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Sunday, May 10, 2020

Mailvox: Money magic

A reader observes the creation of money ex nihilo in action:
I wanted to share something with you that demonstrates how you are correct that debt and money creation are one and the same.

Recent changes to 401k rules (from the CARES act) allowed me to withdrawn/borrow 90k from my retirement account, with the promise to pay it back over 5 years to avoid the tax penalty. I did this to pay off my mortgage. Even though this doesn't change the basics of my personal finances, I just like the idea of being the only person with a legal claim on my house. Also, I figured the market is going to go down, so now might be a good time to sell, and buy-back over the next 5 years.

So I apply for the loan. I get the 90k check and deposit it in my bank. I look at my 401k balance and the amount has not changed! The 90k was literally created out of thin air with the understanding that I'm obligated to pay it back over 5 years.

Now that money essentially exist in 2 places; in my house, and in the stock portfolio of my 401k. I naively thought that the 401k was an arrangement between me and the government that I get a tax break on money I put aside for retirement. In reality, the 401k is an arrangement between me on the one side, and the government and the financialized class on the other side. Once I put money in those stocks, I can't sell it off until I turn 60 without a huge tax penalty. My 401k money is essentially a trust fund for the financial class.

At face value, most would think this is beneficial to me. But in reality, I'm prevented from the opportunity to sell high and buy back low. This protects the financialized racket from any loses today, but it also prevents the opportunity for that money to be redirected toward more profitable endeavors in the future. As losses to the financial market are prevented, so too the opportunity for profits are prevented. And they wonder why the economic recoveries are so feeble or non-existent.
Heads, everybody wins. Tails, they win and you lose. It's not the worst scam in the history of financial shenanigans. But it will lead to an economy-wide breakdown, in which everyone loses, sooner or later.

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40 Comments:

Blogger RedJack May 10, 2020 1:50 PM  

Similar happened when I had to cash out $40K for my little Bear's NICU expenses. The balance staid the same till I left the job (was paying payroll deduction on the loan). At THAT time (not under CARES) I had the option to pay the sum back in full or pay the tax penalty. I paid the penalty as it was still smaller amount than the medical bills.

Only then did I see the deduction of the remaining balance from my 401K account. Thought it was very odd at the time.

Blogger Tetro May 10, 2020 2:15 PM  

"Once I put money in those stocks, I can't sell it off until I turn 60 without a huge tax penalty. My 401k money is essentially a trust fund for the financial class."

Exactly. It's a way to make the little guys prop their system up. They can do a lot more buying and selling, pumping and dumping without as much risk of it all imploding and going to zero. Worse case scenario they know they'll still be filthy rich. The rest of us are fighting for the scraps (traders) or are stuck waiting, hoping their gamble pays off.

Blogger tkurtz May 10, 2020 2:23 PM  

What would be your recommendation with how we survive this chaos coming? If we have about 30,000-50,000 dollars saved up what should we do. Buy a shotgun and put it under my bed?

Blogger weka May 10, 2020 3:03 PM  

Been told my house has increased bin value by 300 to 500 Kiwibucks in four years. But the only value i care about is the one I'm taxed on, because mortgage was zeroed out with the last house move and I expect the property Ponzi scheme to collapse in a swamp of foreclosures.

The banks will be smaller and regulated. I expect payments based on the post tax income of the breadwinner again.

Blogger Azure Amaranthine May 10, 2020 3:07 PM  

"Heads, everybody wins. Tails, they win and you lose."

Really they win and you lose either way, it's just that on the one side of the coin they don't break you as a host quite yet. Even on the side where you "win" you would have usually won more if they didn't exist.

Blogger furor kek tonicus ( The Surprised Pig hadn't had any idea he tasted this good ) May 10, 2020 3:15 PM  

it still amuses me that the financial class got everyone to accept Debt in exchange for Capital.

what would be a greater shell game? exchanging Life for Death?

https://www.biblegateway.com/passage/?search=Genesis+3&version=KJV

Blogger Nihil Dicit May 10, 2020 3:18 PM  

I just like the idea of being the only person with a legal claim on my house

You live somewhere without property taxes?

Blogger Zbignu May 10, 2020 3:19 PM  

You should have a cash/money market option within your 401. You can sell stox in the 401 and leave the proceeds in a money market within the 401 so at least you aren't stuck in the market

Blogger map May 10, 2020 3:54 PM  

Btw, has anyone had any difficulty posting? I can't use either Edge or Brave to post. I was using Firefox, and now Firefox has uploaded the code to treat comments on this site as blocked security content. Finally, I managed to get back here using Chrome.

