Note I meant neutral, not superneutral, and neutral in the long run, not short run.

I might have finally understood what your mantra meant. So, we have 100 $1 banknotes for whose creation the government has to repay the central bank $110 debt. The government pays privates sector for goods and services with all those notes. Tax day comes and private sector sends $40 dollars back to the state in the form of taxes. Government repays $20 of the debt and spend the rest. The central bankers have to live off something so they spend $10 on goods and services. Another tax day comes... Was the problem in your belief that once the money is spent, it doesn't circulate anymore? Definitive money hoarding?

"I give up"

So do I.

ulytau - all those repayments and tax days and spending...are using interest bearing notes. Where does the money come from to pay back the interest to the central bank?

IT DOESN'T EXIST!

"So do I."

Strat, yer a good guy. I mean nothing personal. But really, you are being dense. What is so hard to understand?

If someone gives you a jar of 10 marbles, how do expect to pull out 11?

You don't because the 11th marble doesn't exist. That represents the interest of the central bank.

get it?

It's THAT SIMPLE!

Darwyn...there's no simple way to say it: everything you said is 100% right but you're still wrong. An hour long excursion into the Federal Reserve's website yielded this.

"The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately $22 billion to the Treasury."

http://www.federalreserve.gov/pf/pdf/pf_complete.pdf

I hope the link works, its to a pdf.

So yes, the Fed creates 100 marbles, gets 110 back, but then gives that 110 to the government, who incorporates it into the economy. The discount rate, which you are referring to is 1) Not the primary source the Fed uses to enact monetary policy and 2) is the only way the Fed can really control interest rates at banks across the country.

goldfinger, I don't think it's of much use to explain real-life examples to Darwyn, he didn't listen to them up to this point. His idea can be easily disproved in the terms of his own example, it doesn't matter that his vision of a central bank doesn't actually exist.

"all those repayments and tax days and spending...are using interest bearing notes. Where does the money come from to pay back the interest to the central bank?"

There is a hundred dollar bills created by the central bank. This money circulates, all the agents in the economy use that money to increase their consumption and therefore their utility. As long as the central bank and the government agree to a feasible repayment schedule, any debt incurred while issuing the money can be repaid - by those same $1 bills central bank printed. If the discount rate was 1000% and the debt was $1000,
the government could promise to repay it back during 50 years in $20/year installments - if the central bank didn't agree to the schedule, no deal would be made and no money would be printed. The government would then use it's powers to collect taxes to repay the debt. Even if the central bank was exempt from taxes (the case where there is a tax from wealth is trivial, central bank couldn't hoard money then even if it wished), it has to buy goods and services from the private sector - and does it with the notes government use to pay it's debt with. Thats how the money flows back into the economy, ready to be taxed and transferred back to the central bank. There is no magical barrier separating one bill from another, both can be used for all purposes. Debt is no difference. It's only a claim on future stream of payments, it redistributes the income among the economic agents. You can have (we have) total sum of debts many times higher than the amount of money in the economy and it doesn't matter, all these debts can be repaid using the money we have.

"the Fed creates 100 marbles, gets 110 back"

Are you even listening to yourself?

you guys realize that there is absolutely NO reason why this public currency cannot be issued sans interest, right?

Issuing public money without interest is perfectly feasible.

"You can have (we have) total sum of debts many times higher than the amount of money in the economy and it doesn't matter, all these debts can be repaid using the money we have. "

Clearly, you aren't getting it.

You let me "borrow" 10 widgets of your own creation. There exists ONLY 10 widgets. Yet you expect 11 in return. <-- this makes no sense.

We are not talking about money that exists within the system...because ALL money that exists in the system is a product of an interest bearing loan. You can pay for anything you want, but you cannot pay back the interest on the money that was issued.

Please tell me what you aren't getting?

Better yet, explain to me how I can take 11 marbles out of a jar full of only 10 marbles.

Explain this.

You are absolutely hopeless. There are 10 marbles in the whole world. I owe you 11 marbles. I give you 10 marbles, I only owe you 1 marble now. You trade 1 marble for 500 tons of thermite so that you can pull of 91100. I have 0 marbles, you have 9, the dealer has 1. I owe you 1. I trade 5 nuclear warheads for 1 marble with the dealer. I give you that marble. I owe you no marbles and yet there are 10 marbles in the whole world.

D, I would like you to answer a question for me.

If there is an individual who is making a statement that he believes is "simple", yet no one agrees with him, which of the following choices is likely to be true

A) The individual in question is a genius but is not necessarily the best at explaining things, hence the proposition he finds simple is simply beyond other people

B) The proposition in question is not accurate - or enough evidence has not been presented to prove it is accurate - and the people who are dismissing it have been given no compelling reason to believe it is accurate

Your statements appear to boil down to "10+1 = 11, and you can never subtract 1 from 11", which is both mathematically inaccurate and completely irrelevant when it comes to economics.

