Can every debt be paid off?

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lorb
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Re: Can every debt be paid off?

Postby lorb » Mon Feb 23, 2015 9:51 pm UTC

ucim wrote:
johnfrmcleveland wrote:The difficulty of paying off all debt is that you would need to somehow take dollars from people who are legitimately ahead of the game, holding more dollars than debt. The bank-created dollars exist to pay off the bank-created debt, but some people are in debt while others are in the black.
Yes, those people will be indentured, and will have to work to pay off their debt.

Again, take the simple case. I have nothing, you have $50. I borrow $20 from you and buy a pizza. I am now fed, I owe you $20, and you have $30. The pizza parlor has $20, but is not part of the scenario. The debt exists between you and me, nobody else.

This debt cannot be erased just by moving money around.

However, I can wash dishes for a few hours at the pizza parlor in exchange for $20, and give that money to you.

I will now be fed, tired, and out of debt. All debt in this system will have been erased.

Real world? The same thing. Some people will have to work to pay back what they owe.

What about interest? Do the $20 you borrow to eat pizza not increase to something like $21 of debt?
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Tyndmyr
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Re: Can every debt be paid off?

Postby Tyndmyr » Mon Feb 23, 2015 10:16 pm UTC

Often, but it's a needless complication that doesn't enhance the example. You get a lot of these in economics, because modeling the whole economy is obnoxious when you're just trying to explain one concept.

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Re: Can every debt be paid off?

Postby ucim » Tue Feb 24, 2015 5:15 am UTC

lorb wrote:What about interest? Do the $20 you borrow to eat pizza not increase to something like $21 of debt?
Short answer: See Tyndmyr's post just above this one. But the question is legitimate once you understand the example without interest.

Long answer: Expand the scenario to include a bike shop that has $75.

After I pay back the $20 I borrowed, I still owe you $1. So, I work at the bike shop greasing chains for a while. They give me $1, which I pay you. All debt is erased, you now have $51, the bike shop has $74, and their chains are greased.

The net is that I worked for a pizza, and the bike shop paid you $1 for you to cause me to grease their chains. The first part is a straight trade (mediated by the money you lent me). But in the second part, your charging of interest increased the GNP of this scenario. I (as the worker) am more tired, but chains got greased, and the machinery of industry advanced.
Spoiler:
We could leave the bike shop out of this; at the point where I owe you $1, I could agree to take some dictation for you in exchange for a virtual dollar, which you never actually have to give me because I give it right back to you to cancel my debt to you. It so happens that you have $30, but you don't have to give me any of that $30 because I give it right back to you. (This scenario works even if you don't have any money left!) You create money out of thin air, and then make it disappear in an instant when it comes right back to you.
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Re: Can every debt be paid off?

Postby johnfrmcleveland » Tue Feb 24, 2015 6:53 pm UTC

lorb wrote:What about interest? Do the $20 you borrow to eat pizza not increase to something like $21 of debt?


Whatever dollar you use to pay the interest is a pre-existing dollar, moved from somewhere else. So in effect, you have paid $21 for your pizza.

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Re: Can every debt be paid off?

Postby johnfrmcleveland » Tue Feb 24, 2015 7:07 pm UTC

Sorry for the delay. Busy week.

ucim wrote:
johnfrmcleveland wrote:The difficulty of paying off all debt is that you would need to somehow take dollars from people who are legitimately ahead of the game, holding more dollars than debt. The bank-created dollars exist to pay off the bank-created debt, but some people are in debt while others are in the black.
Yes, those people will be indentured, and will have to work to pay off their debt.

Again, take the simple case. I have nothing, you have $50. I borrow $20 from you and buy a pizza. I am now fed, I owe you $20, and you have $30. The pizza parlor has $20, but is not part of the scenario. The debt exists between you and me, nobody else.

This debt cannot be erased just by moving money around.

However, I can wash dishes for a few hours at the pizza parlor in exchange for $20, and give that money to you.

I will now be fed, tired, and out of debt. All debt in this system will have been erased.

Real world? The same thing. Some people will have to work to pay back what they owe.

Run the scenario again, except that I break my back on the way to wash dishes at the pizza parlor. I now cannot work to pay my debt back. This scenario cannot be unwound, at least not without some debt being forgiven.

Real world? The same thing. There are almost certainly people who are in debt beyond their ability to pay. Those debts could be forgiven, but that's not the same as paying them off.

So, in theory, yes every debt could be paid off. But in practice, there are almost certainly debts that cannot.


If you were paid for your labor, then money still moved.

