let's review: Paper currency, which only comes in the form of FRNs, is backed by the Fed. Coins are backed by the Treasury. Government bonds are backed by the Treasury. Dollars created through fractional reserve banking are primarily backed by private banks, though many of them are also guaranteed by the Treasury. Overall, the great majority of U.S. dollars--all except those ~$1T that exist as physical paper FRNs--have come into existence entirely independent of the Federal Reserve.

 

You're contradicting yourself here. You say that most Treasury debt is owned by somebody other than the Fed. But you say that if we had no Fed, we'd have no debt. These can't both be right. (Hint: the former is true, so the latter must be false.)

Also, the Fed's full net profit goes to the Treasury. The Fed does pay 6% dividends on its stock to its member banks, but the total value of all such stock is tiny compared to the amount of Treasury debt owned by the Fed. The interest that the Fed earns on its Treasury debt is *far* more than needed to pay all the dividends *and* pay all the Fed's operating expenses (the cost of printing and shipping currency, processing checks, putting out economic reports, paying Bernanke's salary, and all the rest of it), and so quite a lot is left over to be transferred to the Treasury.

In calendar year 2010, for example, the interest earned by the Fed on its holdings of Treasury debt was $76.2B. With small amounts of income from other sources added in, the Fed's total income was $80.9B. Total dividends paid out were only $1.6B, and after accounting for miscellaneous expenses, the annual payment to the Treasury was $78.4B (note that this is actually *larger* than the amount of interest the Treasury paid to the Fed!). The interest numbers were quite a bit smaller just a few years ago, before the Fed started buying up huge quantities of Treasury securities ("quantitative easing" or QE), but the basic fact that the lion's share of the Fed's income ended up as profit transferred to the Treasury still held true.

Finally, let's suppose we eliminated the Fed and replaced all the FRNs with USNs. The great majority of the national debt--all the Treasury securities *not* owned by the Fed--would still exist, unaffected by the change. The Treasury would no longer have to pay interest to the Fed, but the Treasury would no longer receive profit payments from the Fed either; as seen in the figures above, it'd basically be a wash. The costs of printing and shipping currency would be borne by the Treasury directly, instead of being netted out of the Fed's payment to the Treasury: again, no real change. Eliminating the Fed and its FRNs would have essentially zero impact on the Treasury's financial position.

Thus the "tremendous benefit" you claim is entirely illusory. Certainly it'd be wonderful if we had no national debt, but the national debt wasn't created by the Fed and won't vanish if the Fed is eliminated. The only ways to get out from under the national debt are to (a) pay it off, or (b) default on it. And neither is going to be pleasant, but that reality is not the Fed's fault.

 

Let's address these two points because if you can't get past this, the rest doesn't matter.

The only reason the Federal Government needs to go into debt is that it can't create it's own money under a central banking system, so it borrows it. So there is no contradiction. If the Treasury creates its own money, there is no debt. Remember, the debt is the money and the money is the debt.

And, if the Fed was replaced by the Treasury, debt would be repaid in whole or in part with US Notes as it came due instead of rolling it over. This could be streched out over time if necessary to avoid roiling the markets. In any event, the debt would decrease over time until it was extinguished, if desired.

The question I always have is, if it is possible to have debt-free money and no interest payments, why oh why do people argue against it with so much passion? Is being in debt and paying interest on the money in your wallet that desirable?

 

Well, I still can't get past it....

The only reason the government needs to go into debt is that it spends more than it takes in in tax revenue. If that situation were reversed, through spending cuts and/or tax increases, then the government would begin to pay down the debt. If they did that for long enough, they could pay down the debt all the way to zero, even while the Federal Reserve still existed and the FRNs still circulated. (The Fed would have to start holding much larger quantities of assets other than Treasury debt, but this could be done--they were studying this issue seriously back in the late '90s, when the government was running a surplus and projections showed the debt could be paid off in a decade or two.) There is no connection between the existence of the Fed/FRNs, and the existence of the national debt. Either would survive the elimination of the other.

If "the debt is the money and the money is the debt", then why do you keep talking about "debt-free money"? You're still contradicting yourself. As I've been saying all along, USNs are debt too: debt owed by the Treasury to the holders of the USNs. They're interest-free debt, yes--but as I pointed out above, paying interest to yourself is the same as paying no interest at all, so the FRNs are still just as good as the USNs in this regard.

Also, keep in mind that the value of all FRNs in circulation is less than $1T, while the total national debt is around $14T. If we tried to pay off the national debt by using USNs, that'd multiply the amount of paper money in circulation by fifteen. Clearly this is absurd--where's all that paper supposed to go? Currently, many countries and investors like to hold on to Treasury bonds because they pay interest; nobody would want to sit on a large pile of non-interest-bearing USNs. So either the Treasury would have to redeem the extra $14T in USNs (hey, there's that debt right back again!), or else the USNs would rapidly become worthless due to the massive excess of supply. (Note that this isn't exactly inflation--the *dollar* would still retain its value, but a $1 USN would be worth far less than a dollar, possibly zero if it were truly non-redeemable. People would just have to do all their dollar-denominated transactions using checks or electronic payments, since the paper money would have little to no value.)

