2016: The Year of Bond Defaults

[Orange_Crush]

I have a brand new car. Great shape. Runs like a dream.

I also have car that has to be push-started, can only be driven for 10 minutes before the fumes reach a dangerous level of toxicity, and the floorboards are starting to rust out.

Tell me: which one isn't a car?

The third option. The one that isn't a car, but is an IOU promising to give you a car, one piece at a time, over the next three to 30 years.

Thanks for highlighting the equivocation that Ras is pointing out. :hi:

 

[GAVol]

By this logic (and I am responding to your entire post, I just cut it for brevity), then any amount of lending is a "Ponzi scheme". There is no way for a depository institution to lend without creating money.

Please note that I'm not defending any specific practices of any specific institutions. I don't believe in notions like "too big to fail."

Exactly

 

[Orange_Crush]

By this logic (and I am responding to your entire post, I just cut it for brevity), then any amount of lending is a "Ponzi scheme". There is no way for a depository institution to lend without creating money.

Please note that I'm not defending any specific practices of any specific institutions. I don't believe in notions like "too big to fail."

How did the economy work before we got off of the gold standard?

Again... It sounds as though your argument is, "Let's not call it a Ponzi scheme because it has to be a Ponzi scheme", and "We can't do anything other than the Ponzi scheme because the Ponzi scheme would fail if we stopped the Ponzi scheme". ???

 

[Orange_Crush]

That's the problem. It's a popular conspiracy theory to believe banking is a Ponzi scheme, but you can't blame everything on banking and turn them into nothing more than money warehouses. The economy would grind to a halt.

By this logic (and I am responding to your entire post, I just cut it for brevity), then any amount of lending is a "Ponzi scheme". There is no way for a depository institution to lend without creating money.

Please note that I'm not defending any specific practices of any specific institutions. I don't believe in notions like "too big to fail."

Exactly

OK... So, by that logic, is it a Ponzi scheme or is it just a conspiracy theory?

 

[bamawriter]

The third option. The one that isn't a car, but is an IOU promising to give you a car, one piece at a time, over the next three to 30 years.

Nice attempt at a dodge, but you're failing to realize that, in that scenario, the responsible party is delivering a car.

 

[Orange_Crush]

Nice attempt at a dodge, but you're failing to realize that, in that scenario, the responsible party is delivering a car.

It wasn't a dodge (a Dodge would be an actual car, unless it was a bunch of parts in a warehouse, being sent out once part at a time on a monthly basis, over thirty years). It was just pointing out your equivocation between debt, assets, and actual cars.

ETA: In that scenario, it would become a car after the last part was delivered, and the car was assembled.

 

[DancingOutlaw]

You can't have an infinite money supply chasing a finite world of goods and services. The system will crash epically.

That's not really an answer. 1:1 or no?

 

[bamawriter]

How did the economy work before we got off of the gold standard?

Again... It sounds as though your argument is, "Let's not call it a Ponzi scheme because it has to be a Ponzi scheme", and "We can't do anything other than the Ponzi scheme because the Ponzi scheme would fail if we stopped the Ponzi scheme". ???

Indexing to gold, silver, aluminum, or whatever doesn't change the fact that money lent by a depository institution reduces the amount the institution has on reserve. It is the same "scheme" without the ability to control interest rates. We were still on the gold standard when the market crashed in 1929.

 

[bamawriter]

ETA: In that scenario, it would become a car after the last part was delivered, and the car was assembled.

So, by definition, it's a car.

If some circumstance occurs that prevents all the parts from being delivered, then the receiver has the ability to use the parts he received as he is able, or he scraps them and writes off the loss. But if he receives every part, it's going to be a car. There is no chance that, after thirty years, he's going to get that last part and realize it's something other than a car.

 

[Orange_Crush]

Indexing to gold, silver, aluminum, or whatever doesn't change the fact that money lent by a depository institution reduces the amount the institution has on reserve. It is the same "scheme" without the ability to control interest rates. We were still on the gold standard when the market crashed in 1929.

And do away with fractional reserve and tell banks that they can't lend it if they don't have the reserves on hand. Then it wouldn't be a Ponzi scheme. There would not be more debt than money, the banks would be much more careful as to who they lent to, and they would be much more accountable.

I know... I know... The doom and gloom that the economy would seize b/c debt would cease to drive the economy. Woe is us... We'd have an economy that wasn't driven by debt. I don't think that would be a bad thing in the long run.

 

[Orange_Crush]

So, by definition, it's a car.

If some circumstance occurs that prevents all the parts from being delivered, then the receiver has the ability to use the parts he received as he is able, or he scraps them and writes off the loss. But if he receives every part, it's going to be a car. There is no chance that, after thirty years, he's going to get that last part and realize it's something other than a car.

Um, no... By definition it is not a car. This shouldn't be that hard to understand, especially considering that you are writing it yourself

and thanks again for highlighting the equivocation that Ras has been trying to get you to see. If you are writing it off as a (potential) loss, it shouldn't be categorized as an asset. It should probably be categorized as a risk/liability.

 

[bamawriter]

And do away with fractional reserve and tell banks that they can't lend it if they don't have the reserves on hand. Then it wouldn't be a Ponzi scheme. There would not be more debt than money, the banks would be much more careful as to who they lent to, and they would be much more accountable.

If a depository institution has 1 billion on deposit, and lends $100, it has created money. Its reserve would still be vastly larger than its receivables, but if every depositor came in to withdraw his balance, the bank is going to be $100 short.

Any scenario in which deposits are subsequently lent requires the creation of money.

 

[DancingOutlaw]

Um, no... By definition it is not a car. This shouldn't be that hard to understand, especially considering that you are writing it yourself

and thanks again for highlighting the equivocation that Ras has been trying to get you to see. If you are writing it off as a (potential) loss, it shouldn't be categorized as an asset. It should probably be categorized as a risk/liability.

That's not how allowances and impairments work at all. A receivable is an asset period. It is money owed to you by another party. If it needs to have a valuation allowance against it, ok. If the allowance is the full amount of the receivable, ok. That is the function of allowances, impairments, whatever you want to call them. They reduce book value in the event FMV is considerably lower.

 

[bamawriter]

If you are writing it off as a (potential) loss, it shouldn't be categorized as an asset. It should probably be categorized as a risk/liability.

If you write it off, it is neither. If you write off an asset, it doesn't become a liability as you don't owe anything to anyone.

 

[Orange_Crush]

If a depository institution has 1 billion on deposit, and lends $100, it has created money. Its reserve would still be vastly larger than its receivables, but if every depositor came in to withdraw his balance, the bank is going to be $100 short.

Any scenario in which deposits are subsequently lent requires the creation of money.

They have not created money, unless they leave that money on their ledgers as "still in the bank on on the books". You illustrated that in your own post, above.

If they had created money, they would have been able to lend it and still cover their withdrawals. But they didn't "create" money, so they will not be able to cover their withdrawals.

It is true that if there was a run on the bank, depositors would be short-changed, but that is only the case because they did not actually create the money! They sent existing money out of the bank in the form of loans.

At the end of the day, there is the same amount of money in the economy as there was at the beginning of the day. It just moved. And there is the danger that someone will be short-changed...because they did not, in fact, create money.

 

[Orange_Crush]

That's not how allowances and impairments work at all. A receivable is an asset period. It is money owed to you by another party. If it needs to have a valuation allowance against it, ok. If the allowance is the full amount of the receivable, ok. That is the function of allowances, impairments, whatever you want to call them. They reduce book value in the event FMV is considerably lower.

Thanks for reiterating how the system works. Ras is just stating how it works, which you all seem to agree with him on, and saying that it should be changed (his opinion that you don't seem to agree with him on).

He is saying that debt is called an asset, which is an equivocation of meaning, and debt should be considered separately from true "assets" since they aren't a true "asset" yet. They are a promise (which is an unproven variable in the equation), and not something that you have on hand, as you would a true asset.

But again... If it is "owed to you", why should it be considered your asset? In the strictest of terms, it becomes your asset as it arrives, no? Otherwise it is a promise. Little more, little less.

 

[Orange_Crush]

If you write it off, it is neither. If you write off an asset, it doesn't become a liability as you don't owe anything to anyone.

If I got to print my own money, I could write every loss off too--no harm, no foul--right? So, you're saying that the banks get to create money out of nothing, loan it out, add it as an asset on their ledgers, and then write it off as a loss when they lose it. It can always be listed as an asset, unless they lose it, then it was never a liability.

But a wheel and a radiator is a car. And it was never a liability to give the current worth of a Dodge Challenger, when you may only get a wheel and a radiator?

Equivocate much?

 

[DancingOutlaw]

Thanks for reiterating how the system works. Ras is just stating how it works, which you all seem to agree with him on, and saying that it should be changed (his opinion that you don't seem to agree with him on).

He is saying that debt is called an asset, which is an equivocation of meaning, and debt should be considered separately from true "assets" since they aren't a true "asset" yet. They are a promise (which is an unproven variable in the equation), and not something that you have on hand, as you would a true asset.

But again... If it is "owed to you", why should it be considered your asset? In the strictest of terms, it becomes your asset as it arrives, no? Otherwise it is a promise. Little more, little less.

