Is Credit Card Debt an expansion of the Money Supply?

[Steven Douglas]

Again, crack pot theory!

You are suggesting the entire economy - all at once - takes their ball glove and bat and goes home! .... Your crack pot theory requires a situation that has never and will never happen in modern human history - save global nuclear war. If that happens, banking is the least of your worries.

It's an hypothetical - a thought experiment, not a theory, and I already gave you a plausible out, so not so fast. I already said have a concurrent currency in circulation. That was to head you off at that dismissive pass. Which you headed for anyway.

Currencies are replaced ALL THE TIME around the world. One winds down as another takes over. That's not crack pottery - that's HISTORY.

So no, the entire economy continues to run in this hypothetical - which was only designed to illustrate what you refuse to entertain anyway: Two currencies (pretend we adopted and are widely circulating Pesos, RMB, a new Uber-EURO, or whatever else makes you feel better). All banks and all other commerce use both currencies, so nobody's hurting in the process, and business continues as usual.

Remember, we're just winding down one currency, and just to see how, or if, it can be done. Stop evading, and simplistically explaining away - and do what you love most: get out that handy monopoly set:

$100 in FED reserves (and can print any new money, just show how it fits into the scenario)
$900 in demand deposits
$900 in outstanding loans (all 30 years, all at 7% fixed, compounded annually) which means
$1,207.02 in interest also payable over the next 30 years.
The bank (single banking system) is phasing out this type of money, so it won't re-lend any of that currency.
Everything proceeds normally in our scenario, nobody panics or makes any sudden moves.

Now show me how all that can be paid down. Wind down that wonderful, perfectly normal and working currency, to make room for one that's essentially the same, just more global, and not tied to this one.

IF all the debts were unwound, there would the same $100 in money that the system started with (using my monopoly example) -which is, has been, and the only money running around our little economy example from the beginning.

Don't tell me. Show me.

By my reckoning, with the bank as the only one doing any lending, all bucks stop with the bank/banking system (closed loop anyway, so call it one bank). I'm trying to figure out a) Where does the $1,207.02 come from, and b) how does that transform back into the original $100? As I understand it, the bank - which as you said is just one more business - is fully expecting more than just its original $100 M0/$900 M1 in return. It also has $1,207.02 (Can the bank fully expect and demand, like any other business, nothing but M0?) coming to it after 30 years of patiently waiting (while surviving on lending out another currency simultaneously).

Here, do this exercise:

Leave out the banks and fractional reserves and all of that.

You have $25, I have $25, rwpi has $25 and Roy has $25.

I have a better exercise, one that actually gives a meaningful workout, and doesn't go completely and evasively off point:

You have $25, I have $25, rwpi has $25 and Roy has $25. We each borrowed it from BANK, which has $100, the only $100 in existence, which loaned it out directly to each of us - no fractional reserve banking involved. The loan duration is irrelevant, make it whatever you want, but the interest on each loan amounts to $5 for each of us when all is said and done. Each of us borrowed $25, each of us owes the bank $30 dollars, for a grand total of $120 owed to the bank.

I know where we can each get the principle - in theory. I can see that with your monopoly money just fine. I even know where a couple of us might get the interest to satisfy our own debts to the bank - but not without shorting the money available for the principle one or more others of us owes, forget the interest. But let's just say we make equal payments, all on time.

Where do we get the principle plus the interest in the aggregate? There's only $100 in existence. The entire system appears to be $20 short.

[Black Flag]

It's an hypothetical - a thought experiment, not a theory, and I already gave you a plausible out, so not so fast. I already said have a concurrent currency in circulation. That was to head you off at that dismissive pass. Which you headed for anyway.

So, thrown in a few fire breathing dragons while you are at it, along with leprechauns (oops, you got those already) and a fairy god mother just for kicks.

Making up ridiculous, impossible and irrelevant scenarios is simply absurd.

Economics is the science of human action - all action occurs in reality - so keep it there, and read the fairy tales to your kids at night.

