They pay a fee for the risk the bank takes of not being paid back.

What risk? What are the banks actually risking?

Why should a borrower want to keep X dollars from a loan

You just answered that.

What matters is that there is enough money in circulation that commerce can accommodate what the population produces.

See, you do know what I'm talking about.

if it's somehow not real because the bank "made it up"?

It becomes official - there is no "undo" button at that point.

If it isn't spent, ever, it has neither purpose nor value.

Why would it never be spent?

If it is spent, the money is gone anyways and in return you have the result of someone else's production.

That the point of trade, isn't it?

If you want to take out a bank loan in order to have a pile of cash under your mattress, you're a fool.

I don't think a loan application like that would get approved.

You clearly are unhappy about the specific methods by which money enters and leaves the economy

Naturally. Who wouldn't be?

You have not established enough credibility

What if I was a billionaire?
Or a member of the board of a central bank?
What difference does it make?

to declare the entirety of economists bullshit

I said "Don't believe the bullshit", you can still believe the truth on the rare occasions it's mentioned.

That some unnamed people apparently consider central banking a substitute for slavery is unimpressive and unpersuasive.

I didn't want to bring it up, but I'd thought it help to understand how it got its start. Sadly, it was true. They have my compliments (even though they passed away long before I was born), because the system is "elegant". But we live in different times now. There needs to be some adjustments made to that wonderful system.

So post it or move on.

You want me to do everything? I'm not getting paid for this.

I find what you have posted to be unpersuasive

Which part?

Take some time to think about the cause and effects if you were to adjust the amount of debt without changing the amount of money supplied. Take a look at some of the policies that central lenders are trying right now to stimulate the economy with. Think outside the box, lower the debt below 100%, and imagine how that would change things. If you're sincere, I'm confident you'll have your "eureka" moment and want to preach it to the world.

In the U.S., the only entity that can "create money from nothing" and lend it out is the Federal Reserve.

The only entities that can borrow from the Federal Reserve are member banks and the U.S. treasury.

All profits from its operations are paid out to its member banks and the U.S. treasury.

All member banks are required to invest 3% of their capital in the Federal Reserve. Member bank share of profits are capped at 6% of their capital investment by law -- it takes 34 years before member banks start to actually profit from membership.

Federal reserve interest rates are HIGHER than market interest rates. The Federal Reserve "discount window" is misleadingly named. Federal Reserve loans to banks are typically overnight loans made with the purpose of meeting reserve requirements at close of business.

So the only entities that profit from the system the OP is describing are the only ones that can borrow from the system, at least as far as the U.S. is concerned. Inflation aside, I don't really see the problem?

it takes 34 years before member banks start to actually profit from membership.

Has it been 34 years yet?

I don't really see the problem?

Well if you don't see any problem, then I guess there is no problem.

-

Why are people so quick to defend a system that is designed to keep them in debt. Can anyone explain to me what is so noble about artificial debt?

-

I know this topic is uncomfortable for some people, because it means admitting to some truths that you simply wish were not true. But there is no way forward or way out of this without honest critical examination of the system in place. For most of my life I took it for granted that this economic system was the best possible one and that anyone who failed, did so at their own fault. I can no longer pretend that to be the case.

Can't just wish this one away. It's easy to figure out if you're willing to take the time and be honest about it.

I can't believe that everyone has become so cynical that they refuse to accept the idea of a better result for everybody.

BrianRhineheart:

You're a hero of manual quote arrangement. I am not, so my formatting will not look as nice as yours.

What risk? What are the banks actually risking?

The risk of not being paid back. It's not generally a huge risk for a whole institution, but a bank that never gets repaid on its loans will eventually fail as a result.

You just answered that.

No, not at all. You want to spend the money you borrow for some purpose, or else the loan really is a terrible deal. That's why I included the mattress piece. Spending the money is consuming goods and services, which you can "keep" after you've paid back the cost of the loan.

See, you do know what I'm talking about.

Yes, I think so. I've read your posts carefully and asked questions to try to clarify your meaning. I have also thought about these matters a lot, though cetainly less than many. The issue now is, I think, not that I don't understand what you've said but that I don't see the connection to your conclusions. There may be more information you can provide that will help me see that link, though that increasingly seems not to be the case. It may be that we just disagree.

It becomes official - there is no "undo" button at that point.

That would make the money more real, not less.

Why would it never be spent?

What I'm trying to express, perhaps poorly, is that holding X dollars is not the purpose of a loan or of money. The idea that holding a dollar in your hand is the only possible measure of the value of a dollar is just wrong. Few people want currency, but most want the production that currency lets them obtain.

