What's the Big Deal About Government Debt?

[dre]

Any government that adopted a policy printing currency instead of issuing bonds would quickly see hyper-inflation appear. That said, you are not completely wrong. When inflation is low the central bank can reduce pressure on governments by buying government debt. The only caveat is the government cannot depend on this assistance since inflation can emerge at any time. This means governments still have to control spending even if the central bank is helping out in the short term.

The last two times I can remember when this was done was the greenbacks that lincoln used to fund the civil war, and JFK's kennedy dollars. Neither resulted in hyper inflation. Recent rounds of massive monetary easing didnt create hyper inflation either.

In fact the government should be able to mint enough money in this fassion the expand the monetary base at the same rate the economy is expanding with absolutely no inflationary effect at all, and we wouldnt owe a dime of public interest. Inflation only happens when the money supply grows faster than the economy.

Based on the size of the money supply today, the government could create about 50 billion dollars a year in this interest free fassion provided they forced commercial banks to have a reserve ration of 100%.

[TimG]

The last two times I can remember when this was done was the greenbacks that lincoln used to fund the civil war, and JFK's kennedy dollars. Neither resulted in hyper inflation. Recent rounds of massive monetary easing didnt create hyper inflation either.

I agree that as long as an independent central bank has the power to stop printing money as soon as inflation becomes evident then it can be an effective short term relief. But it cannot be a policy which government depend on which means they still need to issue bonds and they still need to control spending.

Based on the size of the money supply today, the government could create about 50 billion dollars a year in this interest free fassion provided they forced commercial banks to have a reserve ration of 100%.

Banks expand the money supply via free market choices (lenders and borrowers taking on risk). Governments borrowing money instead of letting the free market decide is centrally planned BS.

[dre]

Banks expand the money supply via free market choices (lenders and borrowers taking on risk). Governments borrowing money instead of letting the free market decide is centrally planned BS.

Yes but they take an inimaginable ammount of money for performing such an easy and base function. Think about it... When I go and get a mortage all the bank really DOES is look at my last three years income tax returns, buy a credit report on me from equifax for about 20 dollars, and see if the ammount of money I want to borrow is within my debt maintenance ratio, then print out some forms. Thats it... they dont actually have any money to lend anyone. At the very most they should charge a simple fee for setting up a 25 year mortage. In reality if I buy a 400 thousand dollar home amortized over 30 years, they will charge me more than 300 thousand dollars.

People whine all day about taxes, but I pay almost twice as much in interest to people who provide nothing in return but rudimentary clerical services than I pay to the government who are expected to maintain a nations infrastructure, provide healthcare, police, national defense, etc.

Goverments could distribute money in the same way the banks do. Commercial lending really just involves the application of simple formulas and debt maintainance ratios, based on a persons credit worthiness (which is tracked by other private companies), and a persons income (tracked by the government). The entire commercial banking industry could be replaced with a fairly simple computer system. It would look at each persons balance of trade (income and expenses), and their reputation (credit score) and decide how much they could borrow.

The only difference is that the money could be interest free. Right now if a business or person gets a mortgage they often end up paying back twice as much the home was worth. This discourages economic investment and growth. Interest free money would be a boon for the economy and its totally possible.

There would still be investment banks... unlike commercial banking which is pure waste and fraud, investment banking is actually a natural function of the economy. They just wouldnt be able to lend money they didnt have on hand.

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham Lincoln

Edited May 19, 2014 by dre

[dre]

In the case of Canada, the government has paid back almost every single dollar it has ever borrowed. 90% of our entire market debt is interest. The bank of Canada is authorized by the constitution to make interest free loans to the government, and if the government borrowed its money that way, then we would be virtually debt free. The government has already paid back all the money it borrowed.

[TimG]

Yes but they take an inimaginable ammount of money for performing such an easy and base function. Think about it...

The bank gives you a loan and you spend the money and that money ends up in someone's bank account. The bank that lent you the money now has to pay interest to the people you gave the money too. If they loan the money out again they have to pay interest again. That is why banks only make money on the spread between what they charge and what they pay.

The idea that it costs them nothing to make loans is absurd but it is a common misconception by people who do not understand how fractional reserve banking works.

Edited May 19, 2014 by TimG

[dre]

The bank gives you a loan and you spend the money and that money ends up in someone's bank account. The bank that lent you the money now has to pay interest to the people you gave the money too. If they loan the money out again they have to pay interest again. That is why banks only make money on the spread between what they charge and what they pay.

The idea that it costs them nothing to make loans is absurd but it is a common misconception by people who do not understand how fractional reserve banking works.

I never said it costs them nothing to make a loan, so not sure what youre on about.

[TimG]

I never said it costs them nothing to make a loan, so not sure what youre on about.

You don't need to be so pedantic. You said:

At the very most they should charge a simple fee for setting up a 25 year mortage. In reality if I buy a 400 thousand dollar home amortized over 30 years, they will charge me more than 300 thousand dollars.

