Is it? Seems to me the premise is by definition more loaded than this. What does the 'debt-based' in 'debt-based monetary system' stand for? Surely 'DBMS' is different from just 'MS'. I mean, is an MS using gold as the sole medium of exchange a DBMS? I do believe that the loan sharks lurking outside prehistoric casinos predate the advent of fiat currency!

MQ also repeatedly said that in a DBMS ALL money is money owed to somebody--I find this an incredible claim and can't see how this could be so. Is he speaking specifically of the US economy, where thanks to the trade deficit everybody owes thousands of dollars to the rest of the world? What if we are talking about China, which is swimming in so much money that the government doesn't owe anybody any money and in fact is lending out more and more money every day? Even if TSHTF and China finds itself trying to foreclose on nothing but worthless MacHouses, the Chinese still aren't going to owe anybody any money.

(OK I just read up about DBMS on wikipedia. It seems that loaning money is part of the definition of DBMS: 'as a condition of its creation it is required to be paid back at some point in the future'. I have thought about this. My response can be summarized as follows: a purely DB MS doesn't make any sense. At some point, the bank had to pay its employees, and heck, the banker had to buy food! These have to be paid for with 'real' money. Can the banker buy a burger with $10 and expect McDonald's to pay him $11 tomorrow!??

I don't think there is, or has ever been, a money system where ALL the money is money owed to the bank.)

All money is money owed to someone. Not TO the bank, but to the owner of the money BY the one printing the money.
The banker buys a burger with $ 10. That $ 10 is a piece of paper that says: I owe you $ 10. The IOU even has the central banker's signature on it. And it tells you to trust in God that he actually will give you something valuable back for his IOU. I hope you never accepted any of this guy's IOUs, because he owes a lot of money to a lot of people.

There is money that is created by commercial banks when they grant credit to an indivdual. This expands the money supply because the bank doesn't tell the depositor that their money isn't really in the bank anymore.

Then there is the money created by the central bank (the FED) when they expand the monetary base. (This is where the actual paper currency comes from) The central bank inserts this money into circulation by lending it to the government. The government treats this debt like any other debt. They pay interest on it and promise to pay back the principle.

So yes basically all money is created by lending it to someone who promises to pay it back. The central bank runs itself on the interest it receives on the debt it holds and (mostly) returns the profits back to the government.

The central bank instead of buying debt could have bought a hard asset like gold to put the money into circulation. This is the way it used to work.

If you think about the way the central bank inserts money into the economy you realize that in effect they are simply giving free money to the federal government to spend. Some people advocate (I think MQ does) that the whole rigamarole of buying federal debt and then returning the interest be suspended and the central bank should just give the money directly to the federal government. If you trusted politicians to not abuse this non tax revenue stream this would be fine as well.

Not my forte but I would have thought it is difficult to expand the money supply with low inflation without actually making stuff (using energy )?

Infinite(big/continuious) growth in the money supply without actually making things must equal hyper-inflation surely?

Boris
London

It is never hard to increase (or decrease) the money supply. The trick is to have the fine control so that you manage to meet you target inflation rate.

I don't understand why you link inflation with economic growth. Inflation means more money chasing fewer goods. Nowadays inflation is only a worry when the economy is growing strongly because the bottlenecks to increased production are reached only when the economy is increasing strongly. In a declining resource economy, the bottlenecks will be tightening, choking back growth and also causing inflation (eg. the current inflation in the oil services sector).




Well if the economy was declining by 3% a year, and you increased the money supply by 3% a year that would imply an average inflation rate of 6%. That isn't exactly hyper inflation. The real problem is that nothing ever happens at the average rate. The average masks large swings that I expect will only get larger. It will take a very skilled captain to navigate the money supply throught the hurricane of economic disruptions caused by the "above ground factors" associated with peak oil.

But there is no interest generated from this kind of IOU. I wish there were (holding a banknote and reading the '...promises to pay the bearer on demand xxx dollars' line as we speak), but no matter how long I hold on to my $100 bill, it is not going to turn into $110 when I hand it in to the bank.

Thus this kind of 'debt' is irrelevant to the Debt Virus hypothesis.

Oh, it's quite clear. In our system, money only comes into existance through loans.

Loans are only taken out and given based upon future growth to repay those loans plus the interest.

No prospect of growth due to declining energy supply = no loans

No loans = shrinking money supply, as the existing outstanding debt principal is retired. Repaid loan money disappears upon retiring of the debt.

Other arrangements will have to be made.

All the fiat debt-based money in the world is owed to someone, save the coins in your pocket.

All fiat debt-based money comes into existance through loans.

All fiat debt-based money is an IOU.

If you have $100 in the bank, someone has a loan out on it or it wouldn't exist.

Not so.



Federal Reserve Bank of Chicago

Yes, new money needs to be spent into existance, not loaned.

Surely. Too many dollars chasing too few goods = inflation

Way too many dollars chasing fewer and fewer goods = hyperinflation.

Like Hubbert opined, zero interest rates or continous inflation.

Wrong. It's perfectly fine to create money by issuing credit. It's the charging of interest which is the deadly sin that require infinite exponential growth.

Not so. A $100 bill under your mattress is in existance because someone borrowed it.

You are using someone else's IOU as a medium of exchange.

On that point, I agree.

MonteQuest,

What I described is a simplified version of what the Fed is saying. They are talking in accounting terms where a demand deposit is defined as money and where of course the deposit account doesn't change when the asset and liability are added to the books. I was trying to avoid complicating it but preserve the essence.

What I was saying isn't in conflict with what the FED is saying, I'm just talking more colloquially.