Student, Sevenoaks School

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Why can't countries function without going into debt?

After reading various articles about Japan's incredibly high living standard I couldn't help but ask how they can afford to do so much for their citizens (i think it's admirable but is it not being unrealistic? I then looked at Scandinavian countries such as sweden who have comparable living standards but are in far less debt than Japan. The question i am asking is not concerned towards how effecieint a countries economy or surplus' they aim for. but rather why is it that a country whether developed or not has to have continuous debt? e.g. the US, its incredibly expensive, and can lead to great volatility in such situations as the US Shutdown. So again why is that a country has to go into, and stay in debt? any economist should realise the profit in the long run of not having to pay interest.
p.s. i understand the benefit of debt, just simply not why countries can't pay it off instead of going deeper into debt.

  • Jan 21 2014: Hello Oskar,
    This is a great question. What has happened most places is simply that the central bank is a separate, independent and usually private entity from the state in most developed countries. The Federal Reserve and the Bank of England are both owned and operated by banks and bankers, not by the government. Our governments are constantly paying interest that is compounding on itself, so as long as we only pay the new interest payment the debt is only going to get bigger. That said, we have already paid off the debt many times over (as has pretty much every other country) if you were to take out the interest. This is a structural choice that basically assures that any country with this system of an independent central bank will remain in debt because it is constantly having to pay interest to an outside entities to fund itself. The process is a bit complicated, but that's the inevitable end result. As for Japan, most of their debt is held by their own people, which makes their debt much less threatening to their economy. Their economy is not in the hands of foreign creditors because of this, which is very powerful. This is partly because their biggest bank is a public bank. Many Asian countries (China, Japan, South Korea, etc.) have very different banking systems, many with a very strong public banking sector. The system pioneered by the Bank of England is a system empowering to bankers and dis-empowering to the people. Public banking can help to use the power of credit for the benefit of all in the form of more productive taxes and less interest paid on the national debt. If you are interested in learning more take a look at this book. I just came across the book in my own financial research and it was a great eye opener. I have no stake in it financial or otherwise, I just think it was very informative and eye opening. Hope this helps.
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    Jan 17 2014: They don't have to go into debt.

    But politicians want to get elected. To get elected they have to promise something for your vote, this is something for free. E.G. healthcare, lower taxes, a better standard of living through more regulations, pay back for campaign contributions.

    In order to pay for these things money has to be borrowed or favors granted or companies subsidized or tax breaks given or bailouts granted.

    In order for this debt to remain a small portion of t he economy the economy must grow. The rich's investments grow through inflation the poor languish through inflation.

    The politicians further a meme that the government can control the economy and keep it level with no downturns. This prevents the market from fixing itself though market clearing. Which mean trimming the dead wood from the market. Part of this meme is that inflation is good. Inflation is not organic to the economy.
    • Timo X

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      Jan 19 2014: What exactly do you mean by 'market clearing'? And how do you think this affects inflation?
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        Jan 20 2014: It is allowing the price of something to drop to a price someone will pay for the item.. This would include declaring bankruptcy, where a company can not sell it products at a price adequate to cover it's bills.

        This has been a problem recently when the US government decided to remove a necessary part of the business cycle by bailing out companies that should have been put into bankruptcy. This has prolonged and exacerbated the recession that should have been over about 4 years ago, instead the recession has continued long past when it should have ended.
        • Timo X

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          Jan 20 2014: So if I understand you correctly, you believe that if the US government does not bail out companies, there is 0% inflation in the US? Do you think that is accurate if you take a look at all the years that the US government did not bail out any companies?
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        Jan 20 2014: Inflation and bail outs are 2 different things.

        Inflation is an increase in the money in circulation.

        Recessions are a necessary part of the economy. Recessions get rid of business’ that become irrelevant to the market. Examples are buggy whip makers, typewriter manufacturers, cassette manufacturer

        The current problem started when the government kept AIG and some of the banks in business, this cost the taxpayer 1 trillion dollars. The government then decided to keep doing this to stimulate the market and since have spent 6 trillion dollars.

        The problem is that since this did not create business activity because the money did not represent someone’s labor but rather was printed out of thin air so instead it just created inflation.
        • Timo X

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          Jan 20 2014: I know that inflation and government bailouts are two different things. I am mainly curious how it follows from your reasoning that "inflation is not organic to the economy." You brought up government bailouts yourself. So in order to further the conversation, I will ask you a question about a hypothetical situation that I would like you think about and answer if possible. Imagine a fictional country that has no government whatsoever, meaning that there are no taxes, no government bailouts, and no central bank. Assume further that the country has only one currency, and that private banks exist. Do you think there would be inflation in such a country?
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        Jan 20 2014: "Do you think there would be inflation in such a country?"


        Private banks would not be able to print more money so there would not be inflation.

        The natural disposition of the economy is deflation. This is because technology reduces the cost of things. In the US from 1776 to 1912 there was no inflation. You could bury a dollar in 1776 and dig it up in 1912 and it would buy the same amount of stuff or even more. A nickel in 1913 would buy about a dollars worth of stuff today or it would take 24 dollars today to buy one dollar worth of stuff in 1913. This is because the central bank creates inflation.
        • Timo X

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          Jan 20 2014: "Private banks would not be able to print more money so there would not be inflation."
          Private banks do not print money, but they can create money through fractional reserve banking. Fractional reserve banking means that a bank has more outstanding loans than it has in savings, i.e. its liabilities are greater than its assets. Such a bank is assuming that it needs only a portion of its savings reserves to continue its operations. For further information see:

          Because there is no lower limit on the fraction that banks have to have in their reserves (or, alternatively, no limit to the amount of private banks), private banks can expand the money supply indefinitely. If they currently hold 60% of outstanding loans in reserves, they can go down to 59%. This increases the money multiplier from ~1.67 to ~1.7, which, assuming the amount of goods in the economy remains the same, equals an inflation of ~1.7%.

          You argue that the 'natural disposition' of an economy is deflation, but I do not see why deflationary tendencies due to technological innovation are more 'natural' than inflationary tendencies due to money creation.
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        Jan 20 2014: Apparently you know more about this than me ?

        Have a nice day
  • Jan 23 2014: Corruption.
  • Jan 20 2014: Because they choose short-term pleasure over long-term wisdom.
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    Jan 18 2014: All things are possible. Families just as governments make choices. If I make $50K a year then I set up a budget to live on that amount. I know that I cannot by a million dollar home and a $250K car. However, (most) government do not think in this manner. The type of economic model has a lot to do with it. You must read and try to understand the difference between Austrian and Keynesian economics. We in the USA have a Constitution that minimizes the size an power of the federal government and gives the power to the "several states" .... By the Constitution the "government" has only four areas of concern .... yet our government is growing and consuming. This is consistent with Keynesian economics. This is normally associated with Liberal governments ... there is no budget and no savings. ... there is no reconciliation between the expenditures and the intake thus massive debits.
    Nothing ever adds up. Social Security is 22% of the budget ... why? I contribute and my employer contributes every month ... why is this a government expenditure? Yet we believe these figures.

    I cannot find anywhere the cost of "running" the government .. manpower, vehicles, facilities, maintenance, etc .... at least 80 of that total would be saved if we returned to a Constitutional government.

    My opinion: We have allowed the representatives to lie and steal from the people with little or no return. Until we demand that the government become responsible and hold them accountable nothing will change.

    Send two struggling housewives moms from each state to Washington for a couple of months and watch what happens ... the crap would stop.

    OMB lists hundreds of ineffective programs each year ... it is ignored.

    We need to reign in the modern Kings and Queens of America ... politicians from ALL parties..

    My opinion .... Bob.
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      Jan 18 2014: I have a question to which you may have the answer, Bob.

      Over twenty years ago I was the revenue forecaster for the legislative branch of my medium sized city. That involved forecasting what we could expect from sources like traffic ticket revenues, sales tax, charges for water and electricity, dog license fees, and so forth.

      In my city, we absolutely could not spend more than our revenues. It was not just policy that we needed to be balanced. It was law. Municipalities in my state could not have expenditures in excess of revenues. We did, of course, have an emergency fund. And the practice was for revenue forecasts to be on the low side, in recognition of the fact that revenue streams could be affected by unexpected downturns of the economy and so forth. We never came in under my low estimate.

      Is this always true of municipalities in the United States- that they may not in any year have expenditures exceeding costs? Or is this different in different states?
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        Jan 18 2014: I have submitted projections also ... In Arizona we have what we call a "Rainy day Fund" However, going over is "bad" . By law we must submit a budget and are expected to follow it. There all sorts of models and formulas to arrive at this magic number.

        We have "forecasts" for large expenditures and recurring maintenance/capital assets. All of these are balanced by grants, income revenue, bonds, etc ...

        In the military I submitted our squadron budget and was proud when we came in under ... the next year our budget was lowered by that number. It taught me to be over and NEVER under. If we were over we were covered and got more in the next cycle. Just the way it is ...

        It may vary from state to state ... but I think it is common.

