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Monday, March 30, 2020

How money is created

Earlier today, I banned the commenter "map" for his ignorant attempt to "correct" those who actually understand how money is created. And on that note, if, at this point, you are going to try to argue with me on core economic concepts, you simply will not be permitted to comment here. The fact that I have correctly predicted two out of the last two serious economic crises - and done so in a timely manner - is sufficient justification for not putting up with idiots opining in ignorance on the basis of their outdated college textbooks. I am perfectly familiar with their beliefs about everything from comparative advantage to the money supply to the woefully inaccurate belief that banks keep 10 percent of their deposits in reserve.

In any event, back in 2014, the Bank of England helpfully explained how modern money is actually created in an article entitled Money Creation in the Modern Economy (pdf). If you don't understand that money is debt, read the whole thing. And if you still don't understand that after reading the article, read it again.
One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.  In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.... Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach....

Lending creates deposits — broad money determination at the aggregate level

As explained in ‘Money in the modern economy:  an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy.

Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans.  When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes.  Instead, it credits their bank account with a bank deposit of the size of the mortgage.  At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card.  Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If the consumer were then to pay their credit car bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.

Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.
Now, perhaps you will understand why I am a deflationista. And so are you, if you believe that any of the current outstanding debt will be written off or otherwise go unpaid, even if you don't realize that you are. Debt forgiveness and bankruptcy-related debt write-offs are the literal destruction of money, and since deflation is a reduction in the money supply, any reduction in the amount of debt must necessarily be deflationary.

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149 Comments:

Blogger Ska_Boss March 30, 2020 8:11 AM  

Forget what the money changers tell you, just follow the logic.

Blogger Sillon March 30, 2020 8:20 AM  

I've always loved the term "Imaginary millions", money made in the imagination of the usurers.

Blogger Rahul S March 30, 2020 8:24 AM  

Won't there be inflation in the stock market after all of this Corona-Chan stuff is taken care of?

From 2008-Present, there was deflation across commodities....inflation in the stock market, cost of student tuition, and a few other gooods.

Blogger Mathias March 30, 2020 8:27 AM  

I find it terribly interesting that the interest that needs to be paid back on these created deposits are ever so conveniently left out of that pdf's analysis... Does anyone else see even a single colored box therein labeled "interest"? Is the word even mentioned once in the entirety of the document at all?

Blogger qualitycontrol March 30, 2020 8:29 AM  

I don't understand the last part. How does debt forgiveness cause deflation? As I understand it, the money created by taking a loan stays in the system after the creditor forgives the debt. This should cement the inflation created by going into debt and not cause deflation the way paying back a loan does.

Blogger Newscaper312 March 30, 2020 8:30 AM  

Ouch.
Makes me really appreciate an NCIS Gibbs-slap on back of the head here a couple times.
Please never let me stomp on my dick so hard, publicly and repeatedly.

Blogger Sargent.matrim March 30, 2020 8:30 AM  

Thanks for this source. Sums it up well.

Blogger worldskipper March 30, 2020 8:35 AM  

Thanks VOX!!!!!

My engineer brain could never grasp fiat money! This might explain why I got a D in Econ in college, it was all BS!

Thanks for giving me some good reading to get up to speed.

Blogger Iamblichus March 30, 2020 8:36 AM  

Best place for economics

Vox do you have any more thoughts on coronu as more data comes from other countries?

Blogger Bernard Korzeniewicz March 30, 2020 8:38 AM  

VD, can you recommend any work on buying power of a money unit?

Blogger Zaklog the Great March 30, 2020 8:42 AM  

Now I wonder what you think of something I said a while ago elsewhere, because this appears to make it even truer than I knew then: Functionally, our economy is usury.

Blogger Lazarus March 30, 2020 8:44 AM  

What does paying interest do? When you pay off the principal, that is money destruction. When you pay off interest, is that even more deflationary?

Blogger MadFrank March 30, 2020 8:45 AM  

Do you think this will play similarly like the Japan's Bubble Economy of the 1980? If we are expecting deflation, is the correct action in loading on long term bond?

Blogger RobertDWood March 30, 2020 8:49 AM  

Is there any good reading on deflation in a macro numbers while there is experienced inflation in the micro?

The 2008 crash was deflationary (as vox predicted) but the cost of consumer goods (what I buy) seems to have gone up in price or down in quality for the same money.

Blogger thechortling March 30, 2020 8:50 AM  

Any thoughts on Paul Grignon's Money as Debt animated series? Stumbled on this before the smaller great meltdown in 2008 (first one was released on Youtube in 2006) .

Money as Debt II / Revised version

Blogger Johnny March 30, 2020 8:51 AM  

Deflation is just so 1930's. The way things are run now and conceptually framing it in terms of debt forgiveness, covert forgiveness through inflation is a much more likely outcome. Tip of the iceberg and not enough to trigger it by itself, is that two trillion dollar spending bill they just passed.

The Germans you might say were ahead of the times in the twenties. You know, wheelbarrows full of money but it wasn't worth much. And the recent USSR or Russia blow up, and Venezuela, and so on. All inflationary.

Blogger Dole March 30, 2020 8:54 AM  

Vox Day - Predicted two out of two of the major economic crises.
Peter Schiff - Predicted 100 out of the last two major economic crises.
Paul Krugman - Was not able to predict the time of day correctly once during the day, when given access to a clock.

But Vox is incorrect, because I am true king.

Blogger Quicksilver March 30, 2020 8:58 AM  

Very useful, thanks.

Blogger VD March 30, 2020 9:04 AM  

How does debt forgiveness cause deflation? As I understand it, the money created by taking a loan stays in the system after the creditor forgives the debt. This should cement the inflation created by going into debt and not cause deflation the way paying back a loan does.

Oh, FFS, how can you possibly not grasp this? THE MONEY DISAPPEARS! When the debt is created, the money is created. When the debt is written off, the money vanishes.

Are you similarly mystified as to why there isn't any water in the glass after you empty it into the sink?

Blogger swiftfoxmark2 March 30, 2020 9:10 AM  

I love it when Gammas challenge Vox on economics, ignoring both his IQ and his college major.

Sorry kiddos, but when it comes to economics, I'm going to trust the guy who knows more about than I do, is smarter than me, and also is able to correlate events better than I am able to.

If you show some humility and admit that you possibly don't know everything about economics, you might learn something. Hell, even Vox listens and reads up on what others think about this subject from time to time.

Blogger Mr.MantraMan March 30, 2020 9:12 AM  

I keep a small operating loan out on my mini-farm so as to get a heads up on bank activity. But then again I'm never right I thought in 2009 that farm land would be more in line with my cash position I was way, way, way off, the spigots got opened instead.

Blogger Azure Amaranthine March 30, 2020 9:14 AM  

I can understand his confusion as to where money goes when written off. The human mind isn't built to easily think in negative values. Even though I know exactly what happens to it, trying to think of it in spatial concepts, for instance, leads to confusion.

Welcome to upside down world!

Blogger Rahul S March 30, 2020 9:26 AM  

My wife and I sell collectible items (like graded baseball/football/bball cards) on the side....I've noticed thus far, that prices haven't been going down....they've been stable. I thought they would have gone lower. I wonder if the low interest rates policy puts a bid under that market.

Blogger Mathias March 30, 2020 9:26 AM  

Lazarus,

Only the principal is deposited into the account, but both the principal and interest accrued are owed. Imagine 10 people getting loans for 10k each, and owing back each 2k in interest beyond that. A total of 100k exists in this little example economy, but a total of 120k in obligations exists. When the notes come due, where does the extra 20k come from?

Blogger thechortling March 30, 2020 9:26 AM  

@17 Dole wrote:Paul Krugman - Was not able to predict the time of day correctly once during the day, when given access to a clock.

have you noticed how he's been super-quiet and even more gamma-timid Krugman has been since "he was working with the FBI regarding child p*rn which was PLANTED on his computer"

Blogger Unknown March 30, 2020 9:26 AM  

The "economy" is usury and that's all it is. All "get America back to work" means, is "Oh Gawd, don't let the payments stop!!!"

"Rescuing" the economy with more debt is foolish. I'm a very long in the tooth gold bug (sorry), but sound money does offer a way out after the debts are cancelled by executive order. If FDR could cancel gold contracts in 1933, DJT can cancel FRN contracts in 2020.

Blogger peacefulposter March 30, 2020 9:31 AM  

That was a most excellent paper by the BOE.

If I understand correctly, the vast majority of the money supply is in the form of bank deposits which are generated by lending. And as VD is says, you can't print more borrowers.

