The downside to deflation in a debt-based monetary system?

[Travlyr]

You jest.

It worked in the 30's when 80% of the people were rural and 20% in the city.

Today its 90% urban and 10% rural.

If you have an internet connection, you should download the first episode of the original "Connections" a BBC series of how things are interlinked.

He demonstrates perfectly what would happen if electricity was not available - and the unwinding stops at the point of the plow - in other words, you will live if you know how to hook an ox to a plow.

Even if you had an ox and a plow (which you probably don't) you do not know how to do this, and neither do I nor Steven nor anyone else here.

We would die.

Now, I do not believe this will happen as the biggest losers in this unwinding is the elite - the higher up the further the fall - but that does not mean it can't happen.

PS: You should also review the project called "Dark Winter", a scenario of a biological attack.

What is interesting about that was the massive disaster to the nation - assumed to be the attack itself - was minor to its consequence.

Everyone stayed home which collapsed the division of labor, and within weeks -even though death from the attack was small- the nation was in total collapse as the economy imploded.

So severly, that they ended the scenario experiment early, as there was no point in going on after the nation was wiped out....not by the bug, but by the starvation.

I'm not saying that the government can't kill us all off. They have pretty much proven they can do that by killing off over 300,000,000 people in the 20th century. That's democide. But the dollar dying isn't going to do it. Zimbabwe and Argentina are recent examples of how barter succeeds and eventually the free-market defaults back to gold & silver money.

[Black Flag]

I grew up in Amish community. Their garden will thrive, their crops will grow, their generators will run, their furniture will be assembled, their butchers will butcher, their homes will be candlelit, and on and on and on. Sure, people who haven't prepared will struggle.

But we are not all going to die when the dollar dies.

True, not all.

Only millions.

[Black Flag]

Zimbabwe and Argentina are recent examples of how barter succeeds and eventually the free-market defaults back to gold & silver money.

First, the US ain't either of those countries.

Zimbabwe is 95% rural - and they weren't far from subsistence level living to start with - they did not have a high division of labor at all. It is very dangerous to assume their case would be the US case

Argentina is a very small economy, a $435 billion GDP - compared the US 15.1 TRILLION - do not, again, make a mistake believing their scenario is at all representative to the US

[seraphson]

Great responses though I want to dig a bit on the responses of credit not being created during the housing bubble.
I'm fairly new to the concept of debt-based money (couldn't you tell?) and I watched a video I found Money As Debt to get a better understanding

Around the 13:50 point they mention that using the 9:1 reserve ratio the bank can "conjure" up to 9x the "money" the bank has. Is this video wrong or is my take on their explanation not right?

[Black Flag]

Great responses though I want to dig a bit on the responses of credit not being created during the housing bubble.
I'm fairly new to the concept of debt-based money (couldn't you tell?) and I watched a video I found Money As Debt to get a better understanding

Around the 13:50 point they mention that using the 9:1 reserve ratio the bank can "conjure" up to 9x the "money" the bank has. Is this video wrong or is my take on their explanation not right?

Oh my - this is why this thread is so long!

To start with, begin your thinking with the concept of "leverage".

If I had a gold coin, and went to you and borrowed $1000 with it as collateral, then went to Steven and did the same thing, and then to Travlyr and did the same thing - that coin has been leveraged to get $3,000 in borrowed cash... ok?

Note some things here: no one "printed" or "created" any money, or gold coins. There is not 3 "thin air" gold coins out there - there is only 1 - but it has been pledged 3 times over.

Now, you'd see that act as fraudulent - but let's not get into that right now.

This is not exactly what the bank does with your deposit - there are some other details - but just keep in mind what I said above - just because the coin has been pledged three times over, does not create gold coins out of thin air.

Everything is always real - there is no fantasy or magic in banking. (Which is why I cringe when I see the words "conjure" or "money out of thin air")

When you deposit your money in a bank, you surrender the ownership of that money to the bank - it is no longer yours.
In return you get a slip of paper that says one of two things:
1) In X number of months, we will give you money back of this amount plus this interest
or
2) On your demand, we will give your money back of what ever amount up to what is recorded on your account.

We will focus on (2).
Now, watch and follow the real money - as it is the only thing that exists

You can think of it this way: there is a page in a book that says "The bank owes Seraphson X amount of money"
Do you think that page in a book is money? ... well, no. No more than an IOU between friends is "money".

So let's say you give your money, $100, to the bank, they write that down and give a piece of paper, and IOU (bank deposit slip).

It is now the bank's money.

