Article : why debt growth must exceed interest payments

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

You have things confused again. You've made the blunder of calling the expenses "paid" before they really were.

I did not do that, because I knew better.

As far as your transactions 1 and 2, those are supposed to be the transactions, but will they actually occur? Is the question. Intentions are not results, until after the intentions are achieved.

In my scenario, they were paid. Period.

Yes, those transactions occurred because I said they occurred. Period.

My scenario did not have intentions. It had a specific sequence of actions. Period.

You comments are irrelevant to my scenario because, by your own admission, you refuse to consider my scenario "because you know better."

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Between 3pm and 4pm he hands the $1 to you, and you hand it back to him, and he hands it back to you, and etc, until the $1 has gone back and forth between you a hundred times, and you end up with it.

gnk then leaves.

Has he paid you back the $100 he owes you?

That depends on the reason the $1 was passed back and forth. If the $1 went one way as a payment on the debt, and went the other way as compensation for services rendered, then yes, the debt is paid. Those services rendered were monetized.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

In my scenario, they were paid. Period.

Actually, they were not - period - but I know you're too ignorant of the subject to realize that. Since you don't know anything about it, you can't recognize your own mistakes.

My scenario did not have intentions. It had a specific sequence of actions.

Unfortunately for you, the actions you showed for your own scenario were wrong.

You screwed up.

You got gnk's starting balance wrong.
You failed to balance the books at the beginning.
You counted the same dollars twice.
You thought $9 was $10, and that $10 was $11.
You didn't repay the loan.

In sum, bossy didn't do a proper spreadsheet, bossy did a cow pie.

You comments are irrelevant to my scenario because, ...

Because my comments showed that you were incompetently wrong, and your ego won't let you face that fact and deal with it.

You thought that just handing a bill back and forth constituted a payment. That was wrong. People who actually know anything at all about bookkeeping or accounting know better than that.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

That depends on the reason the $1 was passed back and forth. ...

That is wrong. Just handing the same bill back and forth accomplishes absolutely nothing.

Something is accomplished only according to the net result.

... If the $1 went one way as a payment on the debt, and went the other way as compensation for services rendered, then yes, the debt is paid. ...

One more time --

On Monday, you lend gnk $100. You give gnk 100 one dollar bills. You and he agree that he'll pay it back on Friday.

He arrives on Friday with $1 in his hand, a single dollar bill. You and he then spend an hour handing that $1 back and forth.

Let's say, during that hour, you and he hand that same $1 back and forth 200 times.

He then says you owe him $100.

Are you going to give him $100?

Please answer yes or no.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

I wrote that scenario, not you.

I've grown tired of your ignorant insults.

Bye.

[FRED]

Re: Article : why debt growth must exceed interest payments

Actually, they were not - period - but I know you're too ignorant of the subject to realize that. Since you don't know anything about it, you can't recognize your own mistakes.

Unfortunately for you, the actions you showed for your own scenario were wrong.

You screwed up.

You got gnk's starting balance wrong.
You failed to balance the books at the beginning.
You counted the same dollars twice.
You thought $9 was $10, and that $10 was $11.
You didn't repay the loan.

In sum, bossy didn't do a proper spreadsheet, bossy did a cow pie.

Because my comments showed that you were incompetently wrong, and your ego won't let you face that fact and deal with it.

You thought that just handing a bill back and forth constituted a payment. That was wrong. People who actually know anything at all about bookkeeping or accounting know better than that.

Please conduct yourself with respect toward your fellow members.

[unlucky]

Re: Article : why debt growth must exceed interest payments

Yes, that's true.

The essential detail of my scenario was the flow of tpc's payments to gnk ($10/week) back to tpc as wages ($1/week), thus enabling tpc to make that critical 11th and final week $10 payment and thus paying back both the $100 principle and the $10 interest on his $100 loan all without introducing more than $100 total money into the system.

The startup conditions and initial steps I kept as simple as possible, to the point of being rather silly.

TPC, the extra $100 did throw me at first, but having thought it through I've convinced myself that your model still works in the case where all assets/liabilities net to zero. For example:

In the beginning, gnk creates the loan by marking both a $100 asset (loan to tpc) and a $100 liability (tpc's deposit, or equivalently the notes issued that bear gnk's mark and in this model are considered to be liabilities of gnk).