Can anyone explain how to set up Brave to be able to comment on this site? What has to be deactivated to do so?

Blogger Newscaper312 May 10, 2020 3:59 PM  

What Zbignu said. OPs take is overly simplistic. You can try to buy and sell within the fund. Separate subject... Market timing is usually a fools errand. And if your cash or cash like low risk options are limited there, you can rollover to an IRA with a lot more options.. Wo hitting the tax penalties. And fwiw you can dodge the tax penalties on special withdrawals for big medical expenses and a first home downpayment.
A bigger racket in some ways is the artificially low interest rates to prop up debt financing, but which have side effect of making savings accounts and even CDS pay crap rate for more modest or conservative savers.

Blogger Newscaper312 May 10, 2020 4:02 PM  

FWIW I did eat early withdrawal penalty to finish off my house mortgage balance of 15k about 3 years ago. Lost a better paying job at the time and getting the monthly mortgage pmt off my cashflow was worth it to me. Doing a 401k loan made no sense.

Blogger Ingot9455 May 10, 2020 4:10 PM  

I'm under the impression that you can trade stocks in a 401k privileged account - that's what my family has been doing for a long time. You can buy and sell individual stocks and it's all tax-privileged. So you can do all the buying low and selling high that you want. It just can't leave that bucket without you paying taxes on it the once, after you reach your retirement age.

Blogger Gallant May 10, 2020 4:20 PM  

A risk with something like the 401K, great or small - and apart from the stock market, is that it's sort of pinned in place under special rules that can change. You can see (other) third-world countries locking them down during crises.

They could effectively raid it by forcing it to be converted to govt bonds 'for your safekeeping' and withdrawals frozen, while they mirror the purchasing with bonds they're simeltaneously dumping onto the market.

And, you defer taxes - which are currently low - for decades later, when the bills come due and the govt has to pay for more Gibs - i.e. could be deferring tax from low to high.

Blogger LES May 10, 2020 4:55 PM  

@9 map The only way I have found to post a comment is Firefox on my desktop.

Blogger jeffro May 10, 2020 4:57 PM  

Also, the mortgage was created out of thin air, and the house (asset) pledged as collateral. Turtles all the way down.

Blogger KPKinSunnyPhiladelphia May 10, 2020 5:04 PM  

I’m not quite sure why the Vox’s interlocutor is so surprised.

What he did was effectively what anyone does who borrows money: put up collateral. Businesses do it all the time.

That’s what his 401K Is—it’s collateral against debt. What he has done is simply exchange his collateral source that is matched against his ongoing outstanding dollar liability. Before his house was collateral; yes, he retires his mortgage, and owns the house free and clear, but his personal balance sheet still has that $90k debt liability.

Every individual’s situation is different, but with interest rates so low, it might have been a better deal to refinance the house, unless this person got a great interest rate for the 401k loan. Or it just “feels” better to own a house outright. But his personal balance sheet has not changed.

I don’t know anything about this particular scheme, but I would advise this person to scrutinize the loan docs and its terms closely.

What happens if you roll over the 401K when you switch jobs, or you lose your job and roll it over into an IRA? Is the full amount of the loan outstanding due? What about borrowing against the 401K a second time for unforeseen medical expenses; is the full amount of the loan outstanding due then? Do you have obligations to keep them informed of your job and financial status? Are there penalties if you don’t? What if you die? Or get incapacitated and can't work? In other words, what provisions allow them to come knocking on your door and say, “Time to hand over the remaining value of your loan?”

Finally, think about this deal from the lender’s side. It’s about as no-risk for the lender as you can get. Chances are the borrower and his employer are going to continue to contribute to the 401K, so even if the market tanks, more money will be going in. And after five years, there likely will be appreciation as well as new contributions. It’s a perfect deal for them.

Blogger MichaelJMaier May 10, 2020 5:19 PM  

I submit this is a bad example if it works the same way retirement plans loans work.

It's simply a 100% collateralized loan. The principal doesn't earn any money until it's paid off. You borrow 100K? That 100K isn't earning you any interest, except for the re-paid portion as you go.

So the money is out the door in the form of a check to you. And if you default, it's the same as cashing out early, with penalties.

