Re: debt IS money, and vice versa

preface: I'm neither an economist nor a money expert. I'm just bothered by this phrase.

I understand that the promise of future payment is exchanged for immediate cash and that it is by this mechanism that money enters our economy. That promise to pay is not actual cash, anymore than apples growing on trees are cash -- debt and apples can be exchanged for cash, but neither is cash. In healthy markets, promises of future payments can be bought and sold with cash, but that also doesn't make the debt turn into cash.

Further, a promise that is broken leaves nothing behind. If a promise was cash, there would be some residue of its prior existence -- even vaporized in a nuclear blast, the molecules that were once cash will be floating around in one form or another. A promise is not tangible and aside from the record of its creation (the contract), there is nothing to it. Hmmm... I suppose the same could be said for fiat money ... perhaps I'll just post anyway and read the comments rather than do the hard thinking.

The problem we are having in our current market is that promises are easily broken, and the realization that many are breaking promises has made people reluctant to exchange cash for those promises.

... if we are going to make it through the coming hard times we've got to accomplish profound improvements in the way we govern?

You mean, like this?

We're Laying the Groundwork for Recovery
The necessary policy tools are in place.
By BEN S. BERNANKE

As Americans well know, the challenges we now face in the financial markets and in the economy are both extraordinarily complex and historic in scope. I firmly believe, however, that with the actions policy makers are announcing today, we will be able to meet those challenges.

Our strategy will continue to evolve and be refined, and we will adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system, and thereby restoring prosperity to our economy.

Over the past year, the Federal Reserve has actively used all its powers and authority to try to help our economy through this difficult time. Central banks around the world have also consulted closely and cooperated in unprecedented ways to reduce strains in financial markets and to bolster our economies. We will continue to do so. However, clearly the time had come for a more comprehensive and broad-based solution.

History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. In these conditions, the consequences and costs of inertia and inaction can be staggering. Fortunately, that is not the situation we face today.

The Congress and the administration acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit for our economy. Their prompt passage of the financial rescue legislation made possible the critical measures that will be announced this morning. These steps will allow us to restore more normal market functioning, and encourage private capital to further support the reinvigoration of financial markets.

I also find it heartening that we are seeing not just a national response but a global response to the crisis, commensurate with its global nature. Indeed, this weekend, the finance ministers and central bankers of the G-7 industrialized countries announced a comprehensive plan to unfreeze credit and money markets, increase capital in banks and other financial intermediaries, and protect deposits. Each of these governments is now moving quickly to put their own specific measures in place. The announcements we are making today are consistent with the G-7's statement of principles.

As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. This has had cascading and unwelcome effects on credit availability for households and businesses, and on the value of savings. Under these circumstances, steps to restore confidence in our institutions and markets will go far toward resolving the current market stress. Our economy will not be able to function at its best unless and until financial market stability returns. The bold actions taken by the Congress, the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation and other agencies, together with the normal recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.

The most immediate responsibility of policy makers and elected officials is to restore confidence in our credit markets. Even as we do this, we must begin to consider long-term reforms that will mitigate similar crises in the future. A comprehensive review of our regulatory structures is an essential task in the coming year. The events of the past year or two have highlighted regulatory gaps and deficiencies that we must address to improve the structure of our markets and the resiliency of our economy. As we recover from the current crisis, it will be important to address these issues as soon as possible, to develop a regulatory structure that will better respond to future economic challenges.

Policy makers here and around the globe have taken a series of extraordinary steps. Americans can be confident that every resource is being brought to bear: historical understanding, technical expertise, economic analysis and political leadership.

I am not suggesting the way forward will be easy. But the tools are in place to respond effectively and with force. These tools will bolster the capital of our financial institutions, restore confidence in their debt, and offer increased access to funding for businesses. Their application, together with the underlying power and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous growth.

Mr. Bernanke is chairman of the Federal Reserve.

http://online.wsj.com/article/SB122394360912831019.html?mod=todays_us_op...

Reading what are the chairman's priorities is enlightening. He is interested in, "repairing and reforming our financial system, and thereby restoring prosperity to our economy ... to encourage private capital to further support the reinvigoration of financial markets."

