Basically the Fed (a privately owned institution) print money out of literal 'thin air', then lend it at interest to the US Government and banks etc. Which in practice means there's literally never enough money in circulation to pay off the 'debt'.
The IMF is an extension of that, they lend money to countries, then siphon off that countries assets in return.
Look up the Federal Reserve Act 1913 also.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
> Basically the Fed (a privately owned institution)
The Fed overall has a weird hybrid public/private hybrid structure, but the monetary policy decision-making part, the Federal Reserve Board of Governors, is a bog-standard “indepedent within the executive branch” federal agency just like the FCC, FTC, etc.
The best description I have read is that the Fed is a govt sanctioned monopoly on check kiting. As you say, it is a hybrid and they split the "profits".
> Which in practice means there's literally never enough money in circulation to pay off the 'debt'.
I always wondered why so many people were in so much debt, and was really shocked when I came to the understanding that we've designed our monetary system to trap people in debt.
https://youtube.com/watch?v=2nBPN-MKefA is a cartoonish but thorough explanation for anyone who has the time.
This system really is insane. I mean, I thought Bitcoin was dumb because it's based on nothing, but our national government-based monetary systems being based on debt are even worse.
I struggled for years as a non-economics person to understand how money is produced and if there is a fixed supply of money, how can interest ever be paid.
Going down that rabbit hole is so insightful. We are all stuck in a debt based system. The only way to pay off debts is to print more money and create even more debt. That's all there is. There is no way to eliminate all the debt+interest. None.
By the time you get into any depth in that rabbit hole, the question really starts being about what money actually is.
In the end, money is just some kind of an abstract quantity that we collectively believe and agree can be used for obtaining something directly useful or desirable later. Its value is based on that mutual understanding and belief.
As long as the economy isn't a zero-sum game, thinking of money that way makes debt (and interest) actually kind of make sense without having to turn it solely into a vicious circle of more debt to pay off the interest.
If the real economy keeps growing and those abstract resources borrowed from someone else (debt) can be used for investment that allows for creating added real value (or decreasing real costs), that added value can be used for offsetting the interest. The entire arrangement may still require "printing" more money and creating more debt but that's not necessarily the only thing that's happening. The real value that can be obtained with that increased amount of money in circulation also increases as long as the real economy also grows.
It kind of does seem to make it a requirement that the real economy actually keeps growing, though.
Or, at least that's how it looks to me as a layman.
For every debt there is a financial asset. It all sums to zero.
Interest pays for itself. It is nothing more than the wages of bankers. Banks earn interest and pay it to bankers and shareholders, who spend it with firms for stuff who then pay it back to the banks.
It's always worth remembering to differentiate stocks and flows. $ and $/month are as different as miles and miles per hour.
Yes. Hard to over-emphasize how important this point is. For the longest time I also incorrectly understood the money system because I watched videos (DVDs back then) that claimed there wasn't enough money to pay back all the debt, and I believed them.
The simplest way to understand why this isn't true is to consider the following thought experiment.
1. Alice has $100. This is the only money that exists in the world. She loans it to Bob at a rate of 10% interest.
2. Bob receives the money and immediately hands it back to Alice in order to purchase supplies to set up his new business. Alice now has $100 again, and Bob owes $110. Note: total debt > money supply.
3. Bob creates his business and finds a customer - Alice again, who lent money to Bob because she needed his business services.
4. Alice pays Bob $20 for a widget he made.
5. Bob now has $20, Alice has $80.
6. Bob uses that $20 to pay off part of his loan to Alice. He gives it right back to her, which clears both his interest payment and part of the principal. Alice now has $100 again, and Bob has nothing, but Bob now owes Alice only $90.
7. Go to Step 4 and repeat until Bob's debt is reduced to zero.
In this scenario Bob will eventually pay off his debt even though there apparently isn't enough money to do so. The reason is the difference between stocks and flows, as neilwilson points out. Debt is cancelled by a flow of capital, but money circulates and as it moves it creates flows. The less money you have the faster it needs to move to cancel a debt in unit time.
