Saturday, November 5, 2011

"Total Debt and M1 on a 2 line graph, normalized to 100 at, frex, 1933"


"I suggest graphing Total Debt and M1 on a 2 line graph, normalized to 100 at, frex, 1933. I'll bet M1 grew a lot through WW II." -- Jazz

Good idea.


Money increased much faster than debt during the FDR years.

Q: Does this mean that again, today, we should allow debt to rise of its own accord while we again print money so fast that the debt-per-dollar ratio falls?

I think not. I think the debt-per-dollar graph shows us what must be done: We must reduce the accumulation of debt relative to the quantity of money.

You can do it by increasing the money. But then you have to deal with the people who are concerned about inflation.

There is an alternative. Rather than increasing the denominator we can reduce the numerator. Reduce the debt. Deleverage. It's what people want, anyway.

Of course, then you have to deal with the moralists, the people who say "you can't just pay off debt for people" for whatever reason.

So there you have it. We upset the sound-money people, or we upset the moralists, or we sit in this depression until hell freezes over.

10 comments:

nanute said...

"We must reduce the accumulation of debt relative to the quantity of money." Or, we need to increase the accumulation of money, more broadly among income groups. Very large disparities in wage and income growth is a part of the problem. Too much debt can be problematic, for sure. The inability to service the increased debt is what is as relevant. Here's an interesting excerpt from Richard Wilkinson posted at Angry Bear: The model known by many aliases (Chicago School, Friedman, etc) has resulted in the thought that people are drowning in debt and that we have privatized the profits but socialized the losses. These are inaccurate metaphors. They are the results of the language of the delusion we have been living for 3 decades and thus by definition can not capture the truth of our condition. As the science presented in the lecture shows, if our all encompassing concern should be equality, then people are not drowning, they are dehydrating. See this video for more: http://www.ted.com/talks/richard_wilkinson.html

The Arthurian said...

"We must reduce the accumulation of debt relative to the quantity of money." Or, we need to increase the accumulation of money, more broadly among income groups. Very large disparities in wage and income growth is a part of the problem.

Yes, absolutely. So we can
1. print money, but the rich don't like that; or we can
2. tax the rich, but the rich don't like that; or we can
3. print money and use it to pay off debt. And since this eliminates risk while returning money to lenders, maybe the rich would find this option acceptable.

And probably, whatever solution we get will have to be one that is acceptable to the rich.

Mansoor H. Khan said...

Here is how the banker's game works:

1) Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.


2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.

Accmulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).


3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.


4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.


5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.


6) The bankers then have to decide how to "reset" the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.


7) Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.


8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).



For more details on this stuff please read the following articles in order listed below:



http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way



http://aquinums-razor.blogspot.com/2011/08/what-is-relationship-of-money-to.html



http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html





http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset




http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift




http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system




http://seekingalpha.com/article/146658-great-banking-confusion-is-there-a-better-way


Mansoor H. Khan

http://aquinums-razor.blogspot.com/

jim said...

Monsoor wrote:
___________________________
Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.
__________________________

The first sentence is close to correct. The second sentence is not. Currently what you claim can't happen is happening. Fewer net loans is the current reality. This also happened in the great depression. The private sector is now deleveraging and that is removing money
from the system. The federal govt is adding roughly an equivalent amount to the system. Total debt has been holding close to constant for 3 years.

The debt is being shifted to the Federal govt. This is also what happened in the Great Depression. The Great Depression ended when about 60% of the Total US debt was assigned to the Federal govt. Then there was an 60 year period where the debt shifted gradually back to the private sector. By 2007 the total debt was around 88% private and 12% federal govt. And then the debt started to shift back to the Federal govt.

The total debt now stands at about 18% govt and about 82% everyone else. It is going to be a while before it gets back to where it is once again mostly assigned to the federal govt.

-jim

__________________________

The Arthurian said...

Jim, I like that analysis!

Mansoor H. Khan said...

Jim,

you are correct but only partially. Fewer net loans cannot continue for too long unless the government continues to deficit spend which it will not as much if the tea party republicans get their way.

The bankers will reset the system soon since the whole idea for them is to not let the gov issue much currency so they can issue as much as they can and get interest income on it.

Mansoor

jim said...

Hi Monsoor,

Your analysis appears to be based on the theory of the infallibility of Bankers.
My personal take is that bankers are like the rest of us. Sometimes they are the windshield and sometimes the bug.

I don't see the "bankers reset the system" scenarios that you outline as being feasible even from the viewpoint of bankers.

The tea party is going to instantly lose popularity if ever their policies are implemented. A mass voter revulsion to conservatism (like in the Great Depression) isn't something the bankers are likely to want. The tea party is far more useful to bankers if they just barely fall short of having a majority.

Printing "too much money" doesn't seem possible either. Total Credit Market Debt (TCMDO) would be something like $77 Trillion by now had the economy not run off the rails in 2008. That puts the Feds at $25 trillion behind what the private sector would have, as a matter of course, created in new credit money had it continued on the same course that it had been on for decades (10%-11% credit expansion/year).

Mansoor H. Khan said...

**-+
/*j+im,

thanks for your thoughtful reply.

i hope and pray that you are right and i am wrong.

i pray that we don't accept -defation as something that is +natural and ok to have to "liquidate" bad debts as during the great depression.

Mansoor

Mansoor H. Khan said...

jim,

thanks for your thoughtful reply.

i hope and pray that you are right and i am wrong.

i pray that we don't accept deflation as something that is natural and ok to have to "liquidate" bad debts as during the great depression.

Mansoor

Mansoor H. Khan said...

obama does not know simple algebra -- very good article -- please read (don't forget to read the comments as well!)

http://rodgermmitchell.wordpress.com/2011/11/14/if-logic-doesnt-solve-federal-deficits-might-simple-algebra-help/