So to answer your final question: If it were "possible to have debt-free money and no interest payments", I doubt that anybody would argue against it. The only reason you find anyone arguing against it is that it's not possible. "Debt" does not mean what you say it means, and debt does not work as you say it works. The only truly debt-free money would be money with intrinsic value (think gold or silver coins); and that kind of money is no help in paying off the existing national debt, because the Treasury doesn't own enough gold or silver to make much of a dent in $14T.

I'm sorry to have to break this to you, but we can't get out from under the national debt just by seeing the light and standing up against the evil central bankers. Our problem is even worse than that. If you think it'd be difficult to convince our politicians to eliminate the Fed, then wait until you see how hard it is to convince them to do anything that'd *really* solve our debt problem!

 

It's okay for us to disagree. I wish I could explain it better. These ideas aren't mine and with some research you may find other economists who can explain it better.

Regarding (1), the government can go into debt when it spends more than it taxes, or it can create new money. In fact, when the government goes into debt and the Fed purchases the debt, it is creating new money. What folks fail to see is that the creation of the debt is purely voluntary and does not have to be part of the money creation process.

Regarding (2), when someone says it isn't possible, the more likely answer is that they just don't understand how it works. Human flight was impossible for a long time. You are correct that gold is debt free money, and if you take one more step forward in your thinking, you can realize that a US Note is also debt free money with the intrinsic value coming from a combination of government law requiring its acceptance and a requirement to pay all taxes with US Notes.

Regarding (3), sometimes it is very difficult to unlearn something you were taught to believe that happens to be untrue. The folks who teach that it isn't possible are the same ones who benefit from the status quo. A lot of what passes for education is really teaching that the way things are is the only way they can possibly be, and that is a shame. The bankers are preaching that we can't survive without their debt, that only the bankers can create the magic that allows us to exist. As long as people believe them, we can never be free from debt bondage.

This is about the best I can explain it, and I don't want to argue in circles so we'll have to leave things with your unbelief intact. I hope I've helped some readers of this thread to think about new possibilities for escaping the current mess before a crushing debt load destroys the nation. There is no way to salvage the present system, and if new ideas are not entertained, I'm afraid the worst predictions will come true. This would be a tragedy since there are multiple solutions right in front of us if we choose to see them.

 

You just contradicted yourself earlier when you were stating that all currency represents national debt. It's the bankers that issue the currency, not the government. This is a key element to any fiat money system. Obviously you just agreed with what I have previously stated.

This is why I said that central bankers can then create as much currency as they want because there are no restrictions on them. When they screw up because their investments went bad, they then try to get the sovereign government to bail them out with taxes (i.e. gubment assumes the debt) so that bond holders don't lose out. With the exception Iceland, this is what every government in the world has done. Iceland refused to assume the debt of the bankers and this is the one time that bond holders lost.

It's exactly the same in the USA when the banksters got bailed out in 2008, the taxpayers assumed the debt created by the banks. It's the same now with Greece. They created an off the books funding mechanism via a scheme cooked up by Goldman Sachs, it's not soveriegn debt, but now that they can't pay it back, they are looking for the taxpayers to do exactly that. (This situation is wildly more complicated because the Euro is issued by the ECB which is an institution that only exists by treaty with numerous countries.)

 

I haven't known bankers to issue currency for a very long time, since before the Civil War in the US. The Fed is efectively the US government, they were just appointed separately to avoid politicians messing with it. Iceland, like almost all other countries, has national debt. This is debt issued by the government, with the proceeds going to the government. We are not talking private bank debt or insolvency. Citibank does not issue US government currency, and neither did Iceland's private banks.

 

Quoted for truth.

 

A "parable" worth a read for the truth seekers and open minded folks out there...

http://www.silverbearcafe.com/private/guernsey.html

 

Interesting read Cloud, but you have to admit this only works in a small amount. There WAS debt issued for that project, it was the issuance of currency. All nations profit by issuing non interest bearing currency. Think of it this way, how did the currency get retired? By tax payments. Effectively the government issued debt to the people, and paid it back with loss of future tax receipts. This can and is done. However, the limit is how much currency you can put into circulation without driving inflation, a limit we reached 100 years ago or more. After that, debt is the only option for further borrowing.

Your little story was not new or groundbreaking, and I am not sure why you have to be "open minded" to agree with it, since its extremely simplistic, basic stuff. I would have assumed most here already knew this.

Chris

 

They held a funeral for the Euro today.

