Go, Economy!

[Cheebs]

I think you're ignoring that we never started from zero. We did have a gold reserve when we initially started, which had a monetary value.

Right, we didn't start from zero. But with the size of the debt, the starting point is vanishingly small compared to the money that the Fed created.

So again, how do we pay debt when the very act of creating money makes more debt than money?

Just to clarify, I'm not saying we couldn't pay the government debt, just that the debt itself wouldn't be gone. The less debt the government has, the more debt people and buisnesses would have to have. And that would be bad.

[Anthony]

It has been a bit since I have studied this stuff, but to my memory the fed mostly control money supply (which only matters in respect to velocity) via open market operations of government bonds. I don't think the fed actually has to "lend" the government money. It can just give the government money, which creates inflation, which is simply a tax on all holders of money. IIRC, the way the fed injects money into the system is to issue a bond, this means that they get money from borrowers on the promise of giving them more money later. They can then create this money when they need to. Now there is money to pay for government debt.

So yeah, they can "pay" the government debt with massive inflation, which would wreck temporary havoc on pretty much everything. But this tax would mostly hit the holders of government debt, so its not too far removed from defaulting (except, cue Gooch, we can't default because its based on our money.). The downside of this act is that future borrowing would be extremely difficult, pegged to another currency, or at a very high interest rate.

Edit: All of which, long term situation, lowered standard of living for Americans than what we currently enjoy.

[Gooch]

Public debt is a subsidy to the private sector, particularly the financial sector which needs a risk-free return to benchmark. The Treasury issues debt to assist the Fed with monetary policy. For the Fed to meet its targeted Fed Funds rate, reserve drains and additions must be conducted through the issuance and purchase of securites. When there are excess reserves as there are today, the Fed has to pay interest on excess reserves at its targeted Fed Funds rate as it is doing. When effective Fed Funds falls below target, it is the result of arbitrage in addition other drivers (SFP discontinuation, FDIC fee assessment).

Anthony, you are assuming monetary base impacts aggregate demand, which it does not as our current balance sheet recession is proving and Japan's for the last two decades has already proven (as well as the Great Depression and Germany post-telecom bust). When the governments issues US Treasuries, all it is doing (aside from assisting the Fed) is providing holders of US dollars with an interest bearing savings account, merely debiting the "checking account" of the foreign central bank and crediting its "savings account", merely a journal entry, no money creation, an asset swap, not inflationary despite what all the fear mongerers (who don't understand QE or monetary operations) will have you believe.

[flux=rad]

...I'm guesing none of you know how money is created.

In a nutshell, you borrow money from a bank. The bank gives you that money. The bank doesn't actually have that money. It created money when it created your debt. Money literally is debt. Pay the bank back, and you're back at the original scenario before the money existed.

Or look at it this way: Paying down the debt means paying money to the Fed, who issued the loans in the first place. The Fed has legal authority to create US currency. So this means the Fed can loan out however the fuck as much as it wants dollars and infinity cents. After the Fed orders a pizza, it still has however the fuck as much as it wants dollars and infinity cents.

So think of the Fed on one hand and the world on the other. The US government is part of the world, so if the government pays the Fed 1 trillion of what it owes, the world now has 1 trillion dollars less money. But however the fuck as much as it wants dollars and infinity cents plus a trillion is still however the fuck as much as it wants dollars and infinity cents, so the Fed did not gain money. So a trillion dollars is gone.

First, you're going to confuse the crap out of yourself if you think of a dollar as a tangible object. Second, you're going to confuse yourself even further if you equate private bank lending with U.S. federal debt.

You're right that a private bank creates money when it loans, but it does not create net financial assets. And really the only way to make sense of it all is to think of financial assets--not individual dollars. Most money exists only as little bits of data plugged into spreadsheets, and multiple people can have claims on those bits of data, each claim having a different level of liquidity. It's much easier to think of it in terms of financial assets. Here's an example:

Let's say the Bank of Cheebs loans IronPlant $1,000. To do that, they create a demand deposit (checking account) for IronPlant at the Bank of Cheebs. At this point, everyone's balance sheet is effectively the same as before the loan happened. The Bank of Cheebs has a $1,000 asset (the loan to IronPlant) and a $1,000 liability (the $1,000 checking account), and IronPlant has the $1,000 asset (the checking account) and a $1,000 liability (the loan--the liability will eventually be more than $1,000, but let's pretend that if he pays the money back immediately he owes no interest). We have to assume that IronPlant wanted to do something with that $1,000, so let's say he goes to Best Buy and spends all the money on anime DVDs. Now, the bank has a $1,000+interest asset and no liability (since the checking account balance is now $0), and IronPlant has a $1,000+interest liability with no remaining asset. Also, note that, at any given point, the bank's asset is worth exactly the same amount as IronPlant's liability. The point is that the net financial assets always equals $0, or, put another way, banks can create money only by creating a corresponding debt. No financial assets are added to the economy.

On the other hand, when the federal government issues debt, it does add financial assets to the economy. If I buy a $1,000 treasury bond, my financial assets remains the same. I lose my $1,000, but I have a treasury bond worth $1,000 (and it'll be worth even more in a few years). The government will take that $1,000 and give it to someone else, so there is now an extra $1,000 in the economy. Additionally, more financial assets are added to the economy once my bond matures because the government pays me interest. It's not a zero-sum game when the government borrows. The only way financial assets would be removed from the economy is if we run a budget surplus in order to pay back federal debt. If the government taxes Diff-Chan $1,000 to buy back my $1,000 bond, Diff-Chan loses $1,000 and my financial assets remain static (because I lost my $1,000 bond but gained $1,000 in cash), so there's a net loss of $1,000 to the economy.

To sum up: (1) private lending is a zero-sum game, (2) federal borrowing is not, and (3) raising taxes in order to pay back federal debt is money destruction.

[Fe 26]

how do you guys know this stuff, anyway? I've taken some econ classes and some finance classes, and they never get past stupid math shit to find whatever thing. They never really talked about how this shit interacts in the real world.

[flux=rad]

To be honest, about a year ago I just googled some of the shit Gooch was talking about in here and read some stuff. Mostly http://moslereconomics.com .

[Gooch]

I've posted Mosler, Bill Mitchell, Randall Wray, Abba Lerner, Knapp, etc., but only a handful click on the links while the rest keep discussing flat-earth economics.

The key words are "currency issuer", "non-convertible", "floating rate".

Brief summary

[Gooch]

Basil Moore as well, important to understand the difference between the Vertical component of money creation (Congress, Treasury, Fed) and the Horizontal component (private sector) as flux mentions.

[Gooch]

how do you guys know this stuff, anyway? I've taken some econ classes and some finance classes, and they never get past stupid math shit to find whatever thing. They never really talked about how this shit interacts in the real world.

Most econ is flat-earth garbage, including Chicago and Harvard.

[icarusfall]

Yeah, a friend went to Harvard Econ and I had to stop listening to what he said when he told me "the answer to capitalism is more capitalism."