Which completely misrepresents the costs to the bank because in addition to the cost of administering the loan the bank has to pay interest to someone else on that 400K for 25 years because once they give the money to you, you will spend it and whoever you give it to will come back to the bank and demand interest on that money. Edited May 19, 2014 by TimG

[dre]

Which completely misrepresents the costs to the bank because in addition to the cost of administering the loan the bank has to pay interest to someone else on that 400K for 25 years because once they give the money to you, you will spend it and whoever you give it to will come back to the bank and demand interest on that money.

But when that money is deposited the bank can simply lend it out again. The average interest on deposits is 1 or 2 percent. The interest on loans is anywhere from 3-20%. Furthermore nobody can demand ANYTHING of a commercial bank. They are free to arbitrarily set the interest rates given to depositors and savers. So despite what you claim deposits are an asset to commercial banks... not a liability. They are not a "cost". Every dollar in deposits represents an opportunity to make a bunch of money doing nothing besides shuffling paper and entries on an electronic balance sheet.

[TimG]

But when that money is deposited the bank can simply lend it out again.

And when they lend it out again they have to pay interest to someone else again. Every time a bank creates a loan they create a liability that requires them to pay interest on the liability. They can end up paying interest on the same dollar many times just like they can end up earning interest.

The average interest on deposits is 1 or 2 percent. The interest on loans is anywhere from 3-20%.

Banks only make money on the spread and with this spread they have to cover all of their costs including money lost because people do not repay. This means you were completely wrong to say the only cost involved in creating a loan is administrative overhead. The majority of the cost comes from the interest that must be paid on the liability created with the loan.

Back of the envelope guesses about what the spread is are not helpful. You have to look at stats like return on assets or return on capital to get an idea of how much banks really make on their loans. On average they are no more profitable than other types of businesses.

Furthermore nobody can demand ANYTHING of a commercial bank. They are free to arbitrarily set the interest rates given to depositors and savers. So despite what you claim deposits are an asset to commercial banks... not a liability.

They are BOTH. When a loan is created an asset AND a liability are created that balance each other out. So the *net* assets of a bank do not increase simply because they make loans. That is why CODs were popular because they allowed banks to dump the liability for the loan on an unsuspecting bond holder.

Also the market for loans is competitive. Why do you think mortgages dropped to less than 2% this month? It is not because banks are being charitable. They want to increase the number customers that they have which means they need to offer attractive interest rates to depositors and borrowers which reduces the potential profit they can make on the spread.

Edited May 19, 2014 by TimG

[cybercoma]

And when they lend it out again they have to pay interest to someone else again. Every time a bank creates a loan they create a liability that requires them to pay interest on the liability. They can end up paying interest on the same dollar many times just like they can end up earning interest.

You know the interest they pay out for savings is a fraction of the interest it costs to borrow, right?

[TimG]

You know the interest they pay out for savings is a fraction of the interest it costs to borrow, right?

A 5 year GIC is 2.2% A 5 year fixed rate mortgage is 4%. A 2% spread is not a huge margin.

As I said: if you want to debate how profitable banks are then look at stats that provide that information like Return on Assets. Back of the envelope calculations based on your gut feel mean nothing.

[cybercoma]

It doesn't need to be a huge margin when they're dealing with billions of dollars. And besides, you simply picked two products with the closest spread that you could find and even then it's still 1.8% profit for doing nothing but moving money.

[TimG]

It doesn't need to be a huge margin when they're dealing with billions of dollars. And besides, you simply picked two products with the closest spread that you could find and even then it's still 1.8% profit for doing nothing but moving money.

The banks take on risk. If a loan cannot be repaid the bank is still responsible for paying interest on the money loaned.

Like I said, if you want to debate how profitable banks are after taking into account all of the costs of loaning money then look at stats like return on assets. If you do you will see that banks are not that much different than other businesses.

For someone you likes to lecture people on making decisions based on data you are awfully quick to draw conclusions without actually looking at the relevant data. Here are some stats for Japan: http://industry.ediunet.jp/choice/503/?lang=en. Banks have a negative ROA there.

Edited May 19, 2014 by TimG

[cybercoma]

I'm not debating how profitable banks are. You were complaining that banks have to pay out when they lend money. I'm simply saying they make more than they pay out. You supported my argument with your subsequent response that showed they make 1.8% more on lending out the money. So there you go.

[TimG]

You were complaining that banks have to pay out when they lend money. I'm simply saying they make more than they pay out.

And when did I say that they did not make a profit on the spread? The discussion you jumped into started because dre thinks that making loans costs nothing other than the administrative overhead. This is false because banks must pay interest on the loan and only make money on the spread.

[dre]

I'm not debating how profitable banks are. You were complaining that banks have to pay out when they lend money. I'm simply saying they make more than they pay out. You supported my argument with your subsequent response that showed they make 1.8% more on lending out the money. So there you go.