That the point of trade, isn't it?

Yes, and the point of money is to facilitate trade. Again, holding a unit of currency is not important. Using it in transactions is, in which case it's the movement of money through the system that matters, not where money is resting at a particular moment. This and the above point were in response to your "you can't keep any of the money" comment.

Naturally. Who wouldn't be?

I'm not that unhappy about it. It's not issue-free, to be sure, but neither is it some massive, shadowy con job on the population.

What if I was a billionaire?

Or a member of the board of a central bank?
What difference does it make?

Are you kidding? If you throw out assertions, but not enough evidence to support those assertions, your credibility may bridge the gap, at least for the sake of argument. You're hammering your assertions pretty hard all over the thread, but your arguments and evidence aren't supporting the assertions. If you were a Nobel-prize winning economist or monetary policy theorist I might have more faith in your assertions even in the absence of evidence which compels me. Instead, you're using terminology oddly, blending different ideas together and deploying them for convenience instead of clarity or methodology, and complaining that pretty much everyone is a fool but you and you are one of the few guardians of the Truth. If you want to be believed you'll need to make arguments that are better or more persuasive in some way. Your major persuasive point really seems to be what you perceive as your own Obvious Correctness, and getting frustrated when people are not convinced by it.

I said "Don't believe the bullshit", you can still believe the truth on the rare occasions it's mentioned.

I should hope so. But you didn't provide any guidance as to what's bullshit and what isn't. The clear implication from this thread is that anything contrary to your position is inherently bullshit. See above for why that doesn't do much for me.

I didn't want to bring it up, but I'd thought it help to understand how it got its start. Sadly, it was true. They have my compliments (even though they passed away long before I was born), because the system is "elegant". But we live in different times now. There needs to be some adjustments made to that wonderful system.

Unless you have direct quotes from the architect of the central banking system (18th and 19th century architects would be OK too, because the continuity of the central bank has not been constant but its nature has been more continuous) saying that it's a substitute for slavery I will still find this assertion a stretch too far. And if times are different, necessitating a change, does that mean that the current system is no longer an effective substitute for slavery? Or are you referring to the social acceptability of slavery between then and now?

You want me to do everything? I'm not getting paid for this.

You've not done anything. If you want to fuss and vent about how not enough people are being persuaded by what you have to say then you might want to try to be more persuasive. You indicated that you had more information you intended to post (the thread title includes "step 1"!), and that that information might help express your views more clearly or persuade others.What, you were only going to grace everyone with more if you got universal accolades in part 1?

Which part?

Take some time to think about the cause and effects if you were to adjust the amount of debt without changing the amount of money supplied. Take a look at some of the policies that central lenders are trying right now to stimulate the economy with. Think outside the box, lower the debt below 100%, and imagine how that would change things. If you're sincere, I'm confident you'll have your "eureka" moment and want to preach it to the world.

All of it. I'm not sure that your understanding of the monetary system is accurate but it's been hard to draw enough information out of you to conclude that. My view could be wrong as well, though I don't think it is, but your argumentation here has not lead me to conclude that either. Obviously the same is true in reverse, and you are not convinced by what I've said. You could present me with some of the (apparently nefarious) policies from central lenders, which may well be enough to change my opinion. But you don't. You direct me to the wide world to be convinced, with my only guide your supposed Obvious Total Correctness.

I've thought about the issues you have raised, before as well as during this thread, and none of my eureka moments have involved reaching your position. I don't imagine that lowering "the debt" below 100% would change things anywhere near what you are suggesting it would. Your use of "the debt" is also unclear-- are you referring to the national debt?

Are you really the same person that, upthread, was so unhappy that others acted as if they already knew it all and would not listen to any other ideas?

I know this topic is uncomfortable for some people, because it means admitting to some truths that you simply wish were not true. But there is no way forward or way out of this without honest critical examination of the system in place. For most of my life I took it for granted that this economic system was the best possible one and that anyone who failed, did so at their own fault. I can no longer pretend that to be the case.

Can't just wish this one away. It's easy to figure out if you're willing to take the time and be honest about it.

I can't believe that everyone has become so cynical that they refuse to accept the idea of a better result for everybody.

I'd like a bit more of that honest and critical examination from you. I can absolutely accept the idea of a better system for everybody, but until you present that idea there is no alternative to the current system for me to evaluate in this thread. Even if I put one forward it may not be the one that you are considering.

What you have offered so far is your own certainty, along with some muddled platitudes, and a mystifying refusal to post additional information which you, at least at one time, intended to post. Because you "shouldn't have to do everything" in a thread you started ostensibly to do what you are now reluctant to do.

it takes 34 years before member banks start to actually profit from membership.

