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The Problem Of Debt As We Reach Oil Limits

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Submitted by Gail Tverberg via Our Finite World blog,

(This is Part 3 of my series – A New Theory of Energy and the Economy. These are links to Part 1 and Part 2.)

Many readers have asked me to explain debt. They also wonder,Why can’t we just cancel debt and start over?” if we are reaching oil limits, and these limits threaten to destabilize the system. To answer these questions, I need to talk about the subject of promises in general, not just what we would call debt.

In some sense, debt and other promises are what hold together our networked economy. Debt and other promises allow division of labor, because each person can “pay” the others in the group for their labor with a promise of some sort, rather than with an immediate payment in goods. The existence of debt allows us to have many convenient forms of payment, such as dollar bills, credit cards, and checks. Indirectly, the many convenient forms of payment allow trade and even international trade.

Figure 1. Dome constructed using Leonardo Sticks

Figure 1. Dome constructed using Leonardo Sticks

Each debt, and in fact each promise of any sort, involves two parties. From the point of view of one party, the commitment is to pay a certain amount (or certain amount plus interest). From the point of view of the other party, it is a future benefit–an amount available in a bank account, or a paycheck, or a commitment from a government to pay unemployment benefits. The two parties are in a sense bound together by these commitments, in a way similar to the way atoms are bound together into molecules. We can’t get rid of debt without getting rid of the benefits that debt provides–something that is a huge problem.

There has been much written about past debt bubbles and collapses. The situation we are facing today is different. In the past, the world economy was growing, even if a particular area was reaching limits, such as too much population relative to agricultural land. Even if a local area collapsed, the rest of the world could go on without them. Now, the world economy is much more networked, so a collapse in one area affects other areas as well. There is much more danger of a widespread collapse.

Our economy is built on economic growth. If the amount of goods and services produced each year starts falling, then we have a huge problem. Repaying loans becomes much more difficult.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Figure 2. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

In fact, in an economic contraction, promises that aren’t debt, such as promises to pay pensions and medical costs of the elderly as part of our taxes, become harder to pay as well. The amount we have left over for discretionary expenditures becomes much less. These pressures tend to push an economy further toward contraction, and make new promises even harder to repay.

The Nature of Debt

In a broad sense, debt is a promise of something of value in the future. With this broad definition, it is clear that a $10 bill is a form of debt, because it is a promise that at some point in the future you, or the person you pass the $10 bill on to, will be able to exchange the $10 bill for something of value. In a sense, even gold coins are a promise of value in the future. This is not necessarily a promise we can count on though. At times in the past, gold coins have been confiscated. Derivatives and other financial products have characteristics of debt as well.

To understand how important debt is, we need to think about an economy without debt. Such an economy might have a central market where everyone brings goods to exchange. But even in such an economy, there will be a problem if there is not a precise matching of needs. If I bring apples and you bring potatoes, we could exchange with each other (“barter”). But what if I don’t have a need for potatoes? Then we might need to bring a third person into the ring, so each of us can receive what we want. Because barter is so cumbersome, barter was never widely used for everyday transactions within communities.

An approach that seemed to work better is one mentioned in David Graeber’s book, Debt: The First 5,000 Years. With this system, a temple would operate a market. The operator of the market would provide a “price” for each object, in terms of a common unit, such as “bushels of wheat.” Each person could bring goods to the market (and perhaps even services–I will work for a day in your vineyard), and have them exchanged with others based on value. No “money” was really needed because the operator would take a clay tablet and on it make a calculation of the value in “bushels of wheat” of what a person brought in goods, The operator would also calculate the value in “bushels of wheat” that the same person was receiving in return, and make certain that the two matched.

Of course, as soon as we start allowing “a day’s worth of labor ” to be exchanged in this way, we get back to the problem of future promises, and making certain that they really happen. Also, if we allow a person to carry over a balance from one day to another–for example, bringing in a large quantity of goods that cannot be sold in one day–then we get into the area of future promises. Or if we allow a farmer to buy seed on credit, with a promise to pay it back when harvest comes in a few months, we again get into the area of future promises. So even in this simple situation, we need to be able to handle the issue of future promises.

Future Promises Even Before Debt

Whenever there is division of labor, there needs to be some agreement as to how that division will take place–what are the responsibilities of each participant. In the simplest case, we have hunters and gatherers. If there is a decision that the men will do the hunting and the women will do the gathering and care for children, then there needs to be an agreement as to how the arrangement will work. The usual approach seems to have been some sort of “gift economy.” In such an economy, everyone would share whatever they were able to obtain with others, and would gain status by the amount they could offer to share.

Instead of a formal debt being involved, there was an understanding that if people were to participate in the group, they had to follow the rules that the particular culture dictated, including, very often, sharing everything. People who didn’t follow the rules would be thrown out. Because of the difficulty in living in such an environment alone, such people would likely die. Thus, participants were in some sense bound together by the customs that underlay gift economies.

At some point, as more of an economy was built up, there would be a need for one or more leaders, as well as some way of financially supporting those leaders. Thus, there would need to be some sort of taxation. While taxation to support the leader would not be considered debt, it has many of the same characteristics as debt. It is an ongoing payment obligation. The leader and the other members of the group plan their lives as if this situation is going to continue. In a way, the governmental services and the resulting taxation help bind the economy together.

Benefits of Debt

The benefits of debt are truly great, including the following:

  1. Debt allows transactions to take place that are not precisely at the same time and place. I can order goods and have them delivered to my home. An employer can pay me for a month’s work with a check, rather than needing to give me food or some other barter item corresponding to each hour I work. There is no need to have billions of gold coins (or other agreed up metal currency) to facilitate each and every transaction, and to transport around. We can each have bank accounts. From the bank’s perspective, the amount in a bank account is a liability (debt) owed to the depositor.
  2. Additional debt gives additional purchasing power to individuals, governments or businesses. The additional funds available can be spent immediately. Very often, repayment (with interest) is spread over several years, making goods that would not be affordable, affordable. Thus debt raises “demand” for goods and also for the commodities used to create these goods.
  3. Because debt makes goods more affordable, additional debt tends to “pump up” the price of commodities. These higher prices make it worthwhile for businesses to extract more minerals (including fossil fuels) from the earth, and make it worthwhile to plant more acres of food. Debt, particularly cheap debt, makes building new factories and opening new mines more affordable for businesses.
  4. Debt allows a steep step-up in standard of living, such as that obtained by adding coal or oil to an economy. Debt allows goods to be purchased that will substantially change a person’s future, such as transit to a new country, or purchase of a college education, or purchase of a delivery vehicle that can be used to start a business. Without debt, it is unlikely that fossil fuels could ever have been extracted; consumers would never have been able to afford the goods provided by fossil fuels, and businesses would have had difficulty financing the many new factories required to make goods using these fuels. See my post, Why Malthus Got His Forecast Wrong.
  5. Adding debt is self-reinforcing. Suppose a considerable amount of debt is added for what is deemed a good purpose, such as extracting oil in North Dakota. Oil companies will use the debt they receive for many different purposes–including paying employees, paying royalties to land owners, and paying taxes to the state. Employees will buy new houses and cars, taking out loans in the process. North Dakota residents who receive royalty payments may decide to take out home improvement loans to fix up their homes, expecting that the royalties will continue. The state may fix its roads with its revenue, giving additional income (which may lead to more debt) to road workers. A grocery chain may decide to build a new store (borrowing money to do so), further pushing the chain along. What happens is that indirectly, the new oil company debt makes a lot of people at least temporarily wealthier. These temporarily wealthier individuals can then “qualify” for more in loans than would otherwise be the case, giving them more to spend, and allowing yet others to qualify for loans.
  6. Arrangements that are not debt, but more of the nature of contingent debt, make people feel more confident of the current system. There are insurance programs for pension programs and for bank accounts, up to a selected balance per account. These insurance programs generally don’t have very much money in them, relative to what they are insuring. But they make people feel good, especially if there is a government that might come in and take over, beyond the actual funding of the insurance program.

What Goes Wrong with Debt and Other Financial Promises

1. As mentioned at the beginning of the post, debt works very badly if the economy is contracting.

It becomes impossible to repay debt with interest, without reducing discretionary income. Government programs, such as health care for the elderly, become more expensive relative to current incomes as well.

2. Interest payments on debt tend to transfer wealth from the poorer members of society to the richer members of society.

Economists have tended to ignore debt, because it represents a more or less balanced transaction between two individuals. The fact remains, though, that the poorer members of society find themselves especially in need of debt, and many pay very high interest rates. The ones lending money tend to be richer. Because of this arrangement, over time, interest payments tend to increase wealth disparities.

3. All too often, the payment stream upon which debt depends proves unsustainable.

In the example given above, everyone thinks the North Dakota oil will continue for a while, so takes out loans as if this is the case. If it doesn’t, then this is an “Oops” situation.

In the case of US student loans, many students are never able to get jobs with high enough wages to pay back the loans they were given.

4. Governments tend to put programs into place that are more expensive than they really can afford, for the long term.

As an economy gets wealthier (because of more fossil fuel use), there is a tendency to add more programs. Representative government is used instead of a monarch. Medical care and pensions for the elderly are added, as are unemployment benefits, and more advanced levels of schools.

Unfortunately, it is hard to properly estimate what long-run cost of these programs will be. Also, even if the programs were affordable with a high level of fossil fuels, they almost certainly will not be affordable if energy availability declines. It is virtually impossible to roll programs back, even if they are not guaranteed, once people plan their lives on the new programs.

Figure 3 shows a graph of US government spending (all levels) compared to wages (including amounts paid to proprietors, including farmers). I use this base, rather than GDP, because wages have not been keeping up with GDP in recent years. The amounts shown include programs such as Social Security and Medicare for the elderly, in addition to spending on things such as schools, roads, and unemployment insurance.

Figure 3. Comparison of US Government spending and receipts (all levels combined) based on US Bureau of Economic Research Data.

Figure 3. Comparison of US Government spending and receipts (all levels combined) based on US Bureau of Economic Research Data.

Clearly, government spending has been rising much faster than wages. I would expect this to be true in many countries.

5. There is no real tie between amounts of debt issued and what will actually be produced in the future. 

We are told that money is a store of value, and that it transfers purchasing power from the present to the future. In other words, we can count on balances in our bank accounts, and in fact, in all of the paper securities that are outstanding.

This story is only true if the economy can continue to create an increasing amount of goods and services forever. If, in fact, the production of goods and services drops off dramatically (most likely because prices cannot rise high enough to encourage enough extraction of commodities), then we have a major problem.