Blogger Richard Rahl March 30, 2020 9:38 AM  

Thanks Vox. This makes it more clear to me and now I see why you said something to the effect of, "$2 Trillion is a drop in the bucket." The amount of debt in America is staggering. Save some cash if you can.

Blogger SDaly March 30, 2020 9:42 AM  

I went on Kitco's site to check the price of gold, but all gold products are out of stock (except for 100ox delivery for $166,341 and 400 oz delivery for $664,764. All platinum is out of stock and the only silver in stock are bizarre commemorative coins that are priced extraordinarily high. I assume it is the same for other online dealers.

Blogger MDN March 30, 2020 9:45 AM  

Thank you for posting this Vox.

So if I am understanding this correctly, if the US Gov cancels all student loan debt (lets assume $1T) and then prints $1T to give out as TrumpBux, we should expect no net overall inflation?

Blogger Stilicho March 30, 2020 9:45 AM  

"Interest that needs to be paid back on these created deposits are ever so conveniently left out of that pdf's analysis"

Sure. And that interest creates new debt as it comes due. Banksters thought they created the perpetual motion money machine. Debt money creates more debt money by its very nature. Until the debts are not honored. Debt money deflation means the free ride is over for banksters. They will do everything in their power to prevent deflation. Right now, everywhere two or more banksters gather, they are trying to figure out how to print more borrowers. Some will embrace zero or negative lending rates just to keep the carousel spinning a bit longer in the hopes of getting out themselves before the crash. If any of those guys are reading, sign me up for a few billion, non-recourse, naturally.

Blogger Silent Draco March 30, 2020 9:47 AM  

Makes more sense now. An analogy from high-energy physics is gamma or cosmic radiation decaying under certain conditions into a particle, anti-particle, and shower of little stuff. Your can close down asset and debt, but there's a price. The "little stuff" gets lost into the background, like points charged or the litany of banking and organization fees. The bankers always extract their pound of flesh.

Blogger VD March 30, 2020 9:49 AM  

So if I am understanding this correctly, if the US Gov cancels all student loan debt (lets assume $1T) and then prints $1T to give out as TrumpBux, we should expect no net overall inflation?

More or less. But since some of the TrumpBux will be saved, whereas the student loan debt is repackaged into additional debt packages, the exchange would be somewhat deflationary.

Blogger Mathias March 30, 2020 9:53 AM  

Stilicho,

Of course, this is what I'm getting at, but let's spell out the nature of the free ride: Bankers make their cut on the default, when real property is seized over fictitious obligations.

It's a game of musical chairs, except somebody loses their collateral/livelyhood when the music stops. It's not simply usury, it's usury with spiky glowing green-gold hair and serious social issues.

Blogger Bearable Pain March 30, 2020 9:53 AM  

This is why I am here. Thank you Vox.

Blogger Oswald March 30, 2020 9:53 AM  

I'm not burdened with a background in economics, so think I see the truth of it. I assume they can get rid of loan defaults by making new loans to pay off the defaulting loans. A game of shells and a very small pea.

Blogger Scuzzaman March 30, 2020 9:57 AM  

And as VD says, you can't print more borrowers.

The Obama Administration disagreed: Theranos, Solyndra, residential liar loans, etc.

But like the one-way ratchet Stilicho mentions above, eventually the machine breaks spectacularly.

Blogger Bobiojimbo March 30, 2020 10:03 AM  

"Debt forgiveness and bankruptcy-related debt write-offs are the literal destruction of money, and since deflation is a reduction in the money supply, any reduction in the amount of debt must necessarily be deflationary."

This summation helped. Thank you. I don't think I fully get it, but thank you for sharing.

Blogger MDN March 30, 2020 10:05 AM  

Thanks Vox.

One more question: Is there any distinction to be made between debt that is repaid versus debt that is forgiven in terms of deflation? For instance, if I borrow $100 from the bank, the bank creates that money and I now have $100 new dollars. If I repay the loan, that money is ‘destroyed’, but what if the government comes in and forces the bank to forgive the loan? Would that still be considered deflationary since I would still presumably have the $100?

Blogger scrOOs March 30, 2020 10:07 AM  

Sincere question from an ignoramus: Then what is wealth? It would seem that the “Wealthy” would just have more of nothing.

Blogger VD March 30, 2020 10:09 AM  

what if the government comes in and forces the bank to forgive the loan? Would that still be considered deflationary since I would still presumably have the $100?

Yes. Why do you presume you have the $100? When you borrow money, they usually don't give you cash. Normally, you use the new money to buy existing goods. If the government forces the write-off of the loan, you still have the car, or the college degree, but the money that paid for it is now gone.

Hence deflationary.

Blogger qualitycontrol March 30, 2020 10:15 AM  

@19. VD
Thanks for pointing it out. I simply didn't understand it.

Blogger MDN March 30, 2020 10:18 AM  

Hence deflationary.

Ah got it, thanks. Could you make an argument that let's say I borrow $100K to get a college degree and that debt gets forcibly written off, wouldn't the $100K in cash still be on the college's balance sheet? Or am I stupid an missing something?

Blogger Ominous Cowherd March 30, 2020 10:21 AM  

peacefulposter wrote:And as VD is says, you can't print more borrowers.
Fortunately, the US Treasury stands ready to borrow infinitely.
Bernard Korzeniewicz wrote:VD, can you recommend any work on buying power of a money unit?
Currency is just another commodity. It's the unit of account, so it looks special, but it's just another commodity. Supply and demand work together on currency same as for every commodity.

Blogger Salt March 30, 2020 10:28 AM  

@43 You're missing something. The 100K paid for the degree exists, but the 100K loan on the lenders books disappears.

Blogger Joe Smith March 30, 2020 10:29 AM  

@Johnny All that actually has to happen, as Vox notes, is that the debts go otherwise unpaid. Your analysis assumes people will keep valuing electronic and physical money 1:1. Wheelbarrows full of money meant there was that much actual, physical, printed money out there. Unless you think they will literally print $10T and dump it into the money supply, people will just stop taking your Visa card as payment eventually.

Blogger Dan in Georgia March 30, 2020 10:31 AM  

thechortling wrote:@17 Dole wrote:Paul Krugman - Was not able to predict the time of day correctly once during the day, when given access to a clock.

have you noticed how he's been super-quiet and even more gamma-timid Krugman has been since "he was working with the FBI regarding child p*rn which was PLANTED on his computer"


It's like the dog that didn't bark. I'd totally forgotten about him. Looks like he has much bigger problems now.

Blogger VD March 30, 2020 10:34 AM  

Or am I stupid an missing something?

Yes. What cash? You're confusing a bookkeeping entry with printed notes.

Blogger John Rockwell March 30, 2020 10:35 AM  

Lazarus wrote:What does paying interest do? When you pay off the principal, that is money destruction. When you pay off interest, is that even more deflationary?

If all money is debt. The money to pay off the "interest" literally cannot exist.

Blogger VD March 30, 2020 10:36 AM  

Then what is wealth?

In the material objective sense, legal claims to physical property. In the philosophical sense, the answer is intrinsically subjective.

Blogger Stilicho March 30, 2020 10:38 AM  

@MDN there is no cash in the college account. It is just another debt (bank owes college 100k). If bank doesn't get paid 100k because student loan isn't paid, it cannot pay college).

Blogger Doktor Jeep March 30, 2020 10:38 AM  

All I know is, when we demand that the gov not give everybody checks, with money created out of thin air, they actually attempt to comply or water the idea down.
Then months later we'll see in the news: "Today (insert billions here) was given to (insert any shithole country here) to fund (insert any globohomo program that nobody gave a rats ass about here)".
Trillions in debt is impossible to pay back. And since there's no stopping it, we might as well demand it go to Americans, be it debt jubilee, student loan cancellation, or NEETbucks. I don't care any more. At least we get fiat notes to turn into real assets before the debt-usury system goes tango uniform.
Oh and I used to be one of those "we need to go back to gold!" idiots. There is not enough gold in the Galaxy to cover those trillions. Something has to break, but we don't go winking out of existence just because bankers get upset.

Blogger Stilicho March 30, 2020 10:39 AM  

@MDN it isn"t an accounting issue which is what you are thinking of.

Blogger BD March 30, 2020 10:40 AM  

Money is just a tangible way to trade time. As such, inflation is just a really fancy way of saying "your time is now worth a little bit less", but that wouldn't go over well with people.