        I wish you well. Bob.
      • Jan 20 2014: Fritzie, let me give you a brief answer. Both the state and municipality are suppose to have a balanced budget. But a provision has been made that the state/municipality could make a temporary deficit by issues of bonds (by the approval of the voters) to finance the deficit of that year. Eventually that debt has to be paid, with interest, back. By the way, pension fund shortage probably can't be used for the purpose of issuing bond because it would most likely to be rejected by the voters. State like Texas, they not only balanced the budget, they also set aside some excess "rainy day" fund for emergency in future years. Some cities, like Detroit, fell into debt cycle deeper and deeper, finally found out that they will never be able to repay all the accumulated debt, so finally they had to apply for bankruptcy. Bankruptcy can't be declared unilaterally, it has to be granted by the court of law. The "debt" also included the shortage in the city employees pension fund, so the city's filing went through lot of suit and counter suit before it was approve later last year. So here is an example of the complicity of state/municipality debt problems. Notice that the federal government has less problems like that because the Federal Reserve System could always print new money to finance the debt. But even that can't be done forever, because the debt(bond) holders by foreign governments can call on the U. S. central bank to pay up their bond holdings. That's why there have been national bankruptcy too.
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    Jan 17 2014: Aside from politics, the technical reason is that a government in debt - is a good government.

    It gets out of control if the government - exceeds the debt limits it sets.

    It doesn't make sense from the governments POV. Just ask yourself, if the government is saving or paying-off debt - then on whose expense is it doing so? the answer is pretty simple - people!

    If a government is in surplus then why is it taxing people? or if the government isn't borrowing then how can it spend on people? and if they're not going to borrow then one of the ways they'll finance public amenities is through deficit financing... That doesn't do any good to the economy. The idea is to find a balance!
    • Timo X

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      Jan 19 2014: I was going to say precisely this, but you did it more eloquently, so thank you.

      I only want to add that governments also have many assets that provide a balance against the debt, even if many of them cannot immediately be converted into money. The idea that a government's debt is balanced by the assets of its people underlies the practice of expressing government debt in percentage of GDP, for example.
      • Jan 23 2014: What assets are you talking about?
        • Timo X

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          Jan 23 2014: A government has many, many assets. There are too many to list them all, but think of buildings, roads, waterways, land, natural resources, etc. Of course governments also have a large amount of financial assets, as well as less tangible assets such as human resources and a tax base.
  • Jan 31 2014: debt and asset are two sides of the same loan. Currently, the loan is an asset to the bank and a debt to the borrower. Since the federal government is one of those borrowers, it is a debt to gov. The bank is the only one without a debt.

    Under the Chicago Plan, we change the originator. The government makes the loan to the bank, then the bank reloans to consumers. It is still debt based money. It just changes who is the originator... that is, which entity is the only one that doesn't have a debt.
  • Jan 31 2014: "BTW confusing the action with the actor is an interesting topic ( ) "

    Interesting, but I think she has something very wrong. Probably the cognitive dissonance where she accepts what she wants to believe.

    Faith is not vulnerability. Faith is joining the 90%. Faith is believing in higher reality, life after death, a heavenly father with a plan. Faith is a higher authority to appeal to.

    True vulnerability is rejecting faith. Vulnerability is being the 10% outcasts. Vulnerability is accepting death. Vulnerability is the absence of a heavenly father with a plan. Vulnerability is knowing there is no absolute authority, and every assertion I make I am going to have to back up.

    Vulnerability is leaving the pack, rejecting tradition, being willing to question everything including the beliefs that define you, to not have angels watching over you, to not have a demon to blame, to accept harsh, uncomfortable reality.
  • Jan 31 2014: Darrell,

    There is only a couple of hour left for this conversation and another one ended without me responding to some ideas you mentioned... will like to invite you and other to visit ( ) where I will address something you said in the conversation that ended...
  • Jan 31 2014: Aside, why do so many of my posts pop to the top? I swear I hit reply to your message below. It should nest, not be a new root.

    "Did you mean I should had used 'whoever' rather than 'whomever'?"


    "Who borrowed from whom and who agreed to pay interest to whom"

    Sorry, that was just intended to be redundant example to demonstrate the difference between the subject (did the action) and the object (to or from the action is done).

    No great economic insight there, just more grammar lesson.

    If ever I do not respond to something you say, it is safe to assume that I agreed with it, and therefore had little to nothing of value to add.

    This stands in stark contrast to Mike Colera, who is so far gone that discussion is generally a waste of time. He views the word as those that agree with him, and those that must be destroyed. He seems to reject the possibility that he is not correct. I can't...

    I have been proven wrong more times than I can count, and I am thankful for each and every one, for it is only by being proven wrong, that we can move away from ignorance toward truth.

    Faith is a many horrid thing.
    • Jan 31 2014: After three levels down you cant nest any further. Replaying below is like replaying above. To keep a somewhat threaded flow, look into the nested flow and use the reply at the appropriate level and hopefully it will put response at just the appropriate place.

      Yea we ought differentiate between the subject (did the action) and the object (to or from the action is done); just keep in mind that I always sort of confuse which is which; kind of like the distinction between listening and hearing; we ought differentiate between; the physical perception and the cognitive perception; I just sort of confuse which word goes with which distinction; and I am glad that I didn't use 'witch' rather than 'which' as I have done in the past; I know many place significant importance on word nuances without observing that sometimes the word there isn't the word there; kind of dyslexic humor

      If you ever do not respond to something I say; I assume that you did not respond to it; or did and it didn't show and you didn't notice it didn't show; or you just couldn't respond because the conversation deadline was reached; I prefer to validate the real important stuff; one way or another; sometimes in multiple ways; and even then keep a lookout; I think many times its vital to expose the agreements and insights gotten; that way everyone sees them and learns from them

      Those who view the world as ' those that agree with them, and those that must be destroyed" can help us learn how to shift from that state to a better one. In a way the enemy ought to be destroyed through friendship for thats the only true way to get 'eliminate animosities". The dancer guides the fighter into a graceful dance. Of course sometimes its easier said than done; Turn the other cheek can mean move in such a way as to transform the slap to the face into a gentle caress; ideally before being struck and knocked down

      BTW we can move away from ignorance toward truth by learning truth! Faith is Faith for some it's divine.
      • Jan 31 2014: Because I grew up speaking English, and who and whom are so often incorrectly used, I too had trouble knowing when to use which.

        In English we do much better with I and me than who and whom. The are the same concepts of subjective and objective, but we never have to think about I and me because we just know.

        However, when I learned to speak Spanish, I did not have any illusion of knowledge as to when I should use yo (I) and mi (me). I was forced to understand the difference between the subject (yo) and object (mi) in order to speak Spanish.

        Once the concept is understood for one situation, it can be transferred pretty easily.

        You can try thinking of "who" (subjective) and "whom" (objective) as "I" (subjective) and "me" (objective).

        Who loaned what to whom? I loaned what to me?

        So, when you said "whomever loaned" instead of "whoever loaned" it was the equivalent to saying "me loaned" instead of "I loaned".

        Another one that irks me is the use of an adjective where you need an adverb.

        Hey Mr. NASCAR driver, how is the car running? Good.

        Arg! Running is a verb, so the answer should be well.

        Of course this one trips me up too.

        You meet someone. They ask "How are you..." Good ":,,,doing?" Fcuk! Now I just made myself look ignorant for assuming the question before letting them finish asking.

        How are you? Good.
        How are you doing? Well.

        Let's stop the horror and just standardize on a freaking small-talk, rhetorical initiation and response!

        Some people say I sweat the small stuff too much. I have no ide what they are talking about. Then they will say, something like "you stress alot". ARGGGG!!!!!
        • Jan 31 2014: Darrell,

          Language can be so entertaining ... specially for the dyslexic. Kind of like that joke which isn't a joke and involves telling the humorless joke where the joke involves observing the faces of the other people not getting the joke... or the face they make when you ask them to explain whats so funny...

          I appreciated the statement "Once the concept is understood for one situation, it can be transferred pretty easily". sure for those who understand it... kind of esoteric ... those that get it get it and those that don't don't... and there is actually quite little value in explaining it... those that get it don't need the explanation and those that don't get it will not understand the explanation... still explaining it can help some understand it a bit better...

          BTW confusing the action with the actor is an interesting topic ( ) There is a difference between someone made a mistake and someone is a mistake... guilt and shame ... though I wished they could had focused on positive terms... akin to using the notion of 'incentives' rather than 'loopholes'... sometimes a debt is defined as an investment ... and then there are the terminology that is a bit ambiguous like a readjustment for a loss or an interest for a cost and the list could go on...

          countries could function in the green by sourcing the funds before doing the stuff...

          FWIIW I too learned spanish and english and find some terminologies can easily transfer from one to the other then sometimes the ways in one are difficult to conceive in the other... Ever wonder about how to express the notion of wonder in spanish...
  • Jan 31 2014: I'd already read the Kumhof/Benes paper. Indeed, an excellent read.

    The question was how the committee gets the money into the economy once it decides it needs to. Spend it, like the old government script days, or how we get coins into the economy? Loan it to banks that can then loan it out to individuals, as in the Chicago plan?

    The flaw I see with the 1% money growth for 1% population growth is that price is not simply: total stuff/total money. Price is set only by the portion of money that is actively out chasing goods.