At this point, tpc also has $100 assets (cash) and a $100 liability (to gnk).

During each week, the following happen:

1. tcp repays $10 to gnk. This reduces both the assets and liabilities of each party by $10.
2. gnk charges $1 interest to tpc. This increases gnk's assets by $1 and increases tpc's liability by $1.
3. gnk pays $1 to tpc for services rendered. This increases gnk's liabilities by $1 and increases tpc's assets by $1.

The net effect of these payments/charges each week, is to reduce both the assets and the liabilities of each party by $9.

After 10 weeks, each party has $10 of assets and $10 of liabilities. tpc now takes his $10 asset and uses it to extinguish the loan, so reducing all balance sheet entries to zero. Of course in this version, economic activity ceases after 11 weeks unless a new loan is made. But it does show that you are correct that interest can theoretically be repaid in a purely debt-based system, without creating new debt.

Thanks for posting the model, it has been an informative exercise for me at any rate.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Thanks for posting the model, it has been an informative exercise for me at any rate.

You're welcome, and thanks for restating it with a proper balance of assets/liabilities.

[Rajiv]

Re: Article : why debt growth must exceed interest payments

What was done was what happens when money is in short supply. tpc and gnk engaged in barter to cover tpc's interest obligation. However, in tpc's scenario, that barter transaction was off the books. In Nevilles version, it was put on the books.

Legally, all transactions have to be on the books. Off balance sheet transactions can get one in a heap of trouble.

Theoretically, you do not need money at all to live your life, if you live your life using barter. However, in the world we live in, those barter transactions have to be accounted for as if a monetary exchange took place.

[unlucky]

Re: Article : why debt growth must exceed interest payments

What was done was what happens when money is in short supply. tpc and gnk engaged in barter to cover tpc's interest obligation. However, in tpc's scenario, that barter transaction was off the books. In Nevilles version, it was put on the books.

Legally, all transactions have to be on the books. Off balance sheet transactions can get one in a heap of trouble.

Theoretically, you do not need money at all to live your life, if you live your life using barter. However, in the world we live in, those barter transactions have to be accounted for as if a monetary exchange took place.

Good point. So to make it concrete, let's say that rather than providing services to gnk, tpc is actually giving him a "rock" each week, and gnk pays $1 for the rock.

In that case tpc obviously had the rocks to begin with, so he starts out with $10 of assets on his books.
Over the course of 10 weeks, the rocks move into gnk's vault, and gnk ends the game with $10 of assets.

But it seems the loan (with interest) is still fully repaid without the need for the creation of a new loan to pay the interest...
or am I missing something?

[Rajiv]

Re: Article : why debt growth must exceed interest payments

Yes, whether it was rocks, or slave labour, is immaterial. Something exchanged hands. TPC had $10 worth of something to give him.

However the problem is that tpc appears to be dealing directly with the FED or the US Treasury, and not with an intermediary bank (which is where most of the money in the economy is created) What a bank creates is what is known as check book money -- gnk wrote tpc a check for $100. In order to pay back gnc, tpc either has to obtain FED notes or coinage issued by the US Treasury, write another check, or barter.

The first two option imply the creation of additional debt obligations somewhere in the system (in other words creation of new money) to cover the interest demanded by gnk. When gnk is paid back by check, or barter, and the loan capital is paid back, gnk's books balance, and the $100 created by gnk no longer exists. If the loan is repaid in part by FED notes, then also the $100 is destroyed, however another book keeping entry comes up in gnk's transactions with the FED -- from where, and to where those FED notes ultimately come and go. The FED note either resides in gnk's vault, with a debt obligation to the FED, returns to the FED either as repayment of a loan, or if the notes or coins are old or disfigured, they are sent to the FED or treasury to be destroyed, and a new note or coinreplaces it.

Ultimately, all transactions have to be accounted for, and "on the books."

FYI fromthe wiki on money supply

Money is used in final settlement of a debt and as a ready store of value. Its different functions are associated with different empirical measures of the money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.^[6] Each measure can be classified by placing it along a spectrum between narrow and broad monetary aggregates. The different types of money are typically classified as Ms. The number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:

Type of money	M0	MB	M1	M2	M3	MZM
Notes and coins (currency) in circulation (outside Federal Reserve Banks, and the vaults of depository institutions)	V[8]	V	V	V	V	V
Notes and coins (currency) in bank vaults	V[9]	V
Federal Reserve Bank credit (minimum reserves and excess reserves)		V
traveler's checks of non-bank issuers			V	V	V	V
demand deposits			V	V	V	V
other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.			V[10]	V	V	V
savings deposits				V	V	V
time deposits less than $100,000 and money-market deposit accounts for individuals				V	V
large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets[11]					V
all money market funds						V

• M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.^[12]

• MB: is referred to as the monetary base or total currency.^[13] This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. ^[14]

• M1: Bank reserves are not included in M1.