The only way to extinguish all debt is for those who hold all of the dollars to spend them. Otherwise, if they hold dollars, then somebody else holds the debt.

Government dollars can offer some relief from debt, because the government (and not a private party) holds the liability (which isn't much of a liability, since they only owe themselves). There are, I think, about $12 trillion worth of government-created financial assets (dollars + bonds) held by various parties (which includes every entity that is not the U.S. federal government), which provides the economy with $12 trillion that can be saved/held without the pressure of having to be repaid to a bank.

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Re: Can every debt be paid off?

Postby Tyndmyr » Tue Feb 24, 2015 8:25 pm UTC

ucim wrote:
lorb wrote:What about interest? Do the $20 you borrow to eat pizza not increase to something like $21 of debt?
Short answer: See Tyndmyr's post just above this one. But the question is legitimate once you understand the example without interest.

Long answer: Expand the scenario to include a bike shop that has $75.

After I pay back the $20 I borrowed, I still owe you $1. So, I work at the bike shop greasing chains for a while. They give me $1, which I pay you. All debt is erased, you now have $51, the bike shop has $74, and their chains are greased.

The net is that I worked for a pizza, and the bike shop paid you $1 for you to cause me to grease their chains. The first part is a straight trade (mediated by the money you lent me). But in the second part, your charging of interest increased the GNP of this scenario. I (as the worker) am more tired, but chains got greased, and the machinery of industry advanced.
Spoiler:
We could leave the bike shop out of this; at the point where I owe you $1, I could agree to take some dictation for you in exchange for a virtual dollar, which you never actually have to give me because I give it right back to you to cancel my debt to you. It so happens that you have $30, but you don't have to give me any of that $30 because I give it right back to you. (This scenario works even if you don't have any money left!) You create money out of thin air, and then make it disappear in an instant when it comes right back to you.
Jose


It's sort of an illusory increase of GNP, though. If the debt were uncollectable, the increase would vanish. It isn't until the additional work is done that the actual production of the increase occurs.

Usually, this abstraction is good enough, but it is illustrative of how bubbles can occur.

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Re: Can every debt be paid off?

Postby ucim » Tue Feb 24, 2015 9:13 pm UTC

Tyndmyr wrote:It's sort of an illusory increase of GNP, though. If the debt were uncollectable, the increase would vanish. It isn't until the additional work is done that the actual production of the increase occurs.
Yes, that is correct. I should have written a bit more carefully. The GNP increases when I grease the chains. The interest causes me to (want to) grease the chains, and thus spurs me on. But yes, if I break my back first, or decide to smoke weed instead, then no GNP increase occurs and I remain in debt.

All debt carries this risk.

johnfrmcleveland wrote:If you were paid for your labor, then money still moved.
Yes, but the movement of money isn't the important part. It's the labor that justifies the movement of money.

johnfrmcleveland wrote:The only way to extinguish all debt is for those who hold all of the dollars to spend them. Otherwise, if they hold dollars, then somebody else holds the debt.
No, and double no. You are still confusing "spend" and "redeem". Forget about bank accounts for the moment (an unnecessary complication for now) and just deal with ordinary M0 dollar bills. These represent an obligation of the US government and can only be redeemed at the Treasury itself.
Spoiler:
Now, just what this debt is has gotten fuzzy, since it's no longer gold, but that is a different issue. The point is that it's the US government that issues these pieces of paper, and so only the US government can redeem them. (One way to do so is to pay taxes with them). Spending them (trading them to somebody else for goods and services) does not count as redemption any more than my trading you my {grocery store coupon for free soup} in exchange for your fixing my flat "redeems" that coupon. I can only do that at the grocery store. For soup.
johnfrmcleveland wrote:Whatever dollar you use to pay the interest is a pre-existing dollar, moved from somewhere else. So in effect, you have paid $21 for your pizza.
Half right. Yes, in effect I paid $21 for the pizza. But look under my spoiler at the "no bike shop" version. You create a dollar out of thin air and give it to me in exchange for my work of taking some dictation. I then give that dollar right back to you, extinguishing it. You, in this case, are the issuer. It's a different kind of dollar.
Spoiler:
To be more precise, it's a "promise by you to pay me a (real) dollar on demand". You keep track of these promises on your own ledger book, and I trust you to do so.
This is akin to (but not quite the same as) the difference between an M0 dollar and an M1 dollar, in that I didn't actually have to have that dollar beforehand, and the issuer is not the government.