Blogger Tars Tarkas March 30, 2020 10:49 AM  

I was watching some episodes of a show the National Association of Manufacturers used to produce in the 50s in America called "Industry on Parade." It's a kind of how it's made type thing. The episodes I was watching from 1951 or 52 included PSAs about the need to fight inflation and the need to produce and invest. They were saying how you needed to save money to finance the expansion of machines to increase production and how as a saver, you were effectively an investor in the country through the banks. They also were urging people not to buy anything on credit as that would run up inflation even further. The NAM was actually endorsing the raising of taxes for a pay as you go system, again to avoid inflation.

All I could think was my how things have changed. Nobody is ever asked to save any money and certainly not to avoid buying consumer goods on credit because of how inflationary it is.
We have been on a steep inflationary curve my entire life.
Putting aside the fact that the government lies about inflation in the last 12 years, if money creation and total supply has been going down since the great recession, why have prices continued to go up? Why have we been seeing shrinkflation? Other than electronics, I can't really think of anything that is cheaper today than it was in 2008. Even the price of gold has gone up significantly since 2008.

Blogger Iamblichus March 30, 2020 10:52 AM  

Haha

Blogger pyrrhus March 30, 2020 10:54 AM  

Money is (1) a store of value that enables workers to save for retirement or adverse events, and (2) a way of facilitating transactions that is more efficient than barter...In Japan, where the emperors/rulers would periodically devalue the coinage by 90%, the common people stopped accepting Japanese coins and used Chinese coins or bags of rice instead....

Blogger Azimus March 30, 2020 10:57 AM  

If creating debt is creating money, and repaying debt is destroying money, does this mean that the interest payments made on the debt are a net creation of money over time? And is that a source of inflation then?

Blogger pyrrhus March 30, 2020 10:57 AM  

O/T Weekly US death toll drops 7-10,000 during c-19 outbreak..https://www.zerohedge.com/health/covid-19-saving-lives..IMO far less gang banging and fewer auto accidents are to blame....

Blogger 1LLoyd March 30, 2020 10:58 AM  

Thank you for this post and the explanations, and those of various commenters. My brain hasn't felt this scrambled since Econ 101, when the teacher explained that America's debt was to the people, so removing it wouldn't make any difference. But I am getting a better grasp of things.

I have been reading a book that argues that one effect of debt forgiveness is to prevent de facto slavery to the debt holders; and allows the people to keep the fruits of their labor. I am adding this to the deflationary frame.

Oh, my brain.

Blogger Sicilian Switchblade March 30, 2020 10:59 AM  

(Wealth) would be whatever people perceive as having intrinsic value. Even gold up until the electronics age was only a perceived value for the most part. If it weren't for its use in electronics I doubt it's value would be as high as it is currently.

My personal opinion on earthly wealth is as follows.

It is anything that can be measured in acres, calories, or round counts. In other words if you can't live on/off/in it, eat it, or defend yourself with it, you can probably write it off as "perceived wealth."

I'm sure someone more versed in econ and more intelligent than me can give additional clarity or facts on the matter.

Blogger Bobway March 30, 2020 11:02 AM  

"How does debt forgiveness cause deflation?"

Because that loaned out money was listed in the bank's books still.

Once someone defaults it isn't anymore and they have to update the books to reflect that.

Example: You're a bank. Depositors give you 1,000,000 fiat bux. Your reserve retirement is 10%. You loan out 900,000 fiat bux and have 100,000 in reserve. I convinced you to loan me 100k of that 900k you lent out to various people. Then I tell you "oh, I spent all that on hookers and blow. Plus, I'm going to live as a vagrant in the forest now. I default, LOL."

Now you're on the hook for 1,000,000 in deposits still, but between your reserve and the outstanding loans you've made all you have is 900k.

Now instead of keeping the interest payments people are giving you as profit or loaning it out you have to withdraw it from circulation and use it to cover the bad loan you gave to me.

Blogger crescent wrench March 30, 2020 11:03 AM  

Just a side note that governments can prop up moribund systems you would think "unsustainable" for obscene amounts of time.

The soviet regime's rigidly-stilted, famine-inducing command economy produced piles of rotting boots for 3/4 of a century before finally giving up the ghost to mass preference cascade, and had that cascade not happened, it might have been propped up a half-century longer.

The problem I'm seeing is, doddering as western systems are from systemic corruption, the competing ones on the geopolitical stage are worse, so the only way this happens is through wide-spread rejection of "law and order" on the home-front.

Corona has been a black swan for trust in media for sure, whether that sticks with other institutions is an open question.

Blogger ChicagoRodent March 30, 2020 11:05 AM  

I assume they can get rid of loan defaults by making new loans to pay off the defaulting loans. A game of shells and a very small pea.

You missed the escalation aspect. Each round requires larger volume new loans. It's a chief contributor why we have had so many bubbles in our lifetimes.

Blogger peacefulposter March 30, 2020 11:08 AM  

@@44 cowherd - Fortunately, the US Treasury stands ready to borrow infinitely.

Indeed. Federal govt deficit spending truly is "money printing" in the sense that it adds financial assets directly into the private sector.

Whether they would ever spend enough to counteract the massive deflationary contraction in private debt is another question.

Blogger Brick Hardslab March 30, 2020 11:14 AM  

Why forgive any debt? They've already established that debt can be made non dischargable. Extend that to all debt. They will own most folks until they die.

Is there a downside to bankers for that?

Blogger KPKinSunnyPhiladelphia March 30, 2020 11:25 AM  

Simple examples are often the most helpful.

I borrow $500,000 to open a restaurant. The bank has created that money; it never existed until I borrowed it. I use that money to buy fixed hard assets -- tables, chairs, dishes, signage -- and for working capital. I think I own that business, but I don't. The bank owns it, or a large portion of it, depending how much money I personally put into it, or pledged against the value of my own assets, like my house, say.

This happens all the time.

Things move along, business is good -- customers are giving me enough cash (again, also money that has been created) which I use to pay employees, suppliers, lessors, with some cash for me.

Then a shock comes. Let's call it Coronovirus. No one shows up anymore to give me their created money so I can give some of that money in turn to OTHER people. Suppliers and lessors no longer get money from me. And the bank no longer gets any money from me to "retire" (i.e, destroy) their loan.

I declare bankruptcy.

EVERYBODY'S asset value deflates in the face of declining or absent demand. The suppliers trucks and warehouses become less valuable. The building I rent becomes less valuable to that landlord. The chairs, tables, barstools I bought become less valuable. And whatever cash I put into the business is GONE, never to return. And, finally, the employees themselves are less valuable.

DEFLATION.

Whenever anybody says that in some enterprise they "lost" money, that's a misnomer. You didn't "lose" that money like you lost your keys, which are still around somewhere but you don't know where exactly.

No, you have "destroyed" that money.

Blogger justaguy March 30, 2020 11:27 AM  

The finance system of banking/commercial paper/debt and risk swapping has gotten so complex and intertwined that I cannot imagine anyone accurately knowing how it will react. The complexity and sheer size makes me think it might be fragile, but it has so many people all trying to work their little portion of it-- that I HOPE-- it might be a bit Hyakean, and all the leeches trying to suck more from their part keep the parts working, much like a any adaptable system motivated by people.

However, it has crapped out before, and some people stand to gain by it crapping out so they will/might be working for it to default-- I really cannot tell what is inside of the constantly changing Black Box.

Blogger John Regan March 30, 2020 11:28 AM  

I know this is kind of horrifying, and for the most part I don't like even thinking about it, but one of the other important things I try to understand about our "monetary system" is loan amortization tables. Interest on loans is front loaded, and the "money" to pay interest - unlike principal - is never created. It must be gotten from other money that was created as principal. The idea is to generate a scramble of activity among borrowers to get money from each other to pay interest to lenders. Supposedly, applying game theory, this contest produces healthy economic activity and a peaceful and productive society in economic "equilibrium".

That's the spin. But the counter-spin is that it's a terrible way to look at human beings, like they need to be treated like dogs in a race chasing a fake rabbit.

And the rabbit is indeed fake, it's every bit as bad as that, because at the bottom of it all is a "promise" that is entirely illusory and dishonest.

Blogger Ominous Cowherd March 30, 2020 11:29 AM  

scrOOs wrote:Sincere question from an ignoramus: Then what is wealth?
Wealth isn't currency, nor even money; wealth is the stuff money can buy. When the banks create money from nothing, they get to trade fake wealth for real wealth. The bank makes a ledger entry and winds up owning your house or your business.

Blogger Seth S March 30, 2020 11:32 AM  

But wont the fed just buy all the bad debts with fresh digital money?