    How do you address savings, international deficits?

    The Chicago Plan relies on a very progressive tax code with massive deductions for converting savings from money into non-debt assets. I am not sure how the Chicago Plan addresses international deficits, other than by not borrowing our deficits back, we remove a major tool used to manipulate exchange rates. We still have the problem of foreigners loaning to our citizens, then then import that borrowed money. In fact, your citizens being in debt denominated in foreign currencies is far more dangerous than having the debt denominated in your own currency.

    What I have never seen the Chicago Plan address (perhaps I've just missed it) is non-bank lending's creation of near money. With 100% reserve, we can control how much banks lend, but we can't stop businesses from selling bonds. I have seen versions of the plan that point out this is still an issue that needs to be addressed, but no hard ideas for addressing it.
    • Jan 31 2014: The essence of the Chicago is to convert existing debt-based money to equity-based money. No new money is created when the Chicago goes into effect. How to get new money into the economy? Spend it into circulation for government infrastructure programs.
      • Jan 31 2014: aaa. Not exactly.

        The essence of the Chicago plan is to change who originates the debt/money.

        In colonial days, there were two kinds of debt/money.

        Governments issued script, which they later collect back as taxes. The fact it could be used to pay taxes gave the script value. The governments ran deficits, in effect borrowing against future taxes.

        The other debt/money was bank note, created when a bank made a loan. It had value because people would use it to repay debts.

        Globally, some nations had a central bank that issued the official bank note of he nation. Other banks and the government borrowed from that central bank. Central bank notes were the only legal tender. Every bank and the government had to accept them for payment of debt and taxes.

        Other countries had each bank, and the government issue their own notes. Notes were legal tender only to the entity that issued them.

        After the revolution, the USA had to decide what it wanted to do for legal tender. It decided on a central bank notes and the First Bank of the United States was born. 50 years later, Jackson took us to the no single legal tender system.

        The Chicago Plan is the first attempt to go to the Government script being the legal tender.

        But it does it in a hybrid with the central bank concept. Government would run balanced budgets, not spending the script into the economy. Government money would be loaned to banks, then banks would loan it into the economy. The gov, rather than banks, would be the originators of the debt/money via lending rather that deficits.

        If the government were to just spend it into existence, then there would be no way for banks to issue loans.
        • Jan 31 2014: To correct my statement, the essence of the Chicago is to change the nature of money, from debt-based to equity-based. Changing the money originator is also part of it as you correctly state.

          Private banks can still make loans, why not? The government can spend money into the economy and make loans to the banks.
  • Jan 31 2014: "Well whomever borrowed the money and agreed to pay that interest "

    Your statement is correct. We are able to earn interest on money because others are willing to borrow money and pay the interest. Here we see that not only does debt create money, but also gives the money value.

    The grammar, however, is incorrect. Borrowed and agreed are the predicates. Whoever borrowed is the subject, and therefore the subjective form should be used. If the sentence had alluded to the person borrowed from, than that person would be the object of the predicate, requiring the objective form of the word.

    Who borrowed from whom and who agreed to pay interest to whom.
    • Jan 31 2014: I got a bit lost following with the grammar stuff ... and subtleties that you mention there...
      Did you mean I should had used 'whoever' rather than 'whomever'? after looking at it sure 'whoever'... 'the one that'...

      Now focusing on what you said creates money... using the statement "We are able to earn interest on money because others are willing to borrow money and pay the interest". Please note that the new money is created dew to the fact that others are willing to pay the interests as part of a mutually agreed exchange of 'stuff'!

      Your question "Who borrowed from whom and who agreed to pay interest to whom" can be a bit misleading representation of the transaction that took place. Using a different framing we could say someone payed somebody for the use of a certain tool they had a vested interest in using by agreeing to take it - while leaving some of it behind - and returned it in full. Thus somebody would end with their certain tool and an little extra of it. Who rented from whom and who agreed to pay the rent to whom... can be a representation of the transaction that took place. Note that the contract specifying the clauses of the agreement may be done through simple agreements as to what each will do and when they will do it... including the recourses and action each has to consent to.
  • Jan 31 2014: "Yea I realize that some agent/entity managed to skim and take the money and keep it... or spend it"

    Then you should realize that your argument is specious on its face. What you dismiss so easily, is key to discovering how the economy actually works.

    "if we focus just on the money in active circulation (as this is the portion that drives demand, and therefore economic activity) within a country, then

    Savings are both leaks of money and sources of money. Likewise 'deficits' "

    I am not exactly sure what you are trying to say here. Yes, under our fractional reserve banking system, money leaking from active circulation becomes the reserves that new money is created against. The deposits at banks allows banks to lend, but it is actually the loan that creates both the money and the offsetting debt that ensures the money has value.
    • Jan 31 2014: Darrell,

      I find it kind of humorous when someone tells me what applies to them ... for example I see that -What you dismiss so easily, (as specious) is key to discovering how the economy actually works- involves something that applies to you dismissing some of my statements. I do wonder what it is you consider I dismissed speciously. Maybe you can elaborate what you meant by your statement.

      To be congruent with myself I will elaborate on what I meant by my statement that you quoted above.

      The conditional focuses us 'just on the money in active circulation'. I think we would agree that money stored under the bed isn't included within the criteria of 'money in active circulation'. To use your language 'hoarded money' isn't included within the criteria. The money leaking from active circulation ONLY becomes the reserves that new money is created against WHEN the money is deposited somewhere. Money only generates interests when loaned at a gain. Do note that implicit in that last statement there exists a bunch of notions. When we take money or a product out of circulation by withholding it and putting it under the bed/cellar we may induce a greater demand for it. In a monopolize situation we could buy at a discount and sell at a premium... be it with potatoes... beans... grapes ... or chickens in the middle of nowhere... as an uncle found out when on a bad hunting trip... they ended gladly paying 10X for a chicken than they would had in the city... when they complained about the price the rancher simply said yea there in the city it cost that much here it cost this much... do you want it here and now or will you be going to the city anytime soon to get it there? As I sort of implied the deficit can be a source of money for the opportunistic rancher or a leak of money for the unprepared unsuccessful hungry hunter... Of course they could had prepared and brought their own chickens at a fraction of the cost... though I am not sure they could had sold them chickens
      • Jan 31 2014: How am I to take your argument seriously, when you do not take your argument seriously.

        Here is a summary of your argument.

        There is friction because money disappears.
        Money doesn't really disappear.

        One person's loss is another's gain, so people manipulate to make others lose so they can gain.

        People make mistakes.

        There wasn't a whole lot there for me to respond to, other than you pointing out the flaw in your own argument so that I did not have to.
        • Jan 31 2014: Darrell,

          The summary you presented of my point reflects what you think not what I said. I said there is friction because of a situation that someone takes a bit from what flows regardless of how it flows... You take the products to the store and they take some out... you want to take the products from the store and they take some out... keep doing it and eventually the store has all of the products ... Of course the store owner can take them... to or from without incurring losses... the store always wins ...

          In regards to one person loses because the someone gains reflects a zero-sum-game... sometimes 'everyone' losses because of what someone did ... and that everyone includes someone. The corollary is that sometimes 'everyone' wins because of what someone did! Now will somebodies actions and contributions be beneficial or detrimental ...
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    Jan 31 2014: Darrell
    Keynes, a progressive economist, allowed governments to interfere in the capital markets by saying:

    "That when market forces ebb and flow, the government should jump in and fix it."

    First, consider, at least in the USA, there are no market savvy people working for the government, we have politicians who are looking at the next election. Any "fix" to the market system is doomed from the get go.

    Second, consider the labor force, why should they worry about the market, if there are any problems, the government will fix it. They can just go on making buggy whips.

    So, Keynes provided bureaucrats an opportunity to gain power from the electorate because they are doing something to fix a problem.... they know little about.. And there are the people who are not thinking or planning for their lives, because the government will take care of them.

    An example, When General Motors should have... maybe.... failed due to bad management and let the market adjust to the situation, we got the Feds jumping in, creating Government Motors. The end result was bond holders lost billions, the taxpayers lost billions and thousand of employees of Delco Remy, a major non union supplier to GM, lost their jobs.

    That is why I say the Keynesian theory is...BS,
    • Jan 31 2014: I find that peoples' view of Keynes is greatly influenced by their opinion of what the purpose of the economy should be.

      Some believe the economy should exist to facilitate the production of goods and services and the efficient distribution of those goods and services amongst the participants based upon the relative value of their input.

      Others believe the economy should exist to sort winners from losers. A few winners manipulate the power of markets to acquire the majority of the wealth, becoming the masters of the universe who then get to rule over the masses of peasants.

      The former group tend to like Keynes. He did an excellent job of explaining how the economy works and offered insights into how and why we should manipulate markets to optimize the production of goods and services and keep liquid the markets that facilitate the trade of those goods and services to ensure distribution of those goods based on the relative value of input.

      The latter group despise Keynes for revealing how they were already manipulation markets, and how those manipulations where actually hindering production and miss-directing vast amounts of wealth away from those that input value, to those that hoarded wealth.

