by CrudeAwakening » Wed 07 Jan 2009, 02:23:36
$this->bbcode_second_pass_quote('shortonoil', 'T')hat debt can not now be serviced, so it begins to default. When it defaults, the money goes out of existence.
I see this misconception so frequently - the reasoning goes something like this: money is debt, so when debts disappear through default, so does money. This simply isn't true.
When a debtor defaults on his debt to a bank, the bank loses an asset (it's loan to the debtor), but it's liabilities are unchanged. Money and credit are bank liabilities, and any destruction of money or credit occurs on the liability side of a bank's balance sheet. Debt destruction takes place on the asset side of the bank's balance sheet, and the bank's equity is reduced accordingly. But bank equity is not money. Lower bank equity will lead to reduced credit creation in the future, but defaults don't directly destroy money unless the bank's liabilities are wiped out by collapse of the bank.
"Who knows what the Second Law of Thermodynamics will be like in a hundred years?" - Economist speaking during planning for World Population Conference in early 1970s
-
CrudeAwakening
- Tar Sands
-
- Posts: 834
- Joined: Tue 28 Jun 2005, 03:00:00
-
by ReverseEngineer » Wed 07 Jan 2009, 03:00:29
$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('shortonoil', 'T')hat debt can not now be serviced, so it begins to default. When it defaults, the money goes out of existence.
I see this misconception so frequently - the reasoning goes something like this: money is debt, so when debts disappear through default, so does money. This simply isn't true.
When a debtor defaults on his debt to a bank, the bank loses an asset (it's loan to the debtor), but it's liabilities are unchanged. Money and credit are bank liabilities, and any destruction of money or credit occurs on the liability side of a bank's balance sheet. Debt destruction takes place on the asset side of the bank's balance sheet, and the bank's equity is reduced accordingly. But bank equity is not money. Lower bank equity will lead to reduced credit creation in the future, but defaults don't directly destroy money unless the bank's liabilities are wiped out by collapse of the bank.
You must have missed the last paragraph in ShortonOil's post:
$this->bbcode_second_pass_quote('', 'W')hen the overall leverage in the system hits 1:1, the currency (which represents the money) disappears. We have seen the overall leverage in the system decline by at least a third in the last two years.
The point he is making is that once you hit the 1:1 ratio, the bank disappears. Its Bankrupt. All the Assets and Liabilities disappear off the face of the earth.
As each smaller bank fails, the assets and liabilities are being subsumed onto the larger balance sheet of the Fed. Onto what balance sheet do these get transferred once the Fed fails, eh?
The Fed of course will just keep printing money out of thin air to balance it out, but that is just making the money worthless. The money they are printing can't be sold as debt to anybody anymore really, so you are just borrowing agaisnt yourself in a kiting scheme.
ShortonOil is absolutely correct, once you hit the 1:1 ratio, once no debt can be sold because nobody will buy it, the money just disappears off the face of the earth. The bank goes out of existence.
Back in da days of the Great Depression, a few folks were able to basically steal enough Gold from everyone in the country to back the Federal Reserve Bank, and do a restart after impoverishing basically everyone but themselves. Then in 1971 they went off Gold to a complete fiat system based on an ever increasing mountains of debt. Such a system eventually goes top heavy with debt and so it topples down in cascade fashion.
The Chinese it is rumored are considering buying up simply TONS of Gold to try to back the Yuan as the next Reserve Currency. Same game doesn't work again though, because the resources represented by Gold are depleted too much relative to the total population. There isn't any room for growth, and investment can't pay back interest. As usual, the Chinese are a Day Late and a Yuan Short here, they missed the boat back in the late 17th century when the banking system of the Rothschilds took over the planet.
Its very accurate for ShortonOil to say the money disappears here, because in fact it is in the process of doing so right before our eyes. Its all burning up now in the Greatest Bonfire of Paper Wealth in all of Recorded History.
Reverse Engineer
by ColossalContrarian » Wed 07 Jan 2009, 09:23:50
$this->bbcode_second_pass_quote('Jotapay', '')$this->bbcode_second_pass_quote('ColossalContrarian', '
')AFTER.... all other currencies fall through the floor and meltdown.
The dollar will be the last paper currency standing.
I don't know if I buy that. What exactly are your reasons for this?
From my limited economics knowledge, our currency is much more susceptible to a collapse because 1) we don't make anything which we can sell, and 2) everyone in the world is sitting on a mountainous supply of dollars.