Blogger Shane Bradman March 30, 2020 11:37 AM  

Cue the boomers that start whining about debt forgiveness being unfair because they paid for college and a house by the time they were 23.

Modern finance is dealing with literal make believe money. GDP calculation is proof of this because debt contributes to GDP. And even worse is that economists are unable to distinguish between debt and equity as sources of financing, when the layman can tell you straight away how they are different.

Blogger John Regan March 30, 2020 11:38 AM  

@55 You might want to go down this rabbit hole if you think it was a different monetary world in the 1950's.

Blogger Jeff March 30, 2020 11:40 AM  

So do we need a Jubilee Year? Wipe all the books clean. Everyone gets a do over?

Blogger Nathan Hornok March 30, 2020 11:42 AM  

I thought the process of money creation through bank loans, as explained in this article, was what is called the "money multiplier" effect. I now learned that "money multiplier" refers to something about central banks and commercial bank deposit ratios. But it seems link this process (money creation through debt creation) should have it's own term that explains what is happening, and that term should be commonly used since it is by far the prevailing process involved in money creation. Maybe it should be called the "big money multiplier," while the central bank process should be called the "small money multiplier."

My question is what effect do central banks have on this?

I'm guessing that when people as a whole have reached their saturation point with how much debt they are willing to take on (determined by interest rates that banks are willing to give on ever more risky loans), this where the central bank puts a finger on the scale so that banks give risky loans at interest rates lower than they should. In effect, the central bank "small money multiplier" is like a hing upon which the private bank "big money multiplier" can swing ever further into more debt creation. Keep the usury game going!

If my understanding of all this is totally off, forgive me. I'm trying to figure it out.

Blogger AbnEng March 30, 2020 11:48 AM  

Vox: Just cuz you stole it doesn't mean it isn't wealth, as long as you can keep it. If you keep it long enough, it eventually becomes a legal claim, e.g. William the Bastard.

Blogger Cis Scum March 30, 2020 11:48 AM  

The BOE's statement is broadly correct but they've oversimplified to such an extent that the mechanics they describe are wrong.

Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

No. When the mortagage is made actual cash is transferred. Here's how it works:

A deposits $1m with B (the bank)

B loans that same $1m to C

B now owns an asset, the unencumbered loan to C

B uses the loan to C as collateral to borrow $1m on the interbank markets

B now has an encumbered loan to C plus $1m in cash which it loans to D

B now has an encumbered loan to C and an unencumbered loan to D

B uses the unencumbered loan to D as collateral to raise $1m on the interbank markets

And so on potentially ad infinitum. The reserve requirements are there to stop banks from stretching the chain too far. They are not about preventing bank runs. That concept has been obsolete since 1932 when central banks set up deposit insurance. The reserves are there to plug bad loans in order to prevent the chain from unwinding in a disorderly manner.

Having said this the BOE is correct, banks do create money. They do so via interest payments on the mountain of debt they build off of a single deposit. They do not create money as described, by materializing it in a borrower's account. That's accounting fraud.

I think the reason they said so is because providing the actual technical explanation would have been too confusing to most people so they oversimplified and went too far. But since their point is that banks create money, and since they in fact do, it's no harm no foul.

Blogger Roddie Piper March 30, 2020 11:49 AM  

Loans "create money" in the sense that they allow the same dollar to occupy multiple bank accounts at the same time. E.g. I deposit money in the bank, the bank lends some of it to Vox, and instead of $100 in my pocket, there's now $100 in my bank account and $80 in Vox's.

The Fed "destroys debt" by paying off the creditor with freshly printed money and not trying very hard to make the debtor pay it back.

This makes bogus loans extremely lucrative. I sell Vox a bracelet for $1 million, payable over the next twenty years. Then I sell this loan to the Fed for half a million cash. Instead of paying it off, Vox defaults and gives them the bracelet, which actually cost $9.99 at Walmart.

Blogger Oswald March 30, 2020 12:03 PM  

64. Got it. Each successive loan has to be bigger. The money though is worthless in real terms and only has value as long as we contend to pretend it does. Is that right?

Blogger Jack Amok March 30, 2020 12:06 PM  

I have a fair amount of sympathy for people getting confused about economics, money creates an indirection, sort of like a void pointer in C/C++, that's just inherently difficult for people to keep straight. But that just means it's important to be open to correction. No point arguing with the compiler, or the Null Pointer Exception error.

let's say I borrow $100K to get a college degree and that debt gets forcibly written off, wouldn't the $100K in cash still be on the college's balance sheet? Or am I stupid an missing something?

Using Vox's glass-emptied-into-the-sink metaphor, maybe this will help. You borrow $100k in a student loan, the bank pours (creates) $100k of water into your glass. You pour (transfer) it into the college's glass. From there, that water gets poured into many other glasses (salaries, utilities, construction, maintenance, etc.). Eventually all that money, in drips and drabs, makes it into the glass of someone who owes on their own loan, and they pour it back into the sink.

Meanwhile, elsewhere, someone takes out a loan and a bank pours (creates) water into their glass. That water makes it's way through the economy to your employer who pours some into your glass as your salary. You use it to pay back your loan, pouring it into the sink.

There are millions of glasses pouring water between themselves, and at any given moment, some of those glasses are getting filled up by banks issuing loans, and some (maybe most) are pouring money back into the sink as they pay loans off. In theory, it could probably be a system in balance, except for the interest payments.

As a couple of people have hinted at, if you pay a loan off with interest, you destroyed more money paying off the loan than you created when you took it out. Where did that come from? It had to be fabricated itself. The system - with interest - requires perpetual growth because every unforgiven loan destroyed more money than it created. Therefore loans have to be created at an ever-increasing rate to keep the system from crashing.

That's why the banksters appear so stupid as they destroy the host they rely on - they can't help it, their system requires pulling in more and more matter - more sectors into debt, more third worlders in to take out loans.

Blogger Ska_Boss March 30, 2020 12:12 PM  

@Azimus
No, it's just a transfer of wealth (as defined above by VD) from the borrower to the creditor.

Blogger Akulkis March 30, 2020 12:17 PM  

"Please never let me stomp on my dick so hard, publicly and repeatedly."

He was warned, in the form of correcting his error-laden posts, by several of us, totalling a half-dozen times.

Blogger LES March 30, 2020 12:18 PM  

What is likely to happen when people have no savings and no income?
I find a dystopian nightmare hard to believe.

Blogger RA March 30, 2020 12:22 PM  

@57 The Japanese stopped accepting paper money for 600 years as a result of those emperors who insisted on screwing them over. If anyone remembers the James Clavell novel Shogun, the koku of rice was the Japanese monetary unit described in the novel and that really was the case, not just for that period but for centuries around that time.

A few more remarks:
Martin Armstrong has said the ultimate backing of currency is not tangible resources, but the productive capacity of the people. Think of Great Britain, that small island nation with few resources of its own. Then the think of the empire they built. Think of Venezuela, the largest oil reserves in the western hemisphere plus lots of gold miners, but without the people or the culture to take advantage of that. The US had both the resources and the productive capacity of the people. Remains to be seen how much longer that is the case given the sticky fingers of the kleptocrat class. I think this ties into what VD has said about the kind of people who compose a nation.

Finally, for those who still don't get it: start with this: Every dang last dollar of debt must be repaid. If not by the borrower, then by the lender. Either way, the money is gone. If the lender has to write it off, it can no longer be counted an asset on its books. The borrower doesn't have it, otherwise the lender could have got repaid. The money is gone. If enough loans have to be written off, that means there are knock on effects of those writeoffs on a bank's balance sheet and that can't be ignored for long.

The bankers love inflation. But it's a tax on the rest of us. Not only in the diminished purchasing power of the dollars (or other monetary units) we get, but also in that the interest we pay has to come out of our real economic output. Either way, it together with higher taxes and higher healthcare expense is ultimately deflationary because it reduces the discretionary funds available to the real economy. Ratchet that higher and then more borrowers can't make it, those lenders will have to eat it. And so on.

Another way to look at it: Denninger wrote about the financialization of the economy: look at student loans: the bankers figured out what the utility of a college degree was worth and then conspired to help themselves to that equity. By the same token, the bankers did that to real estate and they helped Big Medicine and Big Insurance to do that to health care as well. In other words, helping themselves to extract more and more of the real economic output of the people. This is the practical effect of usury. Eventually it doesn't end well for them then they get bailed, but eventually even the bailouts won't work either and that's when the bankers take us all into the proverbial creek with them. Unfortunately there are precious few times in history when bankers have been met with pitchforks and rope.