Not a word about the people, it's all process, for the chairman.

"As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. "

Throwing money at our financial institutions will magically solve everything, eh?

This is where we are here and now. The captain of the Titanic now has all the administrative tools in place to right the ship, so to speak. Doncha feel confident, already?

The real problem is how to we get from the boat deck to where we need to go ... without hitting the bottom of the Atlantic, first? Yowza, that's a problem. Rapid economic transitions have historically required revolutions or conquests and even so, there is little relevant 'economic history' to serve as a guide. The Soviet Union emerged from a crony- capitalist autocracy but required Imperial Germany as a midwife. Socialism snuck up on France, Germany and England for political, rather than economic reasons, as all were dependent on the US for capital in the ten years post WWII.

Japan maintained its centralized banking and finance structure even though Douglas McArthur completely re-wrote the Japanese constitution (and outlawed military expenditures at great economic benefit to the Japanese). In the post-war, post- modern NOW, the changes have tended toward the 'born-again US-style capitalism' that has transformed the Indian and Chinese economies and is making headway in Africa. The countries that have made the most progress toward a more reasonable relationship to natural resources have been Denmark and ... ??? Denmark follows a social - democratic semi-welfare state approach that is similar to Germany's. Their economy has been experiencing some turmoil as they are in the Eurozone and their banks undoubtedly issued and bought bad loans. Unlike Iceland, they did not over-leverage their reserves nor did they have a housing bubble.

The question is whether Denmark's approach is a model at all, other than the manifestation of a form national conservatism and caution that inherent to Denmark. Adjusting the knobs on our economy will not be enough to pay off or settle all debts, reduce to small level consumption, build a level of savings, and invest in a resource- sensitive (capital-conserving) infrastructure ... all roughly simultaneously.

The most important message that Mr Bernanke has to offer us is this, "Americans can be confident that every resource is being brought to bear: historical understanding, technical expertise, economic analysis and political leadership."

The Fed and its contemporaries have shot their wad. Let the games begin!

I do not agree that debt is money. Debt is a claim against someone who has issued the debt. The debtor is a counter party and you rely upon his ability to pay to give value to the debt. You will find this out when your bank does not honor your checking account, or if it does you can buy very little with the depreciated value of what is denominated in. Circulating the debt instruments does not make it money, but does make it circulating evidence of debt. It is a second rate medium of exchange subject to depreciation and default.

Gold and silver have intrinsic value, and do not require a counter party to ultimately be called upon to pay. History has shown that gold and silver are superior money for these reasons, and for other traits like durability, easy divisibility, high value per quantity, and difficulty in expanding the supply.

When you work and accept something in exchange, you are using a medium of exchange. It is only of value because you recognizes it as having value in exchange. It is not a symbol of a debt owed to you for you work. Rather, under our monetary system, you have accepted a third party's debt as a settlement of the debt owed to you for your work by your employer, and only accept it because you think you can use it in exchange with others. You don't call in the debt when you exchange the money to a merchant, but rather you pass on the medium of exchange to him; you cannot call the debt of the third party, the bank, other than by accepting debt of a different form, perhaps as you cash a check at your bank and get debt of the Federal Reserve bank in exchange (Federal Reserve Notes). If you really called in the debt by passing it on to a merchant, then the debt would be canceled instead of being further passed on by the merchant to other. So in effect we just circulate hot potatoes and the rate at which we circulate them, the velocity has an effect on the value we can exchange them for, as does the total volume of the hot potatoes in circulation.

My point is that debt is not money but debt; there is no money, only circulating debt. If banks can issue their own debts as money and loan them out to you as interest, you do not have money circulating, but you have bank debt circulating. It can be expanded as easily as banks can make loans. It depreciates in value as the supply increases. It can be defaulted upon. The loans made to the population can be defaulted upon. The interest on the loaned debt money enriches banks at the expense of the population.

Debt is not money. Money is:
1. A medium of exchange.
2. A store of value.

#2 is not valid for the current paper debt pieces. It is NOT money.