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Debt.....

Discussion in 'Political Discussion' started by Holy Diver, Oct 10, 2011.

  1. Holy Diver

    Holy Diver Rookie

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    #80 Jersey

    List of countries by external debt - Wikipedia, the free encyclopedia

    So, if almost every nation on Earth is in debt and the US, and EU carrying the lion's share...

    who, if anyone, would benefit from all debt to be wiped clean, and credit to be outlawed? Seems to me thyat national paranoia would be fed the same way by massive debt than would personal paranoia.

    I often talk with a few of my wall street friends about whats our nations biggest problem, and they always say "credit".

    What nation on Earth is NOT in debt?
  2. PatsFanInVa

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    Okay good post... 2 things...

    Thing 1, you outlaw credit (I'm assuming you mean industry as well as individuals,) you are looking at huge job loss and dislocations. We'll assume you mean something that gradually takes hold, with lending capital replaced with something else.

    The machine doesn't work that way, not at present... what are the new gears? The old gears of capitalism include capitalizing businesses from corporations to mom n pop shops by gambling on their future prospects, and a company starting up, growing, or even in trouble, often needs to borrow. You can start up a one-guy desktop publishing shop in your home, with the extra money you save from your day job for hardware/software. You can't very well put up a factory that way, or even a modest-sized restaurant.

    Thing 2, there actually is a natural feature of capitalism that erodes debt. Unfortunately it also erodes assets. That feature is inflation. It's one of the only leveling features in the system... and we have forced it to low rates for decades, a sort of Carter hangover. At present, we have stated a policy of keeping lending rates artificially low for at least a few more quarters.

    That's the ultimate de-leverager. It's started at the mass level: higher food/fuel/etc. costs. At the corporate level, we have to keep money easily available. :eek::rolleyes:

    PFnV
  3. Holy Diver

    Holy Diver Rookie

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    #80 Jersey

    If everyone is in debt....who owns it all?

    Its kinda what me and my wall street peeps always come back to. That there is more $$ being traded and moved than actually exists.

    they throw out the figues in quadrillions, saying that 4QD exist and 8QD are being traded/moved at all times.

    how is this sustainable?
    Last edited: Oct 10, 2011
  4. mcgraw_wv

    mcgraw_wv Rookie

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    The easy answer is the practice of fractional lending. Banks only need 10% of the cash they lend. This creates money out of thin air.

    As well, the printing presses from the fed reserve create money, and lend it as interest, therefore inventing new debt. What blows my mind is with this practice, you see how it is literally impossible to ever payback the central bank, since they are the only ones who can create money, the government always has to pay back more then exists... Therefore needed to borrow ever more.

    its why the founding fathers were so against ce tral bankers, and why we as Americans have ended 2 central banks previous to our current 3rd federal reserve.
  5. PatsFanInVa

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    Fractional lending doesn't mean you print your own money and give it to somebody else, with only (say) 10% of "real money" somewhere in a vault.

    It means that a lot of people need loans, and you only keep a portion of that as reserves.

    So if you borrow $1 million from the Fed, they give you $1 M in either legal tender or some instrument accurately representing legal tender.

    The trouble is that they (private banks) lend out most deposits, which can be defaulted on, and only keep (say) 10% in reserve.

    However, if your deposits are also borrowed, then something else happens, counterparty risk.

    Since the big banks do in fact borrow from the Fed, that puts the Fed on the hook.

    Let's say you borrow a bunch of money to lend it to someone else. You lend it to that someone else and then the person who lent to you (the Fed) wants their money. Fine you say, I have thousands of revolving accounts, many of which are due to be repaid today. I will take what comes in today and pay what I have borrowed.

    So if 10 of the commercial bank's customers default, meh. If 20 default, meh. If 100 default, oh-oh, sort of. The big problem: of those thousands, what if 1/2 default? Then you can't pay the people who lent to you, and your risk you took on by lending that money gets transferred to whoever lent to you -- in this case, the Fed.

    Furthermore, you probably borrowed from other sources, or made bets depending on other banks. If all of them out-borrow their ability to pay bets and make loan payments at one time, that's the systemic risk scenario we've so recently experienced, right?

    Now let's look at the same question from an even "loftier" point of view, that of capitalism as an institution.

    Using a "real economy" example, think of what a P/E ratio is. You buy a stock not because that stock and company are "worth" your fractional investment today. It's not. You buy with an expectation that the P/E ratio will get you more than your investment back.

    Let's say the P/E ratio is 7. So in 7 years, the earnings of that stock should total the value of that company.

    You also have the raw value of all the stuff the company has today to parcel out to shareholders in this calculation. So in normal times, you should be able to buy today, sell tomorrow, and, if the stock hasn't moved, probably get back about the same you paid, minus any fees.