Blogger Akulkis March 30, 2020 12:22 PM  

"Please never let me stomp on my dick so hard, publicly and repeatedly."

There is no "conservation of money" law akin to "the conservation of mass" or the "conservation or energy" or even the more esoteric "conservation of mass-energy"


Think of it as there being "money sources" and "money sinks" which do not have to be connected, or even balance out (in contradiction to, say, a voltage or current source in an electric circuit, in which electrons in = electrons out)

Blogger Section 8A March 30, 2020 12:25 PM  

"Then what is wealth?"

--- "In the material objective sense, legal claims to physical property. In the philosophical sense, the answer is intrinsically subjective."

This is exactly where my thoughts went yesterday during my walk while thinking about VD's deflation thesis.

Blogger Akulkis March 30, 2020 12:29 PM  

"When you pay off interest, is that even more deflationary?"

Here's the paradox.

Let's say there are ZERO Federal Reserve Notes (FRN)'s in circulation.

You want to buy a car, so you borrow $20,000 to buy one from a dealer, you withdraw the money in the form of FRNs. Now you owe $20,000 of FRN's plus the interest which accrues while you pay it back.

But there's only $20,000 worth of FRN's in circulation, and as you pay off the loan, FRN's disappear.

So where do the FRN's come from for you to pay off the interest?

SOMEBODY ELSE has to borrow some FRNs, and you need to divert some of his FRNs into paying off your loan. Now there aren't even enough FRN's for the other guy to pay off the principle. So, to get more FRN's in circulation, a 3rd person needs to take out a loan. (but he'll do so willingly, because he can't get his hands on enough FRNs to buy whatever it is that he wants to buy, anyways).

In short, although strictly speaking, paying off the interest would decrease the money supply, the fact that the interest DEMANDS more money in circulation than what you borrow, the ONLY way you even CAN pay the interest is if the money supply is inflated still further by other borrowers, who, of course, won't be able to even pay off

Blogger Meanoldbasterd March 30, 2020 12:31 PM  

Just getting shot, that's all.

Blogger Akulkis March 30, 2020 12:37 PM  

"If you show some humility and admit that you possibly don't know everything about economics, you might learn something. Hell, even Vox listens and reads up on what others think about this subject from time to time."

The sad part is, in the 7 years I've been reading this blog, VD's discussions on economics have only been at the technical level of 200-series courses. (sophomore year), although his analysis and conclusions have been both widely differing and more accurate than the corresponding material I was taught at Purdue's Krannert School of Management.

Blogger Unknownsailor March 30, 2020 12:40 PM  

MDN wrote:Hence deflationary.

Ah got it, thanks. Could you make an argument that let's say I borrow $100K to get a college degree and that debt gets forcibly written off, wouldn't the $100K in cash still be on the college's balance sheet? Or am I stupid an missing something?

What you are "buying" with that college loan is the reputation and accreditation of that college, presented to you in the form of the degree. There isn't anything tangible changing hands. As for the money, all of it is moved around electronically, ergo all of it is just journal entries on various accounting ledgers. There is no actual cash changing hands anywhere in the transaction history, from the instant the loan was created to when it is written off.

To use one of the previously given examples, if you use loan proceeds to purchase tangible goods, and that loan is written off, yes you still have those tangible goods, but the value of the loan used to purchase those tangible goods is offset by the negative entry that must be written down on the lender's books.

Having just earned an accounting minor, the way Vox explains this stuff makes intrinsic sense, it is just basic 2 entry accounting. For every debit there must be an offsetting credit. Funny thing is, bad debts are able to be written off for tax purposes, so even in a debt jubilee some people will be able to take advantage of it.

Blogger Stilicho March 30, 2020 12:46 PM  

"Oh and I used to be one of those "we need to go back to gold!" idiots. There is not enough gold in the Galaxy to cover those trillions."

Nah, you are thinking in gold in terms of current dollar value rather than ounces used as basis for measuring value. Gold's attraction isn't that it cannot be abused, but that it is harder to manipulate and abuse that electronic ledger entries. It can be done, but just not quite as easily as electrons. That's why banksters and govts hate it. Ultimately any form of money is only as good as the confidence in it. Govts can engender confidence by fair enforcement of clear monetary laws. Something none of us has seen in our lifetimes.

Blogger LR27 March 30, 2020 12:49 PM  

Wow. This was very helpful. I’ve always heard that money is debt over and over but it never made sense to me.

Blogger Silly but True March 30, 2020 12:55 PM  

Wealth is now what you can capture before anyone notices from the difference in clock cycles of the Nikkei central processor and the NYSE central processor.

Or, also see Superman III or Office Space.

Blogger mike March 30, 2020 1:03 PM  

It's even worse
https://youtu.be/HBk5XV1ExoQ

Blogger Noah B. March 30, 2020 1:13 PM  

While deflation is the natural response of an overleveraged economy, helicopter money backed by debt on the Fed's books as zero or negative interest loans can stop this but only at great cost. The macro result of handing people money they didn't earn is malinvestment and waste, creating longer term scarcity of everything.

Thus the opposition to bailouts.

Blogger Mathias March 30, 2020 1:16 PM  

Akulkis,

When you say money "sources" and "sinks" I'm forced to think of MMO economies.

And then I realize our system is far more psychopathic than the economy of EVE Online. An economy that features legalized theft and fraud on a democratic level is less harmful than what is being done to us in real life.

Blogger Stryker4570 March 30, 2020 1:28 PM  

$3 Trillion in physical cash in existence
$11 Trillion + of 'electronic money' (Credit, debt)
If all those electronic ones and zeros are written off, your physical cash is going to go farther than you have dreamed.

Blogger thechortling March 30, 2020 1:30 PM  

I linked the wrong video above for the Part 1, "Money as Debt" animated, 45 minute video. Looks like the edited version is only available via Youtube here (or DVD) .

The author has worked through a lot of the objections and "burn him at the stake" responses for his calling our balloon-oriented system what it is... a system of enslavement. I guess Google won't link it because it's a pure HTML/non-https site but the disputed information page is here.

This makes clear at least one major root of the West's crazy-for-kookoo-puffs immigration policies of the last 40 years. It's really just that simple: follow the money ... balloon.

Blogger Doktor Jeep March 30, 2020 2:43 PM  

We should make our own cartoon: how a dollar becomes debt.

Blogger TroubleSpeak March 30, 2020 3:08 PM  

This article is also helpful in understanding money creation: https://workableeconomics.com/the-debt-based-economy

"To feed the expanding debt, the whole economy has to grow. It has to expand whether the people in it need it to or not. Manufacturing must increase, sales must increase, and consumption must increase. Businesses have to expand to stay afloat."

Blogger Scott Alfter March 30, 2020 3:19 PM  

SDaly wrote:I went on Kitco's site to check the price of gold, but all gold products are out of stock (except for 100ox delivery for $166,341 and 400 oz delivery for $664,764.

On a smaller scale, I took a look at junk-silver prices over the weekend. When you can find it, it's trading at ridiculous premiums. $1 face value (pre-1965 dimes/quarters/halves/dollars...no war nickels or 40% Kennedy halves) has a bit over $10 worth of silver, but I've seen vendors asking $16-$18, and some of the more shady eBay sellers want over $20. They'll sell by weight (including the base-metal content), some will sell in non-standard "standard" (avoirdupois) weight instead of troy weight, and few will tell you what, exactly, you are going to receive for your money (this many quarters, that many dimes, etc.). It's a real pig in a poke.

Blogger Balkan Yankee March 30, 2020 4:08 PM  

@97: Not necessarily. You have cash. But prices are declining. Why buy today if the price is going to be lower tomorrow, and the day after, and the day after that?

Writ large, deflationary psychology can easily cause economic activity to grind to a halt.

And stay halted.

Under these conditions, government could give people tons of money, but if it doesn't order them to spend it within a specified period or lose it, then the reflationary impact is likely to be negligible.

Blogger Jack Amok March 30, 2020 4:54 PM  

Writ large, deflationary psychology can easily cause economic activity to grind to a halt.

And stay halted.


Banks are so leveraged, deflation is going to happen really fast. There won't be time for "deflationary psychology" to take hold, let alone persist. I expect unclear ownership of assets to be a bigger impediment post-fizzle. People won't be reluctant to invest in a new factory because they don't want to spend their super-dollars, they'll be reluctant because they don't know for sure if the title to the property will be valid. Our court systems are so sclerotic and the records (as the '09 real estate bust showed) so sketchy, untangling the mess will take a long time without some sort of cleaving stroke at the Gordian knot.