      Most of your post is pure ignorance, and therefore not worth my time to respond to.
      • Jan 31 2014: Darrell,

        Some food for though in your response... something that jumped out at me was the underlying fundamental reason for existence ... of the economy :-) How some believe this and some believe that... and how what each believes sets in motion a bunch of actions beliefs stances...

        I think we ought to wonder a bit deeper into the underlying fundamental reason for existence of the economy... it may shed some insights into why rather than facilitate harmonious sustainable wellbeing it produces all sort of products (including them winners and losers). Doing this may even expose that we ought to shift the underlying fundamental reason for existence of the economy towards generating wealth in harmonious sustainable ways.
        • Jan 31 2014: "Doing this may even expose that we ought to shift the underlying fundamental reason for existence of the economy towards generating wealth in harmonious sustainable ways."


          We have 10s of millions of unemployed people that want jobs. We have 10s of millions of elderly that are going to need healthcare. Providing healthcare consumes VERY little natural resources, and therefore, should not be constrained by the availability of resources other than the human capital it takes to provide that care (which we are no where near the limit of).

          And yet, we are told that we cannot afford to provide healthcare to our elderly.

          What the heck? It is not like we are saying, there is not enough oil to put everyone in China into a Hummer.

          We have people that need jobs, and people that need services that consume very little physical resources. So why not put those people to work providing those services....

          OH... we can't do it in a way that provides the profit margin that the rich, who control the economy, demand. They demand that we maintain the fat trade imbalances that drain money from circulation, requiring more money be borrowed into existence, and we can't support that additional borrowing to support their additional hoarding of money.

          Now that makes sense.... NOT!

          Generally, fixing the economy, where that be reducing our reliance on unsustainable debt growth, or reducing our use of limited natural resources, generally means slowing the rate at which the rich are getting richer.

          The rich are generally against that!
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        Jan 31 2014: As is yours, but you cast a stone and then run away.

        1st. No one believes (except Keynesians) that there are winners and losers in a market economy. The whole point of it is that both parties to a transaction are satisfied. In effect there are no losers. If I sell a product that millions of people want to buy and I make money and this is bad how? In fact, this is what you said in your first paragraph.

        2nd. Those who would sort winners and losers in the economy are and have been the Government officials that Keynes gave permission too, and the crony "capitalist" who are their minions.

        3rd. You have switched your conclusions.

        And think you for the pure ignorance comment, I am seldom recognized for being perfect in most anything.
        • Jan 31 2014: No one believes, except those that believe. Your powers of logic and persuasion are amazing.

          If every transaction has two winners, regardless of manipulation or not, then why not manipulate?

          Do you honestly believe that manipulation of markets began 100 years ago? You should read about ancient economics.

          The Babylonians were communists and the ancient Egyptians were fascists.

          Rome dictated prices, shaved coins, set fiat exchange rates, invented the concept of tax (punishment for not spending. In addition to the portion paid by all, Julius began levying a fine for hoarding money, which could be avoided by spending. The word tax has its root in the Latin word for being charged with a crime. Look it up.)

          Traders didn't randomly begin using money instead of barter. Governments issued, regulated and manipulated the value of money from the very beginning of civilization. More than half the Code of Hammurabi dealt with issues of markets, money and debt, and those regulations are manipulations that were already ancient concepts 4000 years ago.

          The modern re-emergence of banking stems for the Knights Templar who were instructed by the Pope to protect gold shipments between Europe and the Holy Land. Instead, they reverted to the ancient practice of ledger money.

          Soon, government chartered banks were popping up all over Europe, issuing legal tender money and manipulated the hell out of economies.

          The Federal Reserve and central bank concept was not a new concept in Keynes time. The Constitution was ratified in 1789. In 1790, Hamilton proposed The First Bank of the United States. In 1791, it was officially chartered and became the first central bank in the USA, issuing the only legal tender money for the young nation.

          It was followed by 2 more officially chartered central banks, the last was destroyed by the Ron Paul of his day, Andrew Jackson, in 1841.

          50 years with, 50 without, and now 100 years with a central bank. Truth. You should try it out.
      • Jan 31 2014: Darrell

        "So why not put those people to work providing those services...."

        Frictional Liability costs ...
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        Jan 31 2014: Yes Darrell,
        Thank you for you kind words.
        And in all those instances from through out history you have cited, it was government interference that created the chaos. Down at the local farmers market, during all these perilous times, the baker was trading his loaf of bread for a bag a wheat and both parties were satisfied with the exchange.
        OK, let's get real, As I said before, government should referee commerce, insuring that everyone is playing by the rules. It's when government gets in the game, I get annoyed.

        If the Federal government would present congress with a working budget and congress would establish an equitable method of taxing all citizens to execute tat budget, I would have a lot less to complain about.
        • Jan 31 2014: "Down at the local farmers market, during all these perilous times, the baker was trading his loaf of bread for a bag a wheat and both parties were satisfied with the exchange."

          Illusion of knowledge. It is simply not true. In times without government manipulation, one person owned all the land. The farmer was an employee of the land owner. The baker was an employee of the land owner. The land owner took the wheat, had the baker process it into bread, then handed out scraps to the workers, keeping the majority for himself.

          Government falls, economic manipulation stops, we enter the dark ages, and we have a few lards and masses of serfs.

          Truth, give it a try.

          "If the Federal government would present congress with a working budget and congress would establish an equitable method of taxing all citizens to execute tat budget, I would have a lot less to complain about."

          Like the 1800s, when we spent half the decade in some state of economic collapse, and ended with the top 10% owning 80% of the wealth.

          Yeah, no one had anything to complain about then.

          You know when people actually had less to complain about? The 1950s, when inequality was low, jobs were plentiful, wages were high. What was the top income tax rate? Oh yeah! 91%!

          But no one actually paid that rate. We were not taking from the rich and handing out to the poor. The rich spent and the poor had jobs.

          Oh, if only we could return to the days of the 1950s!

          Guess what, we can. We just have to want to.

          We have to switch our mind set from believing the economy should sort winners from losers, to thinking the economy should be about production and distribution of goods and services.
  • Jan 31 2014: "Mike Colera 14 hours ago:
    Simple explanation.."

    Laughably funny if not so sadly incorrect. You have, the illusion of knowledge. You think you know, but you do not.

    "Money came into being when traders needed a medium to use in exchange without having to carry the actual product to the point of transaction."

    In the beginning, humans lived in communal groups of extended family, hunting and gathering in packs, sharing all they had. Food was kept in a central store. Barter occurred only between packs and was conducted by leaders.

    When humans settled into villages, the central storage was maintained. Raiders were looking to take stuff, and keeping it all I one place made it easier to guard. Governments established standardized weights and measure, created tokens to represent the goods and highly regulated the economy.

    But, tokens could be lost or stolen, so very early on, shares were tallied on clay tablets that were kept in the central store. Ledger entry money.

    "Today, most money is printed on paper by national governments"

    Really, where do you get your info?

    As of Dec 2013 there was $11T of money. Only $1.2T of that existed as bank notes and coins (currency). The vast majority exists as ledger entries in depository accounts created by banks.

    "National governments guarantee the value of their money to the traders and have ruled that the money is a legal medium in transactions."

    Again, you are incorrect. The only government guarantee is that legal tender can be used to pay debts and taxes. The ability to use it in trade comes from the value that it gains as legal tender for debts and taxes.

    The guarantee is printed right on the notes. This note is legal tender for all debts public and private. Government guarantees it can be used to repay your debt.

    Did Keynes come up with that? Nope. Legal tender long predated the Code of Hammurabi, which included a legal tender law 4000 years ago.
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    Jan 31 2014: The reasons many countries are in debt are the same reasons why so many us, humans, are in debt - spending more than what we earn, buying on credit the things we want instead of what we really need. And our wants are limitless.

    On December 12, 2013, debt held by the public was approximately $12.312 trillion or about 73% of Q3 2013 GDP. Intragovernmental holdings stood at $4.9 trillion (29%), giving a combined total public debt of $17.226 trillion or over 100% GDP. As of January 2013, $5 trillion or approximately 47% of the debt held by the public was owned by foreign investors, the largest of which were the People's Republic of China and Japan at just over $1.1 trillion each.(Wikipedia)

    Humans, collectively as groups, make up cities, cities make up provinces or states, and states make up countries. Safety, security, and keeping peace in not cheap. Our military and our police forces take a huge chunk of our national, states, and cities budgets.

    To keep our homes safe and secure, we have to build strong fences, gates, windows, and doors. Security systems are not cheap.

    Keeping law-breakers locked-up is very, very, very expensive. In California in 2008, it cost the state an average of $47,102 a year to incarcerate an inmate in a state prison. From 2001 to 2009, the average annual cost increased by about $19,500. In 2007, around $74 billion was spent on corrections. The total number of inmates in 2007 in federal, state, and local lockups was 2,419,241. That comes to around $30,600 per inmate (Wikipedia).

    Protecting ourselves from our fellow humans is one of the main reasons why countries go into debt.

    And, of course, if you want to analyze this issue further and make the discussion long and complicated, read Economics books.
    • Jan 31 2014: Like many, you seem to think money disappears when spent. Nothing could be further from the truth.