    In reality, in day-trader and "quant"-land, you'd also get 1 day's worth of movement in the stock, which is beside the point. The movement in the stock is from someone else calculating what the future prospects of the stock are.

    Now back to buy-and-hold guys. They buy stocks with uncalculated P/E ratios (startups and vaporware) as well as established issues. In other words, in either scenario, they take risks based on future returns.

    What gets out of whack -- and what we continually call for, this administration included -- is the call again and again for looser money (easier lending,) which regardless of your political party, is considered an absolute necessity to get enough liquidity into the system to capitalize new growth and new startups.

    Long story short, if you don't like capitalism in general, inveigh against the features of capitalism, and propose an alternative... but all investment shares the underpinnings of the fractional lending scenario.

    More money is out there than exists because people borrow and lend on future expectations; loaned money is not realized money. If I lend you $1M I might record on my balance sheet that I have $1M plus interest on my books, and that I have 1,000 similar loans. But some will default, and if they all default at once (or a sizeable proportion,) my balance sheet is just wrong.

    In other words, everybody's rich until the music stops. The goal becomes for the music to be able to start again at some point, whether the music re-starting means two or three people trying to wedge onto one chair, or whether it means people don't have chairs, or whatever.

    But a system dependent on future expectations of returns and rewarding of risk depends on money being loaned... so I am not so clear on how we correct this, without correcting our way into some new banking system I have not yet heard of (?)

    I'm all for tweaks to the current state of affairs but I definitely need to know what they are (having large banks mutually insure each other is a start, if you make them pay into the mutual insurance fund at a substantial enough amount to actually address systemic risk.)

    What do we do if systemic risk is so inherent to the model that it's a binary choice, of Capitalism or "Whatever else you can dream up"?

    PFnV
  6. mcgraw_wv

    mcgraw_wv Rookie

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    Great post, but I still believe the idea of fractional lending creates money out of thin air. If I only have $10.00 and I give you $100.00, that $90.00 has to come from somewhere, which is usually the Fed, and since the Fed doesn't generate wealth, they only invent new money, that's $90.00 more money added to the money supply.

    Now that's not such a bad idea since the money supply was expanded on growth, due to a loan. But as you say, when the money supply is so dramatically expanded on what turns out to be a bubble, we end up with higher prices because what we essentially did was inflate the currency on what we later discovered was false growth.
  7. mcgraw_wv

    mcgraw_wv Rookie

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    I disagree with that, I would rather them not pay into any insurance, as well ensure there is enough healthy competition in the industry which can absorbed failed banks by acquiring their assets via bankruptcy. I feel the insurance requirements are a drain the margins, and therefore is just one more reason why Banks push further into risk in order to make that money back.

    I don't think the banking industry is healthy, and not simply because of the recent issues, but because of the acquisitions each bank goes through in order to get bigger, to attract a higher stock price... Banks should almost not be allowed to be listed on NYSE, and they're values should be directly based on the rate of return and dividend.

    We are weak when we have too few mega banks, and not enough regional banks. We allowed our major banks to grow too large, and now they have become too big to fail, and that in itself is un-American, and kills the financial industry, as the entire valuation of banks are set on the size of bailout it will demand, and how much the government will support it.
  8. Holy Diver

    Holy Diver Rookie

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    #80 Jersey

    Debt fueled economics sounds like a shell game...

    3 card 'Monty Burns'
    Last edited: Oct 11, 2011
  9. mcgraw_wv

    mcgraw_wv Rookie

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    It is, and it all comes from the Central Banks. There is a ton of wisdom in the writings of the Founding fathers, and earlier presidents when it comes to their fears of bankers, and central banks. It's worth reading, and it's tells you everything to why were in the situation we are in now.

    This system will only continue to work as long as the rest of the world prefers to perpetuate it. True, many countries stand to lose a lot when the dollar falls, but it will happen, and people will grow tired of supporting our citizens lives with their blood and sweat.

  10. Holy Diver

    Holy Diver Rookie

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    #80 Jersey

    McG...


    well said.


    The saddest part of all of this, seems to be the loudest fringe of the networks seem to be protecting the criminals who keep taking our money, then taking it again, then getting bailed out, then taking more money...

    Its like they think the founding fathers were writing about capitalistic facism, instead of democracy...

    Herman Cain, for instance, was dissing the OWS protesters, because they were "against capitalism"....


    ?


    seriously?
  11. mcgraw_wv

    mcgraw_wv Rookie

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    Well in some of their stated demands they are... Even in the funny piece the Daily Show did on them, they expect services for nothing, not realizing that real people, not corporations work to bring these services and goods to market for them to USE and BUY.