In any year, all we have available is the actual amount of resources that can be pulled out of the ground, plus the actual amount of food that can be grown. Together, these amounts determine how many goods and services are available. Money acts to distribute the goods that are available. Presumably, the people who work at extraction and production of these goods and services need to be paid first, or the whole process will stop. This basically leaves the “leftovers” to be shared among those who are now being supported by tax revenue and by those who hold paper securities of some sort or other. It is hard to see that anyone other than the workers producing the goods and services will get very much, if we lose the use of fossil fuels. Workers will become less efficient, and production will drop by too much.

6. Derivatives and other financial products expose the financial system to significant risks.

Certain large banks have found that they can earn considerable revenue by selling derivatives and other financial products, allowing people or businesses to essentially gamble on certain outcomes–such as the price of oil falling below a certain price, or interest rates rising very rapidly, or a certain company failing. As long as everything goes well, there is not a huge problem. The concern now is that with rapidly changing commodity prices, and rapidly changing levels of currencies, companies may fail and there may be major payouts triggered.

In theory, some of these payments may be offsetting–money owed by one client may offset money owed to another client. But even if this is the case, these defaults can sometimes take years to settle. There may also be issues with one of the parties’ ability to pay.

One particular problem with many of the products is the use of the Black-Scholes Pricing Model. This model is applicable when events are independent and normally distributed. This is not the case, when we are approaching oil limits and other limits of a finite world.

 7. Governments tend to be badly affected by a shrinking economy, so may be of little assistance when we need them most.

As noted previously, payments to governments act very much like debt. As an economy shrinks, programs that seemed affordable in the past become less affordable and badly need to be cut. Thus, governments tend to have problems at the exactly same time that banks and other lenders do.

Governments of “advanced” countries now have debt levels that are high by historical standards. If there is another major financial crisis, the plan seems to be to use Cyprus-like bail-ins of banks, instead of bailing out banks using government debt. In a bail-in, bank deposits are exchanged for equity in the failing bank. For example, in Cyprus, 37.5% of deposits in excess of 100,000 euros were converted to Class A shares in the bank.

This approach has a lot of difficulties. Businesses have a need for their funds, for purposes such as paying employees and building new factories. If their funds are taken in a bail-in, the ability of the business to continue may be damaged. Individual consumers depend on their bank balances as well. As noted above, deposit insurance is theoretically available, but the actual amount of funds for this purpose is very low relative to the amount potentially at risk. So we get back to the issue of whether governments can and will be able to bail out banks and other failing financial institutions.

8. More debt is needed to hide the lack of economic growth in an ailing world economy. This debt becomes increasingly difficult to obtain, as wages stagnate because of diminishing returns. 

If wages are rising fast enough, wages by themselves might be used to pump demand for commodities, and thus raise their prices. Our wages are close to flatmedian wages have been falling in the US. If wages aren’t rising sufficiently, increasing debt must be used to raise demand. Debt is growing slowly in the household sector, according to figures compiled by McKinsey Global Institute. Household debt has grown by only 2.8% per year between Q4 2007 and Q4 2014, compared to 8.5% per year in the period between Q4 2000 and Q4 2007.

Even with business demand included, debt isn’t rising rapidly enough to keep commodity prices up. This lack of sufficient growth in debt (and lack of growth in demand apart from growing debt) seems to be a major reason for the drop in prices since 2011 in many commodity prices.

9. Differing policies with respect to interest rates and quantitative easing seem to have the possibility of tearing the world financial system apart.

In a networked economy, not moving too far from the status quo is a definite advantage. If the US’s policies have the effect of raising the value of the dollar, and the policies of other countries have the tendency to lower their currencies, the net effect is to make debt held in other countries but denominated in US dollars unpayable. It also makes goods sold by American companies unaffordable.

The economy, as it exists today, has been made possible by countries working together. With sanctions against Iran and Russia, we are already moving away from this situation. Low oil prices are now putting the economies of oil exporters at risk. As countries try different approaches on interest rates, this adds yet another force, pulling economies apart.

10. The economy begins to act very strangely when too much of current income is locked up in debt and debt-like instruments.

Economic models suggest that if oil prices drop, demand for oil will grow robustly and supply will drop off quickly. If oil producers are protected by futures contracts that lock in a high price, they may not respond in the manner expected. In fact, if they are obligated to make debt payments, they may continue drilling even when it may not otherwise make financial sense to do so.

Likewise, consumers are also affected by prior commitments. If much of consumers’  income is tied up with condominium payments, auto payments, and payment of taxes, they may not have much ability to respond to lower oil prices. Instead of increasing discretionary spending, consumers may pay off some of their debt with their newfound income.

Conclusion

If the current economic system crashes and it becomes necessary to create a new one, the new system will have to deal with having an ever-smaller amount of goods and services available for a fairly long transition time. Because of this, the new system will have to be very different from the current one. Most promises will need to be of short duration.  Transfers among people living in a particular area might still be facilitated by a financial system, but it would be hard to have long-term or long-distance contracts. As a result, the new economy will likely need to be much simpler than our current economy. It is doubtful it could include fossil fuels.

Many people ask why we can’t just cancel all debt, and start over again. To do so would probably mean canceling all bank accounts as well. Most of our current jobs would probably disappear. We would probably be without grid electricity and without oil for cars. It would be very difficult to start over from such a situation. We would truly have to start over from scratch.

I have not talked about a distinction between “borrowed funds” and “accumulated equity”. Such a distinction is important in terms of the rate of return investors expect, but it is not as important in a crash situation. Similarly, the difference between stocks, bonds, pension plans, and insurance contracts becomes less important as well. If there are real problems, anything that is not physical ends up in the general category of “paper wealth”.

We cannot count on paper wealth (or for that matter, any wealth) for the long term. Each year, the amount of goods and services the economy can produce is limited by how the economy is performing, given limits we are reaching. If the quantity of these goods and services starts falling rapidly, governments may fail in addition to our problems with debts defaulting. Those holding paper wealth can’t count on getting very much. Workers producing whatever goods and services are actually being produced will likely need to be paid first.

 

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Wed, 02/11/2015 - 20:05 | 5773771 noben
noben's picture

Diesel boom, diesel bust.

Wed, 02/11/2015 - 20:13 | 5773809 zorba THE GREEK
zorba THE GREEK's picture

The problem with debt is that it has now become the #1 asset in the world.

That is some crazy shit. Banks are concidered more solvent if they hold bonds (someone's debt)

than if they hold gold. The mental patients have taken over the asylum. 

Wed, 02/11/2015 - 20:15 | 5773816 LetThemEatRand
LetThemEatRand's picture

That is because when a bank holds a bond, it holds a promise (made by a central banker) that the issuing country's taxpayer will make good on the bond (that the taxpayer had no role in).  And there's the fact that the government of said country will force the taxpayer to pay it back.

Wed, 02/11/2015 - 20:53 | 5773934 A Lunatic
A Lunatic's picture

Yes, in the end it's always the same; your money or your life. How civilized it is to have a monetary system that ultimately relies on death threats as collateral........

Wed, 02/11/2015 - 21:11 | 5773962 LetThemEatRand
LetThemEatRand's picture

Humanity is the problem.  There are the sociopaths, of course, who make up a small percentage of the population but who strive to lead everyone else.  But more importantly there are the sheep, who represent probably 90% of the population.  They want to be led.  They cry when they hear their national anthem and see their flag waving.  They log on to facebook.  They buy an iPhone but complain about the NSA.  They follow the sociopaths.  They will send their kids to fight wars for the sociopaths who tell them it is their duty as citizens.  Or they pay money to a promoter to see a rock concert to protest said wars.  You can bang your head against the wall and read books about how to fix it, but there's no fixing it.  This condition has afflicted humanity since history books were written.  Only recently in terms of human history have the sociopaths had the need to be creative about telling the sheep they are free.

Wed, 02/11/2015 - 23:06 | 5774309 cornflakesdisease
cornflakesdisease's picture

And you yourself are a sheep, fraught with imperfections and flaws like everyone else that also contribute to the social, political, and economic problems humanity faces.  Humans were never designed to rule themselves.  They can not.  But you are rght, there is no fixing it by human means.

Wed, 02/11/2015 - 21:01 | 5773954 Bossman1967
Bossman1967's picture

Ya but what happens when they finish killing off the rest of the tax base I know they killed me I used to pay alot of taxes now nothing unfortunatly but hey I finally found a job so maybe i can pay a little

Thu, 02/12/2015 - 07:01 | 5774929 kurzdump
kurzdump's picture

Taxpayers do not account for government bonds. In (the new) reality its the central bank who is accountable.

The valid formula is:

government debt / GDP = level of socialism.

Wed, 02/11/2015 - 22:51 | 5774223 Radical Marijuana
Radical Marijuana's picture

I agreed with all the subreplies under Zorba's comment posted so far! It takes A Lunatic to make an absolutely correct summary of the origin of the existing debt slavery system! It is not merely that the inmates have taken over the insane asylum, it is the most criminally insane who have done so!

From previously posting some of my comments on Gail Tverberg's Web site, I know that she tends to to believe in Hanlon's Razor, i.e., our problems are due to incompetence rather than due to malice. However, while Occam's Razor makes logical sense, and should be considered in the special case of Hanlon's Razor, there is way too much evidence which indicates that there is plenty of malice in the minds of the pyramidion people, while the incompetence is more to be found in those who are lower down in the political system. (I.e., the majority of successful politicians were the banksters' puppets, while most of the muppets that voted for them believed in bullshit that the mass media and the schools taught them to believe in.)

I REPEAT my summary of how we got into the predicatment we are in now, which Gail Tverberg correctly describes, in my opinion, on a superficial level, while she does not want to go through the severe cognitive dissonance suffering that one has to go through to comprehend that this was NOT accidental incompetence, but rather, step by step runaway triumphs of evil.

That tragic trajectory was, bit by bit, faster and faster, due to the world's combined money/murder systems becoming more and more successfully enforced frauds. There has never been anything able to prevent the people who were the best at being dishonest and backing that up with violence from controlling civilization, and thereby driving it towards its own psychotic destruction. The ability of some human beings to control other human beings using the methods of enforced frauds are the foundation of the political economy, while that structure automatically and necessarily becomes more criminally insane everyday.

That is especially the case because there MUST be some death controls within the context of any human ecology, since there ARE chronic political problems inherent in the nature of life. The human species have developed an expedient set of solutions to those problems which operate through small groups, who specialized in being dishonest and violent, dominating larger groups, who are thereby kept ignorant and afraid. Thus, the established systems are almost nothing but organized crime and controlled opposition.

That combination of organized crime and controlled opposition means that the world is almost totally dominated by professional liars and immaculate hypocrites operating in BOTH the established organized crime AND the controlled opposition groups. Hence, there can not be any genuine progress, but only more overall criminal insanities, headed towards psychotic breakdowns. None of the "peace processes" or "debt repayment negotiations" ever address how the human species might be able to operate better death controls, in order to back up better debt controls, because everyone participating in those meeting tend to be there because they were the best available professional liars and immaculate hypocrites, within the groups that they are representing.