      A person borrows money into existence and spends it into the economy. Even if mal-spent, it becomes income to someone. Ideally, that someone spends the money, becoming income to yet another person. In an ideal world, the money would cycle through the economy forever. Or perhaps, until it comes back to the person that borrowed it into existence, and then it is used to repay the debt.

      That ideal is not our reality. The USA has created conditions where something akin to 10% of GDP stops moving each year. This tends to slow the economy, and putts the money out of reach of the people with debt.

      To combat the slowing when stops moving, powers-that-be create conditions where more money is borrowed into existence and put into the economy. $1.5T stops moving? No problem. Borrow more than $1.5T into existence and get it moving.

      So, rather than looking at money when it moves (spent), the key to understanding our reliance on debt growth is to look at what makes it stop.

      It is not coincidence that debt began to spiral out of control at the same time that we embraced international trade imbalances and lower tax rates on those with very high incomes.

      It is not the people that spend money that cause money to stop moving. It is the people that do not spend.

      But there is good news. Some say the debt can not be paid back. That is wrong. It can! Every dollar of debt that we have created has created a dollar of money, or near-money.

      To fix the economy we simply reverse the trade imbalances. Get those that have been spending less than they receive to begin spending more than they receive. This is a necessary prerequisite before those that have been spending more than they receive can being spending less, allowing them to pay down debt.

      First, we must accept that money and debt are two sides of the same transaction.

      For money to be created, debt must grow. For debt to shrink...
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        Jan 31 2014: Hello Mr. Shimel, Jr.,

        You quoted, "First, we must accept that money and debt are two sides of the same transaction."

        You are right. There are two sides of the debt transaction: 1) the borrower, who will have to pay the principal and the interest on the principal and 2) the lender, who capitalized the transaction and who will receive the payments on the principal plus interest. Most of us know this.

        The question is, "Which side do you want to be?" This is basically the concern of Mr. Goodwille, when he posed the question. This is also my concern, both on the personal level and on the national or universal perspective.

        Perhaps one of the most respected investors in the world, Mr. Buffett, can enrich the discussion:
        • Jan 31 2014: The question is not as to side, but why the debt exists at all.
    • Jan 31 2014: The other day I was in a conversation over having to pay extorting criminals a protection fee... of course the protection was from them ... and in addition to having to pay other 'protection' fees to operate without others paying a visit.

      The underlying question I asked: Why should we have to pay a protection fee in the first place? Heck I know that prisons in some places are actually a rather lucrative business... that extort money from everyone to pay this and that 'privilege' ...

      I would also like to point out that 'the debt' in part is just made up ... literally fees and interests are added and compounded to make the number keep growing... I know some businesses operate on the model of late fees/service fees... yea the front is something a bit different but the real dow comes from charging late fees... in a way it was similar to a one dollar watch that came with a life time guarantee ... if it ever stopped working one could send it in to have it repaired or replaced ... just include proof of purchase in addition to a shipping and handling fee of 5 dollars!
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    Jan 30 2014: Darrell,
    No debt no money?
    That's Keynesian BS.
    The evolution of mankind in the barter system 10,000 years old was all screwed up until Keynes came to get government involved and fix it? Again BS.
  • Jan 30 2014: "Esteban Trevino

    2 days ago: Darrell,

    Unfortunately there exists frictional force where what one person spends isn't what another person's income be...This means that as each person spends the personal income diminishes to the point of all ending up in the frictional coffins."

    You should think of the economy as the set of all entities: people, businesses, government, foreign trade partners, etc.

    Viewed in that way, there are no leaks of money from the economy. Every unit of money spent is received by some entity.

    Money(plus near-money) is created when it is borrowed into existence, and is destroyed when the debt is repaid. At all times in between, it is in the possession of an entity in the economy.

    However, if we focus just on the money in active circulation (as this is the portion that drives demand, and therefore economic activity) within a country, then there are leaks of money. Savings and trade deficits both drain money from active circulation. These are the frictions you speak of.

    We can maintain the amount of money in active circulation, despite these leaks, only by ensuring an equal or greater amount of new money can be borrowed into existence.

    It is not coincidence that , in the United States, debt began increasing at 3x the sustainable rate, at the exact same time we lowered taxes on the rich (draining money from active circulation via savings) and embraced free trade (creating large international trade deficits). The debt was necessary to create the money needed to fund the imbalances, both domestic (rich getting richer) and international (trade deficits).

    We love the money, but hate the debt, not realizing they are flip sides of the same transaction.
    • Jan 31 2014: Darrell,

      I was pointing out a frictional force in one particular case... if you need other examples consider exchange rates or brokers fees. If you have 'x' currency and exchange it for 'y' currency and then exchange it for 'x' currency you end up with less than you started because of a frictional force ... keep repeating the process and eventually you end up with nothing... dissipating the money away ... yea I realize that some agent/entity managed to skim and take the money and keep it... or spend it... the point here being that there exists a frictional force in the exchange rates... of course if one be the exchanger such frictional force 'vanishes'... and one could keep repeating the process indefinitely ... BTW I understand that one such broker managed to amass quite a fortune and bankrupt the bank of england taking advantage of arbitrages where they charged a fee when buying and selling... or buying at a discount and celling at a premium exchange rate... the thing was they managed to be both at the same time! Imagine going to the bank and requesting a product at a discount and also going to the bank and offering a product at a premium ... and the bank holding the policy of having to selling the product at a discount regardless of having to procure it at a premium... from what I understand it had something to do with maintaining a fixed currency rate regardless of fluke higher demand and lower supply... Reminds me of a vending machine business operator who was impressed how some chocolate bars where flying of the machine and what a great profitable cash cow product it was ... thing was the advertised price said 100 while the procurement cost was 70 thing was the programed charged price was set at 40... OOPS ...

      BTW if we focus just on the money in active circulation (as this is the portion that drives demand, and therefore economic activity) within a country, then

      Savings are both leaks of money and sources of money. Likewise 'deficits' ...
  • Jan 30 2014: Another way to think about the relationship between money and debt is, we all want to be able to accumulate some money, then earn interest on it. Whether it is depositing it into a bank or buying a bond, we hope to be paid interest on our investment.

    Who is paying that interest and why?

    Prior to the American Revolution, there were 4 distinct types of money in active circulation. Commodity (people traded gold/silver/furs/food), bank note (borrowed into existence, valuable because people with debt need to get it to repay debt) and government script (spent into the economy by government. Valuable because it could be used to pay taxes).

    The 4th type was ledger entry. This included but was not limited to bank deposits that could be traded via check. This type of money was also used by many general stores and trading posts. When you took your goods to the trading post, you had a few choices. You could trade for other goods, you could trade for one of the other forms of money, but both of those could be stolen from you. The other option was to have the store/trading post just keep a ledger entry of how much they owed you. Later, you could buy stuff against that ledger entry.

    Can we all see that 3 of these 4 types of money are actually backed by debt? Bank note money was clearly borrowed, but the trading post ledger entry money is also debt as the trading post owes you the value it recorded in the ledger. When the government spent script into the economy, it was, in effect, borrowing against future tax revenue since it was going to have to accept the script as payment of taxes.

    The only non-debt money was the commodity money.

    The only money that paid interest was bank account ledger entry money.

    We have now (pretty much) shrunk this down to 2 kinds of money, bank note and ledger entry, both created by debt and given value because people with debt need to get it to repay their debts.
    • Jan 31 2014: Darrell

      You ask who is paying that interest and why?

      Well whomever borrowed the money and agreed to pay that interest ...
      Why did they agree to borrow the money and pay that interest?
      Well because they considered that acquiring that product at that cost was in their interests ... maybe they had an ideal opportunity from which they could get enriched by acquiring this product 'transforming it' and selling it... they took everything into consideration and concluded that if only they had the money to start... or maybe there existed a temporary urgent need to cover; before they got their paycheck at the end of the week... or maybe they just wanted/needed a product now rather than latter and where willing to pay more for it now.; or realize that to farm a land they required seed and time to get a ripe abundant yield. if only they had the money to start.

      Of course there are all sort of lenders, which resort to all sort of collaterals and all sort of interests There used to be a practice where the entrepreneur would hire a work force for their factory... at the factory there was a general store that had everything... heck a worker could even put the purchase on their tab, even the wife could go over get the necessities and put it on the tab... Of course some of the tab at times exceeded the workers weekly allowance without that becoming a problem because the entrepreneur financed and arranged for differed payments with a bit of a premium. Then there are the stores than loan as a way to sell merchandise so that their customers can make some money... the thing is that they figured out the exact amount to charge to keep the customers locked into the system... Micro credits to the rescue!

      Of course the problems surface when that business idea turns sour and what one gets in return doesn't cover the capital and interests which one agreed to pay... and as we know there are all sort of collectors ... that would prefer to be payed cash or a favor or with an arm and a leg
  • Jan 30 2014: I walk into a bank and take out a loan. This creates money and debt.

    If I spend the money now, then at some point in the future, I am going to have to trade something to get money to repay the loan.

    This means there is a demand for money. People with debt need to get the money so that they can repay their debt.

    Once there is demand for money, it has value. You are willing to accept that money now, in exchange for goods and services, because you know that in the future, you will be able to exchange that money for goods and services.