So, when you say:
johnfrmcleveland wrote:The only way to extinguish all debt is for those who hold all of the dollars to spend them. Otherwise, if they hold dollars, then somebody else holds the debt.
... this could make sense if you were talking only about M1 dollars, and not M0 dollars. And not just spend them, but spend them in the right "direction". This is the key difference between the two, illustrated (though not proven) above.

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Re: Can every debt be paid off?

Postby Quizatzhaderac » Tue Mar 03, 2015 10:47 pm UTC

@OP, is this sort of what you were imaging when you spoke of every debt being paid off?
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Re: Can every debt be paid off?

Postby Jplus » Sat Apr 11, 2015 10:24 pm UTC

I'm late to the discussion, but I believe I might still have something to add here. Our financial system is, in a sense, so perverse that it's hard to believe.

Disclaimer: I'm not an economist and I had only a single year of economics in secondary school. What I'm going to write here is my best understanding from information I gathered out of interest.

I'll start with a direct answer to the topic question: it is impossible to pay off all debt currently in existence, without either changing the rules of our financial system or creating even more debt. I'll explain why this is the case below (the answer is mostly in the interest associated with every loan).


I think johnfrmcleveland is essentially right about banks creating money out of nothing, and the money thus created being as "real" as it gets. To illustrate, I start from a post on the previous page:

Zamfir wrote:@Autolykos, you might be misreading that article. There are 2 kinds of deposits here.The multiplier is the ratio between the deposits that the public has at the bank, and the deposits that the bank has at the central bank. The balance sheet of the central bank only counts those last deposits, but the first kind is also currency.

Ordinary banks do not loan out more money than they got in! Only the central bank does that.

Suppose people have 100 million in deposits at the bank. And the bank has 10 million in its reserve deposit at the central bank, or as paper banknotes in its vaults. The multiplier is 10. Then the bank can invest the remaining 90 million. So they can loan out 0.9 times the deposits they got in. A multiplier of 100 means they can loan out 0.99 times their deposits.

As johnfrmcleveland has explained, banks do in fact loan out much more money than is deposited to them. The latter paragraph is right that there is a multiplier, however. The multiplier is called the fractional reserve. If the government decides that the fractional reserve should be at least 1 to 10 and a bank has 10m deposited at the central bank, then that bank can loan out at most 100m to customers. That is, regardless of how much money is deposited by customers at the bank. As johnfrmcleveland said, the fractional reserve is just a government-imposed safety measure that doesn't really change how the system works, although it does limit the rate at which banks can inflate the total pool of money and debt.

Suppose that MoneyHoard, my bank, has 1k deposited at the central bank and the fractional reserve is 1 to 10. This legally enables MoneyHoard to create a 10k money-antimoney pair, adding the money as a loan to my account (the principal) and the antimoney to their liabilities.

We can track what happens when I use the loan to pay someone, who then deposits it at their bank, which then issues a loan to someone else, and so on. This has been done earlier on in the thread. However, doing so is mostly a distraction, because all money that gets "created" in this way is balanced by antimoney somewhere. The really mind-boggling stuff can be illustrated from just my relationship with MoneyHoard.

In order to fulfill my debt, I will have to pay off the 10k principal plus some amount of interest, let's say 1k for the sake of the example. Observe that the bank has just created 10k of money but 11k of debt. Nothing in the economy is creating additional money to make up for the difference of 1k. This happens with every loan. So here we already have a problem in paying off all debt.

If I pay off my debt, MoneyHoard uses 10k of the money to anihilate 10k of antimoney in their balance sheet. The other 1k is earnings, which the bank can use however it likes. It might, for example, deposit the money at the central bank. MoneyHoard would then have 2k in its reserve and be able to create 20k of loans, receiving 2k of interest as earnings. This is how banks are able to accumulate money at an exponential rate, and will also explain why we have exponential inflation.

The obvious discrepancy is that MoneyHoard eventually annihilates all money it creates, yet is exponentially accumulating money. There is no (other) magical source to accumulate the money from; virtually all money in circulation is created in temporary money-antimoney pairs by banks like MoneyHoard. They only reason this situation can persist is because, somewhere down the chain, someone is taking a larger loan so I can pay off mine.

Concluding, banks create the money faster than they annihilate it and the total amount of money in circulation grows exponentially. As the amount increases its value decreases, hence inflation. The amount of debt grows exponentially as well and it is progressively greater than the amount of money. So paying off all debts is not only impossible, but increasingly so as time progresses.