In the current flash points, or the leading edges of the established systems having driven themselves into situations of debt insanities and/or death insanities, there is always an almost totally BULLSHIT WORLD VIEW dominating all of those discussions, which makes any genuine progress practically impossible. For thousands of years, Neolithic Civilizations' social pyramid systems have been successfully based on backing up lies with violence, in order to continue to grow an an exponential rate. However, within the lifetime of those alive today, legalized lies backed by legalized violence have become globalized systems of electronic frauds, backed by the threat of force from atomic bombs.

That is the level of collectively social insanities that we have worked ourselves up into. While our problems became millions, then billions, then trillions of times worse than ever before in human history, the established systems of organized crime, and their controlled opposition, continued to be dominated by professional liars and immaculate hypocrites. The ruling classes and those they ruled over became matching bookends of the prolonged processes of controlling civilization through enforcing frauds.

All the language that they use is based on false fundamental dichotomies and the related impossible ideals. Somewhere deeply BURIED UNDER BULLSHIT, are some relatively objective facts, and the unitary mechanisms of general energy systems, however, the social systems are so totally based on being able to continue to back up lies with violence, that those facts have almost no influence upon anything, since enforced frauds are actually controlling civilization. Therefore, the overall systems of backing up lies with violence continue to enable attitudes of evil deliberate ignorance to flourish, while our problems are headed towards becoming quadrillions of times worse than ever before in known human history, as long as progress in science and technology continues to be channeled through social pyramid systems whose basic structure is due to being able to back up lies with violence. That has gradually selected for all the most successful people within those established systems, of organized crime and controlled opposition, to become the best available professional hypocrites, so that when they meet to discuss problems there is almost nothing said which is not UTTER BULLSHIT.

In that context, it is not clear that there will be any future human historians who survive to discuss what went wrong, due to the paradox of final failure from too much "success" by controlling civilization through being able to ENFORCE FRAUDS. The basic structure of social pyramid systems is criminal, and so, the more that they are pumped up and UP by advances in science and technology, the more criminally insane they become, especially since those who benefit from those ENFORCED FRAUDS in the short-term have every kind of political advantage within the established systems to continue to be able to do so ... despite that being able to control civilization through backing up legalized lies with legalized violence has the longer term result of driving that civilization to become more and more criminally insane.

The paradox with respect to being RIGHT about that analysis is that being RIGHT makes no difference, because social systems based on backing up lies with violence do NOT CARE about more rational evidence nor logical arguments. Those ONLY CARE about being able to continue to ENFORCE FRAUDS, by being able to back up bigger lies with more violence. Therefore, the ONLY thing that follows from better understanding these kinds of political problems is that the more one knows, the worse it gets!

Wed, 02/11/2015 - 23:49 | 5774441 usednabused
usednabused's picture

RM you are correct that being right makes no difference. The author (Gail) makes lots of good points that do not really work out as she says. Did she live through the 80's and 90's? The producer got shit upon while the rest of the economy prospered. An inconvenient truth for her I suspect. That said, I still respect her veiws and do wish things did work as she thinks they do. Her problem seems to be the blinders in her eyes can not recognize the economic manipulation taking place via military and political power. After all, MIGHT makes Right.

Thu, 02/12/2015 - 00:42 | 5774555 Earth Ling
Earth Ling's picture

What an oustanding comment.  I am printing this out and sharing it.  Your finale "the more one knows, the worse it gets!" fracking nails it. As I have gone through the congnitive dissonance required to be able to see the system of enforced frauds, I have indeed grown ever more dismayed. For me the very latest is understanding that vaccines are just one more insanity being forced on a duped public. There may well be benefits (i.e. reward is sufficiently greater than risk) in some cases IF the public interest is the guiding principle.  However Big Pharma can no more be trusted than Big Banks, the MIC, Monsatanow, the Democrats or the Republicans. In fact once you've allowed yourself to see just a few examples of the "money/murder system" at work, you realize that you should assume that TPTB in every industry and institution are working to enslave you.  At best they haven't yet turned their sights on you, but they will.  It is just a matter of time. 

"Being right makes no difference."  Man is that ever the truth. Do you think whistleblowers under Bush's watch and especially Obombus would back you up on that claim? Yeah, that might just knock them over.  

 Thanks RM for sharing your insight so that you deepen mine. While I think humanity is fucked, oddly enough clear sighted posts such as your still give me some hope.  

Thu, 02/12/2015 - 01:17 | 5774618 Radical Marijuana
Radical Marijuana's picture

My appreciation back at you, Earth Ling, since I think you explained the problems very well too, including those psychological processes that one must go through!

One observation is that while it is relatively easy to imagine destructive events, it is extremely difficult to imagine creative events. We appear to need some series of technological and political breakthroughs, which we currently can not imagine actually happening. However, that does mean those are impossible. I like to hold on to irrational hopes in some finite forms of human creativity greatly surprising us, (while there is always some infinite, transcendental hope.)

Some examples of hoping that there could be some kind of creative breakthroughs may be found in the Thrive documentary:

www.thrivemovement.com

Thu, 02/12/2015 - 02:18 | 5774704 MEAN BUSINESS
MEAN BUSINESS's picture

Ever watched TROM ? Interesting presentation (13 hours!), can't recall if there was any discussion of death controls.

Thu, 02/12/2015 - 15:54 | 5777252 Radical Marijuana
Radical Marijuana's picture

No, I do not recall ever watching TROM before.

Fri, 02/13/2015 - 06:14 | 5779733 MEAN BUSINESS
MEAN BUSINESS's picture

Well, The Reality Of Me today is, I can come up with the deposit and hire an auditor ; )

Thu, 02/12/2015 - 06:15 | 5774906 supercelld
supercelld's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Thu, 02/12/2015 - 22:54 | 5778961 TheMerryPrankster
TheMerryPrankster's picture

How low the slime that repost "make money fast" the original meme was on usenet,an electronic version of the chain letter.

Keep trolling for morons, but you'd do better on Digg or Facebook.

Wed, 02/11/2015 - 20:13 | 5773781 petkovplamen
petkovplamen's picture

man, that libertarian BS get tiresome after a while....Dont you get tired reciting BS?

An economy without dept and fake fiat is a real economy where there is no exploitation but the problem is the rich cannot exploit everyone else so of coruse that is not gonna happen.

You libertarians are worse that Republicans,you live in a fantasy world.

FAce facts:

you beloved Ayan Rand was a lesbian psycho Jew who preached against "Socialism" but had no problem accepting Medicare and Social Security when she got old and sick. In one word: a total hypocrite.

Wed, 02/11/2015 - 20:16 | 5773819 kaiserhoff
kaiserhoff's picture

I see no evidence that Gail is a libertarian.

More a Doomer/Malthusian/Fatalist who denies all progress and that innovation is even possible.

Like many others, she should get out and work in the real world for a while.

 

Wed, 02/11/2015 - 20:33 | 5773868 Carl Spackler
Carl Spackler's picture

True. Gail is NOT a Libertarian.
She is a member of the Idiot party.

She does not understand economics or money or "debt." She does not understand accounting systems, either. But she has the nerve to prove the world that she is ignorant.

In moderation, debt (a promise to do something in the future) is a good thing for promoting the velocity of money and, therefore, economic output.

Debt facilitates exchange of goods and services, because barter is limited by physical, geographic, and other factors, and barter restricts output potential.

However...Too much of anything is not a good thing, debt included!
This us where we are today...over-promising what can realistically be delivered in the future.

Wed, 02/11/2015 - 21:30 | 5774043 Winston Churchill
Winston Churchill's picture

Far worse than a libertarian , she is an actuary.

An accountant that found bookkeeping far too exciting.

I'm sure she knows all about morbidity and mortality rates, but economics ?

Thu, 02/12/2015 - 05:13 | 5774876 Escrava Isaura
Escrava Isaura's picture

 

 

Research Says: Studying Economics Turns You Into a Liar

http://www.theatlantic.com/business/archive/2012/12/research-says-studying-economics-turns-you-into-a-liar/266423/


Wed, 02/11/2015 - 22:31 | 5774128 Eeyores Enigma
Eeyores Enigma's picture

So called renewables are about as useful to the global economy as $150 to $200 oil. And for much the same reasons.

Thu, 02/12/2015 - 01:05 | 5774307 Radical Marijuana
Radical Marijuana's picture

http://www.doomsteaddiner.net/blog/2015/02/09/as-night-closes-in/

As Night Closes In

By John Michael Greer, February 4, 2015.

... so far, there is no proof of the cargoism delusion that technology will always save us from overshoot due growth beyond the planet's carrying capacity, leading to human mass murders. Rather, we continue to collectively indulge in pretending that the laws of ecology do not apply to human beings, and thus, there is NO carrying capacity, or maximum permanently supportable load, within integrated human, industrial and natural evolutionary ecologies. Even as many indulge in some cornucopian myth, as a euphoric belief in limitless resources, we are actually engaged in a massive drawdown by stealing resources from the future, while transferring onto them the debt burdens to pay for us doing that in the past and presently. 

After studying these issues intensely for several decades, I believe that Tverberg is basically correct, as far as to the degree of what are the current publicly proven facts ... However, as my comment above pointed out, I think that the real situation is WAY WORSE!

Wed, 02/11/2015 - 20:31 | 5773855 cigarEngineer
cigarEngineer's picture

Nobody cares about some dead jew Ayn Rand, and hypocrisy does nothing to dilute someone's argument. 

Wed, 02/11/2015 - 21:22 | 5773997 BigJim
BigJim's picture

As a successful author, Ayn Rand was forced to pay taxes all her life, so she's not a 'hypocrite' for accepting some of those taxes back in the form of government healthcare etc.

She was a zionist, however, which tells us all we need to know about the swivel-eyed bitch (and I mean literally swivel-eyed - have you seen this? https://www.youtube.com/watch?v=1ooKsv_SX4Y)

She did make some excellent points about the evils of too much government.

Wed, 02/11/2015 - 20:07 | 5773792 LetThemEatRand
LetThemEatRand's picture

There is nothing wrong with cancelling debt procured by fraud.  Happens all the time.    Let's say for example that someone steals my credit card and racks up a bunch of ones and zeros.  I file a grievance, credit card company figures out the debt was procured by fraud, it is written off.  Same with all debts owed by taxpayers to central banks.

Wed, 02/11/2015 - 20:18 | 5773821 kaiserhoff
kaiserhoff's picture

Good point, and since all governments use fraudulent, cash basis accounting systems, they are guilty by definition.

Wed, 02/11/2015 - 21:47 | 5774098 lasvegaspersona
lasvegaspersona's picture

Your pesion plan holds debt as does Social Security.