I don't think that when people talk about money being debt, they are denying that the flow will not destroy the debt. The flow surely will destroy the loan.
But when the first loan was made, $10 was given to Bob. But Alice also saw the same $10 as an asset. This created more money in the system, as in, suddenly both Bob and Alice were rich.
And when the debt was finally paid off by Bob, Bob is poor again. The only way more money can come into the system, and Bob can have money again, is if another loan is made.
So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression.
No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run.
"And when the debt was finally paid off by Bob, Bob is poor again."
Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way.
"So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression."
You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
I see where you are coming from but I can also see you are missing the point.
> No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run.
Creation of money is an abstraction. When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit. Alice sees the same thing as her asset as Bob sees as his liability. However, both can trade the asset/liability for goods and services. This is creation of money, via fractional reserve, since both the lender and borrower can trade goods with the same base money.
> Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way.
And that is the point. Bob can pay off his debt by selling goods to others. But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars. It was all created via a loan on some balance sheet and the human simply acquired it via trading of their work.
> You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
Wealth obviously was destroyed. At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk. Wealth was created with the new business but wealth was also destroyed with the asset/liability draw eliminated to zero.
What helps really understanding this wealth effect via fractional reserve is scaling your example to the entire dollar economy. By your example the total amount of money in the system effectively is zero because ultimately it is all two sides of the balance sheet. Yet, wealth is still measured in assets whose value goes up by that asset being more valuable through others spending money that was created via debt.
"When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit"
You're arguing with a scenario I didn't give. As I said already: neither Alice nor Bob are banks, therefore when Alice lent Bob the money she no longer had it. She didn't retain an appearance of having the money in her account because there is no account - it's all just cash. It's a very simplified scenario designed to show why the argument about money supply and debt is false in the general case.
"But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars."
Of course they did! Banking is an evolved system that sits on top of physical money. It isn't the case that all money is bank issued fractional reserve debt and it never has been so. Most people and institutions do indeed control at least some "hard money", even if it's just in the form of cash, or these days cryptocurrency.
In the west, we've come to rely more and more on fractional reserve accounts over time, but that doesn't change the correctness of the underlying argument - we aren't in a situation where paying debts off is impossible because there isn't enough money.
"At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk."
You seem to be having a hard time keeping the various layers of the system separate! The amount of money in my toy scenario didn't change at any point because, again, neither Alice nor Bob are banks. They are people. When Alice lent to Bob she didn't create money: she had zero money at that point.
No, it's partially true. For every debt their is an asset, but the value of the debt created is not always equal to the value of the assets.
Here is a good article from the Reserve Bank of Australia describing how banks create money via loans, and lists the conditions by which "money creation is constrained." Note how none of the conditions ensure that Value(asset) = Value(debt)
"Money can be created, however, when financial intermediaries make loans."
"However, the process of money creation is constrained in numerous ways and depends on the behaviour of borrowers, banks and regulators, as well as the stance of monetary policy. "
https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html
Edit: just to clarify, imagine a pre-GFC mortgage of $1million. This loan results in money creation of $1million + loan of $1million. But if the market crashes and the asset(house) is now worth $200000, the house may be forfeited because the loan is not being repaid. If the house is sold by the bank to balance the debt, the economy now has $0.8million extra money floating around. The bank may have to pay the central bank this $0.8mill eventually, but will do so under relatively tiny interest rates, so the money remains in the economy for as long as it takes the bank to repay the loan. Or the government bails the bank out and the created money becomes permanent!
All money is debt, apart from cash. You don't have $10 in the bank. Instead, they owe you $10.
When you borrow money for your house, this is new money introduced into "circulation". Where did it come from? Well when you borrow $100k you get $100k in your checking account and $100k debt. They add up to zero, so no problem!
You then send the $100k IOU from the bank to you to someone else, and now bam you are in debt. Hopefully you got a good asset in return!
The IMF is an extension of that, they lend money to countries, then siphon off that countries assets in return.
Look up the Federal Reserve Act 1913 also.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford