[steviedog]

As most of you have probably noticed, there's constantly stuff on the news about our debts, national and global debts and it got me thinking...

All money originally comes from a central bank, ie Bank of England or Federal Reserve (US). Now all money which comes from a central bank has to be paid back with interest.

So for example, Mr Brown borrows ten million from the Bank of England with say 10% interest (purely for example). Then he has to pay back 10.1 million.

My question is if all money which is created is given out, whether it's the high street banks, the government or the people, is at interest, where will the money for the interest come from? Surely the current monitary system will keep us in debt for life?

Or have I missed something?

[Miyazaki]

If I understand correctly I think the BoE essentially invents money that is secured against other assets. The money you are talking about doesn't actually exist.

At least thats how I understand it.

[lostinspace]

Following on from your question, I'd like to know who is owed all the money?
If, as they say, this is a world recession, and everyone is in debt...........who are we in debt to?

Also, Brown would have to pay back 11 million, not 10.1- it's worse than you thought!

[blackrod]

It's not tha BofE we owe all this money to though. Also, interest paid is compound, so it is 10% month by month or whatever not the full term of the loan. Yes, we are screwed for a very very long time!

[hornydragon]

Originally Posted by lostinspace

Following on from your question, I'd like to know who is owed all the money?
If, as they say, this is a world recession, and everyone is in debt...........who are we in debt to?

Generally its other countries owns that have higher levels of Cash (liquid assets) The american housing boom was funded by overseas borrowing mostly from China where the general populous save a much higher % of their income.

It was all explained in a very interestign program called "the Ascent of money" which explained it all and the history of Banks, Cash, Bonds Gilts and everything else you hear talked about
The Ascent of Money | Financial History | Professor Niall Ferguson | Channel 4

well worth watching even if it doesn't install any more confidence in the people running the show!

If you look at the longer history go back say 400 years rather than the normal 100 you will see history repeating itself

[MikeTV]

I think you are asking "where does money come from"? The way I see it, money is just a numerical representation of something's worth. So, it doesn't really matter if a car costs £100 or £1000, as long as everyone agrees that's the value of the car, in relation to the value of everything else in world. So if you had a new island of say, 100 people, and you wanted to start a new currency (perhaps "tokens"), it wouldn't really matter if everyone was given 10 tokens each at the beginning, or 100 tokens. It wouldn't affect the number of bags of rice they could buy from their neighbour, because it would be reflected in the price of a bag of rice (it's worth), through market forces.

If you then discover another island, and their currency was "pieces", and you wanted to trade with them, you would need to agree an exchange rate for tokens and pieces.

This would all work well, until one of the islands decides to introduce more currency to their own economy. Naturally, the exchange rate would have to be adjusted to reflect the new tokens/pieces, floating around the economy. The island with more money would discover that their currency was worth less than it was before. But nothing has actually changed - their savings will still buy the same number of bags of rice (which will now be more expensive). Foreign goods will be more expensive, but they'll have more money, so it won't matter.

Hence, there's no real harm in printing more money. Everything will remain equal due to market forces (and assuming perfect markets, of course). Money is just a numerical value assigned to something's worth (and everything has a value, represented by its price).

[steviedog]

Sorry guys but you've missed my point completely.

I know where money comes from - it is created by central banks out of thin air.

My question is, if all money is created by the central banks, then once that money is issued, say £100 million, how are we supposed to pay the interest on that £100 million if the only people who can create money are the people who we have to give it back to?

A very basic example...

A new country is formed, call it AVFland. AVFland has a population of 3; John, Mary and Bob. They all go to the Bank of AVFland asking for money and are each given £10. They must eventually pay back the £10 with an 10% interest.

So they go away with £10 each knowing that they have to turn it in to £11 in order to pay back the bank. John and Bob both work for Mary and earn £1 each from her. So John and Bob now have £11 each and Mary has £8. John and Bob pay the bank back and are debt free (as well as potless). Mary however cannot pay the bank back as she only has £8 and there is no more money in circulation.

So what I'm getting at is using our current monitary system, there is no possible way of us ever getting out of debt, because all money created is created with interest on top which can never be paid because we don't have the power to create more money, we can only fight over the money in circulation. Therefor, we are slaves to the system.

[MikeTV]

I think the flaw in your argument is that the only money in your example is borrowed money. But we're not all born owing money (original debt?). You could be born, grow yourself some rice, sell it, and then have some money that way, with no interest to pay. So the question then becomes, where did the first bit of money in the system come from? Historically you were able exchange your money for gold (or vice versa). So you could be born, dig up some gold, and the central bank would buy it off you. No slavery involved at all. You're only a slave to your own debt. And as a country, we're in a lot of debt, which is really quite worrying.

[DPinBucks]

Originally Posted by steviedog

...
So what I'm getting at is using our current monitary system, there is no possible way of us ever getting out of debt, because all money created is created with interest on top which can never be paid because we don't have the power to create more money, we can only fight over the money in circulation. Therefor, we are slaves to the system.

Yes, that’s it, really.

The government doesn’t actually borrow significantly from the BoE. It uses it as its account holder. Most borrowing is from the worldwide open markets using government bonds, which are essentially IOUs repayable at some later time.


We can get out of debt in two ways:

• Pay it back with new real money. New real money ultimately comes from raw materials; ie stuff we dig out of the ground or generate out of the air;
• Devalue the money we owe: inflation. That’s what governments do when they make new pretend money out of thin air: the current buzz phrase is ‘quantitative easing’

That’s why a small amount of inflation is viewed as a good thing by economists. It’s the only way in which a fixed amount of debt can be reduced.

The upshot, of course, is that it has to go on for ever, but occasionally some limit is reached. It's a simple concept, but apparently beyond the comprehension of the professionals, so we hit a limit last year, thanks to the stupidity, greed & incompetence of the banks and the people who were supposed to keep an eye on them.

[DJT75]

Originally Posted by steviedog

Mary however cannot pay the bank back as she only has £8 and there is no more money in circulation.

Fortunately Mary has a couple of very large assets that the Bank of AVFland would love to get their hands on in return for writing off the debt.

[sniffer66]

Originally Posted by DJT75

Fortunately Mary has a couple of very large assets that the Bank of AVFland would love to get their hands on in return for writing off the debt.

So the banks screw the largest debtor and its all OK again ?

[ddvmor]

Originally Posted by DPinBucks

...we hit a limit last year, thanks to the stupidity, greed & incompetence of the banks and the people who were supposed to keep an eye on them...

...And the stupidity, greed and incompetence of the people who kept borrowing money they couldn't afford to pay back... i.e. us.

Just sayin.

[MikeTV]

Originally Posted by DPinBucks

That’s why a small amount of inflation is viewed as a good thing by economists. It’s the only way in which a fixed amount of debt can be reduced.

I'm not so sure about that. As a rule, interest rates exceed inflation, and so debt just increases over time, rather than reduces. Inflation is usually better than deflation, because it encourages spending now, rather than later, and so stimulates the economy (up to a point, anyway).

[Steve.J.Davies]

Originally Posted by steviedog

Sorry guys but you've missed my point completely.

I know where money comes from - it is created by central banks out of thin air.

My question is, if all money is created by the central banks, then once that money is issued, say £100 million, how are we supposed to pay the interest on that £100 million if the only people who can create money are the people who we have to give it back to?

A very basic example...

A new country is formed, call it AVFland. AVFland has a population of 3; John, Mary and Bob. They all go to the Bank of AVFland asking for money and are each given £10. They must eventually pay back the £10 with an 10% interest.

So they go away with £10 each knowing that they have to turn it in to £11 in order to pay back the bank. John and Bob both work for Mary and earn £1 each from her. So John and Bob now have £11 each and Mary has £8. John and Bob pay the bank back and are debt free (as well as potless). Mary however cannot pay the bank back as she only has £8 and there is no more money in circulation.

So what I'm getting at is using our current monitary system, there is no possible way of us ever getting out of debt, because all money created is created with interest on top which can never be paid because we don't have the power to create more money, we can only fight over the money in circulation. Therefor, we are slaves to the system.

You are correct the increasing interest can never be repaid - and increases proportionally over time.

Every instance of free printed money - money with no backing (fiat currency or 'debt notes') has always ended badly.

read the words at the top of a ten pond note. it may be legal tender but it is not inherently valuable 'money'. The printed stuff only works because we accept it as money but it is just a promise to pay. Huge difference between a promise to do something in the future and actually doing it in the resent.
All the cash getting passed around does not actually pay anything at all, we just 'believe' that it does.

Most people don't even appreciate what 'money of account' is so you are ahead of the curve.

Google for

affidavit of walker todd


yes its about the US but we also run a fractional reserve system and the BoE is not what people think it is - look it up an D&B.

walker todd applies in the UK.

Money supply is controlled by the banks not the government. The government gets all its (non tax) money from the capital markets and is beholden to the banks at all times. The extra it prints for 'quantitative easing' is just a spit in the bucket. Fiat Currency is only a very small percentage of the total.

Rising prices and wage demands are NOT causes of inflation, they are the symptoms at the tail end of the food chain. Inflation and deflation is caused by increases or decrease in the money supply. The banks control this.

If you want to open it up a bit more then study the Bills of Exchange Act.
Then ask yourself when was the last time you actually got a true bill for anything. People pay 'invoices' and 'statements', try asking a true bill and see the reaction you get. Negotiable instruments have a monetary value.... and there are lots of negotiable instruments....the courts and the police produce quite a few.
If you are unlucky enough to get a fine against you in court or an FPN dished out by the police (or increasingly the local council) have a close look at it and see if it is:-
"an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer."

If it is then it is Bill of Exchange and is a negotiable instrument and has a value on the secondary market (derivatives). Much more money riding on these than the base income - but note the authorities only ever refer to the base income and fail to talk about the derivatives.

If it is a Bill of Exchange it can and should be treated as one ! which is why they never give you the original - just a copy - and ask you to sign. By signing it you 'dishonour' the bill and so are snookered.

[thesilverfox]

It's a question easily answered by some basic macro economics Throw in some imports and exports and some stock market trading etc.

But the principles of capitalism remain - for someone to gain, someone has to lose out to balance the equilibrium.

Is everyone familiar with the money multiplier effect?

As in, I borrow £100 from the bank and it is deposited into an account for me. The bank is legally obliged to keep a percentage of this in physical reserves, usually around 10% (it can change - aimed to prevent a rush on the banks).
Therefore, the bank can lend £90 to someone else as £10 is kept physically. That £90 is lent to someone and deposited into an account, and only £9 (10%) is physical, and that £81 left over can be lent to someone else...

Rinse and repeat. This is the essence of "money from thin air". The interest you pay obviously offsets the banks risk and cost of capital (how much they could make investing elsewhere).

But yes: the system at the moment is ever increasing with debt. The solution? The next generation can deal with it - it's not our problem right now.

One could speculate that our debts are offset by creditors owing us huge sums of money (that will never be paid back), and this is perhaps one reason that some third world debt does not get eradicated. That's highly speculative though, and no evidence to back it up!

[Steve.J.Davies]

pop quiz.

Which currencies in the world do NOT use promissory notes but actually have a currency that is backed by real value (instead of being fiat money).