If the USG can't fork over the dollars for those notes held by the SS Trust Fund then no one will get SS payments.

The bright side is your personal debts go away.

For the vast majority of the World this will not amount to huge gains or losses. For the paper rich it  will be very bad. For physical advocates it will be very, very good.

Wed, 02/11/2015 - 20:07 | 5773794 analyzer_66
analyzer_66's picture

The true and final tipping point will only become reality when all the secured creditors of the world realize they will receive nothing for their bonds and claims on the leftovers

Wed, 02/11/2015 - 20:20 | 5773831 new game
new game's picture

the real tipping point is when hyper inflation renders the fiat worthless. then the cb has zero credibility to provide moar fiat. toilet paper becomes real curency as is happening in venzulu. the chain reaction from japans failure will cause a flight to treasuries like never seen before. not sure from there what happens next...

Wed, 02/11/2015 - 20:21 | 5773833 SDRII
SDRII's picture

CROATIA IS DOING HIS RIGHT NOW

Wed, 02/11/2015 - 20:34 | 5773871 cigarEngineer
cigarEngineer's picture

"the new system will have to deal with having an ever-smaller amount of goods and services available for a fairly long transition time"

I think this is false because technological progress is inherently deflationary and we can continually buy more with less in industries that are not regulated, like tech.

 "Because of this, the new system will have to be very different from the current one. Most promises will need to be of short duration. "

I don't think that follows. Promise duration will not be affected; a debt default results in a private loss that may or may not be bailed out and turned into a public loss. However, it does nothing to change the system. People go bankrupt all the time, but they continue to function in the same system that existed previouslY.

Wed, 02/11/2015 - 20:36 | 5773880 Karaio
Karaio's picture

This guy is an asshole!

If I decide not to pay I do not pay, fuck.

What is happening is the following:

Chinese and Russian has many roles in US $, need to spawn this junk at all.

Nothing better to play these roles for Argentina, Venezuela, Cuba etc. so quitem their debts.

If they play these roles in the market the dollar depreciates.

It's like saying:

You issued those papers, fucked these nations now eat their roles, these nations are our friends.

When the sink in (and missing little), it will be late ...

hehe.

Wed, 02/11/2015 - 20:36 | 5773883 A Lunatic
A Lunatic's picture

No one; not man or government should be able to take out debt and charge it to another.......

Wed, 02/11/2015 - 21:11 | 5773951 mt paul
mt paul's picture

ATTENTION

zero hedge boating with bullion skippers 

Silvertowne over on Ebay is selling 1 oz silver buffalos

tube of 20 for 340.$   17 $ each , free shipping 

rite now . buy it now price ,imediate delivery 

thats less than .20 cents over spot 

load up ..

SilvertowneLP    ebay store name

 

[ i have no vested interest in this

other than buying cheaper silver ]

Wed, 02/11/2015 - 21:16 | 5773996 mt paul
mt paul's picture

now the question is ...why

the silver fire sale.....

 

does silvertowne know something we don't...

 

Wed, 02/11/2015 - 23:43 | 5774421 waterwitch
waterwitch's picture

Not finding this deal on ebay for the Silvertowne seller. Closest I find is 10 buffalos for $195. Can you provide a link?

Thu, 02/12/2015 - 00:01 | 5774459 mt paul
mt paul's picture

can not post ebay link for some reason 

try this item #   eBay item number: 301335158202

335.39  $ for tube of 20 silver buffalo rounds

free shipping

Wed, 02/11/2015 - 21:03 | 5773957 dearth vader
dearth vader's picture

>> Workers producing whatever goods and services are actually being produced will likely need to be paid first. <<

Unless they're slaves, of course. 

Wed, 02/11/2015 - 21:10 | 5773979 Yes_Questions
Yes_Questions's picture

 

 

We can’t get rid of debt without getting rid of the benefits that debt provides–something that is a huge problem.

 

This is untrue.  

 

A central bank can buy up your stupid fucking NON PERFORMING debt at mark to bullshit, as they have before.  as there is increasing risk of default (that little word that ASSURES the benefits of that debt go bye-bye) having an angel investor in your NON PERFORMING DEBT is in fact how it WILL, and has gone.

 

 

 

 

Thu, 02/12/2015 - 00:03 | 5774476 Threeggg
Threeggg's picture

Not true. That's the way it used to be. Now that the dollar is leveraged 80 to 1. That means theoretically, that 79 corporations have that same dollar on their balance sheet as an accounts receivable or asset. What happens when that original dollar does not get paid back? $79 new dollars need to be created/printed to balance everyones balance sheet or the system fails. The original borrower is out of luck but, any entity that bet you would't pay back your debt expects to get paid and they do.

That's why nothing can fail. The printing of money would commence in multiples to balance the system if anything failed because of leverage. Leverage is a promise to pay because, the money to cover them hasn't even been printed.......yet.

 

Thu, 02/12/2015 - 00:09 | 5774484 Threeggg
Threeggg's picture

duplicate deleted

Wed, 02/11/2015 - 21:27 | 5774036 29.5 hours
29.5 hours's picture

 

 

Not sure of the point of this article. The poster asks a very accessible and relevant question at the beginning ("why not cancel the debt?") but then goes off course on a very long tangent. Finally, at the end, the poster asks the question again, followed by a series of mere assertions of why not (the electric grid would evaporate; oil would drain from our cars, etc.) without giving any logical backing to the assertions.

However, the fact that she cribbed so much from Graebner's book, Debt: The First 5000 Years, should not discourage anyone from studying this book. It is the best, most stimulating and valuable book on economic theory I have read in many years.

 

 

Thu, 02/12/2015 - 16:02 | 5774732 Radical Marijuana
Radical Marijuana's picture

"If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt — above all, because it immediately makes it seem that it’s the victim who’s doing something wrong."

-- David Graeber

As A Lunatic pointed out in his reply above:

"... in the end it's always the same; your money or your life. How civilized it is to have a monetary system that ultimately relies on death threats as collateral... "

I promote the definition that money is measurement backed by murder, because the debt controls depend upon the death controls. As we run into the limits of diminishing returns from being able to continue to strip-mine the planet at an exponentially accelerating rate, which was being "paid" for by "money" made out of nothing as debts (which debt slavery system had a built-in structure, as a pyramid scheme, to require exponential growth of debts, in order to keep on paying the interest on those debts), running into the real limits of diminishing returns of oil, and almost every other natural resource we have been strip-mining (including the soil itself, etc.), the first and foremost place that those limits manifest will be through the financial systems!

Basically, debt slavery systems have driven their numbers to become debt insanity situation, which are threatening to provoke death insanities. Furthermore, any real limits that prevent any more exponential growth of the human population and human activities are, BY DEFINITION, could to manifest as death controls. Therefore, as we run into the limits of a finite planet, first of all, that will become a financial problem, however, because money is measurement backed by murder, that will become a military problem.

IF we could have more rational public debates, then we would be discussing how to operate better death controls, to back up better debt controls. Those are theoretically possible. However, in practical terms we are currently rushing as fast as we can into more and more severe debt insanities, which threaten to provoke death insanities, while both the ruling classes and those they rule over BOTH want to continue to deliberately ignore that, and believe that endless exponential growth is possible.

At the present time, everyone who is able to rationalize themselves enjoying the processes of strip-mining the planet is mostly still able to participate in doing that, since all the established sytems are set up to enable that to continue to happen. At the present time, it continues to appear practically impossible for human beings to collectively agree that they should slow down ... and so, we continue to rush as fast as we can towards death insanities.

It would take profound intellectual scientific revolutions for enough people to understand the concepts of death controls in sufficiently different ways that the actual death controls could be done differently. However, right now, the established systems are that the death controls tend to be done through the maximum possible deceits, while the debt controls operate through a fundamentally fraudulent financial accounting system.

In fact, almost all the debts that exist today are odious, because they all developed inside the situation where there were government enforced frauds by the banksters. The financial system is a social pyramid system based on being able to back up legalized lies with legalized violence. That existing system threatens to go through psychotic breakdowns by collapsing into crazy chaos, because being able to continue to grow exponentially, by being able to strip-mine the planet exponentially, is running into some real limits of diminishing returns.

However, at the same time, virtually everyone wants to deliberately ignore those basic facts. Indeed, many of the comments posted above demonstrated some of the ways that people appear to be able to deliberately ignore than the planet Earth is finite. While, after all, Gail Tverberg's own Web site is called "Our Finite World."

http://ourfiniteworld.com/

From an intellectual point of view, I have always found it astonishing how people could promote "growth" without ever considering that the planet was finite! However, that was "normal," and there is practically nothing in the established political pyramid systems that can adapt to the limits to growth, (other than through the ruling classes following out their covert agenda to mass murder the majority of the human population.)

The established political economy is based on backing up lies with violence, or enforcing frauds, and that operates inside of a human ecology which is even more profoundly deceitful. I find it astonishing, from an intellectual point of view, that the vast majority of people are able to mostly deliberately ignore that, although the ruling classes have worked hard to brainwash the people that they rule over to believe in bullshit!

As my previous replies above also explained, human civilization has become runaway criminal insanities, which makes resolving any of our real problems with respect to finite supplies of resources, and the diminishing returns from strip-mining those resources, practically impossible to cope with, in any other ways that what the ruling classes are apparently doing, which is prepare to mass murder the majority of the human population. The established social pyramid systems have no other ways to cope with the limits to growth. Especially since the vast majority of people who were ruled over so much, for so long, appear utterly unable and unwilling to even think about those issues.

The established systems based on being able to back up lies with violence have constantly been entrenching themselves, and doubling down, decade after decade. We have collectively never faced any of the facts that the planet was finite, but rather, collectively we have been deliberately ignoring and denying that as much as possible. The basic social pyramid systems have a structure which MUST have exponential growth of more "money" made out of nothing as debts. We are all inside of a treadmill of collectively suicidal behaviors. The established systems of debt ARE based on violence. As those systems generate numbers which are debt insanities, those systems have no other ways to cope than to provoke death insanities, which is actually what the ruling classes have been preparing to do.

I WISH that it was possible for enough people to wake up enough to those facts, so that we could have more rational political debates, leading to a better future. However, at the present time, that looks like it would take a prodigious series of political miracles, since business as usual is to continue to enforce frauds, until that goes through crazy collapses into chaos.

WE DO HAVE "a monetary system that ultimately relies on death threats as collateral."

MONEY IS MEASUREMENT BACKED BY MURDER.

However, even on Zero Hedge, the majority of authors appear to continue to deliberately ignore that ... Even when one of the relatively better authors who is republished on Zero Hedge discusses these issues, they still tend to dance around the issues of death controls, backing up the debt controls, without meeting that central concern head-on, since to do so necessarily means that one can not talk about any real resolutions to the real problems without that including changes in real death control systems.