Good lord. This is just going round and round. There appears to be a very fundamental lack of understanding regarding accounting principles. By all means proceed, I yield my time to whoever wants to continue this madness.

 

[bamawriter]

Edit:

Never mind. Outlaw is right.

 

[Orange_Crush]

Good lord. This is just going round and round. There appears to be a very fundamental lack of understanding regarding accounting principles. By all means proceed, I yield my time to whoever wants to continue this madness.

If we didn't understand how it works, we probably wouldn't take issue with it, no? This isn't merely a discussion about how it works, but about whether it should work this way.

It seems to me that Ras, in laying out the issues he has with the current system, has discussed how it works. He's just also trying to show how ridiculous it is that it actually works that way.

 

[Orange_Crush]

But that is exactly the situation we have today. No matter what the fraction of reserve is, the depository institution either has the amount of deposits on reserve or it doesn't. It only requires a run on the bank to be significant enough to surpass the reserve requirement and they will come up short. The money that is created is, in reality, only theoretical as it is both lent and on deposit. The institution's ledger says that the money is a receivable, while the depositor's ledger says that it's on deposit. Both list is as an asset, but for the latter to be accurate in a 1:1 scenario, then the former can't also be true.

I don't know if the point of your argument is that the Fed allows money to expand to too great a level. I don't know that I would argue against that. But that argument does not have any bearing on what is or isn't an asset.

And there it is.

What if the lending agency's ledger said: "It's no longer an asset. We don't have it anymore. It's gone. We'll update our ledger as it trickles back in"?

And the other ledger said: "We now have cold, hard cash in our bank. It's now our asset"?

That's not exactly what we have today, is it? What would happen if the banks actually had to manage their books against the money they actually had, and all of them had to account against the actual standard that we have in the economy? Not keystrokes, or promises?

What would happen if debt wasn't our country's primary national product?

 

[Orange_Crush]

If there are no goods to buy, the money supply will stop growing. For every buyer, there has to be a seller. For every borrower there have to be depositors willing to not spend money. For every liability there is an asset.

Dodge borrows money to build cars. Lots of that borrowed money is spent to pay advertisers to convince people in debt to borrow money to buy the car.

Samsung makes a bunch of smart phones that are designed to break two months before their two year contract with Verizon is up, thus pushing them to re-sign a new contract with Verizon to get another phone with designed obsolescence built in. Both Samsung and Verizon pay millions of $$$ to advertising agencies to convince people to buy Samsung phones on Verizon plans. They also pay TNT millions to run the commercials on the aging big screen TV that the consumer is still paying just interest on to Chase Visa.

She's making minimum payments and getting further behind because she's living in a delapidating house that is worth half what she paid for it because she didn't realize that she bought it at the apex of a housing bubble that the banks created because they listed debt as an asset and drove up the prices of housing by making money too easy to get.

Products do not limit debt (thus the size of money supply). And money supply does not limit products. When you have the capability to create an infinite money supply, you create market bubbles, which burst and hurt everyone--except the lenders that create the infinite money supply.

"Chasing Bubbles" is only safe for toddlers. It is not safe for the rest of us.

I'll withdraw now as well... :hi:

 

[Rasputin_Vol]

I have a brand new car. Great shape. Runs like a dream.

I also have car that has to be push-started, can only be driven for 10 minutes before the fumes reach a dangerous level of toxicity, and the floorboards are starting to rust out.

Tell me: which one isn't a car?

They are both cars. They are also yours free and clear with no counterparty risk and even the rust bucket has salvage value. I'm assuming you have the title for both in your analogy.

 

[Rasputin_Vol]

If there are no goods to buy, the money supply will stop growing. For every buyer, there has to be a seller. For every borrower there have to be depositors willing to not spend money. For every liability there is an asset.

If there are no goods to buy, the money supply will stop growing.
Why would you still need the money supply to grow if there are no goods to buy? Seems like your problem is a scarcity of goods in that situation... not a scarcity of money supply.

For every buyer, there has to be a seller.
Not sure how printing more money has to do with this. If you have true markets and price discovery, eventually, the new money printed or injected into the system will cause sellers to raise their prices to accommodate the increased money supply.

For every borrower there have to be depositors willing to not spend money.
Not sure what you are driving at here. I suppose in a fractional reserve system, wouldn't there be multiple depositors not willing to spend (based on the reserve ratio)?

For every liability there is an asset.
Agreed... but our definition an asset is flawed.

 

[Rasputin_Vol]

That's not really an answer. 1:1 or no?

No.

The money supply should only grow at the rate of resource growth.