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Originally Posted by SmartAlx  You made a grammatical error there so I can't follow what you are saying. But I do know that when you say that the economy has $1 in it, it does not have $1 million in it. |
Ooops, I was asleep and I started to type.
I meant I lend you $1, then you pay me $1 million. It makes $999,999 of interests.
This exaggeration makes the effect of interests to be very visible.
Yes $1 million does exist.
That $1 million is reflected in the company balance as "account receivable" asset.
And if the loan is refinanced, the principal of the refinanced loan will be $1 million. So lots of money will be created in the accounting books.
The problem of that money is that it is not backed by goods, so if debtor defaults, that money will exist only in the accounting books and you would have a "toxic asset" also called "troubled asset". Some other call it "ghost wealth" or just plain "fake money".
This toxic asset will be backed by goods when you work hard in a job that produces value added, so you worked to earn $999,999 and then as the loan is completely repaid, then the $1 million will be backed by the value added you produced. In the meantime, the money that was not repaid remains a toxic asset.
How do banks get to repay toxic assets? Since subprime customers can't pay, the rest of people will pay. It can be achieved with government bailouts and abusive conditions for credit card holders.
Another way to explain how money is created is this: Imagine I lend you mass of planet Earth. I lend you 100% of the mass of the planet, and you must pay a 5% of interest, but you have no spacecrafts. To pay me, you'd need to create new mass, or bring it from somewhere, so the amount of mass increases.
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Originally Posted by SmartAlx If the economy has $1 in it, you loan me $1 and you say I owe you $1 in interest on top of the $1 you loaned me, the economy doesn't now have $3 in it. Before I pay the debt off it has $2 in it. After I pay the principle back it has $1 in it again, but I still owe the interest. After I pay the interest the economy has 0, yes! ZERO dollars in it. This is why interest is so harmful. Interest anihalates money.Interest doesn't create money. It is anti-money. It anihalates money like antimatter anihalates matter. Interest can not be used like real money. You can not buy a house with interest. You can not buy goods with interest. You can not be used to pay for services. It is a ledger entry that says someone owes this amount of debt on top of the debt "we" created for him. |
No. In this case I lend you $1 and I ask $1 million in return ($999,999 of interests so you can see the effect of interests). Economy has $1 million when I enter $1 million as assets in the accounting books.
There are several ways in wich money is created, that does not involve printing bills by a central bank. Those ways create inflationary pressure. But business schools do not teach that, because they are focused on microeconomics, and this microeconomical view that disregards the big picture or macroeconomics, is exactly what caused this crisis. They designed creatures without looking at the efect on the overall system.
The problem of people driven by microeconomics is that they do not realize about their effect on macroeconomics, so they mistake money as equivalent of wealth, so they create money that is not backed by goods, which creates inflationary pressures.
When banks get to have their toxic assets repaid, the amount ofmoney that would flow should be enough to have a planetary hyperinflation.
Right now we have M that has been growing faster than Q, so it creates inflationary pressure on P. But how is that you have deflation instead of hyper inflation?
Banks have restricted the flow of money by not lending, so they do not appear as insolvent, so the inexistence of their toxic assets become apparent, and in a debt based economy it means a reduction of V.
But when toxic assets are repaid by people with real assets, V will return to normal levels and the amount of money that was created will be apparent, causing a hyperinflation.
US has done nothing to balance its economy. Indeed it has done the opposite of what is recommended. Why? Because it wants to play the same game it played in past decades, while being confident of finding a way to export crisis.