You have yet to convince *anyone* that there is some "phantom currency or marbles or whatever" out there with the metaphors you choose - which is really, really odd, since it would have been MUCH SIMPLER to point at the Quantitative Easing that went on over the last few years. That is a *classic* example of a central bank adding to the money supply by simply issuing (electronic) dollars to buy bonds, effectively increasing the amount of dollars in circulation.

But even if your 'money at interest' argument made *sense*- which I do *not* grant you - you've yet to explain *why this matters*. Except something about "debt is slavery", in which case my counterargument would be "don't buy shit you can't afford then."

@ Strategos

Quantitative Easing is a synonym for increasing the money supply (i.e., the real or virtual printing of more money) to chase a finite amount of goods which cannot possibly expand to the same extent. The inevitable result must be an increasing inflation. That is the depreciation of debt enabling it to be paid back. It is a smoke and mirrors con-trick.

What is really needed in this context is for a massive redistribution of wealth, in a national and international context, and that we stop buying into the mad concept of economic growth as if it is a panacea for our problems.

"I trade 5 nuclear warheads for 1 marble with the dealer."

Here's where you are lost. The dealer (the bank) has no use for nuclear warheads. It is not a currency. It only has use for marbles.

You need to exchange warheads for marbles with someone who has marbles and a use for warheads.

"Your statements appear to boil down to "10+1 = 11, and you can never subtract 1 from 11", "

No, my statement is that you cannot take 11 marbles out of a jar with only 10 marbles.

"you've yet to explain *why this matters*"

One step at a time, my friend. :)

I can't explain why it matters if you aren't grasping the base concept.

Marbles are currency. What is the use of currency? To buy stuff, it doesn't have any other use in this simplified economy. Despite having all the currency in the world you will die from hunger if you won't buy anything for them. "It has only use for marbles" means you believe that the goal of the central bank is to have all the money in the world and hide it in a safe. It means that Bill Gates wants to sell all his assets for dollars and hide that dollar in a safe. You are the one lost.

Also, if you haven't noticed, the (arms) dealer and the bank are two different agents. From it's definition, an arms dealer has plenty of use for nuclear warheads. He values 1 nuclear warhead for 1/5 of a marble, probably because he wants to sell 4 warheads and corresponding services to the central bank for 1 marble. All the markets are pretty illiquid but the only use for marbles is to buy those two goods, thermite and nuclear warheads. Other than that, marbles are useless, they only facilitate the trade. When I owe central bank 11 marbles, it actually means that I owe 55 nuclear warheads or 5500 tons of thermite. The marbles are numeraire and unit of transaction, notjhing else.

"What is really needed in this context is for a massive redistribution of wealth, in a national and international context,"

[Citation Needed]

"No, my statement is that you cannot take 11 marbles out of a jar with only 10 marbles. "

No, but you can print eleven certificates good for a marble, and loan that 11th certificate out to someone who needs to start a business - with the understanding that they will pay you back a marble and a beebee within a year, and putting up a marble's worth of other, non-liquid assets as collateral. Hence the marble lender has ten marbles + a marble's worth of nonliquid assets on the Assets side of the ledger, and eleven marbles worth of liabilities. This is based on the assumption that the people putting their marbles in the bank don't really *need* a marble today, but they can get it if needed - and they will get a few iron filings in interest if they leave it in the bank for a year

A year rolls around, the person who took out the loan pays it back, and hands over a beebee. The marble lender shaves off some filings, and gives them to the original ten marble lenders. He keeps a fraction of the beebee for himself - that's his profit.

He can then loan out the marble certificate again, or *remove it from circulation* if there is no demand for it. He still has ten marble certificates outstanding, and ten marbles in his vaults. But he has a fraction of a beebee for his pains.

Now, if all eleven people come in and request a marble, he's screwed. He has eleven marbles worth of assets, but the 11th person doesn't *want* a bunch of non-marble assets, they want a goddam MARBLE, RIGHT NOW MISTER! That's what's know as a Marble Run, and why banks are forced to maintain reserves instead of floating a jillion marble certificates.

Of course, if they make a bunch of loans, and they've done a crappy job of risk assessment, then what is supposed to be a marble's worth of assets backing the loan isn't worth a beebee. Then you find yourself going bankrupt, and sold to Marble Inc.

There are no marbles in the jar. There are only nuclear warheads and thermite. Their stock forms the budget constraint in this economy. The only reason your marbles have any use is because the government promises to buy warheads and thermite for it.

"There are no marbles in the jar."

The jar IS the economy. The marbles, paper money.

you can pay for this and you can pay for that...you can collect taxes, spend money, buy thermite, nukes, liquidate assests, trade goods and services, feed your family, invest in stock, buy an ipod, a house, work to get paid, pay taxes, give to charity, do risk assessment, borrow, lend, go bankrupt, redistribute wealth, invest in your 401k, go on vacation, etc, etc, etc...

but it all takes place INSIDE the jar...the jar that only holds 10 marbles.

But the central bank that facilitates this, wants the one that doesn't exist BACK.