Has it been 34 years yet?

I don't really see the problem?

Well if you don't see any problem, then I guess there is no problem.

-

Why are people so quick to defend a system that is designed to keep them in debt. Can anyone explain to me what is so noble about artificial debt?

-

I know this topic is uncomfortable for some people, because it means admitting to some truths that you simply wish were not true. But there is no way forward or way out of this without honest critical examination of the system in place. For most of my life I took it for granted that this economic system was the best possible one and that anyone who failed, did so at their own fault. I can no longer pretend that to be the case.

Can't just wish this one away. It's easy to figure out if you're willing to take the time and be honest about it.

I can't believe that everyone has become so cynical that they refuse to accept the idea of a better result for everybody.

Way to act like you're addressing my post while totally ignoring the actual information it contained.

You're not "in debt" to the Federal Reserve, or (probably) any government's central bank. If you have any debt at all, it's because you chose rapid access to some material good or service over having to save to acquire it, and you're probably in debt to some commercial bank, or a firm that bought your debt as a security from such a bank, or perhaps to some other business that extended you a line of credit to get more money out of you, or maybe to a private individual who was kind enough to loan you some money. If you are in debt, you would be in debt regardless of whether or not central banking and fiat currency were in practice, it is something that you chose for yourself independently of this practice even existing.

It is wrong to say that we have a "debt-based economy". We have far too much debt in our economy, for sure -- we all like instant gratification, and many of us have trouble planning for the future and make unwise borrowing choices -- but it's a situation which would have occurred regardless of whether or not we had a central bank creating money from nothing to make short-term and emergency loans to lending institutions, and all economies are based on production.

I haven't even brought up taxes yet. Might as well now. That's part 2.

I going to postpone my reply for at least a day.

In the meantime, how do solve a problem like Greece or Venezuela? Better yet, how do you PREVENT a problem like Greece or Venezuela?

In the meantime, how do solve a problem like Greece or Venezuela? Better yet, how do you PREVENT a problem like Greece or Venezuela?

By keeping corrupting in check and making sure that the political system is not taken over by a single person, a family or some guy and all his own croonies?

Its not as much an economical but more of a political problem, that happened to infest the full society over time.

If the guys up there, the powerful and rich, are not paying their taxes and just taking all the money they can, why should I as a normal guy do anything other than that?

[quote name="samoth" post="5287117" timestamp="1460760917"]

Swiss Franc

How so?[/quote] Because people had money (billions) invested in financial instruments that were based on the Franc being pegged against the Euro.[/quote]Well yes, this lost me a few two-digit grand. But about half of that value is "back" in the mean time, and you needed not do anything but sit on it and let time pass. Notably, the exchange rate recovered (and still is recovering) despite the EU Ship steered by Cap'n Merkel having rammed several huge icebergs since then and still heading for an even bigger one, with the captain having both eyes closed and the first mate being under deck. With someone who is only marginally able at steering the Big Ship (that's admittedly a challenge, given the available alternatives), the Franc would probably only be worth 0.50 Euros now. With Switzerland's biggest industry (secret fraudulent bank accounts) being history, it's still possible that this will happen. Time will show if chocolate, luxury wristwatches, and custom-made hunting rifles alone are enough to keep a currency stable.

Hedge fonds

OK, but that one isn't surprising. Hedge fonds are... well, what do you call them, shady investments? Money burners? Hedgefond managers do deliberately dangerous, haphazard investments all the time knowing that if all goes well they are the hero of the day. On the other hand side, if things go bad, they only lost someone else's money, and they can tell them "Oh, but you knew this was a risk investment".

horror stories in the press about low paid teachers who found themselves 300k in debt from only a 10k position

That's highly dubious. This is only possible if they took up loans to do their "investments" or if they did futures or huge short sales. If you take up a loan to speculate, then you deserve not only end up in debt, but you also deserve getting 30 beats with a bamboo stick. And the banker who gave you a loan for that, too. That's just asking for trouble. Futures and short sales... well, nobody will let a low paid teacher trade futures or go short (no way!). Heck, they're not even allowing me to sell short. You gotta be something like... dunno, a bank owner or something to do that. Which leaves only "normal" investments that these teachers could have taken. Like stocks, options, or fonds. Any of which will be worth zero in the very worst case, but will never leave you in debt.