It doesn't "exist" in two places at all. If it did, the full amount would be invested and earning interest the entire time. I suspect this guy's money is not.

Just my experience.

And because people love to jump to conclusions: NO, I'm not saying our money is not debt or that our financial systems are remotely sane.

Blogger Bobiojimbo May 10, 2020 5:47 PM  

Thank you for sharing.

Blogger Meng Greenleaf May 10, 2020 6:08 PM  

map wrote:Btw, has anyone had any difficulty posting? I can't use either Edge or Brave to post. I tried using Brave in the past, but found only Chrome incognito seemed to work.

Blogger Mitch Connor May 10, 2020 6:29 PM  

"I'm under the impression that you can trade stocks in a 401k privileged account - that's what my family has been doing for a long time. You can buy and sell individual stocks and it's all tax-privileged. So you can do all the buying low and selling high that you want. It just can't leave that bucket without you paying taxes on it the once, after you reach your retirement age."

This is correct. You can sell the stocks within your IRA/401k, go to cash, and buy back later if you'd like, but you can't withdraw the cash from the account before age 59 1/2 without paying a tax penalty.

The real danger with these plans is that the government can choose to tax you at whatever rate they want once you begin taking withdrawals. There's trillions of dollars of untaxed money sitting in these tax deferred accounts, and if you don't think they'll eventually end up in the crosshairs you're sadly mistaken.

Blogger George Phillies May 10, 2020 6:47 PM  

"Once I put money in those stocks, I can't sell it off until I turn 60 without a huge tax penalty. My 401k money is essentially a trust fund for the financial class."

Well, no, though you may be subject to peculiar rules for money from your current employer. In general, you are entirely allowed to trade within your 401k account, for example, to sell those stocks. Depending on your tax situation, you may be entitled (this is not financial advice; laws change regularly) to roll that money over to a Roth account, though advisors I have read explain why you want to pay the taxes not using money from the 401k.

Blogger Rick May 10, 2020 7:10 PM  

“The 90k was literally created out of thin air with the understanding that I'm obligated to pay it back over 5 years.”

I assume there is interest to pay on this loan? If so, what is the rate?

Blogger Zorlig May 10, 2020 7:50 PM  

Yeah, like a self directed ira. Didn't realize they had it for 401k too. You can use a self directed ira to invest in whatever you want, some people do it to buy real estate but if you do you aren't suppose to put any sweat equity into it.

Blogger Zorlig May 10, 2020 7:52 PM  

Now if you could both pay off the mortgage AND keep the money invested in the market! Unfortunately the balance doesn't change because you loan is an asset only accounting wise, worth only as much as you will actually repay.

Blogger DannyDanger May 10, 2020 8:46 PM  

I believe that the CARES Act allows you to withdraw $ from your 401k without paying the usual 10% early withdrawal penalty. The thought is to give people access to cash during the pandemic.

As an incentive to re-enter the 401k system, they made it so that the federal taxes you would pay on the $ withdrawn are deferable for up to 3 years, and if you invest a portion or the whole of the ammount withdrawn in the following 3 years you avoid the federal tax on that total altogether.

It seems to me like a rare opportunity to access 401k money in the moment for those who have a less than positive outlook on how the 401k system will be doing when they are 59-1/2.

Blogger John Rockwell May 10, 2020 8:58 PM  

All this is why our enemies have so many resources on hand.

Blogger Andrew May 10, 2020 11:44 PM  

All this is why our enemies have so many resources on hand.

This. Wall Street is just giving us what we want, which is: Line only goes up. True savings belong outside the financial economy.

Blogger Azure Amaranthine May 11, 2020 12:07 AM  

"What he did was effectively what anyone does who borrows money: put up collateral. Businesses do it all the time."

Whoosh.

Collateral is irrelevant. The whole collateral is still recorded as there. He pulled money directly out of financier ass no matter how you look at it. It's easy to see when you can work a form of the magic yourself.

Blogger PH May 11, 2020 12:09 AM  

As Zorlig said, you can convert your IRA/401K to a self-directed IRA/401K. I used the firm CheckBookIRA.com & recommend them.

Blogger wahsatchmo May 11, 2020 11:52 AM  

@28 Exactly. The loan is treated like an asset of the 401k, specifically it's a loan receivable from the 401k owner to the 401k Trust for the benefit of the owner. It locked the value of the 401k's underlying investments at the point of the loan without the transfer of cash or other consideration, which is a fiction used in tax and estate planning all the time. It's a fake sale of the 401k's assets to the Trust Owner.