    They ( broad generalization ) assume all business is powerful and rich, when more small business is in debt, and struggling to make payroll.. just like people.

    That's the problem of being raised in a city like NYC. NYC provides so many free services, people expect it, don't want to pay for it, and kids who don't work seem to have a pretty good life without working for it.


    The OWS and the Tea Party have a lot in common, and in all honesty they all share 1 single theme... Stop corrupt policies which allow special interests to have special privileges.

    Whether thats poor people getting free health care, or rich people getting free money. It's the same idea, special interests, for their own reasons, are acquiring votes and therefore money from the general public in order to fund their specific needs and wants.

    The practice of petitioning the government to fund a specific need, cause, project, job, business should be outlawed.

    The OWS people need to realize that Ron Paul, the Tea Party, and themselves all want the same thing. Reduce the size of Federal Government and you can achieve those things.

    So much money and power is concentrated in DC, that all DC is, is a special interest system built up to protect those special interests... the FDA, the SEC, the EPA, they are all there to protect big business and other speical interests... not to protect you.

    I'm disgusted in general that just being an American, is not good enough to matter, no one cares about you, they just want your tax money... and just being a normal guy, means you get the least value for your tax money...
  12. DropKickFlutie

    DropKickFlutie Rookie

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    The entire PONZI SCHEME is set up to benefit the printers of money. I mostly lean liberal but about this topic, I ask if anyone can explain who the owners of the fed reserve are? The fed reserve is a private institution that prints money that the government borrows, and there is no way this debt will ever be paid back. Who are the shareholders who stand to make quadrillions of dollars simply off continuous global debt over decades/centuries?

    Andrew Jackson and Abe Lincoln were some of the few brave leaders who tried to give America the power to print its own money. Jackson had an attempted assassination and Lincoln was killed.
  13. PatsFanInVa

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    Sort of.

    The reason a bankrupt bank is bankrupt is it does not have enough assets to pay its obligations. So it's guaranteed that when you take over their assets in bankruptcy you are taking over less than you owe, if you are looking for a device that evens out the impact elsewhere. In other words, you don't address systemic risk by saying "Feeding Frenzy!!! Bear Sterns at $1 a Share!!!" And that's not even to mention the temptation to short one bank into oblivion artificially and then carve up the corpse (that's on the trading-of-stock side, not on the actual assets/obligations side; or rather, they'd be artificially devaluing someone's assets to create the crisis as soon as they smelled blood in the water.)

    So minus the shorting activity, what you have is a fire sale on the assets that does not pay off the stiffed counterparties, which are then weakened by the single bank's collapse. But what we just saw is a situation where if you left it alone, they'd all fall like dominoes, because of the counterparty risk.

    Credit (liquidity) freezes, the engine seizes up, the music stops. No lending capital for payroll loans (which small businesses make especially frequent use of,) no lending capital for new businesses, no lending capital for expanding a business, all the outcomes of our deeply credit-dependent economy.

    And you'll notice that the bond b/w wall street and main street is precisely the part of capitalism you would actually want. That is, real economic activity happening, on credit, because the credit is the expression of risk-taking in the sense of taking a chance on a new or ongoing real-economy business.

    Where it gets ugly, IMHO, is when you can make bets without skin in the game. One obvious example is the business of hedging. Another is commodity bubbles, where you have no intent of ever receiving the shipment of tomatoes or oil or pork bellies or whatev. You just swap the contract around.

    The further removed each instrument is from the economic activity it "represents" the more distortion we get. It's no just leverage; it's leverage unmoored from the real economy.

    Makes sense to me. So does the firewalls between insurance companies, commercial banks, and investment banks that we had before Glass-Steagall was effectively repealed (just for example.)

    I think that makes us weak, in the same sense that a stool with 3 legs is more suspect than a chair with 4, and if you have 20 very small legs, you're in that much better shape. You can lose any one of them and survive it; nobody's "too big to fail."

    Okay, so that's my response... there are 2 ways to go. One of which is to say "It would be better if..."

    And the other one is way harder and more wonky but it's to say, how do we get there from here?

    PFnV
  14. PatsFanInVa

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    Whoa there. The preponderance of gubmit stuff that pisses you off is precisely because you're an American and therefore you're good enough. Social Security, Medicare, for example -- the big programs that cover everybody, that pretty much spring from the idea that "dammit, there's a "floor" to what happens to an American."

    You might not like them for some other reason, but they're pretty much in line with exactly what you're saying you want.

    We're still watching it unfold. These guys are more Elizabeth Warren than Sarah Palin though, from what I've seen. Maybe I'm wrong, or maybe it'll change, but I think that's where they're coming from:

    Don't go after middle class "perks," look at these fantastically rich people that are skating. Vastly oversimplified but I get that vibe.

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