Trump's desire to reduce the deficit. Can someone explain to me how this is a good thing?

Discussion in 'Latest US & World News' started by Econ4Every1, Mar 14, 2017.

  1. Econ4Every1

    Econ4Every1 Well-Known Member

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    No, the first thing that happens is that investors deposit real money in a bank's capital account at the Fed. Banks can also sell stock to raise capital.

    It is the banks capital that acts as collateral against poor decision making. In other words, if a bank takes an unusually high risk, if that risk fails and the bank didn't insist the borrower provide sufficient collateral to cover potential losses, the bank doesn't lose depositors money, it loses investor money.

    Depositor money is still safe in reserve accounts at the Fed. Now if the bank fails that's a different story, hence the FDIC.

    Thus depositor money increases a banks reserves and is the lowest cost source of reserves vs borrowing from other banks or directly from the Fed.

    Quite right, I said that in the text in my diagram.

    Nope, banks take investor money (investor capital) and leverage it to create credit. Because of the risk involved they charge a fee, some profit is paid back to investors as dividend income and some profits are kept by the bank to increase its profit potential by increasing its capital and ultimately its credit creation potential. So if a bank leverages its capital 8:1, every dollar of capital the bank has allows the bank to create $8 worth of credit.

    I think it can better be described as a system of leverage and risk management.

    I really have no idea what you are talking about here.

    Theft of what?

    There is real money involved. It's called capital and it is the incentive that banks have not to take risk. But nothing was "stolen". That is the nature of investment. Some pay off and some do not. When a person takes out a loan and fails to repay it, no customer get's a call telling them the bank lost your money because banks don't lend customer deposits to other customers. The only time reserves leave the banking system is in cash, but cash makes up <5% of all the money in circulation and most people don't stuff cash under their beds, when they get it they spend it or they deposit it in a bank (hence the reserves return to whence they came).

    Now, should you be thinking about bringing up what happened in 2008 (a perfectly reasonable objection given what I said) let me just say that what happened in 2008 is what happens when the incentives to make money exceed the incentives not to lose it.

    As far as "theft" with respect to 2008, I think there is a case to be made that investors lost money because rules were ignored or removed rating agencies falsely gave high ratings to investments that didn't deserve them, so in that case, was there theft? I think the term is fraud, but in effect, the result was the same. People (like me) lost thousands of dollars in investments that tanked because the underlying assets of my investments that were highly rated were junk. Somone lied. That's fraud.

    Fundamentally, the system failed to manage risk. There were aspects on both the public and private side that was to blame, but I don't want to derail our discussion, Just trying to meet a potential objection before it happens.

    Yes, in bank capital, not money lent outside the banking system. Banks lend on credit.

    The thing you don't understand is that the bank's credit is denominated in US dollars.

    Just like you can take a credit card and withdraw US dollar cash.

    Again, no idea what you are talking about. I'm just telling you how the banking system actually works. I'm not telling you it should or shouldn't work this way, I'm just correcting your understanding.

    There is fraud and that fraud has lead to lots of people losing their money. If you want to call it theft. Fine, makes no difference to me. I lost about $50k in the days and months around 2008 and could have lost 3 times that much had I acted more slowly to protect my investments. Honestly, 2008 was the impetus to learn more about the economy (losing $50k of your retirement will do that), but to make the claim that I'm promoting theft is baseless. Again, I'm just explaining that you're wrong in your understanding of how banking works.
     
    Last edited: Aug 31, 2017
  2. Baff

    Baff Well-Known Member

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    You are promoting theft.
    You are promoting a false understanding of how banking works with the sole intention of confiscating the money in them.
    Which you will define as "fraudulently gained" so that you can steal it for yourself.

    We aren't stupid, and no one is putting you in charge of their money. Sorry,


    Investors invest money with the Bank itself, not the Fed.
    They buy shares or bonds typically. But also may make deposits in other countries where the bank already operates for example.
    Soa Chinese lender to HSBC funds HSBC's banking licence in the US and then it starts accepting deposits from US customers.
    Or a bank issues stock or bonds and then applies to the Fed for a lisense, using the stake invested.

