Is this a bubble within the crash?

[Housing-Bubble]

http://www.guardian.co.uk/business/2...bubblenews.com

[FRED]

Re: Is this a bubble within the crash?

http://www.guardian.co.uk/business/2...bubblenews.com

Going through the motions: A generation that grew up with shopping as their primary free time social entertainment activity will not give it up right away just because they don't have any money.

[zoog]

Re: Is this a bubble within the crash?

Going through the motions: A generation that grew up with shopping as their primary free time social entertainment activity will not give it up right away just because they don't have any money.

Especially since not having any money didn't stop them from shopping in the first place.

[ricket]

Re: Is this a bubble within the crash?

Especially since not having any money didn't stop them from shopping in the first place.

Ah, and there is the fallacy that has brought so many down. They equated credit with money and assumed they would always be able to pay it back in the future as long as they worked hard enough.

But what they don't realize, and they will hopefully soon find out, is that it's mathematically impossible for every single borrower to pay back their loans in full because of the very nature of the system itself.

Repeat after me until you realize the full gravity of what I'm saying: The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created.

[ASH]

Re: Is this a bubble within the crash?

Repeat after me until you realize the full gravity of what I'm saying: The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created. The interest to service the debt is never created.

See Sharky's correction to this picture, concerning how the money created by a loan can be recycled multiple times before the debt is discharged, allowing the interest to be paid before the money leaves the system. Admittedly, there is no supply problem with debt-money only if 100% of the interest associated with the loan can be earned by the debtor from the creditor before the loan expires.

[Jay]

Re: Is this a bubble within the crash?

See Sharky's correction to this picture, concerning how the money created by a loan can be recycled multiple times before the debt is discharged, allowing the interest to be paid before the money leaves the system. Admittedly, there is no supply problem with debt-money only if 100% of the interest associated with the loan can be earned by the debtor from the creditor before the loan expires.

Wow, I missed this originally when it was posted, awesome thread and very enlightening. Thanks all and thanks for the link ASH.

[ricket]

Re: Is this a bubble within the crash?

See Sharky's correction to this picture, concerning how the money created by a loan can be recycled multiple times before the debt is discharged, allowing the interest to be paid before the money leaves the system. Admittedly, there is no supply problem with debt-money only if 100% of the interest associated with the loan can be earned by the debtor from the creditor before the loan expires.

I only sporadically buy a Select subscription, because the activity there is a whole lot less than the non-paid sections. There seem to be days between posts sometimes...

I seem to recall that discussion however, but I still don't think it makes sense to me. Since every transaction is denominated in a single currency (ie Federal Reserve Notes) and from a technical perspective the loan balances never lose their values without writedowns, I still don't see how no matter the number of times the loan is recycled that the extra interest is created because it is never created anywhere on anyone's balance sheet and is expected to come from sources external to the original loan transaction.

And since you, me, EJ, Fred, MetalMan, Mega, et.al are not legally entitled to "print" money, then the only mechanism that Federal Reserve Notes enter circulation is by the Fed purchasing Treasury Bonds in the open market, or by banks creating "credit" through Fractional Reserve Lending. Regardless of the sheer amount of loans, the end result is that this is always true:

(I+P)>P (where I=interest, P=principal)

...and since I != 0, then this is what makes it a mathematical impossibility.

[ASH]

Re: Is this a bubble within the crash?

I only sporadically buy a Select subscription, because the activity there is a whole lot less than the non-paid sections.

I seem to recall that discussion however, but I still don't think it makes sense to me. Since every transaction is denominated in a single currency (ie Federal Reserve Notes) and from a technical perspective the loan balances never lose their values without writedowns, I still don't see how no matter the number of times the loan is recycled that the extra interest is created because it is never created anywhere on anyone's balance sheet and is expected to come from sources external to the original loan transaction.

And since you, me, EJ, Fred, MetalMan, Mega, et.al are not legally entitled to "print" money, then the only mechanism that Federal Reserve Notes enter circulation is by the Fed purchasing Treasury Bonds in the open market, or by banks creating "credit" through Fractional Reserve Lending. Regardless of the sheer amount of loans, the end result is that this is always true:

(I+P)>P (where I=interest, P=principal)

...and since I != 0, then this is what makes it a mathematical impossibility.

Sorry for the reference to the thread in the Select section. What it boils down to is the fact that interest on a loan is paid off before the principal, so money that is loaned into existence can pay the interest to the creditor before it is extinguished by paying off the principal. This only works if the money paid to the creditor as interest is earnable from the creditor by the debtor before the principal also has to be paid off -- in other words, the debtor "works off the interest" while the money associated with the principal is still in the system. It passes through the debtor's hands twice. No new money creation -- or new loans -- are required. Instead, the debtor labors for the creditor to earn the value of the interest payment before the loan expires.

Here's how I re-phrased what I learned from Sharky, after I got my mind around it:

The problem I posited is that loan issuance only creates an amount of money equal to the principal of the loan, whereas the borrower must pay back both the principal and interest. However, you are pointing out that the money created by issuance of the loan doesn't leave the money supply until that portion of the principal is paid off, and if interest is paid first, there doesn't have to be a shortage of money in the system with which to pay off debt. However, for this to work, the borrower must earn back the value of the interest from the bank before the loan money leaves the system (the loan is repaid).

That said, we all know this isn't what normally happens. For the most part, the money to pay interest comes from further credit expansion. Your basic point is right. I just find the technical nuance fascinating. Debt money isn't theoretically flawed if the interest is earnable from the creditor within the time frame of the loan's repayment, but it is practically flawed because this doesn't actually tend to happen.

[Housing-Bubble]

Re: Is this a bubble within the crash?

And since you, me, EJ, Fred, MetalMan, Mega, et.al are not legally entitled to "print" money,

actually, you can create and print your own currency and it can be used in competition against the US dollar - there is no law against that. saw where some small towns are already doing that.

[oddlots]

Re: Is this a bubble within the crash?

I think what you've all got a hold of here is the distinction between self-liquidating and non-self-liquidating debt. It's also the distinction between productive and non-productive investment. The upshot is that some debt (the non-productive kind) requires asset price inflation to be sustainable, even on the short term. In other words, its ability to pay the principal and the interest is purely dependent on ever increasing credit supply and so rising asset prices. This does indeed follow the iron law that it is - over the long term - impossible to pay both interest and principle.

Contrast this with investment that increases productivity. Here the interest is paid through profitability and its antecedent: falling costs.

The problem is that both appear to be genuine profit. In fact, due to the magic of leverage (on the way up at least) offered by finance that cannot be nearly duplicated in the "real" economy, the non-productive investment is far more profitable in the short run, especially if it has a grip on the imagination of politicians: short term boom, especially for their campaign contributors. This is doubly important: the more illusory the profits are (in terms of the liquidating / non-self-liquidating dichotomy) the greater the power of politicians to enhance them through gutting regulation. Almost infinite leverage through writing CDS anyone?

My point is that the notion that no debt is payable with interest unless one assumes increasing aggregate credit is false. The 19th century actually had deflationary booms. (I credit Marc Faber for hammering away on this point.) In fact it seems to me that this is the only healthy kind of boom: real investment is rewarded and hard won. The currency is stable enough to reveal purely inflation-dependent ponzi-schemes to be shams. (Contrast today where the hand of government dead-weights the scales in the favour of the most non-productive, inflation dependent endeavours as a matter of course.)

I credit Stephan LaChance with the basic insight into debt-based monetary systems which I've parotted above. This is a short, great read:

http://www.financialsense.com/fsu/ed...005/1212b.html

[ThePythonicCow]

Re: Is this a bubble within the crash?

actually, you can create and print your own currency and it can be used in competition against the US dollar - there is no law against that. saw where some small towns are already doing that.

I'll wager that the IRS would like to tax any income generated in that currency, however.

[ricket]

Re: Is this a bubble within the crash?

http://www.financialsense.com/fsu/ed...005/1212b.html

I think I understand what you and Ash are saying, but you both have a single flaw in your reasoning and that is the convertibility and settlement of contracts in a manner that is outside of our control. You cannot pay any debts with any instruments other than Federal Reserve Notes.