At present, those changes are building up and UP their potential energy, in a pressure cooker whose lid was almost totally welded on by the history of the ruling classes waging war against the consciousness of those they they ruled over. We have ended up with social pyramid systems where governments have become the biggest form of organized crime, controlled by the currently best organized gang of criminals, the banksters. The history of that was that warfare was organized crime on a larger scale, which selected for the surviving War Kings to create the sovereign states, with the power to tax, whose powers were effectively privatized by the banksters applying the methods of organized crime to dominate the political processes, so that those banksters became the new royalty of Fraud Kings. Within those established systems of organized crime, and controlled opposition, none of the dominate forms of controlled opposition, such as various old-fashioned religions and ideologies, directly address the issues of better death controls, but continue to promote the impossible ideals that there should be no death controls, or that there should be none that human beings are consciously aware of operating.

In my view, we have a profoundly paradoxical problem, whose source was that success in warfare was based on deceits, in which context spies were the most important soldiers. Therefore, all of the most important actual death controls were done in the most deceitful ways possible, while the controlled opposition groups that surrounded those systems developed to operate inside of that frame of reference. Hence, although good historical analysis demonstrates that the debt controls were based on the death controls, and that money is measurement backed by murder, the ruling classes, and the controlled opposition groups, do everything they can to deliberately ignore and deny those central facts.

As we rushed at an exponentially accelerating rate into strip-mining the planet's natural resources, we previously never were forced to face the limits of doing that. However, those limits of diminishing returns ARE starting to significantly show up NOW ... By and large, the results are that people are becoming even more insane, rather than more sanely dealing with those relatively objective facts. At the present time, pointing out that the debt controls were backed by the death controls, and that debt insanities threaten to provoke death insanities, appears to be appreciated by only a very tiny minority of the population.

I have intellectually been attempting to think about those problems for several decades. However, my current conclusions are that the vast majority of people, both in the ruling classes, as well as in those who are ruled over, will continue to deliberately ignore the facts that the planet is finite as much as they can, for as long as they can ...

I personally enjoyed the free video presentations by David Graeber, such as http://www.youtube.com/watch?v=CZIINXhGDcs

However, although that has had about 66,000 visits, that is still many orders of magnitude too small a number to amount to something which is politically significant. As the debt insanity numbers keep on getting worse, faster, more people are noticing how blatantly INSANE those numbers are becoming. However, in my view, very few are understanding the ways that debt controls were backed by death controls, and of those, even fewer are willing and able to consider that only better death controls could actually back up better debt controls.

Not being able to continue to exponentially strip-mine a finite planet's natural resources is a problem which is showing up most significantly in the form of the diminishing returns from extracting petroleum. That is having effects of wildly swinging the price of oil, inside of the fundamentally fraudulent financial accounting systems, through crazier and crazier oscillations, far beyond the relatively slight differences in basic supply, because those are amplified by a fundamentally fraudulent financial accounting system having generated numbers which are debt insanities.

Fatal Ignorance

 

I see relatively little common understanding of that, while lots and lots of misinterpretations and misrepresentations of those facts. Overall, I find Tverberg's approach superficially correct. However, since she does not focus on the death controls that backed up the debt controls, she presents a relatively superficial view, which is correct enough at its own level, but still too shallow an analysis.

That is especially the case because the real history of the development of petroleum resources was so totally wound up in the history of war, which facts were amusingly presented in this:

https://www.youtube.com/watch?v=GIpm_8v80hw

Robert Newman - History of Oil

The article above by Tverberg manages to discuss the problems of debt and oil without mentioning military history and death controls. However, David Graeber's History of Debt makes the point that the realities of violence have ended up being expressed through the language of debt, while, of course, that applies to petroleum!

However, that insight tends to be pushed to the side, or out of sight, by most of the articles republished on Zero Hedge, whose theoretical frames of reference tend to by-pass that issue. Rather, it seems to me that only in some of the comments does one consistently observe more correct focus upon the necessary connections between the money system and the military system. Although one can understand how and why that pattern developed, there is no intellectual integrity in discussing the topic that Tverberg purports to discuss in ways which ignore the history of violence which made and maintained the current systems of enforced frauds, which are driving themselves mad, as demonstrated by the price of oil having wild oscillations, that take a lot of deep thought to understand!

Wed, 02/11/2015 - 21:40 | 5774070 lasvegaspersona
lasvegaspersona's picture

We have a winner here!!!

All paper wealth will burn. Whether it is by jubilee (very doubtful) or by hyperinflation (almost certain) promises made that cannot be kept won't be kept. The only real wealth will be physical things in your possession and shares of corporations (if they retain any value).

Skills will be handy as well as a plan to survive long enough for survivors to reassemble society....if they can.

Wed, 02/11/2015 - 21:44 | 5774087 tarabel
tarabel's picture

 

I was not impressed with the first two parts of this series, but I did find food for thought in this concise explanation of debt structures in both an historical and current time frame. Makes one think about how to put things back together again once they fall apart. So, thanks for an interesting perspective.

Wed, 02/11/2015 - 21:57 | 5774123 lasvegaspersona
lasvegaspersona's picture

The author seems to assume that currency would no longer work. That is a fallicy. Current could still be used as a medium of exchange. The store of value function is what would be dead.

Even in the worst hyperinflations currency is used right up to the end. Even then a new imporved currency is trotted out and works for a while. If it were clear that gold is the new SoV then folks would be more likely to use a weak currency. For international trade gold assurances would need to be established but the exchange could still be done by wire if the seller knew he was going to get i) a currency stable enough to be used for an immediate purchase or ii) gold.

Wed, 02/11/2015 - 23:48 | 5774157 Threeggg
Threeggg's picture

The author has a decent handle on what he/she has researched but, She doesn't mention domestic inflation. Domestic Inflation is the real driver of the economy. It has to be exported by any currency printing entity to control the currency's value at home. Printing at will, with no checks and balances is in direct conflict with jobs. The working economy must be slowed to coincide with outright printing/leveraging. Otherwise the combination of the two at the same time would overrun the dollar through hyper inflation, too quickly to control. Not to mention out of control prices and wage inflation.

She read to many written books that don't reflect the real economy and how it works, when printing at will and without permission is at the forefront of monetary policy.

She needs to address this and she will see more clearly. Oil has suppressed more technology than any other element/sarc on earth. Why? because they are using it as the basis for all currencies (petrodollar). Everyone must keep using it, to support the worlds currency that is based on the petrodollar and the Worlds Reserve Currency. (dollar)

So, they suppress the clean energy tech and they now want to tax it, through a carbon tax and it's the basis of the currencies?. It's called double dipping taxation.

So lets prove the above hypotheses. Let's look at what domestic inflation is and see how it is created, exported and directed.

Good inflation: 

Let's take a shale oil worker that has a good job. Oil prices are high so, the expansion of the domestic oil fracking and shale sector are responsible for 70% of the jobs created in this country since 2010. 70% of the jobs.

So, that oil worker gets a paycheck and goes to the bank to save some money for his future. He goes to Bob banker and deposits his dollar for his future use. He gets home and say's yeh, I saved a dollar wooho. Bob banker goes back into his office and say's yeh, that oil worker deposited a dollar, that means I can loan out $9 new dollars to jack , jerry and mary (anyone) that, I can create on a keyboard.

So that's domestic inflation created by an oil worker with a good paying job. That inflation is good Savings, production and investment in our own economy and it helps that economy expand. With the laws and rules being followed.

Bad inflation: 

Enter stage left: Printing without permission and at will. This type of inflation creation does not require any production, savings or investment. Leverage is a form of inflation too. I would put it in the same category as printing at will because, the money promised through these derivatives has not even been printed yet, to pay the insurance/promise.

 

There are two distinct differences with the two above mentioned inflation models.

Number 1, The good inflation is not controllable, non-steerable and cannot be directed too any specific duty or sector of the economy. Anyone can buy anything increasing its demand and intern it's price. That demand intern raises wages.

 

Number 2, Printing at will is bad inflation. This inflation is steerable, is directable and can be deployed with pinpoint accuracy, in milliseconds. Created on a keyboard and sent to anywhere in the world to support the very system that created it, so it doesn't fail.

Why do you think 72% of households receive some kind of public assistance? They receive electronic credits or direct deposits electronically. This is the number 2 type inflation that is referenced above. If you really give it some hard thought, people that had a job and created good inflation are now turned into inflation eaters, controlled by the use of those electronic credits. They create no inflation, they in fact consume it,  through those electronic credits. (if you need proof just reference the $1.5T deficits and rising) They are able to control prices, inflation and wages by steering this money as handouts. This stuff is all on purpose, for the benifit of the dollar while they print it to infinity.

From 1973 to 2009 we exported domestic inflation through Petrodollar/Reserve dominance. We collected that domestic inflation at the pump and exported it too foreign countries for their oil. This was one way to export domestic inflation and control prices and wages. There are many other ways but, this one is the main one because, almost everyone uses gas/fuel. Other forms of Domestic inflation exportation is through grants, debt forgiveness, foreign projects that we taxpayers fund, the military that is set up in every country and on and on.

With fracking and shale domestic production, we have almost reached energy independence in 7 short years. But, what happened to that channel previously used to collect the money at the pump and send it overseas for their oil? This channel has been closed and is pressuring inflation at home. If you have domestic oil production all that money stays here skewing prices and wages. It's still collected at the pump but it does not get exported. That channel will now be reopened with the destruction of our domestic oil production.

This stuff should have been included in one his/her 3 articles associated with this one. This is what is really happening. It is an unwritten chapter in currency wars.

Any questions ?

 

 

 

 

 

Thu, 02/12/2015 - 00:10 | 5774492 usednabused
usednabused's picture

Yeah I have a question. If the oil worker making good wages is a good thing, why was it such a bad idea to pay food industry workers a living wage? I never heard such wailing and howling from rich fucks when they wanted a raise, and they sure as hell didn't get it either, did they? Not disagreeing with your premise, just wondering.

Wed, 02/11/2015 - 22:23 | 5774185 Schwarzschild
Schwarzschild's picture

Deleted duplicate.

Wed, 02/11/2015 - 22:21 | 5774186 Schwarzschild
Schwarzschild's picture

Gail makes some interesting points and gets some of it right but, like monetary cranks such as the Greenbackers, she makes some fundamental errors that lead her astray.

For example, a $10 bill is not a "promise" or a "debt."  

A "promise" is a commitment to take some definite action in the future, and necessarily involves a counterparty.

When you hold a $10 bill, no one has promised you that you will be able to exchange it for any definite thing in the future.  You merely hold it with the expectation that you will be able to do so.  In other words, you bear the risk associated with your expectation.  You have no moral or legal right to force a counterparty to perform to your expectations regarding your ability to exchange the bill for something you prefer more in the future.   