    The Bank pays the Fed an operation licence. And pays in a fraction of it's deposits to the fed as part of capital reserve laws.

    At no point does a banks investor directly interact with the Federal Reserve. The deposits are made by private investors to private institutions.

    (I can trump your $50,000 losses by a factor of twenty BTW. Woot for me!).
     
    Last edited: Sep 3, 2017
  3. Econ4Every1

    Econ4Every1 Well-Known Member

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    No, I'm explaining how the banking system actually works.

    I asked you what you were talking about with respect to this claim. I have no idea what you're talking about when you say "theft".

    What are you talking about? What "theft" am I promoting"?

    Be specific, what are you going on about?

    Not stupid, just ignorant.

    Where did I say anyone "invests their money with the Fed"?

    Yes, investors invest money in banks to provide them capital. I believe that this is done via two types of stock. Preferred and common stock. Each has advantages and disadvantages.


    Guess I'm just a better at investing than you :)

    Totally kidding....Sincerely, I'm sorry to hear that.
     
    Last edited: Sep 3, 2017
  4. DennisTate

    DennisTate Well-Known Member Past Donor

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    Sounds great to me.....

    http://www.politicalforum.com/index...erve-along-with-oprah.527699/#post-1068777123

    V. P. candidates to serve along with Oprah?
     
  5. Plus Ultra

    Plus Ultra Well-Known Member

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    Deficit spending (spending money one doesn't have) requires borrowing, otherwise a sovereign government may simply mint more currency. When a government borrows the money for deficit spending it incurs the obligation to pay back the amount and whatever interest applies to the loan (service the debt). According to the Treasury Department, the monthly interest paid on outstanding US Treasury Notes and bonds, savings bonds, as well as State and Municipal bonds, through January of this year came to almost $175 billion ($174,800,239,416 and eighteen cents). https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm. This is money not available to the government to help the needy, provide healthcare, for foreign aid, education, protecting the environment or improving infrastructure. Moreover, money that is borrowed for deficit spending (as well as the interest paid to service that debt) will need to be obtained from the government's primary revenue source (in the US that's the taxpayers). Some governments opt to simply print more currency, Venezuela offers a fine example of the consequences:
     
    Last edited: Mar 6, 2018
  6. Jim Nash

    Jim Nash Well-Known Member

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    This is the mother of all evergreen threads. Might be the world's first ever thread to get its own pension.
     
  7. primate

    primate Well-Known Member Past Donor

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    If interest rates go up then the deficit costs more.
     
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  8. Yazverg

    Yazverg Well-Known Member

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    In my opinion reducing the deficit is essential.

    1. The country is manufacturing money. It can be compared with the person who writes his debt obligations on paper. If a well-dressed person well-known in the neighbourhood comes with this paper to grocery store he can get the goods in exchange for this paper. But it won't be the end (unfortunately), because one day this person needs to get the job done, get the money for it and return to the grocery with the actual money. On the level of state it means that the economy must grow to the level that the state will be able to repay its debt. In other terms the deficit of the budget must be covered by growing income of the budget next year.
    2. If the next time our person having an obligation in grocery comes to buy a car for the same piece of paper with just a larger sum, it can be compared with growing deficit of the budget. The bigger are the needs the better dressed is the person and the more powerful is the state. But all those who trusted the person are now dependant on him as everyone who gets the money from state depend on it. The person can leave pieces of paper getting houses, cars and having trips to space. Moreover he can even come to a bank every time and borrow the actual money to repay for some old debts of his which will however increase his overall debt. The same issue goes for the state which prints the money enough for all the social programs including health care, military spendings etc. But at some point there comes a moment when no salary and job done can cover these debts.
    3. If a person is irrational he will continue to take more and more debts wasting more and more goods and services and at some point he dies and numerous industries have a huge simultaneous loss. They can no longer build cars, rockets and even bring groceries to the people, because the guy's irrational behavior made them bankrupt. This also refers to big and powerful states which make debts and are able to ruin the whole chain of economical subjects participating in the exchange of its currency. This pattern happened several times as bankruptcy for private households and 'defaults' by states.
    4. A rational economic behavior will mean that a person either gets an additional business or job reducing or stopping to write more and more debt obligations. Or better - both. In this case he pays off his current debts and is ready to make other knowing that he is able to pay for it. A rational behavior from a state is cutting the costs which won't bring him the profit in the nearest future and try to increase the economy with the development of more and more national taxpayers.