    The move from asset money to debt money was a long, slow, and painful one. We discovered that if we allowed ANY loans, it magically created money, but not the commodities that we wanted to believe gave money value. This lead us to implement laws ranging from NO loans, to only short-term loans, to tight limits on the amount of loans. (I'm talking 5K BC here... not "gold standard" days.)

    The problem with a hybrid system (some commodity money and some debt money) is that it created sharp business cycles. In good times we were willing to accept debt money, but the moment there was a hint of trouble, there was a race to commodity money.

    For thousands of years, we tried to have a hybrid system where some money was backed by commodities and other was backed by debt... And actually we still do to a very small point. Of the assets on banks balance sheets, which create money, about 2% is hard assets like gold and real estate.

    Back to the example at the top. I borrow money and spend it. Later, I earn it and repay the debt.

    Notice this creates a 2-way social contract. If I am obligated to repay my debt, then the person with money is required to spend it. If not spent, it is impossible for me to get, and therefore, impossible for me to repay my debt.
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    Jan 30 2014: They can... but those countries are usually dictatorships. In democracies, elected officials have to get votes
    to stay elected. So, they must appear to their voters that they will provide whatever the voters think they might want or need. Of course, this cost money, and the last thing voters want is higher taxes. Democratic governments have to go into debt. They need money to impress the voters to keep reelecting them.
    It's no more complicated then that.
    • Jan 30 2014: In the modern economy, if there was no debt, then there would be no money.
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    Jan 30 2014: Just as one can't run a successful business without taking risks in his business deals & also being indebted in case of loss in the business, the same way no country can successfully run without being indebted to any of his business partner. Let's take the example of Pakistan on a minor scale i.e take the example of traders. I have seen many shopkeepers who do business on a large scale and they are highly indebted to the other traders or shopkeepers. Some shopkeepers even debt upto PKR 400,000 and above but yet their business is well-established and successful.
    • Jan 30 2014: Shopkeepers generally do not want goods for goods. They want money for goods. No debt, no money.
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        Jan 30 2014: The same way every country wishes its economy to boost up and for this purpose they must have to be indebted.
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    Jan 30 2014: Darrell:

    I don't know where you got your dollar, I hope it was legal, but I want to trade my apple for it because the guy who has apple tree fertilizer will trade me some for a dollar.
    • Jan 30 2014: Where does ANY dollar come from, not just mine? How are dollars created?

      Why does anyone want the dollar?
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        Jan 30 2014: OK,
        Simple explanation...
        Money came into being when traders needed a medium to use in exchange without having to carry the actual product to the point of transaction. Over the millenniums, money has had many forms, some times a bit of precious metal, what ever the form, it was accepted as a value by the involved traders. Today, most money is printed on paper by national governments and specific values are assigned to ease transactions between traders. National governments guarantee the value of their money to the traders and have ruled that the money is a legal medium in transactions.
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    Jan 29 2014: Great discussion on money.... kudo's passed around... not sure college credits couldn't be awarded.
    However, Back to basics. Money is a medium of exchange. I have an apple, you have a dollar. We exchange.
    Simple... all this other discussion on near dollars and debits and credits is flim flam, smoking mirrors that is done to obfuscate the simple matter of exchange. As a result, we have financial failures, depressions, recessions, bank failures, bundling of bad loans with good, padding the books and kiting checks. The lengths man will go to to make difficult the fact that I have an apple and you have a dollar and we exchange. Remarkable..
    • Jan 30 2014: What is a dollar? Where did I get it? Why would you trade an apple to get it from me?
    • Jan 30 2014: The exchange with money is a bit more like... I got a chicken trade it for a buck which is easier to carry and to use it to get an apple ... then you take the buck and trade it for a couple of eggs... it used to be that money where shells difficult to find... after a while it became gold diamonds and other 'precious' difficult to find stuff... after a while it got substituted with paper notes... and then the notes could only be traded for more notes...
  • Jan 29 2014: Cutting to the bare bone:

    Debt creates money. People like money, so they create debt!
    • Jan 29 2014: People like what they can do when they have money so they get in debt to have the illusions of having money and end up signing their life over to others ...
  • Jan 29 2014: If you're interested in this topic then Zeitgeist The Movie could be something worth watching. It exemplifies one of the theories explaining inevitable debt creation.
  • Jan 29 2014: Hello all !
    There is a saying that goes in my country...
    'A business cannot run on its own money'
    I think, it goes for a Government also. In order to bring efficiency and to use the available funds judiciously, the debt system must prevail.
    • Jan 29 2014: That is akin to saying that a closed system will wind down and degrade dew to inherent inefficiencies and frictional losses... one needs to feed in nutrients to keep it going... and it is mostly true... well at least at the physical level, thought at the conceptual and spiritual levels things can work a bit different... we can produce self-sustaining expansive systems... In other words a business can be based on having a good idea that is followed into fructification and which can even lead to additional spinoffs...

      Debt system is just one kind of system and there are alternatives and much better ones... ever heard of pay it forward...
      • Jan 29 2014: It is true that a closed system can not run forever.

        However, we have this giant ball of hydrogen that we call the sun, that will take something like 4 to 5 billion more years before it runs out of hydrogen and turns into a red giant and burns away the earth.

        The sun is AMPLE stored energy to keep our closed system going.

        Our economy doesn't have frictions on money, it has leaks of economy that we call savings.
        • Jan 29 2014: Believe it or not I was thinking a bit past the time frame when the sun, galaxy and universe runs out... Heck there is AMPLE stored energy to keep our closed system going for quite some time within a single atom ... for those who know how to 'harness it'... which of course is more along the lines of knowing how to working with it for mutual enrichment...

          From what you said savings are a bit like stagnant swamps...
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    Jan 29 2014: This is a good question and one I have often wondered myself. Does corruption have a role to play in this?
  • Jan 28 2014: Why can’t countries function without going into debt?

    Because governments have a monetary system that requires them to have debt before they can have money. The government issued bills and coins that the public carry around are just a small fraction of the total money in the economy and this is true worldwide. Most of the money supply (97% in the UK) is born into existence as debt. Governments borrow whenever they cannot raise enough money through taxation. The monetary system in all countries is set up so that government can never escape debt. The world is now in debt saturation like never before. Although we can become debt-free as individuals, governments will never be debt-free until money is nationalised.

    It’s amazing how the US government can issue debt-free coins while the majority of US money is issued by private banks as debt. If government can issue coins without debt, surely it can issue bills without debt! If government can issue a bond, it can issue a bill. The element that makes the bond good also makes the bill good!

    How do we stop this debt-based money nonsense? Take the power to create money away from the private banks and place it in the hands of a money committee whose only job in life is purely mechanical. This money committee's job is to maintain the quantity of money just enough to enable the country's commerce. The policy should be zero inflation, not 2 or 3 percent inflation like what the central banks are preaching. We must not allow private banks to create the money supply because they are accountable only to their shareholders, not the public.

    Though private banks have the power to create the country's money supply, they are bankrupt and need bailout by the taxpayers! We might as well let the people of the nation control the money supply through a public money committee bound by the the rule of law, not by the banks!
    • Jan 29 2014: Your grasp of money is better than about 99% of the people that I encounter. Kudos!

      Economists believe deflation is very bad. It has a nasty way of becoming a negative feedback loop. Prices fall, income falls, spending falls, demand declines, prices fall, repeat. We call this recession or depression, depending on the severity.

      Economists will also point out that the tools for influencing he economy are primarily secondary. They can lower interest rates, and hope people borrow and spend, but they can not actually force people to spend. Because of this, the best they can do is be 90% certain that inflation will be +/-2% of their target.

      Well, if they target 0% inflation, and half the time we are above target and half the time we are below target, then half the time, we will be in recession to depression as we'll be below target half the time.

      If you do not believe me, take a long look at the economic history of the 1800s in the United States. The gold standard locked us into a 0% inflation target. Sure, we still had booms, but we had just as many busts. We spent 46 years of the 100 years, in some state of economic collapse.

      And, the unfortunate end result of these wild swings of boom and bust was a rapid accumulation of all the wealth into a few hands. The few rich were best positioned to take advantage of both the up (lend out money), and bust (end up with all the collateral when the debt defaulted). This is why the late 1800s is called the Gilded Age. Never has there been a more unequal distribution of wealth.

      I also like to think of inflation as a tax on not doing something productive with your money. For some reason, if the option is 0%-4% return, many people will chose 0%. However, if the option is -2%-2%, more people will take he 2%. 2% inflation makes that shift.
      • Jan 31 2014: "The gold standard locked us into a 0% inflation target.”

        The whole notion that money has to be backed by something goes back to the gold standard and that was a disaster. I’d rather just have a money supply where people intelligently look at the overall economic picture, real GDP, what’s the prospect for that, how much money do we need to support that and then we issue that money.
        • Jan 31 2014: For anything to have value, there has to be both supply and demand. Fiat money is fine, as long as the fiat creates real demand for the money.

          The days of the gold standard were much shorter than most people think. England was first to go to the gold standard in 1821. The United States did not adopt the gold standard until 1873.