• M2: represents money and "close substitutes" for money.^[15] M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.^[16]

• M3: Since 2006, M3 is no longer published or revealed to the public by the US central bank.^[17] However, there are still estimates produced by various private institutions.

• MZM: Money with zero maturity. It measures the supply of financial assets redeemable at par on demand.

The ratio of a pair of these measures, most often M2/M0, is called an (actual, empirical) money multiplier.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

I wrote that scenario, not you.

Yes, but the problem is, you didn't do your own scenario correctly. You did state the scenario, of course, but you didn't do the calculations and entries correctly for your stated conditions. In particular, you violated the loan repayment condition.

And this still goes back to GNK being right in what he posted, and when you argued with him, you were mistaken. GNK was correct in what he posted.

That's GNK's post $5 in this thread:

http://www.itulip.com/forums/showthr...968#post161968

The point I was trying to make to you, in my previous post, is that it's the net result that counts. A financial objective is not achieved unless it's achieved as a net result. That's a fact, that's the way it is.

Here are the correct calculations, and entries, for your scenario, for the first couple weeks, for gnk, tpc, and the loan.

Pre-money days:
gnk, 0;
tpc, 0;
loan balance, 0.

When the loan is made:
gnk, -100;
tpc, +100;
(loan principal balance, 100.)

The same must be done for gnk's account as for any situation where a person lends money. The loan amount is deducted from his balance. If gnk had had $1000, and lent 100, it would be calculated as 1000-100=900. Of course. The same must be done here, from gnk's original 0 balance. The correct calculation for gnk is:

0-100= -100.

That has nothing whatever to do with single entry vs double entry bookkeeping. It is done to get the account balance correct.

The account balances have to be correct in any system of bookkeeping that's used. When gnk lends 100, his account has to be assigned a factor of -100. Simple as that.

Week 1:
gnk, -100+10-1= -91;
tpc, 100-10+1= 91.
(loan principal balance, 91.)
The 10 factor in both entries is the money tpc gives to gnk, and the 1 factor in both entries is the wage gnk pays to tpc.

In the spreadsheet you did, you didn't repay the loan at $10 per week, as per the stated condition. You violated your own repayment requirement. You repaid the loan at 9 per week. That's how you came up with the extra dollar.

You treated it that just handing a dollar back and forth amounted to a payment. But in fact, just handing a dollar back and forth does not make a payment. A payment happens only as a net result. The above, as I show it, is the correct net for Week 1. After Week 1, the loan balance stands at 91.

As to whose fault it is, that the loan is not being repaid as per agreement, it's gnk's fault. He is taking $1 that he was given, and paying it out in wages, instead of applying it to the loan. (For a loan repayment to occur, money has to actually be applied to the loan, as the net result.)

Week 2:
gnk, -91+10-1= -82;
tpc, 82-10+1= 82;
(loan principal balance, 82.)

As before, the loan is not being repaid at $10 per week, per the stated requirement of your scenario. It's still gnk's fault. He's not applying the full $10 to the loan, he's using $1 of it to pay the wage.

Your scenario doesn't work as you stated it. The loan cannot be repaid at $10 per week, and still provide for gnk to have $1 to give to tpc. That's if tpc gives gnk only $10 each time.

To get a $10 loan repayment, each week, still with the $1 wage payment, tpc would have to give gnk $11 each time. As follows.

Back to Week 1, with tpc paying $11 to gnk each week:
gnk, -100+11-1= -90;
tpc, 100-11+1= 90;
(loan principal balance, 90.)

Now the loan repayment is correct.

However, to get the loan repayment correct, your condition that tpc give gnk $10 per week has to be given up. Instead, tpc would have to give gnk $11 each week.

So again, your scenario, as you stated it, doesn't work. Either one factor, or another, has to change. The $10 loan repayment cannot be done through a $10 payment from tpc, if tpc is still going to get his wage.