Thu, 02/12/2015 - 15:51 | 5777239 Matt
Matt's picture

You can expect the government to accept the $10 bill in payment of taxes. Due to legal tender laws, you can also expect that the $10 bill must be accepted in payment towards any debt.

Thu, 02/12/2015 - 18:05 | 5777890 Schwarzschild
Schwarzschild's picture

I concede the point, and considered mentioning it in my post.  However, I decided to omit it for berevity.

I  agree that you could have a reasonable expectation that you could forestall a violent government assault by tendering the bill to them for taxes, and that this is where fiat money gets its "value." 

My comments should have been preceded with the phrase, "Absent threats of government violence..."

 

Wed, 02/11/2015 - 22:53 | 5774275 directaction
directaction's picture

Gail, you have absolutely positively nailed it with this essay. Nicely done, the way you explain how peak oil meets unsustainable debt resulting in a very unhappy ending.  

Wed, 02/11/2015 - 22:54 | 5774280 Bunga Bunga
Bunga Bunga's picture

Let's cancel all deposits, I am in coins.

Wed, 02/11/2015 - 23:42 | 5774414 ThroxxOfVron
ThroxxOfVron's picture

"Our wages are close to flatmedian wages have been falling in the US.  "

" Workers producing whatever goods and services are actually being produced will likely need to be paid first."

You are too fucking stupid to see what is right in front of you!

The productive members of society should have been getting paid first and paid best all along.

Meritocracy.  Hard work.  Productivity.  These are the things that are no longer rewarded and should have been rewarded all along..

Not the hierarchies of paper pushers, not the politicians and bureaucrats, not the security and surveilance aparatuses, not the lawyers and hustlers...

What kind of society did you imagine would be the result of shitting on the most productive and diligent members of society for 30 or 40 years until no one knew any better or gave a fuck?

Thu, 02/12/2015 - 00:13 | 5774501 usednabused
usednabused's picture

Amen, that sums it up Throxx

Thu, 02/12/2015 - 00:15 | 5774505 Billy Shears
Billy Shears's picture

Debts benefits? It's an ill wind that doesn't blow someone some good, I suppose. While debt backed by lawful money (commodity based?) is certainly an option a debt backed fiat system's shortcomings are all to obvious at this point; what we have is a debt doomsday machine, one that cannot be reverse engineered without destroying the world. Oh, joy!

s/

Thu, 02/12/2015 - 00:44 | 5774550 DaveyJones
DaveyJones's picture

She makes a lot of valid points.

The bottom line is that energy (work) is the "thing" standing behind everything

the "modern" world (read last 150 years) has been exponentially different than any other. Just look at population

That is because this energy source was unlike anything ever before

transferring millions of years of stored physical (solar) energy into a small spec of history

problem is that party is slowing down, rapidly

the larger problem is now debt because, just like everything else on earth,

we built an "economic structure" based on the fanatasy that this spec of time party... would last forever.

so debt will kill us first

and none of these toys, or games, or new math, corrupt politicians, or fancy bankers can change physical reality

and we will soon leave the world of stored solar energy

and return to the world of current 

and unfortunately

we will kill a lot of ourselves in the process

 

Thu, 02/12/2015 - 00:58 | 5774583 christiangustafson
christiangustafson's picture

Travis Bickle: Loneliness has followed me my whole life. Everywhere. In bars, in cars, sidewalks, stores, everywhere. There's no escape. I'm God's lonely man... June 8th. My life has taken another turn again. The days can go on with regularity over and over, one day indistinguishable from the next. A long continuous chain. Then suddenly, there is a change.

Thu, 02/12/2015 - 03:43 | 5774788 Ms No
Ms No's picture

Some species of aphids will breed at exponential rates until they exaust their food supply and then every last one will die.  Maybe people should have learned from the aphid.  

The problem behind the problem is population and people continuing to breed like roaches despite approaching peak everything.  Stop making minnie mes. 

Debt like any instrument is neither inherently evil or inherently good, depends on the context.  If banks loaned out 50 cents on the dollar BFD, businesses can get going and there is still a profit, no insane amount of risk.  What's killed us is fraud, corruption and treason. 

Thu, 02/12/2015 - 12:34 | 5776045 MEAN BUSINESS
MEAN BUSINESS's picture

 

Instead of perpetuating the Neolithic model of "lies backed by violence", we could have a transitional phase of "truth backed by violence". Good luck trying to have a rational public debate about that. The truth is the world today has all the children it can handle.

Sound mean?

Ever seen the movie "Children Of Men"?

 

Thu, 02/12/2015 - 05:04 | 5774863 honestann
honestann's picture

 

Many people ask why we can’t just cancel all debt, and start over again. To do so would probably mean canceling all bank accounts as well. Most of our current jobs would probably disappear. We would probably be without grid electricity and without oil for cars. It would be very difficult to start over from such a situation. We would truly have to start over from scratch. Those holding paper wealth can’t count on getting very much.

Scare tactics and nonesense!  Every debt has a creditor and debtor.  To cancel debts (go bankrupt) is resolved between each creditor-debtor pair.  To pretend that, "Oh, presto-chango magico just because I want to scare people in my article" does not create a magic connection between accounts owned by people who are not creditors or debtors.

Furthermore, any attempt to do so (which the banksters, congress and administration has done in the USSA) is nothing more than pure theft... not something "inherent" or "necessary" or "acceptable" (except to banksters who believe all money and all property on the planet earth belongs to them due to their somehow super-religious status as banksters AKA "supreme beings").

Most people would be much better off "starting over".  And banksters?  Well, the very best of them deserve to start with nothing and start performing productive work, while the rest of them deserve worse than being tortured to death for massive crimes against humanity (not to mention endless real human individuals).

Let the creditor-predators and foolish-sucker-debtor-prey both reset to zero... and finally give everyone else with savings their chance to buy at reasonable if not discount prices for a change.  For they have had to bid against endless hundreds of millions who actively bid up prices to absurd levels by not caring whether they can afford goods and goodies, but only whether some corrupt banksters will give them a loan or credit card.

NUKE THE SYSTEM.

And that means the creditors and debtors alike.

-----

As most people here in ZH know, this kind of disaster cannot possibly happen if money is just a synonym for physical gold coins [and bars, etc].  In such a case, the supply of loans is plenty sufficient, but also quite finite... limited by those individuals who are willing to take the risk of loaning their gold to borrowers and possibly not getting their gold/money back.  Which means, many will not loan out their gold, many will only lend to super-safe entities, and a few will take greater risks with some modest portion of their wealth.  And that is the only quantity of debt that should exist.  And the risks are entirely on creditors and debtors, period.

The only way the current disaster could develop is... with fiat, fake, fraud, fiction, fantasy, fractional-reserve toilet-paper and computer-bits.

-----

Even more nonsensical scare-tactics is to pretend that electric-grids and other essential services would need to be shut down.  That's absurd.  Everyone who goes to work and produces something will be paid with something of value, which they can trade for electricity and other necessities.  The ONLY spending that would not take place is... that spending supported by utterly bogus fiat, fake, fraud, fiction, fantasy, fractional-reserve debt-outta-thin-air corruption.

 

Thu, 02/12/2015 - 07:29 | 5774953 commoncourtesy
commoncourtesy's picture

Exactly honestann.

If 99% of people have very little wealth and/or are in debt, what do they have to lose if the system goes pop?

The 1% of people have the most to lose and are worried their comfortable, secure, luxurious, controlling world will be torn apart. Who will polish their cars? grow their food? mine their gold and diamonds for their latest phone? build their yachts? repair their mansions? build their cars? construct their helipads? drive their cars? grow their wine? empty their swimming pools? clean their homes? alter their stuck-up noses? wage their wars? nurse their ego's? wipe their butts? Protect their sorry excuse for human beings? obey their every commands and generally suck up to ungrateful, decrepit, lying, controlling, paedophiles and morons that are really the dregs of society?

The vast majority deserve to be stripped of their wealth. The so-called elite need to earn a moral compass and respect.

Whatever happened to compassion and empathy for their fellow man? When did it become all about me, me, me, just me and only me, 'you be grateful for me'. The elite buy justice like they buy the world. It is time there was one rule and one justice for all. It is also time to return control of natural resources, Banksters have stolen, back to Nations and prosecute the thieves.

The article mentions using debt to pay taxes. Most Corporations use debt to get OUT of paying taxes. It is time to put an end to confusing tax rules purposely draughted to obfuscate the system. A much simpler, fairer tax regime, understood (and paid) by everyone should be sought. Overwhelmingly the elite use dummy equity companies and even charities as a way of hiding money and setting up trusts for themselves, thus avoiding tax.

Wall Street, The City of of London et al are dens on iniquity where the lazy and very wealthy gamble their ill-gotten 'corporate non-human' gains on the casino of 'real human life' around the world.

The use of 'Leverage' and 'Fractional Reserve' is not discussed in the article, but both procure debt and their use should be outlawed at the same time as dishonest politicians.

The world economy is falling apart because the selfish elite are trying to protect their OWN privileged status.  No wonder they are afraid!    

Thu, 02/12/2015 - 07:20 | 5774944 Schwarzschild
Schwarzschild's picture

Other problems with Gail's Analysis

-----------------------------------

 

I have already pointed out the first fundamental flaw in Gail's theory.  She confuses "money" with a debt or promise.  From the perspective of the holder of money, this is not true (irrespective of whether it is fiat or specie).  The holder of money merely has the expectation that he can exchange it for something of value in the future, and he bears the entire risk that his expectation is correct.  There is no counterparty which is morally or legally obligated to deliver a definite good or service for the money in the future.

---

The second error is in her conception of markets and price formation.  This is apparent in the example of the temple market in which a centrally planned price structure is imposed on market participants, and reference to a commodity money (bushels of wheat) is used as an accounting convention (unit of account) to settle trades among the participants (without any bushels of wheat actually changing hands).

The most basic error in this example is that it begs the question, how does the central authority know what prices to set for the array of goods being sold in the contrived market?  Obviously, the CA can only know that by reference to actual voluntary exchanges which have occured in the past involving actual bushels of wheat.  

While this scheme might work for a limited number of goods being exchanged over a limited period of time, the market will become increasingly inefficient as time moves forward and supply and demand evolves because it provides no mechanism for price evolution.  Further, even from the outset, the marginal seller and the marginal buyer are artificially excluded from the market by the price fixing scheme.

In other words, this type of market suffers from the socialist calculation problem. 

Thu, 02/12/2015 - 16:08 | 5777311 Matt
Matt's picture

This market is an example from Sumer, ~6000 years ago, when taxes and debt and accounting were first invented. It is not a model for us to use today, but it describes the origins of the concepts we still use. The bushels of wheat were taxes owned to the government at the end of the year, so since the government had a monopoly on violence and a monopoly on alcohol, they could set prices as they saw fit.  Workers would go into debt drinking booze at the pub year round, then settle the debts at harvest time. They could forgive debts with jubilees whenever the system became unstable, since the debts were owed to the ruler himself. 