If you could mail in your labor (or gold) and have that be considered as settlement for debts then that would work out just dandy (Not saying this isnt possible, but for the most part it's not acceptable all the time). But your work has to be converted into the Federal Reserve Note currency system before it can then be "sold" into the market and exchanged for Federal Reserve Notes, with which you can *then* settle your debts. Assuming that the financial system is *not* flawed, and everyone else's money is tied up in other contracts equally on both sides (i.e. the money supply expresses neither a profit nor a loss), then the only way in which your labor can be converted to dollars is if more dollars are loaned into existence to "settle" the exchange of *your labor* for *new dollars*. And again, they never do that at 0% interest. Which, even if (interest>0%) occurs one time and the payments are done after the loan has matured, as you agreed happens quite frequently, it throws the entire system into the negative.

So the flaw in the reasoning, from my view, seems to be that you can freely exchange labor and time (through productivity gains) into dollars and back again at will and at whatever price you specify. But I argue that this is false, and the only ones who get to decide how much your labor or new product is worth, is those that control how the money is issued in the first place (i.e. the Federal Reserve and the banks). If they aren't lending money, then there is a whole lot less of it in circulation and you will be forced to lower your prices, but if they lend out plenty of it, then you can raise your prices accordingly. But still, it's a lose:lose situation for everyone except the banks because they are lending every single penny of that money out in interest-bearing loans.

I think my head is about to explode!

[santafe2]

Re: Is this a bubble within the crash?

Sorry for the reference to the thread in the Select section.

No reason to apologize. It is the members that make the entire forum possible. It's about a $1 a day. My cell phone, cable and telephone land line cost more and I'd give them all up before this place.

What it boils down to is the fact that interest on a loan is paid off before the principal, so money that is loaned into existence can pay the interest to the creditor before it is extinguished by paying off the principal.

In business we expect to make 3-10% per month when we borrow money. The credit line can be expensive and we're not always correct when we borrow but we have high expectations with regard to our return and zero tolerance for our failures. Consumers need to have the same point of view. See the iTulip thread regarding borrowing to buy a car.

All of the debt detail leaves me worn out. Who cares? If you borrow money on an asset depreciating faster than your debt payment, you lose. Can we, as a community, quit trying to turn this into a complex argument? If we buy crap with debt, we're monthly payment consumers. If we buy too much crap with debt we're just screwed. I could care less how the debt is created.

[ricket]

Re: Is this a bubble within the crash?

All of the debt detail leaves me worn out. Who cares? If you borrow money on an asset depreciating faster than your debt payment, you lose. Can we, as a community, quit trying to turn this into a complex argument? If we buy crap with debt, we're monthly payment consumers. If we buy too much crap with debt we're just screwed. I could care less how the debt is created.

If you had a thief breaking into your business, would you as a business owner just let him come in and continue to steal from you? Or would you put measures into place to protect that from happening? Also, what if you knew who the criminal was and you knew he was targeting your fellow business owners in your location? Would you not also warn them to the dangers as well? What if his method of theft was always the same, yet they had not caught on to his tactics (but you had)? Would you not feel the obligation to share this information?

In this case, the business owners are us, the public. The criminals are the banks and they confiscate property right under our noses through their scam of the interest bearing loan system (that they have a monopoly control over). They can cause every single asset price to decline (deflation) if they feel so inclined. They only have to stop lending money and you have *no* control over whether or not the asset price increases or decreases.

Why would anyone continually let someone steal from them (by taking out loans that are mathematically impossible to pay back)?

[santafe2]

Re: Is this a bubble within the crash?

If you had a thief breaking into your business, would you as a business owner just let him come in and continue to steal from you? Or would you put measures into place to protect that from happening? Also, what if you knew who the criminal was and you knew he was targeting your fellow business owners in your location? Would you not also warn them to the dangers as well? What if his method of theft was always the same, yet they had not caught on to his tactics (but you had)? Would you not feel the obligation to share this information?

In this case, the business owners are us, the public. The criminals are the banks and they confiscate property right under our noses through their scam of the interest bearing loan system (that they have a monopoly control over). They can cause every single asset price to decline (deflation) if they feel so inclined. They only have to stop lending money and you have *no* control over whether or not the asset price increases or decreases.

Why would anyone continually let someone steal from them (by taking out loans that are mathematically impossible to pay back)?

I didn't find this analogy/argument clear. If you don't like banks, if you find them to be criminal, don't use them. Seems simple enough to me. It is the banks that have no control. This is like the drug addict blaming the dealer.