    You are right that deficit reduction takes the perspectives from the society. In our case a person wouldn't buy a jet and the company wouldn't sell it in exchange for the debt obligation. They will all concentrate on cutting costs though the person wishes to buy and the company wishes to sell. The decision is really ruining this perspective. But in fact it saves both sides and creates possibility for them to survive and develop. Trump is shifting to rational behavior in economics which is a good thing overall. For even if the state making a default is too mighty to pay its debts once the collectors come it will still ruin the system. A person can buy him an army and become a terrorist threatening everyone who gave him the goods. But in this case the loss to the system will anyway be huge and even this person wouldn't be able to continue his previous irrational model of economic behavior.
     
  9. DennisTate

    DennisTate Well-Known Member Past Donor

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    Or...... find a way to make Americans more optimistic......
    so that real estate prices rise....... especially in rural areas where President Trump has most of his support.

    Could a real estate boom plus better Fed policy pay off USA national debt?
     
  10. DennisTate

    DennisTate Well-Known Member Past Donor

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    One of the best things that can happen for the economy is if the prime rate is low....... especially the rate paid by the Federal Reserve or ........
    by the various levels of government on infrastructure projects.
     
  11. DennisTate

    DennisTate Well-Known Member Past Donor

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    And speaking of Weimar Germany.......

    Best explanation for Weimar Republic Inflation I ever read....



     
  12. Baff

    Baff Well-Known Member

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    One of the best things that can happen for borrowers to be sure.
    But for every borrower there must be a lender.
    (No matter how much money is printed, you cannot borrow my resources unless I have resources to lend)

    And to skew the economy of one in favour of the other is not the best thing for the economy at all.
     
    Last edited: Mar 29, 2018
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  13. DennisTate

    DennisTate Well-Known Member Past Donor

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    Assuming that the American model is basically similar to what happens up here in Canada I can think of three economists who would tend to strongly disagree with you.

    https://www.michaeljournal.org/arti...ce-our-country-debt-free-say-three-economists
     
  14. Baff

    Baff Well-Known Member

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    Yes, I'm sure they would.

    But then, they are on the take. Aren't they?

    Vested interests exist.

    But the fact remains for every item you wish to borrow, someone has to lend it.

    With lower incentives to lend, less will be lent.
    And without lenders, there is no borrowing.


    Economists primarily work for governments. They benefit from borrowing.
    They benefit from government debt. Directly. It gets spent on them.
    Left wing bias.

    Anti-capitalist.
    When an anti-capitalist explains the banking system, /ignore.
    Their political agenda is to destroy the current economic system and replace it with one that places themselves at the top of society. To do that they must persuade you that the current one is based on injustice.
    Communist bias.



    Banks don't create money.
    The mint prints money. Governments create money.

    Banks lend money that has already been created. They are a middle man service connecting lenders with borrowers.



    Printing money, makes no difference to the number of available goods.
    You want a house? It's not made of money.
    It's made of bricks and mortar and wood and some guys hard work. Which requires food and transport and fuel.

    And these resources, are what you are borrowing.
    Money, is simply a medium of exchange.



    ****ing with the medium of exchange is simply smart arse's stealing.
    That's all it is.
    Economists love that ****. I've invented a magic way to invent wealth.
    No, you haven't.

