Debt/money system - thoughts on this?

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See I'm not sure why you believe that people can't pay their debts. Paying off your mortgage was an excuse for a party back in the old days. It is true that there have always been situations where people couldn't pay, but the bank would foreclose and in many cases be whole. I'm putting on my "arch-conservative" hat when I say this, but it has only been the past ten to twenty years in which the federal government through Fannie and Freddie made it possible for just about anyone to get a loan, and that is why we have more failures then ever. If you look at the "small local" banks that managed their own loans they didn't have any problems as they only made loans to people they deemed qualified and then only closed on the loans with sufficient equity in the property. I remember when I bought my home from this type of bank. I was buying it with 40% equity. That combined with my income made it a breeze and the bank even gave me a lower rate due to the fact that I was reducing their risk.

 

I still don't see why fractional reserve banking creates debts that can't be repaid. The wealth (amount of goods and services) of an economy is not fixed. New wealth is created all the time. If somebody is willing and able to use his/her share of the new wealth created to repay the loan then there is no problem. That is the kernel of fractional reserve banking. You should only loan out to those who will repay and you should have enough on hand at any one time to cover withdrawals. If $1 billion is enough to cover withdrawals and everybody making up the $18 billion in loans can repay out of future earnings then it's grand. The actual ratio will change according to circumstances but the principal is the same.

 

It's not that some people can't, it's that it is a function of the banking and monetary system that it is literally impossible for all debts to be repaid. Every loan on every house could be repaid, but there isn't enough money for everyone, people and governments, to actually pay off all debts. Even the wikipedia article for government debt states that:

"Some governments are not currently entitled to print money directly, but only through a Central bank at interest."

Every government that uses the fractional reserve system runs up debt by the very process that money (which is supposed to represent value) is created. It's like the world is in debt to itself, how can that be rationally explainable other than it being a buggy system?

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What, you mean use your assets to pay debts? That's how they keep the system going. Every dollar is loaned to the country at interest, so there aren't enough dollars in circulation to pay the overall dollar amount of debt owed in the economy. So the banks get to constantly seize assets of those unlucky enough to be on the short end of the stick due to a simple mathematical function of the system. This alone should be seen as a flawed way to make an economy function, because it's a guarantee of failure regardless of effort or productivity. Nevermind the whole perpetual inflation part.

And if you rely on the banks just being very prudent with who they lend to, let's not forget that their bets are insured by taxpayer money. The incentive to be careful isn't there if they can simply rely on the government to help them if they start to fail- but I realize this is more a problem with our government and bank lobbyists than with the fractional reserve lending system itself. Nevertheless, let's not forget the many bank crashes we have had over the years. Maybe it's not just a matter of responsibility but also of making the whole system safer.

 

If there is €120 of credit created when there are only goods and services worth €100 in existence and the loan is to be repaid immediately then there is a problem. If, however, there is another €20 of goods created in the time between the loan being taken out and being repaid then there is no problem.

A government (which is generally the only entity with a free reign to create money) can create money from nothing which will merely result in inflation. Whilst this is a bad things for certain groups it does have positives and the government may do this deliberately. One positive of inflation is that the real value of the loan is reduced and this makes it much easier to repay in the future.

 

Now let's take that theory to the real world. Every time new credit is created, the economy must grow. Since that money was created out of debt, it must one day find itself back to the banks as part of a loan repayment. And since they don't recycle the money they get back from these loans but instead simply create more whenever there is demand for a loan, all the existing money will eventually "disappear" out of common circulation when people and governments make the payment on their loans (because banks usually take their profits into the stocks, bonds, and speculation markets, making that money effectively "out of use" for the common person), making the demand for new credit higher, which makes the economy need to expand once more due to the currency inflation of new loans. Thus, perpetual growth in the economy is needed to counter inflation, and any sane person knows that perpetual growth is unsustainable.

 

Generally speaking, many people in USA and other western countries have too much debt. If more people saved more and borrowed less then it would probably be a good thing all around. The massive gearing that takes place in these countries does not exist to the same extent in every country, so it is possible to live with less debt. The Chinese, for example, have way more savings than Americans do.

 

I am ALREADY driving for one hour to get to work in the morning and one hour to get home at night. Two hours per day, 10 hours per week, 40 hours per month. That's right, each month I essentially put in an extra work week (40 hours) just driving to and from work. Now you want me to move even FARTHER away? So now I have to spend four hours on the road every day?

It totally matters. Irrespective of what your income is, it's going to take you a hell of a lot longer to save $250K than it takes you to save $100K. This point seems self-evident.

EDIT: Blades, I'm not saying your suggestion is impossible, but it is certainly very impractical for most people. Most people don't want to end up living with their parents until they're in their 30s. We have a name for people like that - we call them losers.

In the US 2/3 of all people either have a mortgage or are paying rent. Of the 1/3 who aren't, I imagine the vast majority are people like my parents who have been living in the same place for the past two or three decades and have paid off their mortgage.

 

It is alot easier to save than what you are saying Aldeth. It's all about priorities, necessities and cutting back on frivilous spending. Like needing to upgrade your Phone to the newest version every year.
Or your PC. Or your Car. Or sending 100 more texts a month than your plan calls for. Like keeping a very basic package on my very basic, very cheap phone. By not buying the NFL package on my dish.Not orderig pay-per-view items. Etc.. I make double mortgage payments monthly by cutting back in other areas of our spending, though we have massive student loan debt from my wife. Saving is easily done with an ounce of willpower. The questions is what is most important to you? Having the new car now or 7 years from now and saving for your home instead.