He also supported my origional argument that banks provide nothing beyond clerical services. Depositors and the central bank provide the funds to loan out, and the general public backstops the entire thing by insuring deposits (taking on the real risk), and when the banks make risky decisions the taxpayer is forced to bail them out anyways.

And no real argument either to the fact that if we wanted it to the system could be interest free.

[GostHacked]

Because a global economic collapse is tin foil hat stuff. You and Charles Anthony said a collapse could happen before 2015, causing Canada not to have an election.

I don't recall anyone giving a timeline. We both said it wont take much for the global money scheme to come crashing down. We have already seen much of that several countries asking for bail outs by the world bank and IMF at an extreme cost to their country.

I was talking in school about our chat the other night and we all concluded that you guys have your tin foil hat on too tightly. I proved you wrong and you got upset.

You have not proved anything yet. In fact most of your quoted articles in your 'education' threads, counter your arguments.

[GostHacked]

The idea that it costs them nothing to make loans is absurd but it is a common misconception by people who do not understand how fractional reserve banking works.

That's kind of the issue. Fractional reserve banking got us into this whole mess. Any bank today that would get a run on it would collapse instantly. They do NOT have the cash on hand to cover the loans they give out.

We actually saw this in the US where people were not allowed to withdraw their money. That is called a 'bank holiday'.

[overthere]

There is no class system in our country. Try and check some of you Marxist language at the door. Regardless, because of dangerously high debt to GDP levels, we had to cut spending dramatically in the mid to late 90s. And yet, we became a more prosperous country, as well as paying off debt and balancing budgets. How did this happen?

The single biggest reason is that interest rates dropped which reduced expenses.

Second biggest reason was that revenue jumped because NAFTA kicked in and revenues increased.

Third reason was that the feds transferred costs to the provinces. Magic.

[TimG]

He also supported my origional argument that banks provide nothing beyond clerical services.

What? You clearly are not reading what I am writing. Creating loans results in a liability for banks. Banks are the one responsible for paying interest on the funds loaned. Banks are the ones on the hook if the loan is not repaid. These are real costs that go way beyond "administrative costs".

when the banks make risky decisions the taxpayer is forced to bail them out anyways.

Completely false. If a bank goes under the current owners (a.k.a. shareholders) lose all of their equity. You need to separate the banks owners from the people running the bank and the banks themselves.

You also need to separate normal bank operation from a crisis scenario. In normal operations all of the costs I mention *are* paid by the bank which still means your claim about loan costs are complete nonsense.

And no real argument either to the fact that if we wanted it to the system could be interest free.

Next you will be proposing unicorn farts as a renewable energy source. Edited May 20, 2014 by TimG

[segnosaur]

exactly. SOCIALIST countries like Sweden,Norway, Finland have the highest standard of living in the world. Finland has the world's BEST public education system in the world. Coincidence? Nope. Just socialist societies that care about the little people and not driven by neo liberal corporatist profit first capitalist pigs;

Ok, a couple of major issues with that post...

First of all, the term 'socialist' is kind of a fuzzy term. In historical terms, it was often applied to an economic system that had complete government control. Countries like Sweden, Norway, etc. would probably be better characterized as "social-democrat". It should also be noted that those countries do not have purely state-run economies. All of them involve the private sector (i.e. capitalists) to a certain degree. (Sweden is the home to such private companies as Ericsson, Atlas Copco and Electrolux). Heck, pretty much every Western economy is a mixture of private and public sector endeavors... including that bastion of Capitalism.. the United States.

Secondly, while you like to jump up and down and praise the "socialist" countries, keep in mind that what you are looking at is currently a snapshot. The U.S. does have significant problems now, but a few decades ago they were doing much better. And the success of a country can depend quite highly on factors outside of its control. (For example, Norway benefits quite highly due to its oil revenues... Its pretty easy to have a high standard of living when you've got a small population base and huge revenues.) The success of any economic system cannot be guaged by examining a single point in time.

[Keepitsimple]

Ok, a couple of major issues with that post...

First of all, the term 'socialist' is kind of a fuzzy term. In historical terms, it was often applied to an economic system that had complete government control. Countries like Sweden, Norway, etc. would probably be better characterized as "social-democrat". It should also be noted that those countries do not have purely state-run economies. All of them involve the private sector (i.e. capitalists) to a certain degree. (Sweden is the home to such private companies as Ericsson, Atlas Copco and Electrolux). Heck, pretty much every Western economy is a mixture of private and public sector endeavors... including that bastion of Capitalism.. the United States.

As Wilbur previously posted and Socialist agreed (calling people dumb-dumbs) because he didn't read the entire post.......

Scandinavian countries rank among the highest when it comes to social programs, per capital incomes and income taxes. They also have much lower debt to GDP ratios than either Canada or the US.

Countries can choose their priorities - but you have to pay for them - with real, hard-earned money, not debt.