I'll say it for the last time...ALL dollars in circulation are a product of an interest bearing loan. ALL of these dollars exist within the economy (the jar). But the bank wants you to pay back ALL of these dollars plus 1.

It is impossible to pay back that one because that one DOES NOT EXIST!

You can talk all you want about buying this, exchanging that, making payments, charging interest, blah, fucking, blah. It exists in the jar with only ten marbles.

And the bank wants you to pay eleven.

I cannot get any more plain than this.

"but you can print eleven certificates good for a marble, and loan that 11th certificate out to someone who needs to start a business"

It starts at the very, very top. You can do what you want with your marbles, but those marbles come with an interest payment to the central bank that created them.

The moment the Fed printed the first dollar, more debt existed than money to pay it back.

Say the Fed printed $1 million dollars in 1913. The Fed expects $1.1 million in return. But that $0.1 million does not physically exist because it was never printed.

So long as interest is attached to the issuance of money (the agreed upon medium of exchange for all things), more debt ($1.1 million) exists than there is money ($1 million) to pay it back.

You will never, ever be able to pay back the original debt because the interest does not exist in the form of physical money. It exists only in the minds of the banks...and those who believe that they are required to pay it back (that means you ulytau and strat).

Keep in mind, we are not talking about a loan you take out from the bank. We are talking about the initial loan to CREATE the money.

If there exists only 1,000 lbs of gold in the entire world, how can you expect anyone to give you 1,001 lbs of it? It doesn't exist. It cannot be given.

Alright Darwyn, let me see if I can explain it to you in another way. Let's keep going with the jar analogy.

There are three jars. Jar #1 is the banks. Jar #2 is the government. Jar #3 is the consumers. Together, they represent the economy, with Jars 2 and 3 depositing and borrowing money from jar 1. It is a closed system (for now). For simplicity's sake, lets say each jar has 5 marbles. There are 15 marbles in the economy.

The Fed is an outside source, not connected to the economy. It loans the banks money. So put 10 more marbles in Jar #1. There are now 25 marbles in the economy.

But wait! You say. They have to pay it back with interest! Very true. 11 marbles are removed from Jar #1 and given back to the Fed. There are 14 marbles in the economy, which is less than you started with. This is your argument and this is where your analysis ends.

However, the law creating the Federal Reserve stated that all funds (after expenses and such) were to be transferred from the Fed to the government each year (with $22 billion or something just in 2003). This means that *all* 11 of the marbles that it took from the bank are to be given to the government in jar #2. There are 25 marbles in the economy. From there, the government will spend it and they will eventually go to jar #3, etc. etc.

So please, do read over the link i sent again.

Additional arguments could be that the discount rate isn't meant for changing the money supply in the economy, but rather for setting the pace for interest rates nationwide in private banks. It has a minimal effect on currency compared to the actions of the Fed in the bonds market.

Also, the Fed has been around 98 years now. The articles you put up cite financial data from the 1970s and 1980s. Why would it take over 70 years to begin to feel the effects of this practice if its as destructive as you say it is?

goldfinger - there is only ONE economy. There is only one jar.

The jar has only 10 marbles, but the central bank that issues those marbles wants 11 in return.

It's not that complicated.

If you want more marbles, you get the central bank to issue more. So now there are 20 marbles in the jar (economy) and they want 22.

It's not that complicated.

Darwyn, did you read the quote I gave you about the Fed giving everything to the government at the end of the year? Whether its 1 jar or 3, it doesn't matter. The Fed is outside of the jar. The Fed puts money in the jar (for banks) gets what it put in +1 back out BUT then has to (by law) give everything it has to the government (which is in the jar).

Even if I'm partially wrong and it only gives profits back, the jar is still in the same shape it started out with

"The Fed is an outside source, not connected to the economy. It loans the banks money. So put 10 more marbles in Jar #1. There are now 25 marbles in the economy."

Fine, you start with 15 marbles, but you owe 16. The minute you put 10 more marbles into whatever jar, you will owe 26. It came from the central bank that issues marbles at interest after all. so you can pay back the 16 now, but you'll owe ten more with only nine left in existence.

goldfinger, please...more debt exists than there are marbles to pay it back so long as a central bank issues them at interest. Period. End of story. You cannot argue out of this. It's simple math.

Ok, let me ask this a different way.

*WHY* are you assuming that the central bank wants an eleventh marble. Or another way:

"Say the Fed printed $1 million dollars in 1913. The Fed expects $1.1 million in return."

*Why* are you assuming that the Fed wants $1.1M in return? Seigniorage? Or something else?

Why does inflation wig you out so much?

Two things:

The NYC General Assembly is not a recognized governmental entity. NYC is governed by the City Council.

The Federal Reserve is not evil nor is it a mechanism to control the world.

That is all.

"The Fed puts money in the jar (for banks) gets what it put in +1 back out BUT then has to (by law) give everything it has to the government (which is in the jar)."

The Fed only has what it has physically created. 10 marbles. But it asks for 11. There is no +1. It doesn't exist.