Thu, 02/12/2015 - 17:59 | 5777868 Schwarzschild
Schwarzschild's picture

I would need a lot more information to consider these claims to be credible (or meaningful, as interpreted by Graeber).  While Graeber provides some interesting anthropoligical observations, his economic interpretations of the information are strongly biased towards a neo-greenbacker type perspective which appears to be ahistorical and functionally impossible in several important respects.

 

Thu, 02/12/2015 - 07:35 | 5774959 Firewood
Firewood's picture

Nobody Understands Debt -- Including Paul Krugman and Gail what's her name

 If you don't got it...don't spend it. Very simple. And if you "believe" in fiat be prepared to get screwed.

http://www.forbes.com/sites/stevekeen/2015/02/10/nobody-understands-debt...

 

http://www.debunkingeconomics.com/

 

Thu, 02/12/2015 - 07:45 | 5774981 Schwarzschild
Schwarzschild's picture

Analytic problems continued

----------------------------

I have already pointed out two fundamental flaws in Gail's analysis.  (1) Her theory of money as a debt or promise and, (2) her error in conceiving of markets and price formation.

A third problem arises in her analysis of a "gift economy." While this terminology has become popular in certain circles, it is misleading.  A true "gift" is actually something that is given with no particular expectation of reciprocity.  What she is actually referring to is an "informal" economy in which debts/promises are loosely accounted for by social convention.  For example, if I and other members of the community come over and help you build a barn, we will have an expectation that you will reciprocate according to our social convention, and if you repeatedly fail to do so, you will likely be excluded from the community or shunned.  Even in the modern world, we see many examples of this.  For example, I might be willing to loan my lawnmower to one neighbor, but not the other, because the first always returns it in good condition and reciprocates when I need to borrow something, whereas the other does not.

 

Thu, 02/12/2015 - 16:17 | 5777359 Matt
Matt's picture

While the terminology of "gift" is problematic, the core concept is a society where people contribute as they are able, rather than a money system where a person must contribute X% return on debt. I think this falls under the catagory of "things that work really great in small groups". I believe that any system can work with a population of up to 100 people, provided they are sufficiently competant and there is sufficient social cohesion. I do not think a gift economy (or whatever word you want to substitute to be more accurate than 'gift') can scale to thousands or millions of people.

Thu, 02/12/2015 - 17:52 | 5777836 Schwarzschild
Schwarzschild's picture

I agree. Beyond a certain scale (possibly as high as 3,000 people on the upper end), the predominant way to effect widespread cooperation is through market exchange. In order for so-called "gift economies" to work, the participants must have direct personal knowledge of each other over a long period of time.

 

 

Thu, 02/12/2015 - 08:15 | 5775059 Schwarzschild
Schwarzschild's picture

The Fourth Problem

--------------------

I have already pointed out three fundamental flaws in this analysis.

The fourth flaw is her very casual ipse dixit that "...there would be a need for one or more leaders, as well as some way of financially supporting those leaders. Thus, there would need to be some sort of taxation."

Of course, this is a huge issue which goes well beyond the realm of economics and into the realm of politics (adjudicating the sanctioned use of violence in society).  This error is common and pervasive, and it deserves a much more in depth analysis than has been provided by the author.

Now, breaking the statement down, what it actually asserts is that "someone would need to provide leadership services and, unlike all other market participants, the provider of these services is authorized to use violence (or threats of violence aka extortion) rather than voluntary exchange to extract payment for those services, whether the services are desired by other market participants, or not."

 That is a debate which goes well beyond the scope of this article.  However, in the most fundamental sense, this is an argument that politically equal individuals can be compelled to pay for positive externalities irrespective of whether or not they have actually requested/bargained for those externalities.

This is an extremely dangerous notion which virtually guarantees that the "boom/bust cycle of empires" will continue indefinitely into the future as a result of the moral hazard arising from authorizing the monopoly on violence (aka the state) to coercively extract payment for its services (and to determine what services it will render).  Under this paradigm, it is virtually certain that any given state will inevitably metastasize into a huge rent seeking aparatus over time, and will eventually collapse under the weight of its own cupidity/bureacracy.  

Thu, 02/12/2015 - 16:13 | 5777331 Matt
Matt's picture

"This is an extremely dangerous notion which virtually guarantees that the "boom/bust cycle of empires" will continue indefinitely into the future as a result of the moral hazard arising from authorizing the monopoly on violence (aka the state) to coercively extract payment for its services (and to determine what services it will render).  "

The problem is, this is a near-universal notion that independantly arises in many places at many times. How could a society that is not totally isolated from the outside world, avoid this notion taking hold? 

Thu, 02/12/2015 - 17:49 | 5777817 Schwarzschild
Schwarzschild's picture

Actually, the idea is not at all pervasive in "human scale" societies such as tribes, hamlets, and villiages (on the scale of Dunbar's number or the average size of a stone age tribe).  To the extent that such societies have formal governments at all, their services are typically rendered by volunteers, and their activities supported by modest contributions.

The "social compact" theory of government, while philosophically interesting, is historically false.  In reality, proto-states historically emerge through conquest of one people by another.  The conquerors then demand tribute from the conquered population.  That is the genesis of coercive taxation.

 

Thu, 02/12/2015 - 18:31 | 5778049 Matt
Matt's picture

Every pride is ruled by a lion. Is he not using his superior strength to coerce the other members of the pride to provide for him? 

It seems the only way humans could avoid government would be to maintain low enough populaton density - but would it not require monopolized violence to force population control, to avoid coercion from monopoly on force? 

Thu, 02/12/2015 - 20:23 | 5778458 Schwarzschild
Schwarzschild's picture

The analogy to lower animals is instructive in some respects, but flawed in others. For example, lower animals do not wear pants or talk on iPhones. The fact that people do is largely an artifact of wide scale social cooperation which, in turn, is an artifact of the human ability to (somtimes) suppress more basic instincts in the service of wider cooperation. In other words, for humans, social evolution has outstripped biological evolution.

It is not clear that population "density" is the problem so much as the atomization of individuals within society. Human social cooperation still depends very significantly on traditional emotional bonds, such as to family, extended family, and well known friends and acquaintences, and strong identity groups. This permits the natural operation of human empathy. When human empathy is disrupted through atomization, human behavior appears to become more schizophrenic and/or sociopathic.

Unfortunately, from the perspective of the ruling class, atomization is preferable because it makes the individuals within society easier to isolate and control. So, the monopoly on violence tends to promote this outcome over time using a variety of methods.

Thu, 02/12/2015 - 08:59 | 5775160 Schwarzschild
Schwarzschild's picture

The Fifth Problem
-----------------

I have already covered several fundamental problems with this analysis. The fifth problem becomes apparent in the section on "the benefits of debt."

Gail reaches several erroneous conclusions in this section because she has not given adequate consideration to the nature of savings and capital in relation to debt.

In a barter economy, it is self evidently true that production must precede the act of savings and capital formation; and that debt can only arise after these activities. In other words, it is not possible save anything until you have produced something.

Consider the simple Crusoe example of the proverbial man on the desert island who survives by catching fish with his hands. In order to "save" any fish for the future, he must necessarily defer consumption of them in the present. So, maybe he tries to save one fish a day by drying it, so that he will have it in reserve for the proverbial "rainy day" in the future.

Similarly, if the fellow wants to make his fishing more efficient, he must necessarily devote some of his time and effort in the present to constructing capital goods (a spear, fishing net, etc.) so that he has the prospect of catching more fish in the future.

If he is existing at a bare subsistence level, neither savings nor capital formation is possible. He is forced by his circumstances to consume everything he produces. But if he can accumulate just a little savings each day, he will then have a reserve to see him through a bad day, or to consume while he is devoting his time to capital formation rather than fishing.

Obviously, if another fellow washed up on shore, no debt arrangement would be possible if savings or capital formation had not already occurred. There is no way that the first fellow could loan the second fellow a fish to eat, unless he had a surplus of fish in the first place.

The larger point of this story is that true savings (deferring consumption in the present to accumulate a surples of goods for consumption in the future) must necessarily precede any debt arrangement. And when credit is extended, the party extending the credit is necessarily deprived of the opportunity to consume the accumulated savings until such time that the debt is repaid. The privilege of consuming the savings in the present now belongs to the debtor.

Thu, 02/12/2015 - 16:22 | 5777385 Matt
Matt's picture

"And when credit is extended, the party extending the credit is necessarily deprived of the opportunity to consume the accumulated savings until such time that the debt is repaid. The privilege of consuming the savings in the present now belongs to the debtor."

While this is true with peer-to-peer lending, with bank lending, the original depositor and the new borrower at the bank can both consume with the same money independantly. Fractional Reserve banking seems like a really bad idea, the more I understand it, since it requires growth to avoid collapse. 

Thu, 02/12/2015 - 17:42 | 5777776 Schwarzschild
Schwarzschild's picture

It is a bad idea on multiple fronts.  Most notably, the fact that it fraudulently creates conflicting claims to the same asset.  This is equivilant to a grain warehouse issuuing more receipts for grain than it has grain in the warehouse.  In all depository or warehousing businesses except banking, it has been declared fraudulent and illegal.

 

Thu, 02/12/2015 - 18:27 | 5778024 Matt
Matt's picture

With legal tender, if it is declared so upfront, the grain reciept would be a debt, and thus could be settled with dollars, even if both parties want the grain.

Thu, 02/12/2015 - 20:40 | 5778525 Schwarzschild
Schwarzschild's picture

Hypothetically, you are correct, due to the freedom of contract. For example, fractional reserve banking would still be possible, so long as all terms of the bargain are disclosed in the contract, and the "depositor" realizes he may not have the use of his deposited funds in a time of crisis, or even get them back at all. In reality, however, few people would choose to enter into such an arrangement unless they were coerced by the state (via legal tender laws, etc.) such that they had no other practical choice.

Thu, 02/12/2015 - 10:23 | 5775513 Schwarzschild
Schwarzschild's picture

The Real "benefits of debt."

---------------------------

See my previous comments for background up to this point.

Contra Gail's assertions, the real benifits of debt are fairly simple.

From the perspective of the debtor, debt permits consumption of someone elses savings in the present, in return for a promise to repay them in the future (usually at interest).

From the perspective of the creditor, extending credit allows the creditor to "invest" his savings in order to generate a speculative (uncertain) return.  Presumably, on a risk adjusted basis, the creditor believes he can generate a higher return by investing his savings this way, than in any other way that is available to him.

NOTE:  Within this context, "invest" means to place savings "at risk" in order to generate a speculative return.