At least in Europe they understand the problem somewhat. Too bad the USA is a long way from something like this.


[video=youtube;RZq4i2KWdAU]http://www.youtube.com/watch?v=RZq4i2KWdAU[/video]

 

People like Farage have been "burying" the euro since its first day.

Christian

 

The Federal Reserve system couldn't exist without this ability. Here is a very simple example of how this works.

• You have $1000, take it down to your local Federal Reserve bank, Bank A, and deposit it.
• The bank sets aside $100 of this money for reserve requirements and then loans the other $900 to Sally.
• Sally takes the $900 over to Bank B and deposits it.
• Bank B sets aside $90 and and loans the other $810 to John
• John takes the $810 back to Bank A and deposits it.
• Bank A sets aside $81 and loans out $729 to Jane

And so forth and so on. So just from your $1000 deposit in this simple example, these two banks created $2,439, put it into circulation and are earning interest on this $2,439 which they created out of thin air. Now suppose you come back and take your $1000 out of this bank. What happens? They don't go and ask for that loaned money to be returned. Instead the bank will simply go to the Federal Reserve and ask for them to cover the $1000. They will automatically do this for any bank in good standing. Since they can print money at will, there is no issue. Bank A will have to pay the Federal Reserve interest. However that interest is current at the big sum of 0.25%. (in some cases it's 0%)

Now take this example and multiply it by all the deposits out there. This is how the Banks create money and which they do every day. This is but one example. They have in fact taken it one step further and simply eliminated the requirement for you to even make the deposit. Why bother with that, when they can get the money for free from the Federal Reserve?

In the days before the Federal Reserve, back when the US issued currency their hands were much more tied.

 

Yeah, I understand fractional reserve banking quite well. This can be done with any central bank or bank controlling entity, it has nothing to do with issuing currency or national debt.

 

I never said that banks issue national debt. In fact I've said the federal reserve can create dollars without it being covered by Treasury debt. This is one of the ways it is done. In terms of creating currency, each of those people in my example can take those loans in federal reserve dollar currency. What about this isn't creating currency?

 

The open mindedness comes into play for those who can see how the lessons apply to today. It must not be simplistic since you have been arguing that it isn't possible. I gave you a real life example which could have been expanded to include the issuance of currency by both Lincoln and Kennedy. The currency was not debt and although it was retired, it didn't have to be if taxes were set at a level to retire only the amount of newly created currency [i.e., a balanced budget]. Now you can call it debt just to poison the idea, but it doesn't meet any of the requirements that people normally associate with debt. There was no lender, no borrower, no interest rate, and no scheduled repayment. Of course there is a limit to how much of this can be done, just as there is a limit to deficit spending today, so that is irrlevant. That's why there is taxation. What is relevant is the observation, denined by many folks in this forum, that one of the powers of government is to create money and put it into circulation. Only the bankers insist that money is not money unless it is offset by an equal amount of debt upon which they can collect a perpetual stream of interest.

The defenders of central banking should consider the fact that they are defending a system that is impoverishing them, and the time is growing very short as the compounding of debt has now reached the level where government deficits START at $1trillion per year. I've seen estimates in the business media that in a few years it will be $5trillion per year. Since you don't have a solution, maybe it's time to consider some alternatives.

 

The debt is the money, and the money is the debt. If money is being created, somebody's going into debt. The only way around this, again, is to use something like gold--then you can get "new" money by digging it out of the ground, with no need to create it outright.

It's been tried. Much colonial currency operated this way, in the 1700s. If the currency could be used to pay taxes, then people accepted enough of it to cover the taxes they'd have to pay in the near future. Once the amount in circulation got much higher than the next year's tax bill, the currency rapidly became worthless--it was still good for paying taxes, but it wasn't good for anything else. Laws mandating its acceptance didn't have much effect, because more people were willing to ignore these laws than could feasibly be punished for said crime. Repeated experience has thus demonstrated that intrinsic value cannot be created by legislation.

In order to have value, created money has to be backed by something: perhaps gold or silver, perhaps just a promise of redemption (i.e., a debt). For as long as USNs were in circulation, they were backed by the Treasury's promise to pay: they were debt. Absent that promise, they'd depreciate as quickly as the colonial notes did.

As for the first sentence: Right back at you.

As for the rest, certainly we can survive, and thrive, without debt. I'd like that very much. But we can't get to a debt-free world by magic. First, we'll have to either (a) pay off the existing debt, or (b) repudiate the existing debt. And both will have such heavy consequences as to make the "debt bondage" look good in comparison, at least to a lot of folks. This is sad, this is unfortunate, but it's a reality we have to face. Myself I'd still rather eliminate the debt, but it's nothing like the no-brainer choice you make it out to be.

 

It's been said that slavery is the natural condition of man, and that freedom is what he fears most. I think we've proved it. Debt bondage it will be.

Good luck.