          For thousands of years there existed both commodity money and debt money. When times were good, people gladly accepted debt money. As soon as there was a hint that bad may be coming, people wanted out of debt money into commodity money. This created the wild swings between boom and bust that have existed since man first created money and debt somewhere around 10,000 years ago.

          Getting rid of commodity money has had an amazing stabilizing effect on the economy.
    • Jan 29 2014: I am interested in your idea of a money committee.

      How would it inject the money into the economy? The way we do coins? Just have the government spend it?

      Would any debt be allowed? How do you prevent debt from creating money, or the near-money that also has the potential to cause debt to spiral out of control?

      Are you familiar with The Chicago Plan put forward during the Great Depression? Under that plan, banks would have to maintain a 100% reserve. That is, they would not loan out against deposits. Instead, the US Treasury would make loans to banks, then the banks would re-loan that money.

      So, let's say we want $10 trillion in debt ($100K per household), then the treasury would make that amount of debt available to banks. The banks would charge x% interest, with a slice going to pay their costs and thin profit, a slice paying interest to depositors, and a slice going to the US Treasury as interest on the loans it made to banks.

      In other words, right now, the difference between what we pay to take out a loan and what we are paid on deposits goes to the banks. Under the Chicago, the banks would get a thin slice of that, but the majority would go to the government.

      Of course, we would still have the problem that the few rich would want to hoard far more money than the amount of debt that we want to have I the economy, so even the Chicago Plan includes a very step progressive income tax code, with lots of deductions for spending, designed to keep money in circulation rather than allowing it to pool into too few hands that just want to loan it out rather than spend it.
      • Jan 31 2014: "I am interested in your idea of a money committee. How would it inject the money into the economy? The way we do coins? Just have the government spend it?”

        This committee or Monetary Authority would be like a separate branch of government bound by the rule of law.

        What we cannot have is the ability of banks to create money without boundary. As soon as that occurs we now start to drive a positive inflation trend. Once we have a positive inflation trend in the economy, we are guaranteed to have either recessions or, if we try to stop it, depressions in order to bring the system back into balance.

        We don’t need to have recessions or depressions if we control the money supply to track population. This many dollars per person per GDP. If the population grows 1%, the government gets a free 1% of the money supply to spend into the economy for government programs and it borrows nothing to do that, without taxation, because there’s no inflationary impact from doing that as long as it leaves the money supply on level with growth.

        "Are you familiar with The Chicago Plan put forward during the Great Depression?”

        Yes, and I’m all for it. There’s a working paper, The Chicago Plan Revisited, by Jaromir Benes and Michael Kumhof, which is recommended reading:

        Benes and Kumhof did something interesting. They remove the mistake in academic models that banks are for intermediation, make the correction that banks are for money creation, and then put the Chicago into a state-of-the-art computer simulator. The Chicago went well in the simulation.

        Dr. Kumhof’s presentaton is here:
  • Jan 27 2014: We love to say that everyone should spend less than they earn, accumulating money or paying down debts.

    Those that truly understand economics knows that this is actually impossible.

    One person's spending is another person's income. Total spending must equal total income.

    This means that one person spending less than they earn is ONLY possible when at least one other entity is spending more than they earn.
    • Jan 27 2014: Darrell,

      Unfortunately there exists frictional force where what one person spends isn't what another person's income be...This means that as each person spends the personal income diminishes to the point of all ending up in the frictional coffins.
  • Jan 27 2014: Let's start with a couple terms:
    Money: Stuff you can use to buy stuff, pay bills, pay taxes, etc, with no transformation. Generally, cash + checking and savings account balances. (Some would include store issued gift certificates and cards.)

    Near-money: Bonds, long-term deposits, money market deposits, brokerage account balances.

    Money is created when a bank puts an asset on its balance sheet. The bank could be buying gold, real estate, or other hard assets, but 98% of the assets on bank balance sheets (at least in the USA) are loans.

    In effect, you take out a loan from a bank and that creates money and the loan on the bank's balance sheet.

    Near-money is created when a loan is taken out from a non-bank, such as when the government or a business sells bonds.

    Money can be transformed into near-money when banks sell loans. Near-money can be transformed into money when banks buy loans (such as QE where central banks are buying bonds).

    The key is understanding that money + near-money = debt + the small amount of non-debt assets on bank balance sheets.

    Then, the answer becomes clear. There is so much debt, because there is so much money + near-money.

    In the USA, under Reagan, we lowered top tax rates, allowing a few people to accumulate vast amounts of money + near-money. This was only possible, without crushing the economy from lack of money in circulation, because we also loosened lending and lowered interest rates, allowing debt to grow, to create new money and near-money for these few rich to accumulate.

    Econ would tell us that increasing the amount of money should create inflation... Really, it is only the amount of money being spent that causes inflation. A few rich hoarding mass amounts of money, not spending it, has allowed us to increase the money + near-money supply without creating run away inflation.

    Better would be to return to a smaller money supply (by paying down debt), but increase its velocity, by returning to a 1950s tax code.
    • Jan 27 2014: Taking a loan does not necessarily create money... in principle the back loans you their money IF you agree to give it back and agree to pay them something for providing it. What creates the extra money is the borrowers consent to pay more than they get. This is actually something desirable for the borrower because in principle they will take that money to get something that will enable them to get more that what they have to pay back. Say that one needs $100 to buy products and make a cake which one will sell for $150. In order to make a $50 one needs to have $100.. So if one doesn't have any money, one borrows the $100, does stuff and gets $150 returns the $100 and then proceeds to splits the $50 made between who put the money and who put the work. Both end up better off... Of course when things go sour, say the baker loses the cake - burns it - and thus the $100 investment goes up in smoke there be complications. Of course the bank gets their money from borrowing from those who have money agreeing to pay it back and an extra something for providing it. Its desirable for the bank to be an intermediary between the borrower and lender because the bank can specialize in analyzing who be the good bakers and can have specialized people to go recuperate the investments. Besides banks could also safeguard the money in a safe location and shift from one individual to another using notes which would keep it from being stolen.

      The problem you mentioned stems from banks loaning to debtors who didn't pay back and a practice of charging interests on the accounts without the backing of funds...
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    Jan 27 2014: Collectively, people living beyond their means and leaders failing to lead.
  • Jan 23 2014: Because restraint and reason are unfashionable.
  • Jan 22 2014: Because countries are run like spoiled children.
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    Gord G

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    Jan 22 2014: I don't know...why can't CEOs function without making more money than their predecessor?
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    Jan 20 2014: The US has passed through periods of surplus and periods of debt. Households do the same thing. People the 'own' their own homes are highly in debt. Sometimes the cash flow is not good and bridge loans are in order. The expansion of the money supply is defined on debt. There is nothing wrong with debt, it is a financial tool. People loan each other money, that is debt. For every dollar of debt there is a dollar given. So why do people lend money? That is what debt is. I am having a difficult time understanding the question. Debt is a financial tool that works really well.
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    Jan 20 2014: Probably this is the reason for wanting to do many things by asking the taxpayers the least amount of money possible. Another thing is the intention, generally electoral, sometimes genuinely social nature, and sometimes the need for cash due to mismanagement or unforeseen situations.
    Most of the times, the ideas are well intentioned, but can't be justified easily.
    • Jan 20 2014: Sean,

      Would like to highlight that part of - asking the taxpayers the least - the taxpayer ends up paying more in the end the capital and interests .. though as you said without asking them about it...
  • Jan 20 2014: Oskar,

    Evidently the reason is bootstrapping... ( (or booting up )
    starting of a self-sustaining process that is supposed to proceed by loading the basics at power-on (or general reset), which will then take care of loading other stuff as needed. The process of starting a process and putting it into a state of readiness for operation
    can require an initial 'kick'. Once a sustainable business is in operation it will pay-up for the initial investments required to get it going.

    To address the issue of why is it that (x) has to have continuous debt may require distinguishing the kinds of debt one can get into. For example one may require to buy an expensive machinery in order to become more productive. One may require to provide 'credit' for procuring, storing, processing, storing, selling, delivering and charging for the finished product. Heck one may even require to provide 'credit' for the buyer to be able to pay for the product from the revenues of their products further down the line. Continuous debt can result in a growing process for multiple reasons. There are all kinds of debt which range from the 'noble' to the not so noble. As you sort of pointed out sometimes one either faces a shutdown or need to figure out how to pay for products and services that are required now when there be money to pay. Of course workers, suppliers, consumers, 'lenders' would rather extend the life of the enterprise by loaning it the 'resources' that are required to get it over the hump than face the alternatives - no work, no purchases, no product, no revenues, after the hump.