The Germans would much better survive a currency crisis. They are the number one exporters in the world (I believe). They make things people want to buy. Therefore, they have an ability to trade with others and demand for Euros (or the old Marks) is high enough because people want to pay for and buy German goods. Germany's currency will not collapse as long as there is demand for their goods and demand for their currency to pay for those goods.
The reason why third world countries' currencies is so low is because they don't make anything that we want. No one wants to buy their goods so there is no demand for their currency to pay for their country's goods.
We are very similar to a third world country in this regard. We don't export hardly anything any more. The only reason the dollar has any value is because the entire world uses it as their reserve currency and most markets are traded in dollars. And countries loan it back to us so we can buy their stuff. The minute they don't want to use the dollar as the world's reserve currency, possibly because we quit buying their exports with the dollars loaned back to us, we instantaneously turn into a third world country. The value of that mountainous supply of dollars sitting in different piles around the world will plummet. And those countries won't want their savings to become worthless, so they will attempt to sell and buy other things (Yen, Swiss Francs, gold) before the dollar loses all its value. It has the potential to be a real panic selling situation.
My reason for thinking the dollar will remain strong is because I don’t see what better currency nations can use. What other currency is so widely distributed and used throughout the world?
For example, what you said about Germany being the number one exporter in the world. I don’t see being the number one exporter in the world as an advantage when nobody’s buying anything. I see that as a major problem Germany has to address if their economy is to survive.
No country is going to build their way out of this mess so I don’t see manufacturing as a prerequisite to ending this depression or isolating a nation from it. I don’t know what will end the depression btw, I think it just needs to take its course.
by shortonoil » Wed 07 Jan 2009, 14:03:21
CrudeAwakening said:
$this->bbcode_second_pass_quote('', '')$this->bbcode_second_pass_quote('', 's')hortonoil wrote:
That debt can not now be serviced, so it begins to default. When it defaults, the money goes out of existence.
I see this misconception so frequently - the reasoning goes something like this: money is debt, so when debts disappear through default, so does money. This simply isn't true.
When a debtor defaults on his debt to a bank, the bank loses an asset (it's loan to the debtor), but it's liabilities are unchanged. Money and credit are bank liabilities, and any destruction of money or credit occurs on the liability side of a bank's balance sheet. Debt destruction takes place on the asset side of the bank's balance sheet, and the bank's equity is reduced accordingly. But bank equity is not money. Lower bank equity will lead to reduced credit creation in the future, but defaults don't directly destroy money unless the bank's liabilities are wiped out by collapse of the bank.
The original liabilities (dollars) that the bank issued are still being held by someone, somewhere. The destruction of money occurs on the bank's balance sheet. When the borrower defaulted, the loan (asset) which the bank held became worthless, and even reposing the collateral behind the loan, and selling it means that the bank is trading the asset for someone else's liabilities (dollars). If the collateral is not sold, the bank has less "money" to pay its employees, taxes, utility bills, or to loan.
The total liabilities (dollars) held by the bank are the same after the default as they were before the loan was made (assuming the collateral is not sold). The money was destroyed when the default occurred.
Another way to see this destruction of money is to look at the FED Flow of Funds report (H.8 - I think). Last time I looked, the net worth of the US banking system was -$132 billion. The best way to get rid of the paper currency will probably be to stack it up and burn it.
by CrudeAwakening » Thu 08 Jan 2009, 03:25:05
$this->bbcode_second_pass_quote('shortonoil', '[')b]CrudeAwakening said:
$this->bbcode_second_pass_quote('', '')$this->bbcode_second_pass_quote('', 's')hortonoil wrote:
That debt can not now be serviced, so it begins to default. When it defaults, the money goes out of existence.
I see this misconception so frequently - the reasoning goes something like this: money is debt, so when debts disappear through default, so does money. This simply isn't true.
When a debtor defaults on his debt to a bank, the bank loses an asset (it's loan to the debtor), but it's liabilities are unchanged. Money and credit are bank liabilities, and any destruction of money or credit occurs on the liability side of a bank's balance sheet. Debt destruction takes place on the asset side of the bank's balance sheet, and the bank's equity is reduced accordingly. But bank equity is not money. Lower bank equity will lead to reduced credit creation in the future, but defaults don't directly destroy money unless the bank's liabilities are wiped out by collapse of the bank.