Blogger Dan in Georgia March 30, 2020 5:03 PM  

pyrrhus wrote:O/T Weekly US death toll drops 7-10,000 during c-19 outbreak..https://www.zerohedge.com/health/covid-19-saving-lives..IMO far less gang banging and fewer auto accidents are to blame....

The lives saved by the closing of abortion mills across the country will dwarf that number, probably has already.

Blogger Roddie Piper March 30, 2020 5:57 PM  

The Fed's always on the lookout for the tiniest spark of deflation, ready to hose it down at a moment's notice with trillions of freshly-printed dollars. Gonzalo Lira pointed out however that while inflation is the opposite of deflation, hyperinflation is something else entirely, so it's possible to have deflation and hyperinflation at the same time. In other words, people curtail all economic activity in favor of hoarding money, but they no longer see government scrip as "money".

Blogger Ominous Cowherd March 30, 2020 6:14 PM  

Roddie Piper wrote:Gonzalo Lira pointed out however that while inflation is the opposite of deflation, hyperinflation is something else entirely, ...
In a hyperinflation, your liquidity preference - the amount of currency you're willing to hold - goes to zero, because you know the currency will be worth less in hours, and entirely worthless very soon.

That's nothing like inflation, in which everyone still wants to hold some currency for day-to-day transactions. A small increase in inflation typically causes a small increase in the amount of currency held, since you need a little more for the usual transactions.

Blogger pyrrhus March 30, 2020 6:33 PM  

pyrrhus wrote:
O/T Weekly US death toll drops 7-10,000 during c-19 outbreak..https://www.zerohedge.com/health/covid-19-saving-lives..IMO far less gang banging and fewer auto accidents are to blame....


The lives saved by the closing of abortion mills across the country will dwarf that number, probably has already.

Quite right, but those lives will not be counted.....Covid-19 could touch off a veritable population explosion...

Blogger Servant March 30, 2020 6:34 PM  

Thanks for this. I was wondering what you meant.

I had forgotten that those zeroes and ones mean nothing in the end and since a lot of debt is just for consumerism out really went to nothing. Falling real estate prices would be a thing but since there be no debt i guess that'll break out fine. Except for governments that rely on property taxes

Blogger Nathan Hornok March 30, 2020 7:44 PM  

From reading the linked article, my guess about how central banks "put a finger on the scale" is confirmed.

From the article;
"The interest rate that commercial banks can obtain on money placed at the central bank influences the rate at which they are willing to lend on similar terms in sterling money markets— the markets in which the Bank and commercial banks lend to each other and other financial institutions. The exact details of how the Bank uses its money market operations to implement monetary policy has varied over time, and central bank operating procedures today differ somewhat from country to country, as discussed in Clews, Salmon and Weeken (2010).(1)Changes in inter bank interest rates then feed through to a wider range of interest rates in different markets and at different maturities, including the interest rates that banks charge borrowers for loans and offer savers for deposits.(2)By influencing the price of credit in this way, monetary policy affects the creation of broad money...This demand for base money is therefore more likely to be a consequence rather than a cause of banks making loans and creating broad money. This is because banks’ decisions to extend credit are based on the availability of profitable lending opportunities at any given point in time. The profitability of making a loan will depend on a number of factors, as discussed earlier. One of these is the cost of funds that banks face, which is closely related to the interest rate paid on reserves,the policy rate."

Since central banks can create their own "deposits" at the stroke of a computer key, this is how they put the finger on the scale and buy commercial bank assets, so the commercial banks can lower interest rates lower on both loans, and savings account interest payments. The people take more loans and save less. They consume based on future promises of labor (debt) instead of past accounts of labor (saved money). The net effect is that more people are enticed into deeper debt slavery, while the bank makes it's profits according to the "dishonest weighs and measures" of the target 2% inflationary target.

Blogger wreckage March 30, 2020 8:00 PM  

@106 isn't that confusing the creation of money with the creation of value? Not trying to quibble, trying to get the concepts nailed down properly.

Blogger MichaelJMaier March 30, 2020 8:26 PM  

Is there any currency in the world that does NOT operate on this model?

Blogger Kraemer March 30, 2020 8:44 PM  

@106 if people found out that money is literally just printed, they would stop using it for exchanges, would they not?

Blogger James Dixon March 30, 2020 8:47 PM  

> There is not enough gold in the Galaxy to cover those trillions.

You really need to look up the term "exchange ratio" sometime.

> Is there a downside to bankers for that?

As someone else noted, getting shot.

But the real problem is it won't work. If you don't have the money or assets to be seized, it doesn't matter if the debt can be discharged or not. It's still not going to get paid.

> Martin Armstrong has said the ultimate backing of currency is not tangible resources, but the productive capacity of the people.

We are the gold: https://www.barnhardt.biz/2013/11/05/the-one-about-how-we-are-the-gold/

Blogger MichaelJMaier March 30, 2020 9:27 PM  

pyrrhus wrote:pyrrhus wrote:

O/T Weekly US death toll drops 7-10,000 during c-19 outbreak..https://www.zerohedge.com/health/covid-19-saving-lives..IMO far less gang banging and fewer auto accidents are to blame....

The lives saved by the closing of abortion mills across the country will dwarf that number, probably has already.

Quite right, but those lives will not be counted.....Covid-19 could touch off a veritable population explosion...


Abortions delayed are not abortions that never happen.

Watch the murder docs work OT once things get back to normal.

Blogger Silly but True March 30, 2020 9:55 PM  

The problem there is governments not seeking property tax from the “possessor” — or repossessor — of the property.

The problem is that banks have been allowed to lack that skin in the game. If those governments made the owning banks to pay the property tax, then those governments would break out fine too.

Blogger Silly but True March 30, 2020 10:21 PM  

Creation of money: AirBnB superhosts taking out 10 different mortgages to run an empire of home rentals in neighborhoods not normally zoned for commercial use pricing out regular homebuyers.

Creation of value: A global pandemic that shuts down travel effectively eradicating money to AirBnB superhosts, forcing them into bankruptcy, selling their mortgaged properties and offering homebuyers a chance to buy homes in neighborhoods with artificially inflated home prices that they otherwise wouldn’t have had.

Blogger John Regan March 30, 2020 10:29 PM  

Give the devil his due. The system works after a fashion, and up to a point. The granting of bank loans is a heavily regulated process. If it's being done right, then for a time things will go more or less smoothly. Loans will increase production, there will be some prosperity, the banksters get their big cut. Along with the government. There's a reason NYC and D.C. are so well off relative to flyover country. But anyway, that aside there's still this nullity at the base of it all - the illusory promise - and that always destroys everything eventually.

The empty promise is a lie. And that lie is the very foundation. And we know who its father is.

Blogger Boomer55 March 30, 2020 10:30 PM  

@19
So there is real money in denominated paper and coins, and then there are the line items banks make?

Blogger MEGAMUS Maximus March 30, 2020 10:56 PM  

Uh, no.

You clearly haven't read anything and are still repeating Libertarian brainwash.

It would be deflationary because the money disappears. So you're either playing dumb or stupid.

Blogger MEGAMUS Maximus March 30, 2020 11:01 PM  

That isn't printing more borrowwers as it was giving extra venues for people to borrow from.

Though International Banking, import of terrorists, rapists, criminals and invaders; and outright fraud by making cloned accounts for one person or a dead person have tried to fill that.

Blogger MEGAMUS Maximus March 30, 2020 11:08 PM  

1930 was 90 years ago.

Thing I ain't the same. Libertarianism and Communism are stuck in the 50s-70s.

Blogger RedJack March 30, 2020 11:17 PM  

As an engineer, it is BS. But people eat it up. Which is why the banks will be bailed out, but the borrowers cant be.

It also confirms that I am way to honest to work in that field

Blogger RedJack March 30, 2020 11:22 PM  

Excellent description, and one I will use. Thank you.

Blogger Wraith March 30, 2020 11:23 PM  

@99: New cartoon series: "Homeschool Rock?"

Blogger Servant March 30, 2020 11:29 PM  

Yeah they fought waiting periods so hard because delaying a thing has no chilling effect on a thing.

Blogger Snidely Whiplash March 30, 2020 11:46 PM  

This comment has been removed by the author.

Blogger Timitz March 31, 2020 12:23 AM  

I learned more about money from this post than I ever have from school.


I have what is probably a stupid question, but it will hopefully help me understand this better.


If I buy a house and take a mortgage, and student loan debt was forgiven. The deflationary effect would lower the value of my house, but not the debt correct? This means I would take a loss. That loss would then be compensated for by all the people now able to afford to purchase a house who would then do it. This would result in a dip in the value of my house, then a rebuilding of the value to an unknown level, because of the new demand created by people freed from debt slavery.