 

Blades,

You're sounding very preachy at this point. With the exception of getting the NFL Sunday Ticket, I don't do any of those things you list. I drive a 2004 Honda Accord. My CPU was purchased in 2006. While I've had many cell phones over the years, I always take the free one, and I have a very basic plan. I buy maybe one computer game a year (the most recent was Starcraft II in July of last year). I don't spend money on clothing or other things for myself. I never order pay-per-views, although we do have Netflix.

I'm saying that saving $25K every year isn't easy (because most people don't have $25K to piss away on frivolous stuff to being with), and even if you could do it, it would take you 10 years to save up enough money to buy a house in cash. As I said previously, it's not impossible, just not practical.

As an aside, have you ever met a well-adjusted, socially normal person who is in his 30s and still living in his parents' basement? Someone who actually did save up a quarter million while living at home with his parents to purchase a home he doesn't need because no woman wanted to date, nevermind marry a guy who was in his 30s and still lived with his parents? Just sayin...

 

That is the dilema you would need to solve if you wre in financial straits. You have other options. Do I get a new job that is closer to wher I can afford to live w/out accumulating debt? Or stay put and pay the big interest? My point in this thread is you do have options.
Lots of options. Mortgages are not a necessity. It's the choices you make in life that make a mortgage a necessity. Don't get me wrong, I understand there are social perceptions on what we should possess to be part of mainstream society. Most people in the US want ot keep up with the Jones's. I know.

Losers? Dude, I know you are way to intelligent to believe that. That is a high school term. If you lived at home after college for 4 years and someone had that perception of you, they wouldn't know the facts, so who cares what they would think... especially since the follwoing year you could be a home "owner" and they would still be a mortgage payer. I would find that rather funny.

 

It's a hell of a lot more than 4 years Blades. To save $250K, even if we're being generous and saying you could save $25K a year, it's a whole decade. Hell, to do it in 4 years, that's $62.5K a year - that exceeds the annual pre-tax salary of your typical college grad.

As an aside, did you read my second comment regarding the 30-something living at home? For your convenience, I said:

Have you ever met a well-adjusted, socially normal person who is in his 30s and still living in his parents' basement? Someone who actually did save up a quarter million while living at home with his parents to purchase a home he doesn't need because no woman wanted to date, nevermind marry a guy who was in his 30s and still lived with his parents? Just sayin...

 

If he was running around with an extra quarter million and nothing to spend it on, I don't think he'd have trouble with the ladies no matter where he lived.

 

That's the thing - in order to have that extra quarter million, he wouldn't be going out at night and pissing away his money, thereby making it unlikely that he even meet a woman that would know he was saving up money in the first place.

 

Oh they'd find him ... like bloodhounds on the trail of a wounded gazelle. (Why am I risking my life with the women of this board just to lighten the mood?)

 

Thats why all the Chinese people around here buy big houses with little self contained units attached to them, so that young people can still live with their parents but have some form of independence, even if in the early stages of marriage. These people are normal and well adjusted, and have no trouble saving up for their first home. As Blades says, it's all a matter of priorities. It is fact that many Western people do CHOOSE a lifestyle that involves a lot of debt. I'm not saying that's good or bad, but it is still a choice and one that I myself have made. I have a big mortgage, but I'm not going to kid myself that it was something I HAD to do. It was a choice I made, in order to have a certain lifestyle.

 

You are using the extreme as 250K as the low-end. That is not the case everywhere. Only in high-end areas. Even in the east, regardless of what you say. I have Googled housing in my home county of Bucks County PA, which is the northern suburbs of Philly. 250K is not the low-end, it is well above it. Lows 100s is the low-end. Which is easily savable for a college grad. fi you want a nice two-story with separate gartage and several bedrooms/bathrooms, then by all means go pay 250K+. But that is a choice, not a necessity. Low end homes are what is referred to as "Starter Homes". That is what I am referencing in this thread.

But if comes to someone looking to buy multiple homes(aka vacation home) or high-end homes, then of course Snook is right. But it is NOT a necessity to have amortage in this era if you are willing to go a little frugal for a couple of years. It sets you up for a much better style of life later on when you actually have no mortagae payment at 30.

 

Why cannot growth be sustainable? Growth is not just using more of the earth's limited resources. It can be by using renewable resources or by inventing new things. You're saying that mankind will never invent anything again ever.

I don't see how putting money into stocks and the likes puts it out of circulation. The capital markets are the way by which companies raise funds to purchase new machines and buildings and so on. This will be spent in the "real" economy at some stage and get recycled.

 

Theoretically, you're right. Growth can be sustainable, but it almost never really is. We deforest beyond sustainable capacity, fish beyond sustainable capacity, etc. The famous WWF report says we are consuming resources 50% above the capacity of the planet's regeneration.

On that same note however, even if banks profits are 100% recirculated into the economy (which is almost never the case), we're still talking about a situation where by the function of the system the only way to possibly pay off the intrinsic debt is if the banks own almost every asset produced. Still a ridiculous standpoint for all involved except the banks.

 

I'm having a bit of a problem following this discussion since the videos are too long to be viewed through. Commercial banks creating money is a known phenomenon and a key tool in formulating monetary policy by central banks. Central banks have ultimate control over the money supply and can theoretically reduce commercial lending to zero if that would be desirable. The increase in commercial bank credit = increasing money supply. As long as growth is higher than inflation the increased money supply is not really a problem since the amount of money should correspond the increase in real assets. If that's not the case the market mechanism fixes the situation through inflation/deflation.

The only major disturbance in the system is in cases when banks have excess reserves and are making the conscious choice of not expanding their credit output. This happened after the fall of Lehman Brothers when banks were extremely nervous and did not trust each other. Central banks can only encourage increase of output by increasing the money supply but individual banks can choose to increase their already excessive reserves instead. Right now similar signs are apparent in European capital markets thanks to uncertainty regarding Greece.