If the Trust Owner leaves the company, the loan becomes due and payable, and if they can't pay it back, it's treated as a withdrawal at the value of the original loan, plus interest.

In other words, a loan receivable was created as a fictional asset at the date of the withdrawal. The fiction expires in 5 years or when the 401k owner leaves the company. Magic indeed.

Blogger Leslie May 11, 2020 12:49 PM  

OP doesn't understand 401k loans. The loan money is reckoned as an asset in the 401k and therefore included in the balance. BUT it is no longer subject to market gains /losses as the money cannot both be invested and in your bank account at the same time.

Also, supposing you leave your employer, you can access 401k money without the earily withdraw penalty IF you first convert it to Roth. Remember, there is no early withdrawal penalty on Roth contribution basis (the sum converted).

Blogger sammibandit May 11, 2020 3:08 PM  

On a Friday I totaled my first car. By Saturday afternoon I pulled out some cash from my employee retirement fund which I had previously been adding to over and above my employer's contributions and put that cash on a used car. I went to a purple car lot (used cars that have cosmetic damage and therefore a great price) and got in a better car than the one I totaled. One scratch on a door panel saved me $4K. A used door is $150. I paid off that purple car in one transaction. It actually cost less than my first car and was a step up in the entry model racket. Not going to lie, this felt a little slimy. Then I got my write off for the first car and pretty much went even Steven. I still drive this beater and will drive it down to the chassis. My shop guys rip on me for it, but they're the same guys who put in masking tape "newly married" on my rear windshield. They're just playing and it's legit. We're always working on our rides when boss isn't around.

Spiritually I didn't feel even Steven.
I hit a native family with a tribal last name (meaning they're nobels). I could have killed 3 generations of a family with a name that's their tribal name. Big ca ca! No one was hurt and I felt so bad I gave the grandma a half pack of cigarettes. They were able to drive away at least.

Blogger sammibandit May 11, 2020 3:56 PM  

Oop that was "newly wed". They're efficient guys.

Blogger Kingly Gift May 11, 2020 3:57 PM  

True, the loan money is not subject to gains/loss in the market. If that were the case, then the borrowers would get in on the same ponzi scheme the lenders run. However, it is still considered an asset on the balance sheet of the 401k fund. The fund keeps the total amount of the fund unchanged based on the expectation of future repayment of the loan. The loaned money is not something that already exists. It is not a "unit of account" that represents some real asset produced by labor performed in the past (such as an apple for sale in a market would be the real asset that was produced by the labor of those who worked to bring it to market). Instead, the loaned money is an expectation of labor obligations in the future. So the loan money was in fact created "ex nihilo" from future expectations. Tomorrow's labor is already spent today. The debtor is enslaved to the lender. And since tomorrow's money is already spent today, the prices are pushed up across the board. The buying power of our labor is pushed down, while the Usurer class siphons the profits off the top. Yes, you can be a cog in this system and navigate it so that it doesn't turn out too bad for you. They have to keep it enticing enough to keep capturing more debtors. But is is a giant system of financial enslavement none the less.

If loans were only ever made without interest, then they would only be given in the context of high trust relationships (close friends, family, etc). There would not be enough loaning to have a detrimental effect of prices, and there would be no usurer class siphoning profits off the top and creating a system of inflated prices where debt is almost impossible to avoid.

Blogger KPKinSunnyPhiladelphia May 11, 2020 5:18 PM  

Azure Amaranthine wrote:"What he did was effectively what anyone does who borrows money: put up collateral. Businesses do it all the time."

Whoosh.

Collateral is irrelevant. The whole collateral is still recorded as there. He pulled money directly out of financier ass no matter how you look at it. It's easy to see when you can work a form of the magic yourself.


ON the one hand you're right, the money IS created. Won't dispute that.

On the other hand, the 401K is collateral against the money-out-of-nothing creation. If the loan goes south, the 401K assets are there for the lender to grab.

Also, the lender might not have "created" it, but got it from some other entity who created it.

Money is always "being created." We just created money in these stimulus packages.

Whoosh!!!

Blogger Azure Amaranthine May 11, 2020 6:20 PM  

"OP doesn't understand 401k loans. The loan money is reckoned as an asset in the 401k and therefore included in the balance. BUT it is no longer subject to market gains /losses as the money cannot both be invested and in your bank account at the same time."