The bank uses THEIR money to make loans.
The law says they need to take 10% and keep it in reserve, so they put $10 of real money into an account at the FED called "bank reserves".

Now they have $90 of real money.

The lend it out as a loan, say to me.
I borrow $90 because I want to buy something and I do not have enough money.

People borrow money to spend money, so that is what the borrower does - spend it - and it is real money - $90.
So the bank gives me MY money - and I give them a piece of paper that says "I will pay you back" - like the IOU the bank gave to the depositor, I give to the bank.

It is now my money ($90).

The guy I bought my stuff from now has $90 in his hand and I have his stuff.

It is now his money ($90)

What does he do?
He deposits it in the bank.

The bank takes his $90, and records in a book "Bank owes Jack $90 on demand" and gives Jack an IOU.

It is now the banks money ($90).

To loan it out, the bank needs to put 10% at the Federal Reserve ($9)

They have now $81 of real money that they can loan out....

...and so on.

Do this over and over.... eventually:

- all the real money sits in the reserve at the FED.

- there are a bunch of IOU's out there
- about $900 of IOU's of the bank to depositors (with interest)
- about $900 of IOU's to the bank from borrowers (with interest)

But all the money ($100) is sitting in the reserve at the FED

[Travlyr]

Great responses though I want to dig a bit on the responses of credit not being created during the housing bubble.
I'm fairly new to the concept of debt-based money (couldn't you tell?) and I watched a video I found Money As Debt to get a better understanding

Around the 13:50 point they mention that using the 9:1 reserve ratio the bank can "conjure" up to 9x the "money" the bank has. Is this video wrong or is my take on their explanation not right?

Yes, that's how it works. It is much like the shoe store which has one pair of boots and advertises them online. They sell the boots to 9 different customers. As it turns out 8 of the 9 customers don't care if they ever get their boots so they do not demand either their money back or the boots. If one of them do complain and threaten court proceedings, then the shoe store guy steals another pair of boots and makes delivery. If all 9 of them demand their boots, then the shoe store guy moves to Paraguay.

It's a theft ring of the highest order. Elastic money is very clever stuff. Daddy Warbucks was a wealthy man.

[angelatc]

I would say to sum up the mainstream economic thought, that deflation causes people to not spend their money because they know if they wait they will be able to afford more in the future.

It also makes it next to impossible for companies to raise their prices, which is viewed as a bad thing by Wall Street.

[Black Flag]

I would say to sum up the mainstream economic thought, that deflation causes people to not spend their money because they know if they wait they will be able to afford more in the future.

It also makes it next to impossible for companies to raise their prices, which is viewed as a bad thing by Wall Street.

Mainstream economic thought is wrong - people need to spend money to live and prosper.

Price companies charge for their goods is independent of deflation - a Ferrari isn't going to be sold for $10.....

Remember the interconnection of money to goods is NOT that money imputes value to goods - human being impute value to goods.

Money is merely another economic good, so let's remove it out of the calculation, since people get all muddled about it.

Trade a Ferrari for some apples - it all depends on what you value your crop of apples for so to establish the number of apples in exchange for the Ferrari.

Price is merely a reference that we use to measure the quantities necessary for one good to be traded for another - and we use money to establish that reference, so we price things in terms of the amount of money.

[Black Flag]

...carrying on...

There are a bunch of IOU's out there
- about $900 of IOU's of the bank to depositors (with interest)
- about $900 of IOU's to the bank from borrowers (with interest)

But all the real money ($100) is sitting in the reserve at the FED

................

So at this stage, there is nothing really weird or magical or conjured up here....

From an accounting perspective, the bank is pledged to return $900 to depositors, but that is balanced with the loans and borrowers who have pledged to pay the bank $900 - the net (ignoring paid interest difference) is $0.

So again to be clear there is no magic here, no conjuring, no "thin air money".

Therefore, the only issue and risk, is the timing and/or the defaults

If everyone pays off, nothing amiss happens.

If one of the parties fail to pay, it is annoying.....
So loan loop 5, the borrower borrowed about $30 (that is all about what is left available of real money still in the hands of the bank, and not stored at the FED).

He fails to repay and reneges - the loan is lost.

...as long as a depositor does not demand his money back.... no problem ... this is an accounting write off.

The next new depositor comes along and deposits $100. The bank simply takes a part of this money, and stuffs it into the Fed reserve as an addition so to cover the loss position... no sweat, life goes on and the bank continues to lend out the remainder as above....

Ok?

[Roy L]

...because it is not money! Wow! What a revelation!

Money is by definition what is generally accepted in exchange. As demand deposit contents are generally accepted in exchange, they are money.