You have to explain why your economy has -suddenly- slammed to an immediate halt - that no bank loans anymore, that no bank spends a dime on rent, labor, computers, luxury condo's, expensive cars, caviar and whatever they spend their profits on and why given this cataclysmic event, people even care about paying off their loan?

...because without this backdrop, nothing makes sense from you.

Currencies ARE replaced ALL THE TIME around the world. One winds down as another takes over. That's not crack pottery - that's HISTORY.

We aren't talking about replace - if it being replaced then your scenario does not occur either.

FDR replaced gold with FRBN - there were still outstanding loans, an economy trade and banks profits. So?

[Black Flag]

Where do we get the principle plus the interest in the aggregate? There's only $100 in existence.

Answer my question:

"Where do you get profit from in a free market capitalist system?"

See the question of the four of us in an economy with no bank - all profitable, all enjoying the fruit of each others labor, and all of this with only $100 between us.

Explain that, Steven - unless you are Marxist, you'll explain exactly how the bank earns a profit on its service, just like you, while participating in the free market.

[Steven Douglas]

"Where do you get profit from in a free market capitalist system?"

Red herring, and a not-so-bright, not-so-artful dodge. Profit in what form? Money? Certainly we're not talking about the mechanics of profit in a free market, are we? Isn't "profit", in the context you're using it, just another word for money? We are not talking about profit, but the origin of money itself, and the mechanics of how it is introduced into the market to become available for profit -- in this particular market.

And your reference to fire breathing dragons, leprechauns and a fairy god mother was nothing more than another dodge, another flagrant evasion, once again, this time with the fallacy of Argument by Ridicule. Why? Because your position is indefensible. You can't afford to exit your closed, and quite circular, loop of reasoning.

Using a hard specie regime I can show you both how the entire system could wind down as well as why it never would. That's because hard specie comes from the ground (aka the "free market", as just another commodity). To get the money to pay the principle plus interest on those loans, the debtors can trade anything that has some connection to a miner and an assayer, and those debts can be satisfied completely -- using stuff that continues to be produced by the free market to this day.

But with M0, you would have to actually pull back the curtain and bare the wrinkled butt of the old man behind it to show how that gets introduced - which is always in the form of -- yet more loans. If you used some kind of M0 counterfeit creation to come up with the interest, you would still be left with the problem of showing how that newly created money got introduced into the economy - so that it could finally make its way to those who must repay their loans. And then there's the problem of ... yet more loans, and no way to wind anything down without...yet more loans.

[rpwi]

It has also has 100K of Liabilities removed from its books.

These weren't real liabilities since the banks never have a means to repay them in the aggregate.

This is true - it has more cash to provide to its IOU's demands - it has become more solvent.

Not possible in the aggregate though. As long as deposits are more than MB, than MB can not be used to repay MB backed loans. It would be circular logic.

But how does improving solvency come at destroying money???? - It can't

Let's use an analogy. Say a counterfeiter exchanges 1000 fake dollars for real dollars. Inflationary and dishonest, yes? Say he feels guilty... So he exchanges the real 1000 dollars for the fake 1000 dollars. Deflationary, yes? Same deal in the banking system. Put another way...ask everybody how much money they had before the debt was repaid and how much money they had after the debt was paid. Since they will count M1, they will have said their money (in the aggregate) has decreased.

"I am more solvent because money was destroyed!" === utter poppycock.

Fake money (M1+) was destroyed. MB wasn't destroyed (although indirectly on the open market it is).

Poppy cock!

You therefore deny the existence of the free market and capitalism!

Fractional banking is fraud...and fraud is not a proper component of the free market. When an economy has trillion dollars in base money and three trillion in deposits...and the deposits are backed by two trillion in loans...how does the economy repay the two trillion? Put another way...say the 3 trillion in deposits all wanted to be cashed out into reserves...what happens?

"Of course "profits" are impossible without the government injecting money into the system!" is your claim here!!

?? I don't know where you are getting this idea... What I was explaining is how the Fed has to constantly inject reserves into the banking system to keep it afloat. Fractional banking is inherently unstable and will always crash because people demand liquidity that is rightfully theirs. Or they will decide they don't want to borrow as much. Or they have the inability to repay bank loans (thanks in large part to how bank money plus interest squeezes the demand for reserves).