    The real conundrum surfaces when there is a shift from investing to keep winning into investing not to lose it all. In other words starting of a self-sustaining process is a good idea where as perpetually maintaining in operation a resource hog isn't.
  • Jan 20 2014: Because most of the countries are following our insane, unsustainable example and we have them convinced that if they do not we are and will continue to use force against them all. First political, then monetary and finally "unofficial" war if need be. The word WAR has a bad connotation so we use other words like "over-whelming force" "military exercise" and now we don't even have to enter there country with troops. We just send a "predator" with (small community of men, women, children plus all their animals) name on it, "greetings from Las Vegas".
    So what happens when this game of charades is over and the rest of the world no longer wants our phony money backed up by "nothing"? Game over....
  • Jan 20 2014: Let me first answer the question of why the U. S. couldn't avoid to build up more and more debt. The simple answer is that, regardless of what their argument is, it's basically the bad economic and financial policy. Specifically, the old government stimulus spending just doesn't work any more. One of the reasons is that, in a global free-trade environment, it doesn't always make the consumer spending leads to factory hiring of new workers because the manufacturing expansion may come from other exporting countries instead of the local industries. A macro-economic computation showed that the amount of total stimulus spending by the U. S. government was slightly LESS than the increase in GDP in 4 years, while the Keynesian Theory said that a $1 stimulus spending could have $3-$4 increase in GDP! So, the the bad policy hadn't helped the economic expansion, but merely increased the debt.
    Let me also comment briefly about the new "health care act". Even though many European and Oceania countries are reasonably successful in establish single payer health care systems, but the U. S.. This is because the U. S. always has the most expensive health care cost than any country in the world. The multiple reasons are, the U. S. medical facilities are at least semi-monopolistic. But we also have the highest drug research expenses, while by a peculiar regulation, the new drug are sold to foreign consumers CHEAPER THAN TO THE U. S. DOMESTIC CONSUMERS. Furthermore the the penal compensation on the malpractice by the physicians are much higher than that of other countries, and that expense was reflected in the malpractice insurance premium (in the order of $100,000 to $150,000 per year) on the practicing physicians. The new U. S. health care law didn't try to limit those excess medical cost, it also imposed additional taxes on the medical devices manufacturers and the health insurance companies which the health care programs in other countries simply didn't involve them at all.
    • Jan 20 2014: Bart,

      The theory may be right a $1 stimulus spending could have $3-$4 increase in GDP! Who's GDP is a different matter... I read there exists all kinds of travel with all sort of destinations and adventures ... including medical tourism... ( Artificial price hikes work in a captivated consumer who has just one option.
  • Jan 20 2014: japan is quite a unique example. education still follows the old method of "do as the master does and you too will be a master", so what we end up with is each generation unable to come up with anything other than trying "the way" to fix any given problem. the textbooks say that to stimulate the economy, huge amounts of public spending are the way to go, creating new infrastructure to help private enterprise run more efficiently and creating construction jobs in the process. successive governments have this 4 times already since the economic downturn of the 90s, it hasn't worked yet and they still don't have any new ideas.

    as for public debt in general, countries can function just fine without going into debt, but it's very hard to get elected on the platform of saving money. also it's worth noting that economists aren't interested in the long run, they really don't care at all what happens next year because they'll have moved their money out of failures and into the next big cash cow.
  • Jan 19 2014: I think people lived years before bankers invented debt.
    Of course You (and a country) can pay with liquid money. There is told that we need debt to grow but is not. It means it's needed to grow way much faster than we could without debt. Natural resources, manufacturing and commerce create money and prosperity. Debt is a choice.

    Don't shake the system. It's scary :)
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    Jan 17 2014: Imagine a water utility that needs to build a new physical facility. There will be a large upfront cost and both costs and benefits that accrue over time.

    The rate payers this year are not in a position to pay huge rates this year and small ones later. Further the current rate payers will not be the only ones benefiting from the facility, as its working life will long exceed theirs.

    So the facility might be financed with a combination of higher rates for water than people have been paying and borrowing that smooths out the payments over time.

    If it is a government with more than one function, there will be other expenditures that have this character. When there is a natural disaster, there are large immediate needs for resources with benefits that spread out over time. One could try a huge emergency tax levy, but it may come at just the time people are least able to pay for it. So the money is borrowed and paid back over time.

    Governments have new commitments each year that may make sense to finance over time and pay back even as they borrow for others. Regular people often borrow money to buy a car and also later to buy a house but may not have the car paid off completely before they buy the house. They will pay off the car before they finish paying off the house, but with the car paid off they may need to borrow for a portion of kids' college expenses.

    You said you understand why debt is used rather than paying only out of the current stream of earnings, so maybe I misunderstand your question.
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      Jan 18 2014: It is a meme that this is necessary or desirable. In japan people often save up and pay cash for a house. Certainly the same applies to cars. In fact the Federal government has used this idea to the tune of 17 trillion dollars. Not to mention unfunded liabilities.

      A more responsible way to do this is to have a budget with set asides for planned expenditures and unplanned ones.
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        Jan 18 2014: Many of us have never borrowed money for a car. I thought, though, that Oskar was trying to understand why in some situations one might borrow.
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          Jan 18 2014: I thought he was asking:

          "Why can't countries function without going into debt?"

          Of course the answer is they can

          The reality is that socialism is borrowing from the future to pay for a better now. The meme however never looks at the future.
      • Jan 20 2014: Pat,

        Do you mean to say that they do it, because they can do it?

        As you pointed out the question is : "Why can't countries function without going into debt?"
        At first the answer 'Of course the answer is they can' seemed to me to be to the question: Can countries function without going into debt?

        Maybe the underlying question be : Why would countries be able to function with debt rather than revenue?

        I realize the meme 'take it now and pay for it latter' seems rather attractive especially considering certain uncertainties. I know many merchants who make their money from the late fees and use the take it now pay me latter as a lure. I also realize taking from the future to pay for a better now applies to many governance systems. In fact the future to come may well depend on the present survival. The more fundamental question involves : is one liable to pay for the debts others made in their name?
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          Jan 20 2014: I explained this below.

          "Why would countries be able to function with debt rather than revenue?"

          If they have good credit they can for a long time. But eventually it will catch up with them.

          "The more fundamental question involves : is one liable to pay for the debts others made in their name?"

          All socialism is doing just that.
      • Jan 20 2014: Pat,

        I noticed that you keep introducing the meme of 'socialism' into the conversation rather than just keep this issue on more general terms. BTW notice that even if 'they' have bad credit 'they' can get in debt... of course they will have to pay more for it... thought that may be irrelevant given that 'they' will make others pay for their debts. Again I ask is one liable to pay for the debts others made in their name?

        'Good credit'?
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          Jan 20 2014: "Again I ask is one liable to pay for the debts others made in their name?"

          Yup that is what is happening in the US right now.
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          Jan 21 2014: Esteban, Have no idea where you are from .. but the term "Socialism" in reference to these "debits" seems to concern you. Are you aware of the preferred economic model (Keynesian) used by Socialist that allows for more and more government, no budgets, and tons of social programs. This type of unrestricted spending is the basis of what is being discussed. The term Socialism used by Pat was not a slam but a example of the debits incurred needlessly by countries. If you wish to compare the alternative is Austrian economics.

          A great read into this issue is the 1916 Argentina ... they had a President who had the country on a high growth rate and was one of the leading countries in the world rivaling England and the USA ... In the 1916 elections a Socialist was elected and brought in many social programs and heavily taxed the wealthy, the government kept growing, the factories failed the farmers all came to town for government jobs, no food, no money flowed, and the country collapsed. It only took two years to go from the top to the bottom.

          Argentina paid heavily for the debits incurred by others and the USA is now 17 trillion in debit ... More than half by the current administration ... that will affect generations to come.

          Socialist/Liberals or Conservatives ... Keynesian or Austrian ... a rose is a rose by any other name.

          Be well. Bob.
      • Jan 20 2014: I realize that is what is happening... my question was meant to raise awareness to what is happening in hopes of changing it. Why would one be liable to pay for the debts others made in their name, especially when one didn't even consent to it? It's akin as telling the bank's credit card holder that they (the card holders) are responsible for the fraudulent charges that appear on their credit card and will now have to pay whatever amount was charged; regardless of the fact the bank knows the charges where fraudulent and the result of one of their employees actions.

        While currently that is what is happening in some places each ought to do something about the situation to change it for the better. The thing is that the system in place has difficulties dealing with the situation and chooses to ignore it rather than resolve it.
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          Jan 20 2014: We are on the same page, this is the water we swim in. It is hard to get anyone to LOOK, they prefer to swim in their ignorance. Most people are not going to hear what you are saying but when you get someone's ear plant the seed.
      • Jan 20 2014: I think most will hear it
        from that to listening there may be some additional hurtles
        and from there to actually incorporating and taking the appropriate actions...
        well a sequoia tree does take a bit of time to grow :-) and can be so massive that it withstands the fires and lumberjacks. The thing is how to get it to mature
  • Jan 17 2014: Mostly because running any organization the size of a country's government is a incredibly hard to do well.

    The sheer scope of things means that no one person can even come close to managing everything. The finances of a country are usually the result of the decisions of both elected officials (executive and parliamentary), alongside the entire civil service. Each individual in either bodies has his own objectives, and they often conflict with his fellow's. On top of that, like any large organization, communication and cooperation are not what you'd call perfect; the left hand often operates without consulting the right.

    The result is predictably, a mess. Going into debt is simply the easier short term solution, which is why its a go to choice for a government instead of emergency measures or funding for a future profitable venture like it is for normal people. So many governments do it, its pretty much become the norm.
    By the time the debt needs to be paid off, the problem's already been kicked down the road. Something for your successors to deal with. Even if that successor is you--procrastination at its finest.