I found that the documentary Money As Debt (youtube) by Paul Grignon explained most of these things very well. The first ~27 minutes cover the factual basics: how the current financial system came into existence, how loans work and how money is coupled to debt. In the next ~12 minutes it gets opinionated, discussing the sustainability of the exponential grow of debt and suggesting alternative financial systems. In the ~5 minutes after that it portrays the banks as an abusive party and in the final ~2 minutes it goes on to overtly insinuate conspiracy. Regardless of where you want to stop, I highly recommend watching at least the first half hour of it. :P
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Re: Can every debt be paid off?

Postby Yakk » Sun Apr 12, 2015 8:40 am UTC

Yes, that is a common misconception JPlus.

The way to deal with it is the coconut analogy.

You are on a mostly deserted island. There is just you, and Alice over there.

Alice owns a grove of coconut trees. You have some good coconut land.

Alice creates 10,000 cocobucks (good for 10,000 coconuts!), gives it to you as seed capitol, and records your debt. You owe 1% interest on it per year.

1 year passes. You eat 100 coconuts (paying 100 cocobucks) and buy 100 to plant some trees and pay 100 cocobucks interest.

You have 9700 cocobucks. Alice has a debt of 10,000 cocobucks recorded against you. Alice has 300 cocobucks.

Alice needs someone to stand and wave a palm frond at her in the heat of the day. She pays 1 cocobuck every 2 days for this right. You so this, and earn back 180 cocobucks.

You have 9880 cocobucks. Alice has a debt of 10,000 cocobucks recorded against you. Alice has 120 cocobucks.

You decide holding onto cocobucks is a bad idea, and pay off as much of your debt as you can.

You have 0 cocobucks. Alice has a debt of 120 cocobucks recorded against you. Alice has 120 cocobucks.

Notice, despite the interest, that debt+assets of the entire economy sums to zero. That is because money used to pay the "bank" was either profit or salary or assets on the receiving end.

The next year your coconut trees bear fruit, and you don't have to buy any more coconuts from Alice. She still wants her daily palm fronding. But she ends up having to borrow from her own bank for this: she borrows 60 cocobucks.

You pay 1 cocobuck in interset.

Now you have 179 cocobucks, she has 1 cocobucks, you owe the bank 120 cocobucks and alice owes the bank 60 cocobucks.

You decide to pay off the last 120 cocobucks.

You have 59 cocobucks, she has 1 cocobuck, and she owes the bank 60 cocobucks.

You decide to pay her 59 cocobucks in exchange for her moving some rocks to make your shelter better.

She has 60 cocobucks, she owes the bank 60 cocobucks. She clears her debt. Nobody owes anyone anything.

A way to understand why things work is that interest is not just an "increase in debt", it is an increase in debt *and profit*. Bad debts you write off is a decrease of debt *and decrease of profit*. And *profit* is another kind of "money" in the sense of being in a money-antimoney pairing with interest.

In the above case, all profit was instantly given as a dividend to the owner. If it stayed on the bank's books, then while it was there all debts could not be retired: but that is because the bank is an entity which can hold money.
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Re: Can every debt be paid off?

Postby Jplus » Mon Apr 13, 2015 3:57 pm UTC

I think I see what you mean. But isn't this just basically the same thing, from a more optimistic perspective?

I mean, the way I understand your analogy, the only way all debts could be cleared is if all banks give up on having profit. In reality, for obvious reasons, banks do what they can to keep making profit, so the rest of the economy must remain in debt.
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Re: Can every debt be paid off?

Postby Yakk » Mon Apr 13, 2015 4:52 pm UTC

They have profit. This profit can be handed to their shareholders.

Yes, this causes a net transfer of wealth to the owners of the bank. That disbursement "balances" the interest generated by the bank. That is the profit from the loan, the flow of money from the borrowers to the bank's backers.

As various entities amass cash capital, that is debt that others owe (assuming all money was created in an anti-money pair). For it to annihilate, the bank cannot hold cash.

The bank may not "choose" to, but in this scenario, it could have gone bankrupt.
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Re: Can every debt be paid off?

Postby ucim » Mon Apr 13, 2015 10:39 pm UTC

Jplus wrote:In order to fulfill my debt, I will have to pay off the 10k principal plus some amount of interest, let's say 1k for the sake of the example. Observe that the bank has just created 10k of money but 11k of debt. Nothing in the economy is creating additional money to make up for the difference of 1k.
Indeed, if you just sit around and drink beer, that's exactly what will happen. However, borrowing money to drink beer is bad for you and for the economy, for reasons that should be obvious. :)

OTOH, if you use the money to help you turn dirt into goods that people want, and that you sell, then you will have more money, and the economy will grow. (The degenerate case is you giving your goods to the bank as interest; this is useful if you and the bank are the only entities on the planet, but in a real economy you'll be able to sell in a win-win transaction and take the money to the bank.)
Spoiler:
You don't even have to use the money to do this; all you have to do is to actually do it. If you do, you can use the money for beer and still come out ok
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Re: Can every debt be paid off?