The implications of these simple facts are far-reaching.

However, before I get into that, I suppose I should draw a distinction between "transactional credit" and "significant credit."  There is no hard and fast rule for where to draw this line.  It will depend on the circumstances of the debtor and the creditor.  However, "transactional credit" is undertaken mainly for the convenience of the parties and neither party places a substantial amount of savings at risk (relative to their overall savings, earning capacity and reputation) in this kind of credit.  An example would be the laboror who is willing to invest a week's worth of his labor before getting paid, but not a year's worth.  Or the store that is willing to sell you a pack of cigarettes on credit until payday, but is not willing to sell you $500 worth of groceries on the same terms.  "Significant Credit" involves the transfer of a relatively large amount of savings from the creditor to the debtor, often for an extended period of time.

In any event, the upshot of all this is that debt/credit coordinates "time preference."  Which is to say that the debtor has a preference for consuming someone elses savings now in exchange for his promise to pay more in the future, and the creditor prefers to defer consumption in the present and place his savings at risk in a credit transaction in order to receive more in the future.  The risk-adjusted rate of interest is the measure of the "price" of this time preference.

Now that we see the benefits to the creditor and debtor, we can examine the larger social benefits of credit.  However, we have to be careful in this department, because there is really very few things which can be said to "benefit society as a whole."  Specific parties are always involved in specific transactions, and there are always specific beneficiaries in these transactions.  However, there is enough truth to the statement "a rising tide lifts all boats" to generalize in some sense about social benefits, so long as we remember the limitations to this line of reasoning.

Theoretically, a "social benefit" occurs when when the supply of goods and services increases relative to the amount of effort required to produce them.  This is what we term "economic growth" and implies that, on average, market participants will be able to command more goods and services for their efforts, and that their standard of living will increase.

With that idea in mind, it becomes obvious that a "credit transaction" can be said to "benefit society" when it increases the production of goods and services in the "economy" relative to the effort expended, and an "optimal credit transaction" is that transaction which increases production the most relative to all of the other ways in which the savings could have been otherwise invested.  The quintessential example of this type of transaction would be when the farmer borrows some seeds (or money to buy seeds), plants them, and yields a bountiful crop which greatly exceeds the original value of the seeds he borrowed.  A credit transaction which has this result not only increases standard of living, but also the potential for additional savings and investment in the future.

The flip side of that is a credit transaction which can be said to "harm society."  Such a transaction would fall into this category if it decreases the overall amount of real savings or accumulated capital in a society, thereby lowering the future capacity of the society to produce goods and services with less effort, and thereby leading to a lower standard of living in the future.  An example of such a transaction would be a farmer who borrowed money to buy seeds, but instead of planting them, simply ate them.  Now, he has no way to repay his debt, and the overall level of savings in the economy has decreased, thereby lowering the future productive potential of the society relative to what it would have been if the credit transaction had not taken place.

 

 

 

 

Thu, 02/12/2015 - 16:30 | 5777423 Matt
Matt's picture

"An example of such a transaction would be a farmer who borrowed money to buy seeds, but instead of planting them, simply ate them.  Now, he has no way to repay his debt, and the overall level of savings in the economy has decreased"

You lend me $100. I pay a merchant $100 for seeds. I eat them. The merchant now has the $100. The total savings remains the same. 

Thu, 02/12/2015 - 17:38 | 5777739 Schwarzschild
Schwarzschild's picture

Interesting observation.

The fact that you can see that the amount of savings has diminished in the first example, but cannot see that it has diminished when the transaction is intermediated by money, might call into question your definition of "savings."

I have characterized "true savings" as a valid claim on, or actual possession of, a tangible good which has already been produced. This would, obviously, differ from the textbook definition, and certainly would differ from what most people would consider to be savings in the modern era (such as a piece of paper with no specific promise of redemption, or a similar electronic ledger balance).

To avoid a semantic quibble, I imagine that we could agree that the aggregate amount of wealth in society has now decreased by one handful of seeds. I would tend to characterize the seeds as a form of "savings" held by the merchant, whereas you might prefer to use some other term (such as an "inventory asset"). However, the language used to describe the situation does not change the objective reality that the seeds have ceased to exist.

Interestingly enough, in an inflationary fiat money economy, if you had merely burned the $100, then the amount of savings/wealth in society would not have changed at all. The only thing that would have changed is that your ability to command goods and services would have marginally decreased, and the ability of all other holders of the fiat currency to do so would have marginally increased.

Thu, 02/12/2015 - 18:26 | 5778013 Matt
Matt's picture

Part of the issue here is there are consumables, such as seeds or gasoline, and durables, like a hammer or automobile. Even if the farmer had planted the seeds, bad weather could have destroyed the crop. Either way, the lender is taking a risk, and the borrower is taking a risk.

Normally, when there is a loan, both parties enter in good faith with the intention that the borrower will repay. If the borrower has no intention of keeping his end of the bargain, it is fraud. Is there any equivelent if the lender has no reasonable expectation that the borrower will be able to repay? Not that both parties are in bad faith, but that due to information asymmetry, the lender has knowledge the borrower does not, that it is likely the crop will fail next year?

Thu, 02/12/2015 - 19:48 | 5778354 Schwarzschild
Schwarzschild's picture

While it might be useful to contemplate the difference between "consumables" and "durables" for certain purposes, I don't find it to be particularly useful in this debate. Ultimately, all goods are "consumables," although the lifetime of some might be more than others. After a few years, a car will be "consumed." A hammer will normally take longer, but it will eventually break or rust away.

In this context, a more important distinction is the difference between a capital good (the hammer) and a consumer good (the food).

All production is ultimately directed towards the goal of consumption. That is its purpose.

To the extent that we divert the primal factors of production to producing capital goods, we are doing so in anticipation of increasing the production of consumer goods.

As to your point that the future is uncertain, and that both the borrower and debtor are "taking a risk," I agree with you.

Whether a fraud has occured or not depends entirely on the terms of the contract. If facts have been materially misrepresented in the contract by one or both parties, then a fraud has occured.

In general, a lender would not be motivated to withold information from a borrower which would cause the borrower to default on his loan, because the lender would lose his investment. However, under freedom of contract, it is conceivable that a lender would be hoping that a borrower would default if the collateral posted for the loan was worth very much more than the funds advanced. However, hoping (or even predicting) does not constitute a fraud. Of course, materially contributing to the failure of the enterprise (by poisoning the soil or something) would constitute fraud on behalf of the lender. A wise borrower would generally insist that any surplus resulting from the liquidation of collateral, above and beyond satisfaction of the debt, be returned to him; and this provision is often incorporated into debt contracts either explicitly, or as a matter of prevailing law. This eliminates the incentive of the lender to cause the failure of the borrower.

Thu, 02/12/2015 - 16:32 | 5777426 Matt
Matt's picture

duplicate from website glitch.

Thu, 02/12/2015 - 12:54 | 5776159 Schwarzschild
Schwarzschild's picture

The "Real Problem with Debt"

---------------------------------

See my previous comments for background.

Finally, and in closing, the real problems with debt are actually as follows:

First and foremost, the real problem with debt is that there is very little "real debt" because, in the modern illusory economy, there is very little "real savings" in the first place.  And, as previously noted, real savings must come before real debt, otherwise, there is no surplus to loan in the first place.

This is easy enough to see in a barter economy.  Bob cannot loan Mike his hammer unless he already has a hammer. And, during the duration of the loan, Mike rather than Bob has the use of the hammer.

The modern economy is built on a set of carefully crafted lies and deceptions to create the illusion of the existence of real savings, when none actually exist (or, if they do, they are not what they appear to be, and do not belong to the people they appear to belong to).

Consider, for example, the typical depositor in a fractional reserve bank.  He might believe he has $10,000 in savings.  His statement might tell him that.  He is guaranteed that he can withdraw it at any time.  So, he really thinks he has this "savings."  Of course, it is impossible that he has these savings if they have been loaned to someone else who has spent them on a house or a new car, or simply deposited them in their own account.  There cannot be two people with conflicting claims to the same $10,000 who both believe that they are free to use the "savings" at their command.  It is a physical impossibility.  Therefore, somebody is lying.  If the savings really had been loaned out, then the original account holder would be holding an IOU rather than a $10,000 balance, and this is much closer to the truth of his actual situation. 

A full recounting of the state sponsored frauds known as central banking and fractional reserve banking is beyond the scope of this article.  However, I imagine most zerohedge readers are familiar enough with them already. 

Suffice it to say that, like grain in the granary, "real savings" consists of a valid claim on a quantity of tangible goods already produced, such as bushels of wheat, or ounces of gold, or barrels of oil.  That is, it consists of a claim on, or actual possession of, a good which exists in the present, and which can be used in the present, either through direct consumption, or through barter for a different good.

In contrast, most people who are in possession of any savings at all are in possession of false savings, which is to say that they are a claim on nothing definite at all.  Instead, they actually have a pseudo-claim on a speculative loan or investment which is dependent upon the creation of goods and services in the future.

In this way, people are deceived about their true level of savings.  It is as if the farmer found out that warehouse in which he had deposited his grain is actually empty.  If people appreciated the true state of their savings (nonexistent) then they would likely take rational steps to increase their level of real savings before undertaking more speculative investments to generate a return.   

The conflation of speculative investments with true savings has led to a situation in which society as a whole is much more fragile than it realizes, because it has no tangible reserves to weather difficult times, and because of the vast misallocation of capital which results from these distorted perceptions. 

Thu, 02/12/2015 - 16:41 | 5777464 Matt
Matt's picture

Fractional Reserve Banking is likely the true cause of inflation (or deflation, in the case of defaults or more debts being paid down than new debts being created) as well as the cause of the business cycles. This is why, as more total debt is outstanding, the purchasing power of the currency is less, because more people are spending those same dollars. At least, that's my current view on it.

Thu, 02/12/2015 - 17:08 | 5777569 Schwarzschild
Schwarzschild's picture

There is truth in what you say.  Fractional reserve banking is inherently unstable.  Empirically, it can pump up the money supply about 8X before hitting a wall.  It was the main cause of banking "panics" in 19th century America.  Fortunately, these panics were relatively localized/regionalized and short lived.  Fractional reserve banking, when combined with central banking and inflationary fiat base money, is like fractional reserve banking on steroids.  Such a system has the theoretical capacity to inflate the money supply infinitely, and to paper over problems until they become so large that they pose a systemic risk to the entire society and entire world.  Given a choice between more frequent but less spectacular crashes, and the sort of less frequent but more systemic crises of the central banking era (eg: the great depression and the more recent financial collapse), I would tend to prefer the former.  Of course, if you dispense with inflationary fiat money, central banking, and fractional reserve banking, you can almost completely eliminate the false financially induced boom-bust cycle that has become prevelant in the last 2 or 3 centuries.

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