All currency is debt

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wolly.green

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If all currency is debt, why does anyone think that government could ever pay what it owes? It follows that if all debt were paid off, it would extinguish our entire monetary system?
 
Fiat currency is not debt. Bank notes are debt, but several countries don't use those anymore - the US being one of those. A bank note is something you can trade in for gold or something else of value.

Fiat currency is just paper that the government says is worth something. You can't cash it in like you can a bank note. US dollars stopped being tied to gold in the '70s.

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Also you have to understand how government debt works. The government is always paying what it owes. There will be no point where it is "paid off" because it doesn't work that way. Bond holders profit off the government debt, so as long as the government keeps issuing and paying off bonds there will never be a time when the government pays off all its loans.
 
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sprinkles said:
Fiat currency is not debt. Bank notes are debt, but several countries don't use those anymore - the US being one of those. A bank note is something you can trade in for gold or something else of value.

Fiat currency is just paper that the government says is worth something. You can't cash it in like you can a bank note. US dollars stopped being tied to gold in the '70s.

Edit:
Also you have to understand how government debt works. The government is always paying what it owes. There will be no point where it is "paid off" because it doesn't work that way. Bond holders profit off the government debt, so as long as the government keeps issuing and paying off bonds there will never be a time when the government pays off all its loans.
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You cleared up a major misconception that I had about bonds and bank notes. Thank you.
 
Pin said:
You cleared up a major misconception that I had about bonds and bank notes. Thank you.
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It's fine. Debt sounds bad and scares people. A bond is just a promise to pay interest for a fixed amount of time. It's like if I borrow $500 from you and promise to pay interest on it for 10 years - it's good for both of us.

It's not that the government just borrows money and never pays back anything. If they didn't pay their bonds the credit rating would plummet down to nothing and nobody would loan money to them anymore. There's a reason they are able to borrow so much money. If they weren't good for it then it would be a bad investment and nobody would do it.
 
sprinkles said:
Fiat currency is not debt. Bank notes are debt, but several countries don't use those anymore - the US being one of those. A bank note is something you can trade in for gold or something else of value.

Fiat currency is just paper that the government says is worth something. You can't cash it in like you can a bank note. US dollars stopped being tied to gold in the '70s.

Edit:
Also you have to understand how government debt works. The government is always paying what it owes. There will be no point where it is "paid off" because it doesn't work that way. Bond holders profit off the government debt, so as long as the government keeps issuing and paying off bonds there will never be a time when the government pays off all its loans.
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I cannot see how you can possible believe this. Bonds are issued by the treasury and bought by the banks. The banks then sell those bonds to the Federal Reserve for a profit. Since the Federal reserves account balance is always $0, they have to create money out of nothing to pay for the bonds. The banks then use this profit to buy even more bonds which are then sold to the Federal Reserve, again, for even more profit. What's more, fraction reserve laws allow banks to lend out money they don't have. What this means is that the Federal Reserve can create money they don't have, and force us to pay it off with our tax dollars. And the banks can charge us interest on money they created out of nothing.

If we were to pay off all our debts, we would effectively extinguish our money supply. The reason we cannot pay off our debts is because of how our monetary system works. This is also the reason inflation happens.
 
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wolly.green said:
I cannot see how you can possible believe this. Bonds are issued by the treasury and bought by the banks. The banks then sell those bonds to the Federal Reserve for a profit. Since the Federal reserves account balance is always $0, they have to create money out of nothing to pay for the bonds.
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That makes no sense. Bonds are sold to anyone who wants to buy them. The Federal Reserve earns interest on securities. When it buys something, it buys it to make profit. To do otherwise would make no sense. The Federal Reserve profits off banks, not the other way around. The Treasury is also an asset of the Federal Reserve so the balance is not really zero.

The only thing you're right about here is that they can print money.


The banks then use this profit to buy even more bonds which are then sold to the Federal Reserve, again, for even more profit. What's more, fraction reserve laws allow banks to lend out money they don't have. What this means is that the Federal Reserve can create money they don't have, and force us to pay it off with our tax dollars. And the banks can charge us interest on money they created out of nothing.
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There's no reason to buy or sell bonds if they can just print money out of nowhere. It doesn't make any sense.

Yes the Fed can print money, but it has to be careful how much for economic reasons. That's how fiat currency works. Paper is not inherently worth anything.

If we were to pay off all our debts, we would effectively extinguish our money supply. The reason we cannot pay off our debts is because of how our monetary system works. This is also the reason inflation happens.
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If we were to pay off all our debts, the banks receiving the payments would still have the money which they would immediately loan out again. The demand for money doesn't disappear.

Edit:
I meant to say that Treasury securities are an asset of the Federal Reserve, not the Treasury itself.
 
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wolly.green said:
If all currency is debt, why does anyone think that government could ever pay what it owes? It follows that if all debt were paid off, it would extinguish our entire monetary system?
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It cannot sustain itself, even in physics the more complicated a system becomes the more energy it needs pumped in to sustain it. The Economy works the same way. Eventually you run out of energy and the system collapses until it finds a new homeostasis or something replaces it. 2008 didnt go away, its still with us, all those big banks that were too big to fail, well theyre bigger now. And they will need exponentially MORE liquidity to remain functional next time, which means the next quantitative easing or TARP bill will have to be for a minimum of 2 Trillion. The one after that 4, then 8, then16, 32, 64, 128 so on and so forth.
 
sprinkles said:
That makes no sense. Bonds are sold to anyone who wants to buy them. The Federal Reserve earns interest on securities. When it buys something, it buys it to make profit. To do otherwise would make no sense. The Federal Reserve profits off banks, not the other way around. The Treasury is also an asset of the Federal Reserve so the balance is not really zero.

The only thing you're right about here is that they can print money.

There's no reason to buy or sell bonds if they can just print money out of nowhere. It doesn't make any sense.

Yes the Fed can print money, but it has to be careful how much for economic reasons. That's how fiat currency works. Paper is not inherently worth anything.

If we were to pay off all our debts, the banks receiving the payments would still have the money which they would immediately loan out again. The demand for money doesn't disappear.

Edit:
I meant to say that Treasury securities are an asset of the Federal Reserve, not the Treasury itself.
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There is so much misinformation here. So I'll provide you with a few links to get you started.

https://www.thebalance.com/how-is-the-fed-monetizing-debt-3306126


http://www.investopedia.com/terms/o/openmarketoperations.asp
 
wolly.green said:
Can someone tell me whether this person is a troll? I don't want to waste my time if he is.
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Not sure, he definitely didn't back up what he said with any examples though that's for sure. So its hard to know if he is trolling or just so much smarter than us, that we need it explained to us slowly.
 
Billy said:
Not sure, he definitely didn't back up what he said with any examples though that's for sure. So its hard to know if he is trolling or just so much smarter than us, that we need it explained to us slowly.
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Look here. People used to use shells and beads as currency. All that makes a currency valuable is demand and the perception that it is valuable.

What the Fed does is expand and contract the economy and modify interest rates in an attempt to keep things flowing and stable. Yes, this involves some debt, as credit. Monetizing debt is more like debt being a currency than currency being debt. Even without debt people will still demand money and therefore money will still have value.

It's not usually debt that causes money to be worthless, that is caused by hyperinflation which is most of the time brought on by printing too much money.

If people pay off all their debt, money will still move because people still have jobs and need to eat. The money does not disappear.

Also note that inflation is not caused by debt, it is caused by the need for profit. If there was only say $10 in existence and that amount could never increase, all people would be able to do is pass the same amount of money back and forth. Businesses could not expand and children could not be fed without inflation.
 
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