Postby slinches » Mon Apr 13, 2015 11:49 pm UTC

I think people are over thinking this. If you take out a loan of $1000 for seeds to grow $2100 worth of crops (after expenses), then you can pay back the $1000 + $100 in interest and have $1000 left to invest in more land, better equipment, beer etc. Debt is paid and everyone comes out ahead (i.e. total real wealth is increased and therefore the economy grows). As long as what you use the money for has a good enough ROI to cover principal + interest with some remaining profit, it is a net benefit to the economy and each individual involved.

That just means taking out a loan to cover expenses with zero ROI is a really bad idea.

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Re: Can every debt be paid off?

Postby johnfrmcleveland » Tue Apr 14, 2015 3:20 am UTC

Jplus wrote:In order to fulfill my debt, I will have to pay off the 10k principal plus some amount of interest, let's say 1k for the sake of the example. Observe that the bank has just created 10k of money but 11k of debt. Nothing in the economy is creating additional money to make up for the difference of 1k. This happens with every loan. So here we already have a problem in paying off all debt.


This doesn't present a problem. Banks earn money just like any other business earns money. When you took out a $10,000 loan, $10,000 (assets) were created, and $10,000 in liabilities (not $11,000) were created as well. The $1000 in interest is going to come from pre-existing dollars (somebody else's loan). When you look at bank created dollars and liabilities as a whole, it's easier to understand. Our money supply is pretty consistent. New dollars are created as old principle is paid off, and the interest paid is just a fraction of the remaining dollars in play. That bank profit gets distributed to people just like GE's profits get distributed to people.

If I pay off my debt, MoneyHoard uses 10k of the money to anihilate 10k of antimoney in their balance sheet. The other 1k is earnings, which the bank can use however it likes. It might, for example, deposit the money at the central bank. MoneyHoard would then have 2k in its reserve and be able to create 20k of loans, receiving 2k of interest as earnings. This is how banks are able to accumulate money at an exponential rate, and will also explain why we have exponential inflation.


Banks don't deposit their profits with the central bank. The central bank, in our system, decides how big M0 is, and banks can't change that without the central bank's cooperation.

Also, it is important to consider central bank policy when you think about what effect (if any) reserves have on M1. Fed policy has been to accommodate banks by supplying whatever reserves were needed to make whatever loans banks were able to make, which means that reserves have zero real effect on how many dollars banks created (since reserves were not a limiting factor). (Reserve levels are a non-factor post QE, anyway.) A number of other countries don't even have a reserve requirement - their banks just create loans without worrying about their reserve levels.

If the central bank were to decide to limit dollar creation by holding the level of reserves constant, they would lose control of interest rates. Reserves would become the limiting factor, and that finite pile of reserves would then be seeking out the highest rate of return. Which is why central banks abandoned attempts to control the money supply long ago.

The obvious discrepancy is that MoneyHoard eventually annihilates all money it creates, yet is exponentially accumulating money. There is no (other) magical source to accumulate the money from; virtually all money in circulation is created in temporary money-antimoney pairs by banks like MoneyHoard. They only reason this situation can persist is because, somewhere down the chain, someone is taking a larger loan so I can pay off mine.


The loan doesn't have to be larger, and the money supply doesn't have to be increasing. It is quite possible to pay off your loan as the money supply shrinks a bit, because interest payments command a small fraction of the dollars in existence.

Concluding, banks create the money faster than they annihilate it and the total amount of money in circulation grows exponentially. As the amount increases its value decreases, hence inflation. The amount of debt grows exponentially as well and it is progressively greater than the amount of money. So paying off all debts is not only impossible, but increasingly so as time progresses.


The value of dollars does not increase or decrease with the amount of dollars in existence. Even if prices could be predicted by simply dividing the number of dollars by the amount of production, the amount of production changes, too. (But that's not how prices are determined, anyway.)

The overall question of whether or not debt could be paid off is fairly straightforward. Debt = money. If you eliminated debt, you would eliminate money. But to make it more complicated, you would also have to account for the fact that some people are in the black, and others are in the red. If Bill Gates holds $10 billion with no debt, then somebody (and/or the government) holds $10 billion in liabilities, and if you can't convince Mr. Gates to part with his dollars, somebody is going to eat that enormous loss - probably the bank. In 2008, it was the government that ate those liabilities, because it has the ability to do so with little trouble (unlike banks).


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