You wouldn't know what OP understands or not. Your last sentence dictates that you either didn't read or didn't understand what you read -- the money CAN "be in both at the same time", and that's the issue.

Blogger Leslie May 12, 2020 12:11 AM  

I'll elaborate. I worked for two of the largest 401k record keeping firms in the US. Not all record keeping firms show the loan balance as part of the 401k total balance. In fact, the last record keeper I worked for changed from not including the balance in the total acct balance to showing it / including it. This whole post is bazaarly familiar to me. We'd get calls like this all the time. It is entirely arbitrary whether a record keeper chooses to show the loan monies as part of the act balance. The loan figure (let's say 10k) if still included in the total account balance must not be confused with the cash value of the acct. It really is just a place holder, not cash, not shares, but potential 401k monies if/when the loan is repaid.

Clearly, neither vox (money ex nihilo!) Nor OP understand a 401k loan. If vox had, he would not have posted. If OP understood, he would not have written,"Now that money essentially exist in 2 places; in my house, and in the stock portfolio of my 401k."

No, the money exists in your house only. Not in the stock portfolio.go ahead calculate how many shares of my stock you can buy with your total acct balance and then see if you can do it.

The record keeper includes the loan balance to show potential ac t balance and to calculate your loan pay off ammount.

Seriously I'd be happy to discuss this on chat form podcast whatever.. . I get it 401k are a regulated money vehicle with lots of strings attached, but no, there isn't any money ex nihilo via a 401k loan.

Blogger KPKinSunnyPhiladelphia May 12, 2020 9:54 AM  

Leslie wrote:

Seriously I'd be happy to discuss this on chat form podcast whatever.. . I get it 401k are a regulated money vehicle with lots of strings attached, but no, there isn't any money ex nihilo via a 401k loan.


Very good explanation.

As mentioned earlier, the borrower's individual balance sheet has not changed. He doesn't miraculously have "more" money; the money does not "exist in two places."

He simply exchanged liabilities. Businesses and people do that all the time.

Now, if you want to say that the money he borrowed was created by the "fractional reserve banking system" that's a different question. A very specific very small money flow like this $90k borrowing could possibly be deconstructed from its original source, but that wouldn't be worth the effort.

It is what it is, and it was what it was. The systemic implications of this individual's financial transaction are, in the end, trivial.

That's not to minimize the bigger issues -- say, creating/borrowing a few trillion dollars to support folks in this stupid lockdown.

Blogger SirHamster May 12, 2020 6:11 PM  

Leslie wrote:No, the money exists in your house only. Not in the stock portfolio.go ahead calculate how many shares of my stock you can buy with your total acct balance and then see if you can do it.
Not being able to change the stock composition of the 401k does not disprove the statement that money is created when the loan was taken.

Accurately calculating the net worth of an individual by accounting for all assets and liabilities doesn't change the fact of money creation, either.

"Just as taking out a new loan creates money, the repayment of bank loans destroys money." - Bank of England
https://voxday.blogspot.com/2020/03/how-money-is-created.html

Was a loan created using the 401K as collateral? Yes. Was money created by the loan? By definition, yes.

Blogger Azure Amaranthine May 14, 2020 8:37 AM  

"Money is always "being created." We just created money in these stimulus packages.

Whoosh!!! "


No point in me saying whoosh at this point, what you have isn't a mistake or oversight, it's an incurable condition called stupid that makes you think you said something meaningfully different than me. No amount of renaming it or pretending that it's someone else's action changes what it is.

"No, the money exists in your house only. Not in the stock portfolio."

That's what sanity plus naivety says, though not finance.

"Not all record keeping firms show the loan balance as part of the 401k total balance. In fact, the last record keeper I worked for changed from not including the balance in the total acct balance to showing it / including it. This whole post is bazaarly familiar to me. We'd get calls like this all the time. It is entirely arbitrary whether a record keeper chooses to show the loan monies as part of the act balance."

Then you either have had at times two divergent sets of records for the same thing, or you're wrong and your company or the holding company is deciding whether to credit (fabricate) the difference or record it as subtracted. The former is technically illegal coming from whoever's actually holding the money, though I wouldn't be surprised to find out that it's "traditional", overlooked, let slide, semantically loopholed, or completely forgotten by the legal system.

The ultimate metric is whether or not the 401k accrues at the same rate whether or not money is marked as lent out. That it is said to be unable to purchase shares doesn't matter if it already has.

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