Let's try this...let's establish what we agree and disagree on.

MB is destroyed = deflation...MB created = inflation. Correct?

You believe that M1 is not money. Therefore when M1 is either created or destroyed it doesn't affect prices, right?

You believe repaying loans reduces M1, right?

But you don't believe a reduction in M1 results in deflation, right?

You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?

If so, do you believe this affects the open market and the amount of t-bills bought and sold as well as the amount of Mb created and destroyed?

If so, do you then believe that paying off loans can result in a reduction in Mb in the economy due to the Fed Funds Rate and open Market operations, so that this would create deflation but in a round-about fashion?

[Black Flag]

These weren't real liabilities since the banks never have a means to repay them in the aggregate.

OF course they are liabilities.

You cannot repay your house in aggregate either! But your mortgage is still a liability!

The problem, again, is the Fractional Reserve, not some fairy tale belief of "thin air" money.

Not possible in the aggregate though.

So?

What fantasy do you imagine upon the economy that would make such a thing something to worry about?

[Black Flag]

Red herring, and a not-so-bright, not-so-artful dodge. Profit in what form? Money? Certainly we're not talking about the mechanics of profit in a free market, are we? Isn't "profit", in the context you're using it, just another word for money? We are not talking about profit, but the origin of money itself, and the mechanics of how it is introduced into the market to become available for profit -- in this particular market.

It is not a red herring.

You sit there pretending the bank stuffs its earnings and loans repayments under a mattress - buying nothing, and selling no more loans.

Under this bizarre scenario, you believe you can make real world statements about banking.

[Black Flag]

And your reference to fire breathing dragons, leprechauns and a fairy god mother was nothing more than another dodge, another flagrant evasion, once again, this time with the fallacy of Argument by Ridicule. Why? Because your position is indefensible. You can't afford to exit your closed, and quite circular, loop of reasoning.

Utter nonsense.

You make up fantastic stories and crack pot theories in an attempt to understand the real world!!

Such a thing Mises warned about ... where half-taught men pretend away at illusions - and such a thing is NOT economics.

[Black Flag]

But with M0, you would have to actually pull back the curtain and bare the wrinkled butt of the old man behind it to show how that gets introduced - which is always in the form of -- yet more loans. If you used some kind of M0 counterfeit creation to come up with the interest, you would still be left with the problem of showing how that newly created money got introduced into the economy - so that it could finally make its way to those who must repay their loans. And then there's the problem of ... yet more loans, and no way to wind anything down without...yet more loans.

I sit stunned at your bizarre assertion that a bank - who is in business to make loans - makes more loans when the past loans and interest is repaid - and this is a problem!!!

Shock on you!

You equally must be stunned to think car manufacturers make more cars after the previous ones have been sold!

You are stunned that a doctor services a new patient after he is cured another!

Man!

[Black Flag]

Steven

Why you need to understand the free market -which I am confident you do - is that it applies to banking too! (Shock, I know!...for you!)

You trade because you need to eat.
You provide a service or a good to trade.
You do this regularly since you need to eat regularly.

Your bizarre theory of banking - from the get-go - is based on a crack pot theory. As you apply it, you need equally to apply more cracked pots.

You now come to a point, in your utter confusion, that you do not know or understand what a bank does with the interest it earns.

Your crackpot theory says "It sits on them".

No, it spends it back into the marketplace to pay rent, salaries, etc.

OR!!!

Invests them!!

JUST
LIKE
YOU
DO

You attribute some very strange behavior to banks that you do not attribute to other businesses.

So where does the interest come from to pay back to the bank?
From providing services and goods into the economy

As the bank participates in this economy by buying such services with its profits, it returns the interest you paid back to you in trade for your services or provides capital to you to expand your business for you to produce even more goods or services and earn even more money.

This is why you need to do the hands on exercises, Steven.

Without them, you get wildly confused about things you already know very well.