The bonus effect would be a lower price of consumer products, such as bread or milk, or a PlayStation because of less money in the supply correct?

Blogger Vaughan Williams March 31, 2020 12:34 AM  

Deflation: over the past year or two I've noted house prices down about 13%, price of OSB (because plywood too expensive for regular people) went back from $18 a sheet to $10 a sheet, and gasoline from $1.36 to $0.99 for the first time in ten years. On the other hand, tiny rental in scummy neighborhood was $650 ten years ago, is now $800, and people are just as grateful to pay the "cheap" price now as they were then. So rental at least has been keeping up with inflation, a perfect 2% per year, while the first few items have been deflating. Also groceries haven't been deflating in price, just in the portion sizes. And the Canadian banks keep giving East Indians favored terms so they are the ones buying the houses that keep going on the market. No family formation for you, heritage Canadian.

If deflation is coming, or here, what is the best strategy for a homeowner who still owes a quarter of the house to the bank? Sell at currently depressed prices and rent until things go even lower? Tough it out until prices rise again?

Blogger Azure Amaranthine March 31, 2020 12:35 AM  

"Money is just a tangible way to trade time."

I thought something like that once when I was young. However time doesn't necessarily translate into anything material. Maybe someone's lazy, maybe incompetent, maybe just not suited to whatever given task they are putting their hand to at the moment.

No, money is, at its best, a lubricant that facilitates the flow of material goods and desirable services. Like blood moving nutrients and oxygen around a body.

What we now call money isn't that, but rather a fiction, supported by the faith of the masses, sheltering and feeding a growing collection of wicked bloodsuckers.

"Creation of value: A global pandemic that shuts down travel effectively eradicating money to AirBnB superhosts, forcing them into bankruptcy, selling their mortgaged properties and offering homebuyers a chance to buy homes in neighborhoods with artificially inflated home prices that they otherwise wouldn’t have had."

Well played indeed, Corona-Chan.

Blogger Snidely Whiplash March 31, 2020 12:36 AM  

MEGAMUS Maximus wrote:1930 was 90 years ago.

Thing I ain't the same. Libertarianism and Communism are stuck in the 50s-70s.

Libertarianism is stuck in the 1930s. Communism is still stuck in the Long Depression of 1873-1896.

Blogger Azure Amaranthine March 31, 2020 12:47 AM  

"But the real problem is it won't work. If you don't have the money or assets to be seized, it doesn't matter if the debt can be discharged or not. It's still not going to get paid."

However that's followed by "and then you either die or forcibly reclaim enough assets from the userers to survive". The debt may not be payed on time, but until the person laying claim to it loses that claim by whatever means, it's still going to be payed into over time.

One of their favorite tricks is making you a new, larger loan so you can make payments on your debt, for a while. Who cares if you can't eventually pay if they can force society bailing them out anyway? The more, the better for their pocketbooks.

Whole thing? Supported by baseless faith that their notes and IOUs have value. On the backside, supported by baseless faith that anyone owes them so much as a wooden nickel.

"I don't owe you anything, but I'll give you a bullet gratis."

Blogger furor kek tonicus ( no need to be racist, Ratchets can Karen better than anybody ) March 31, 2020 1:12 AM  

all Economists tell you that Currency / Monetary systems *ARE NOT* Barter.

i think they're wrong. and a good many of them are probably lying.

all trade is Barter, and trading Goods and Services for Money is merely another aspect of Bartering.

Money, in it's proper function, is the Enzyme / Catalyst of Barter.

and this is it's proper value to an Economy.

https://www.dictionary.com/browse/catalyst?s=t
1 - Chemistry. a substance that causes or accelerates a chemical reaction without itself being affected.
2 - something that causes activity between two or more persons or forces without itself being affected.
3 - a person or thing that precipitates an event or change:


https://infogalactic.com/info/Catalysis

our modern Monetary systems, that are Fiat, Fractional and Debt based are abstracted at least 3 levels from reality and substitute Debt for Asset through the prestidigitation of the Banks.

Blogger M Cephas March 31, 2020 1:14 AM  

Peter Schiff has done a couple of livestreams recently, predicting hyperinflation. He has been saying to get out of the U.S. Dollar, and buy gold/silver.

Vox, if you're right, and there is deflation, wouldn't that be good for the U.S. Dollar? Isn't deflation a good thing in general?

Blogger God Emperor Memes March 31, 2020 4:22 AM  

I once read a book about the Rothschild family, which started with old Amschel Moses and worked down to the modern era. That family clearly understood the power of debt, and made their fortune financing wars between Christian powers.

Blogger VD March 31, 2020 5:38 AM  

Peter Schiff has done a couple of livestreams recently, predicting hyperinflation. He has been saying to get out of the U.S. Dollar, and buy gold/silver.

He's been saying that since 2002. At least.

Blogger VD March 31, 2020 5:41 AM  

You're banned, map. Stop trying to comment here.

Blogger Unknown March 31, 2020 7:23 AM  

So the ancients were prescient in their prohibition against usury.

Blogger Damelon Brinn March 31, 2020 8:20 AM  

If I understand this correctly: If I loan Jim $100, I no longer have the $100, so no money has been created. If I then forgive the debt, Jim still has the $100, so nothing has been lost.

But if a bank loans Jim $100, the bank holds the $100 loan as an asset, so $100 has been created (which the bank can use to make more loans and create more money). If the bank is forced to forgive that loan, Jim's $100 still exists, but the bank's asset disappears, taking that money out of the system.

Blogger MNW March 31, 2020 9:20 AM  

The point us that money, what is your bank account or what is used as a loans doesn't exist outside of a line in a ledger. It never really existed.

Look at the fractional reserve system. It is basically a usery circle jerk the creates money out if things air.

You and I only see a small amount if it. The rest stays in banks.
That is why they so hate gold, silver, etc. The real value of it has remained remarkably consistent, but its value relative to fiat money has not. It shows just how debased your money really is.

Blogger Ominous Cowherd March 31, 2020 10:12 AM  

Why are banks stingy with loans, don't want to create unlimited money for everyone who can stagger through the door?

First, this: the grabblers want to grabble a lot not a little.
Nathan Hornok wrote:... banks’ decisions to extend credit are based on the availability of profitable lending opportunities at any given point in time.
Second, this:
Kraemer wrote:@106 if people found out that money is literally just printed, they would stop using it for exchanges, would they not?
That is a very real danger.
If folks catch wise, they stop taking the counterfeit and that's hyperinflation. That's the end of the grabbling for a while, so the grabblers try to put off that day as long as possible.

Blogger Talios Hammerfist March 31, 2020 12:25 PM  

This is my favorite post here since I have been reading the blog. So much knowledge communicated in such a brief post. Thanks, Vox!

Blogger Damelon Brinn March 31, 2020 1:13 PM  

Abortions delayed are not abortions that never happen.

Are the pregnant women using corks to keep the babies in? It should already be saving some babies in places where clinics do late-term abortions, and that will increase as it goes on.

My county's immunization office is also closed, so that's another benefit, kids aren't getting those cocktails. Probably just delayed in most cases, but some parents may notice their kids are doing fine without them.

Blogger Silly but True March 31, 2020 3:59 PM  

Leftists have already raced against each other to accept post-birth abortion; now it’s just a matter of how far past birth they’re willing to allow: upon exit? ...while still in the hospital? ...18 years?

Blogger Azure Amaranthine March 31, 2020 5:42 PM  

"Abortions delayed are not abortions that never happen."

Depends. If it was going to be a PBA then it will never happen. If they don't manage to work up the malicious solipsism again then it'll never happen. If, at the bidding of Corona-Chan, they have to move to a different state where their particular permutation isn't legal then it'll never happen. If the clinic happens go out of business by the power of Corona-Chan, then it'll never happen.

Every little bit helps, defeatist.

"So the ancients were prescient in their prohibition against usury."

As usual.

Part of the mind-rotting-candy proffered by TENS and the general gnosti-sci cult is that we're smarter than our smartest ancestors were, and therefore we "know better". In reality we're virtually always dumber.

Scratch that, we're always dumber period.

"...18 years?"

Where category defined = {nazi},{racist},{deviaphobe}.
Limit age {legal abortion} = infinity.