    Conman alert.
     
    Last edited: Mar 29, 2018
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  15. DennisTate

    DennisTate Well-Known Member Past Donor

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    I consider this to be a truly good reply..................
    to an extremely complex question......
    Thank you.........

    .........
    If it were not for what seems to be a serious error made by P. M. Pierre E. Trudeau back in 1974.... interest rates would not have been able to go so high in 1979......
    but there is a plus side to the whole question though.

    http://www.politicalforum.com/index...tt-trudeau-save-the-world-environment.424298/
    Did P. M. Pierre Elliott Trudeau save the world environment?


     
    Last edited: Mar 29, 2018
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  16. Baff

    Baff Well-Known Member

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    I'm not sure if debt explicitly causes inflation. May be it does, maybe it doesn't. I've never thought that one through or read up on it.

    I am sure, that inflation acts as a monetary scam to relieve debt.

    If I borrow £10 and must repay £11 in ten years time, as long as the £ devalues every year, I will repay less than I borrowed.

    I work in the state sector. My income is inflation adjusted. Every year I get a pay rise to compensate me for the devaluation of money.
    My mortgage however is not inflation adjusted. Each year my debt is devalued but my wages are not.

    So inflation is the debtors friend.

    Conversely deflation is the lenders friend.
    I lent £10 and will be repaid £11 in ten years time.
    Today £10 buys a packet of cigarettes in 10 years time it will buy 2 packets of cigarettes. My return will be closer to 100% than it is 10%.


    So monetary policy is being set by people in debt.
    Mortgage holding state sector employee's.

    Inflation rates of 2% are targeted in my country. They don't want 0%. They want a slight default on their debt. One small enough not to panic lenders. It's a con trick.

    Bet on low interest rates and inflation. Go with the flow.



    Money supply is a red herring.
    You will never run out of money in the economy. Because fractions can be used.
    If you do not have enough dollars to purchase all the available goods and services, you may pay in cents. Every Dollar neatly divides into 100 of them.
    And you can use half cents.
    Money supply arguments are again, con tricks.



    So my solutions, include no.3 of yours.
    Don't play the game. Barter.
    Minimise trade. Be self sufficient where possible.

    My earlier mentioned one, which is go with the flow. Get a government job, get a mortgage. imitate the financial status to those who rule. The system is designed (by them) to favour this behaviour.

    And also, hedge bet.
    Keep foreign assets.

    And finally, cash out. You aren't out of the game until you've spent it.
    The usefulness of cash may reduce as it devalues, but the usefulness of a house remains the same.


    Your comments on the human capacity for over consumption I very much agree with.
    I would indeed, extend this natural phenomenon beyond the human species. Life blooms.
     
    Last edited: Mar 29, 2018
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  17. DennisTate

    DennisTate Well-Known Member Past Donor

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    I am getting into some theories on how perhaps the 117 trillion dollars in the Derivatives market could be stabilized.

    You might find this kind of interesting?

    Posts 52 - 58 on page three may be my most useful ideas on this?


    http://www.politicalforum.com/index...ada-and-unified-field-theory-of-m-w-p.548225/
     
  18. DennisTate

    DennisTate Well-Known Member Past Donor

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    I am thinking that land within one hundred miles of major cities may soon be more valuable than gold or silver in many ways...... although yes..... they are almost certain to rise in value as well.
     
  19. CourtJester

    CourtJester Well-Known Member

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    You know when you give massive tax cuts for the rich and then run up the deficit the only logical place to cut spending is aid for the poor and middle classes. And just to prove how necessary the sacrifice is you might jusr run up defense and military spending
     
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  20. CourtJester

    CourtJester Well-Known Member

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    Man do you need an investment advisor!
     
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  21. 61falcon

    61falcon Well-Known Member

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    Dirty Donald has shown absolutely no inclination to reduce the national debt as we speed towards $23 Trillion.
     

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