When 100k is loaned, perhaps 105k is owed. The 100k is spent, but needs to be returned to the bank someday. But what about the extra 5k, where it will come from? [...] Meanwhile, nobody is wondering "Where did the bank get all that money?". The answer; they made it up. Don't trivialize this, not only can they can make up money when a borrower asks for a loan, they expect so much in return. The borrower can't keep any of it - it's all debt.

Not sure if I don't understand you, or if you don't understand how money works... but in any case it's all a bit queer. :D If you take up a loan, then you agree to pay back more than you have received. Why? Well obviously because the lender wants to live too, and it's you who is asking for something. Where does this money come from? It comes right out of your pocket. The lender does not "create" it, and neither did you. You must have gotten that money from somewhere (earned, stolen, whatever). The only one who (legitimately) creates money out of nothing is the central bank. Or, more concretely, the government. But that has nothing to do with any loans that you may or may not have or with any interest that you may or may not need to pay. The government (sadly) can just print more money whenever it feels like doing so (note that "print" is not necessarily to be taken literally, they can just as well "print" money logically). All other money that is gained by anyone (banks included) is lost by someone else else. Just like every loaf of bread that I take from you is gone from your pocket. Zero sum game. I win some, that means you lost some. Now, it admittedly gets somewhat funny when governments take up debt. They are taking up a debt and either never pay back at all (taking up loans to pay the interest for loans that pay interests of loans that pay interests), or pay it back with money that they can print as they please. Wealth out of nowhere! Well, of course not, that would be nice. The system stays a zero-sum game. There is a finite amount of property / value and adding more currency to that simply means each discrete amount of currency is worth less (inflation). Which means nothing more and nothing less than all the poor fools who own money get a little less value for their money. If 1 currency could buy 1 cheese before, it can now only buy 9/10 cheese. Every now and then, government will just say "OK, seriously now, we kinda... need to readjust the currency", and everybody will be angry because over night they've lost 90% of the "value" that they rightfully own. But time goes on, and 20 years later nobody talks about it any more. Plus, there's nothing you can do anyway. Governments are criminals, they wouldn't be in government if they weren't. There's none who are any better than the others (though some are worse than others), it's simply a sad reality. There are two kind of people in this world, those who are stupid and work their ass off, and there's those who are better than everybody else. Not much has changed during the last 1,000-2,000 years really, except nowadays it's no longer the guy with the biggest sword who rules, but the most professional liar.

Swiss Franc

How so?

Because people had money (billions) invested in financial instruments that were based on the Franc being pegged against the Euro.

Well yes, this lost me a few two-digit grand. But about half of that value is "back" in the mean time, and you needed not do anything but sit on it and let time pass. Notably, the exchange rate recovered (and still is recovering) despite the EU Ship steered by Cap'n Merkel having rammed several huge icebergs since then and still heading for an even bigger one, with the captain having both eyes closed and the first mate being under deck. With someone who is only marginally able at steering the Big Ship (that's admittedly a challenge, given the available alternatives), the Franc would probably only be worth 0.50 Euros now. With Switzerland's biggest industry (secret fraudulent bank accounts) being history, it's still possible that this will happen. Time will show if chocolate, luxury wristwatches, and custom-made hunting rifles alone are enough to keep a currency stable.

Hedge fonds

OK, but that one isn't surprising. Hedge fonds are... well, what do you call them, shady investments? Money burners? Hedgefond managers do deliberately dangerous, haphazard investments all the time knowing that if all goes well they are the hero of the day. On the other hand side, if things go bad, they only lost someone else's money, and they can tell them "Oh, but you knew this was a risk investment".

horror stories in the press about low paid teachers who found themselves 300k in debt from only a 10k position

That's highly dubious. This is only possible if they took up loans to do their "investments" or if they did futures or huge short sales.

If you take up a loan to speculate, then you deserve not only end up in debt, but you also deserve getting 30 beats with a bamboo stick. And the banker who gave you a loan for that, too. That's just asking for trouble.

Futures and short sales... well, nobody will let a low paid teacher trade futures or go short (no way!). Heck, they're not even allowing me to sell short. You gotta be something like... dunno, a bank owner or something to do that.

Which leaves only "normal" investments that these teachers could have taken. Like stocks, options, or fonds. Any of which will be worth zero in the very worst case, but will never leave you in debt.

1) Well, given enough time, switzerland might actually turn into a still-quite-good-pace-for-banking when all the other hotspots of the financial industry had their own "panama-gate" (like, all the US banks still doing shady things today, and the US government doesn't care because its just foreigneirs and not US tax money lost).