Blogger SirHamster March 31, 2020 7:07 PM  

Timitz wrote:If I buy a house and take a mortgage, and student loan debt was forgiven. The deflationary effect would lower the value of my house, but not the debt correct? This means I would take a loss. That loss would then be compensated for by all the people now able to afford to purchase a house who would then do it. This would result in a dip in the value of my house, then a rebuilding of the value to an unknown level, because of the new demand created by people freed from debt slavery.
It is incorrect to say you took a loss - your house is still yours.

It reduces the value of your house as measured by the deflated dollars. But how other people value your house would be changed in the same proportion. That change should not be called compensation, because it's not a conscious choice. It followed follows from the act of deflating (or inflating) the money.

Let's say you're 6 feet tall, and some nut Bob tries to redefine a foot to equal 13 inches.

Bob might say that you're now a deflated "5ft 7in" tall, but you're still the same height.

Someone who is 5ft 6in doesn't "compensate" for your
deflated height and change their own height to "5ft 1in". They're also the same height they were before, but Bob's deflated measurement will give a proportionally smaller value.

The question you should be asking in this situation is why is anyone listening to Bob's idea of what a foot is. There's a similar question to be asked of the banks controlling our money supply.

Damelon Brinn wrote:But if a bank loans Jim $100, the bank holds the $100 loan as an asset, so $100 has been created
So far so good.

(which the bank can use to make more loans and create more money).
No, the bank printing money (which is debt) doesn't need existing debt (which is money) to create more money (which is debt).

If the bank is forced to forgive that loan, Jim's $100 still exists, but the bank's asset disappears, taking that money out of the system.
The money is this and only this: Jim owed the bank $100.

When the debt is forgiven, Jim owes the bank $0. No money. Poof.

Jim borrows money to spend it. He does not hold onto $100 cash. A forgiven loan is not Jim being gifted $100 by the bank.

When Jim borrowed $100, he paid his student tuition where it became digital zeros in someone else's bank account. Stop tracking where that $100 was spent as if it exists. It's gone.

Jim's loan has ballooned from interest into $200. He also paid another $100 over 10 years. Note that this does not cause Jim's $100 loan to disappear. The bank started with $100 in assets which increased to $200 in assets despite repayment. Money is not conserved, treating it like it is creates silly economic models.

Jim loses his job, and cannot pay back the loan. On paper, the bank has a $200 asset it can legally demand Jim repay, but that loan will never be paid back when Jim is crushed by his debt burden and a "bad economy". This is where debt forgiveness becomes good and necessary.

Our economy is measured by there being trillions of "assets" in the economy. Most of those assets are bad debt that cannot be paid back. Bad debt is effectively fake money. Fake money breaks our ability to buy and sell things, because the prices become fake and stupid.

A small number of people can exploit mostly fake money to get very rich, but it comes at the expense of everyone.

Blogger furor kek tonicus ( no need to be racist, Ratchets can Karen better than anybody ) March 31, 2020 8:39 PM  

143. Silly but True March 31, 2020 3:59 PM
now it’s just a matter of how far past birth they’re willing to allow: upon exit? ...while still in the hospital? ...18 years?



what do you think the Jack Kevorkian "right to die" movement is?

they're actually working both ends of the age spectrum as well as picking up some from the middle of the age cohorts with coma patients and quadriplegics, etc.



145. SirHamster March 31, 2020 7:07 PM
some nut Bob



i might resemble that remark. once in a while.

Blogger Moose Loose March 31, 2020 9:28 PM  

Lazarus wrote:What does paying interest do? When you pay off the principal, that is money destruction. When you pay off interest, is that even more deflationary?

If the borrower produces a surplus of corn then the lender purchases that surplus corn and the interest is extinguished by that simple buy/sell transaction. In other words fiat money mechanics is not a mathematical proof that more money is required to extinguish interest.

There is a proof of the ponzi of our fiat money but this is not hinting at a correct proof:

Only the principal is deposited into the account, but both the principal and interest accrued are owed. Imagine 10 people getting loans for 10k each, and owing back each 2k in interest beyond that. A total of 100k exists in this little example economy, but a total of 120k in obligations exists. When the notes come due, where does the extra 20k come from?

This is also not a correct proof:

As a couple of people have hinted at, if you pay a loan off with interest, you destroyed more money paying off the loan than you created when you took it out. Where did that come from? It had to be fabricated itself. The system - with interest - requires perpetual growth because every unforgiven loan destroyed more money than it created. Therefore loans have to be created at an ever-increasing rate to keep the system from crashing.

Blogger map March 31, 2020 11:48 PM  

VD wrote:You guys are completely wrong because you don't understand how the Fed works. It is simply not true that "debt CREATES money."

You're banned for a) stupidity, b) economic ignorance, and c) learning absolutely nothing here.

The Banks do not, themselves, "create" money by making loans. That is just absurd.

You are a complete idiot whose understanding how modern money works is literally CENTURIES out of date. Don't try to comment here again.


Ok, If I can demonstrate that I understand this, can I come back to commenting?

You misunderstand me. Debt does not create money because currency itself is a non-interest-bearing debt of the national government. In the United States, it comes into circulation through the operations of the Federal Reserve Bank, which has the power to "create money." (Note: commercial banks have this power franchised from the Fed. I will make further note later.) It does so through the simple process of buying interest-bearing debt that had previously been issued by the Treasury Department. That is, Treasury issues a bond in the amount of $1000 in order to finance its budget deficit (Note that "money" cannot exist if there is no national debt.) The $1000 bond pays an interest to its holder at maturity. The Fed can "buy" the $1000 bond with a check for $1000 written in a checkbook that has simply been given it by Congress. When the Fed creates this "ink money," it has "monetized the debt," i.e. converted interest-bearing-debt to cash. The process works because the citizenry needs cash as a medium of exchange, and is thus willing to hold government debt for this purpose without being compensated by the payment of interest.

At the conclusion of the purchase, the Federal Reserve has in its portfolio an asset of $1000 that is paying interest and a liability of $1000 that is not. The interest amount covers the expenses of managing the central bank, and funds in surplus are given to the Treasury as part of its general revenues. The Fed also has the authority, of course, to reverse this process. It can decide to withdraw cash from circulation, doing so by taking the $1000 bond from its portfolio of assets and selling it on "the open market." The decision on whether or not to buy bonds to create cash or sell bonds to extinguish cash is made by the Fed's Board of Governors and the presidents of the regional Federal Reserve banks. They come together every several weeks as "The Open Market Committee" to decide on whether to buy, sell or hold steady. Their decision is communicated to the "open market desk" in New York City, which implements the policy decision through its own operating procedures.

(continued)

Blogger map March 31, 2020 11:50 PM  

(continued)

The difference between the Bretton-Woods gold standard and today is that, before, there existed a fixed rule to guide the decision to create and destroy money. Yet, The Fed today can monetize government debt by buying Treasury bills and bonds from the banks with "ink money," created out of
thin air. Or, it can discount commercial paper at its discount window, as it did in its early days. In the last 20 years or so, for all practical purposes the discount window is no longer used, and all "money" is created or destroyed by the Fed's open-market operations -- buying or selling government bonds to several designated member banks. It does all of this without anyone knowing what their rules will be.

When you see banks creating money through debt, what they are doing is a mirror version of what the Fed does...converting non-interest-bearing debt into interest-bearing debt. BUT...the member banks activity to do this is hemmed in and controlled by the central banks...which is why everything stops when the FOMC is in session. The member banks ability to create debt is the same as that of the Fed, but the Fed determines the scope and limit of that activity. Basically, the Fed has simply franchised its power to member banks as a tool for more granularity in getting currency into circulation because you are more closely matching the creation of debt (money) to the demand for economic activity. IOW, the Fed monetizes debt from the government to get currency into the member banks, and the member banks monetize debt from you, to get currency into your hands.

The central banks are the ones that manage and control economies, but they do not want you to know that. They want to pass the responsibility for their screw-ups onto their member banks. So, we are told that the 2008 crash was caused by "bad loans" when it was actually caused by the Fed choking the economy with much higher interest rates. The member banks have nothing to do with it.

Yes, VD, you can make correct calls observing what banks are doing and higher and higher debt is a signal of something wrong in the economy. Why? This is because the Fed follows the Phillips curve in deciding on how to create and destroy money. It views increasing economic growth as inflationary and seek to tamp down inflation by causing unemployment. That is why it raised the federal funds rate in 2008 and crashed the housing market. It is why is strangled liquidity from 1997 to 2001 and crashed the Nasdaq.

Trump, btw, noticed this control that the Fed has and how it has mismanaged global economies, which is why he is always calling out the Fed and why he is now trying to nationalize it into the Treasury department.

Remember, Trump is a supply-sider economist at heart.

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