Continuing with the $11 payments, to see what happens--

Week 2:
gnk, -90+11-1= -80;
tpc, 90-11+1= 80;
(loan principal balance, 80.)

That works for the loan repayment, and the wage is getting paid, too. So far.

Moving ahead to Week 9:
gnk, -10+11-1= 0;
tpc, 10-11+1= 0;
(loan balance, 0, for the principal. The interest is still due.)

The loan principal has now been paid. However, there is not now any money in circulation. All 100 pieces of $1 paper now reside in gnk's safe.

So, what to do at this point.

Since gnk has all $100, he will need to take $1 out of the safe, and give it to tpc to pay his wage. For gnk, that makes the following his account entry.

Week 10:
gnk, 0-1... and that is not yet his complete entry. It just shows, so far, that he took $1 out of the safe to give tpc.

tpc, 0+1... and that is not yet his complete entry. It shows, so far, that he received the $1.

While the loan principal has now been repaid, we recall that the $10 interest is still due, per the original agreement. Can tpc pay it? No, he cannot. He does not have $10.

A complete entry showing tpc paying the interest, cannot be done, without sending him negative again. He would have to borrow money, again, to pay the interest. But your scenario didn't allow for tpc to borrow, again, to pay the interest. So again, your scenario, as you stated it, cannot be done.

Bottom line: gnk was right. You shouldn't have argued with him. A system based entirely on borrowed money does not work out the way you thought it did. I know you like your own spreadsheet, which is perfectly understandable, but the entries you made in it are not right, according to your stated requirements.

And, by the way, "because I say so" is not an answer that's going to satisfy an auditor, in any financial situation.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

... If you don't mind, would you do a side by side of Double entry, single entry - correctly done, alongside the point where TPC made his error. Please! If it is not too onerous, and time allows for it.

I probably can't take the time to do that, merely for an internet forum post. Unpaid. :-)

But maybe I could take time, in the next couple days, to run a correct spreadsheet on the scenario, so that people can compare a correct one to what TPC did.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

However the problem is that tpc appears to be dealing directly with the FED or the US Treasury, and not with an intermediary bank (which is where most of the money in the economy is created) What a bank creates is what is known as check book money -- gnk wrote tpc a check for $100. In order to pay back gnc, tpc either has to obtain FED notes or coinage issued by the US Treasury, write another check, or barter.

I readily agree and thought it was clear from the beginning, that my scenario did not reflect the usual way that money is created in our current monetary system, just as I readily agree that I did not use double entry bookkeeping in my spreadsheet.

The point of my example was to show, as simply as possible, that Principle + Interest can be repaid in a system with a monetary base of just Principle currency units.

The same thing could happen in a more realistic example, if you prefer. Let's say that you, Rajiv, work at your local Wells Fargo. You take out a loan (P) from them, and repay that loan with interest (P+I), from your salary. Most likely there is no point in that situation in which more than P dollars needed to be afloat in the system. Certainly the bank could and should and would use double entry bookkeeping to track this activity. Unfortunately, such more realistic examples are less useful to show this point, because usually both your salary and loan repayments are co-mingled with other bank funds. But it is theoretically possible I suppose that Rajiv is the one and only employee of that local bank, and that his loan is the one and only asset on the banks books; such does not happen in the real world however. An even more realistic example, with several bank employees and many assets on the banks books could I claim still have loans repaid, with interest, strictly from the cash flows generated by earlier repayments, without requiring an exponentially increasing money supply.

The cycle of "this detail is unrealistic, so your model is wrong unless elaborated" could continue ad nauseum. Such would miss my point, which was that exponentially increasing money supplies are not the inevitable mathematical consequence of usurious lending.

Exponentially increasing money supplies may well be the inevitable social or economic consequence of a debt-based monetary system, and exponential functions may well be a useful tool for explaining to others the basic shape of this growth. I was not denying that. I was merely trying to clarify the nature of the cause of such exponential growth.

Unfortunately, the nature of our monetary system seems to be a hot potato, making such discussion difficult.

[MLM]

Re: Article : why debt growth must exceed interest payments

Dear TPC - I have been watching this little train wreck for days, in utter amazement. You are a very patient person. I'd like to add my thanks for your example, which forced me to actually work through what were previously only somewhat hazy generalities. Best wishes.