The original liabilities (dollars) that the bank issued are still being held by someone, somewhere. The destruction of money occurs on the bank's balance sheet. When the borrower defaulted, the loan (asset) which the bank held became worthless, and even reposing the collateral behind the loan, and selling it means that the bank is trading the asset for someone else's liabilities (dollars). If the collateral is not sold, the bank has less "money" to pay its employees, taxes, utility bills, or to loan.
Money that banks hold in order to pay their bills is not usually considered part of the money supply. Bank reserves are not reduced by bank loan defaults. An important point you raise, though, is what happens when the bank sells its collateral (e.g property) on default of a loan. This
does cause the money supply to drop, by the amount of the sale, as deposit liabilities disappear from the banking system, just as when a loan is repaid.
$this->bbcode_second_pass_quote('', 'T')he total liabilities (dollars) held by the bank are the same after the default as they were before the loan was made (assuming the collateral is not sold).
"Who knows what the Second Law of Thermodynamics will be like in a hundred years?" - Economist speaking during planning for World Population Conference in early 1970s
by JustaGirl » Thu 08 Jan 2009, 03:25:24
$this->bbcode_second_pass_quote('Jotapay', '')$this->bbcode_second_pass_quote('ColossalContrarian', '
')AFTER.... all other currencies fall through the floor and meltdown.
The dollar will be the last paper currency standing.
I don't know if I buy that. What exactly are your reasons for this?
From my limited economics knowledge, our currency is much more susceptible to a collapse because 1) we don't make anything which we can sell, and 2) everyone in the world is sitting on a mountainous supply of dollars.
This is pretty funny. We export a ton of raw materials. The cotton shirts you buy? Chances are the cotton came from the US. It may have been thrown together in China, but the raw material came from the US. That's just one of many examples, steel is another. But yes we are way behind on selling plastic pumpkins. We don't even make tv's here anymore
Many say a strong dollar is actually hurting our economy. It hurts our exports.
Only those who can see the invisible can do the impossible.
by CrudeAwakening » Thu 08 Jan 2009, 03:31:56
$this->bbcode_second_pass_quote('shortonoil', '
')Another way to see this destruction of money is to look at the FED Flow of Funds report (H.8 - I think). Last time I looked, the net worth of the US banking system was -$132 billion. The best way to get rid of the paper currency will probably be to stack it up and burn it.
Do you mean the "negative non-borrowed reserves" figure? It doesn't directly relate to the solvency of the banking system, and in fact is back up to +$220 billion now, thanks to all the recent money creation by the Fed.
"Who knows what the Second Law of Thermodynamics will be like in a hundred years?" - Economist speaking during planning for World Population Conference in early 1970s
-
CrudeAwakening
- Tar Sands
-
- Posts: 834
- Joined: Tue 28 Jun 2005, 03:00:00
-
by rangerone314 » Wed 28 Jan 2009, 17:22:21
$this->bbcode_second_pass_quote('shady28', '')$this->bbcode_second_pass_quote('GeneralGreen', 'I')'m pretty tired of hearing about the dollar collapse..and like what is a 'good currency?" The Pound is MORE levered then the USD..same with the Euro and Frank....
If any west currency crashes first my bets are all on the British Pound.
The imminent collapse of the dollar is much over hyped. I'm not saying it won't happen, but I think we have at least a couple of years before we see any real inflationary pressures.
I've been arguing this point for well over a year now. Everything out there at the moment is DEFLATIONARY.
Easy money led up to overcapacity and overconsumption. Demand destruction has just STARTED, it's nowhere near being complete. Capacity destruction has also started, but it's lagging far behind the demand destruction.
When these two elements hit an inflection point near the bottom, then inflation etc will become a factor. But that is likely years away still. As long as jobs are being lost, demand is being destroyed, and factories continue to close - deflation will be the word of the day.
As far as other countries shouldering this debt - that has already dissipated. The Federal Reserve has been 'printing' money for several months now to finance the government debt. The problem with this thinking is that, to be inflationary, the money has to make it to the hands of the consumer. It has not done that yet, and it won't do that until the economy begins a real recovery that creates jobs and expands demand.
My guess is the EARLIEST we see that is 2010. For 2009, deflation is the name of the game.
The hilarious thing is even WITH demand destruction, we are still consuming VAST quantities of oil. Even the current downturn is probably not going to put peak oil consequences off by more than a few months probably.
You are probably right about deflation in 2009. I am betting on very expensive oil betwee 2011 and 2015.