But yeah, currently its more the fact that switzerland is one of most stable countries * the fact that switzerland is moving slowly all the time, but also moving slowly when doing sh*t decisions * everyone else just crashing their ship with ill decisions which keeps the swiss franc so high... I don't mind, makes the insane prices here in switzerland move into more sane regions over time :)

2 + 3) QFT... high risk investments is best left to the pros... if even a lot of traders are not good/intelligent/fast enough to avoid making huge losses, how should the average guy which a) doesn't trade with the money of someone else, b) has a job besides trading and is not paid to watch his ticker 24/7 or cannot afford the even huger risk of having a machine trade for him, and c) lacks even the basic understanding of economics some traders seem to have (I am pretty sure there are good traders out there, well educated in economics and the products they trade in... I am sure they are a majority (or at least I hope so)... but what I have heard and seen sometimes make me doubt that...).

If the guys up there, the powerful and rich, are not paying their taxes and just taking all the money they can, why should I as a normal guy do anything other than that?

That is a sentiment I hear often. I'm trying to convince people not to use that excuse anymore. But, some habits refuse to fade away.

What I was hoping to highlight, pointing to those real world examples, was what happens when debt is allowed to run its course unimpeded. There's an old phrase about investigating corruption that goes "Follow the money". I'd like to add "Follow the debt".

Not sure if I don't understand you, or if you don't understand how money works

*facepalm* why is this so difficult?

The lender does not "create" it, and neither did you.

Banks can create it and the borrower is the reason why the bank creates it.

Where does this money come from? It comes right out of your pocket.

--Somebody else's pocket.

If you take up a loan, then you agree to pay back more than you have received. Why? Well obviously because the lender wants to live too

Trust me, the Bank has plenty with which to "live on". More than enough. These days banks have more money than they know what to do with it. Because psychologically making money is the measure of their success, and they do nothing else, they just keep making more money, especially when other banks/financial sectors are also making money, they don't want to feel like they're lagging behind.

The government (sadly) can just print more money whenever it feels like doing so

The Government can get a loan from its Central Bank, but the taxpayers repay those loans and the interest on those loans. It simply adds more burden unto the public.

...Wealth out of nowhere!

Which should illustrate why debt is artificial too.

a bank that never gets repaid on its loans will eventually fail as a result.

Banks seldom take that kind of risk (even when under pressure to lend as much as possible).
My point was, when they "create" money, that isn't much of risk. And if a loan defaults, they recover as much as possible by forcing the sale of the borrower's assets (if they have any left).

Few people want currency, but most want the production that currency lets them obtain.

You'll have to introduce me to these people some day, they sound nice (The people I meet usually want currency above all else.)

This and the above point were in response to your "you can't keep any of the money" comment.

I see. You do realize I am talking about "debt" not letting them keep the money, yes?

but neither is it some massive, shadowy con job on the population.

I guess that is just something a person has to find out on their own at their own pace.

Instead, you're using terminology oddly, blending different ideas together and deploying them for convenience

It can't be helped. Take for example "negative interest rates", I can't use that term because it refers to a different concept, but twice people have mistaken it with what I was trying to explain. Some economic terms/concepts are "deliberately" confusing. If you can't take my word on it, then you'll have to study to see for yourself. I'm trying to keep the language as simple as possible but sometimes I have to use an economic term.

But you didn't provide any guidance as to what's bullshit and what isn't.

That isn't what I'm here to do.

saying that it's a substitute for slavery I will still find this assertion a stretch too far.

You don't have to believe me (besides, it's a little late to put those people on trial, isn't it?). But I won't provide a mini-history lecture. You are aware slavery existed legally (immorally) for some time, right?

And if times are different, necessitating a change, does that mean that the current system is no longer an effective substitute for slavery? Or are you referring to the social acceptability of slavery between then and now?

Slavery still exists today in various parts of the world (I'm not exaggerating). I would never agree to slavery. Since you like quotes, you might like this one, in words of MLK: "It may be true that the law cannot change the heart but it can restrain the heartless." I feel the same way about legislating insatiable greed.

you might want to try to be more persuasive.

Like Tony Robbins? Just because I explain or point out something, doesn't mean people are going to be motivated to change or fix it. There is a lot of built-in resistance to change in some people, even when they know the alternative is better for them - I can't explain that. Some people only genuinely want to change when they've hit rock bottom. I would rather society/the economy not hit rock bottom (as well as not continue to limit themselves - there is a lot of unnecessary stagnation).

part 1

Part 1 is the most important aspect at this time. If people don't have the "real" understanding of the economy, part 2 and 3 won't matter a jot.

...

I am more surprised that people haven't arrived at this conclusion on their own. If they genuinely tried, they'd see how it works and how it ought to change for the next phase of the economy.