World Debt

[Notavirusalso]

help me out here, am i missing something ? ?
If all the countries in the world are in financial crisis and all are in debt and paying massive interest on these debts.... then whom are we in debt to and who's receiving these payments ? if like I think it's the world bank or the IMF "the world bankers" then who put them in charge and are they the same banks that we bailed out and where is there collateral or as I suspect we are paying Interest on pretend money ?

[JimOttley]

Yes I have the same question :)

All the large economies appear to run deficits http://www.visualeconomics.com/gdp-vs-national-debt-by-country/

As I understand it WE lend to the governments via our pension fund investments, all buyers of government bonds are lending to the goverment and the governments lend to each other.

Apparently we lend the Americans quite a lot http://www.treas.gov/tic/mfh.txt but I expect they lend us quite a lot as well.

Personally I don't understand where it all comes from either :cwm3:

[Terpe]

This is a good thread.

I am by no means an expert but I hope I can at least provide some contribution. Sorry if you knew all this anyway.

To understand debt you need to go back to first principles.
Why do people, companies and countries borrow?
One answer is because it's the only way to maintain their required or desired level of spending.

Another reason is optimism in the future; to believe the return on the borrowed money will be greater than the cost of servicing the debt.
Creditors must believe that debtors’ incomes will rise; otherwise how would they be able to pay the interest and repay the capital?

So debt is using future wealth to service expediture today.
Yes, in a way "pretend money"
We all owe future expected income/wealth creation.
The money is still there. It didn't disappear or go anywhere.

With ageing populations and shrinking workforces, economies tend grow more slowly
Borrowing from the future and using debt to enjoy today is unsustainable.

Most, if not all countries are in debt.
Most countries have central banks, which rely on deficit spending to keep money circulated.
You can't just keep printing money when you need it because that would devalue your countries currency.

All banks borrow short (from depositors or the wholesale markets) and lend long. The business depends on confidence; no bank can survive if its depositors (or its wholesale lenders) all want their money back at once.

Remember Northern Rock?

If banks struggle to meet their own debts, they have no choice but to reduce their
lending. If this happens on a large scale the effect for the economy as a whole can be devastating.

Both of these effects happened in the current debt crisis.
Falling property and asset prices caused defaults and a liquidity crisis in the banking system so severe that the authorities feared the cash machines would run out. Thus the unprecedented levels of bank bail-out.

Imagine your salary was just not available when you needed it.

The World Bank and IMF are different organisations with different strategies
The IMF's major focus is supporting financial sector issues. (eg exchange rate stability)
The World Bank's focus is on long-term development and poverty reduction.

Countries must join the IMF to be eligible for World Bank membership.

The World Bank gets it's 'deposits' from money paid by it's members, as well as
earnings on the bank's assets.

So again using borrowed money from the future to fund today's expenditure.

Everyone owes something to someone else. How confident can we be of getting back
what's owed when the future is just not generating the wealth needed?
Especially if borrowed money was used to lend.

Only the rich and powerful can and will decide.

[Terpe]

All money is debt-based money

Although the Central Banks can control the size of the monetary base, they can't directly control its composition.

For example, if the public wants to hold more money in their wallets rather than keeping it sitting in accounts at the bank, then they could begin withdrawing money from the bank branch or ATMs.

Seeing their physical money depleting, the banks then go to the Bank Of England and draw down their deposit reserves, which basically are the banks' own accounts with the Bank of England.

So, for example if a bank has,£1 million on deposit (according to the BoE's computers),
and the bank wants to withdraw £200,000 in paper money (currency) to satisfy demand, here's what the BoE does:-

1.It fires up the printing press and creates £200,000 in new currency (more £50, and £20 notes)

2.It changes its computers to reflect the fact that the commercial bank now has only £800,000 on deposit reserve.

What all this means is that the composition of the monetary base has shifted from being in the bank reserves as against physical currency, based on how much paper money the public wants to hold in their wallets.
The public can't change the total level of the monetary base, but if the public wants to
hold paper money, the BoE accommodates them by reducing bank reserves and increasing the stock of physical currency.

So the supply of paper money in our economy is ultimately constrained by the size of the monetary base.The public can hold more or fewer paper pounds, but these changes are balanced by movements in the commercial banks' total reserves

Now, we have reached the top of the food chain.
There is nothing backing up the electronic book keeping entries in the Bank of Englands computers.
The commercial banks' reserves aren't claims on anything other than simply units of account, namely pounds issued by the Bank of England.

Look at your paper money it says:-

'I promise to pay the bearer on demand the sum of...'

[Terpe]

All money is debt-based money ..... continued.

An example of what the banks did:-


Bank's Balance Sheet after Steve's £1000 Deposit

Assets...........................................£1000 (cash in the safe)

Liabilities + Shareholder's Equity .....£1000 (Steve's deposit account)



Bank's Balance Sheet after Loan given to Terpe

Assets..................................£1000 (cash in the safe)
.............................................£900 (loan to Terpe at 5% for 12 months)

Liabilities + Shareholder's Equity .....£1000 (Steve's deposit account)
.....................................................£900 (Terpe's new deposit account)

Just for this simple example a crucial point is:-

When the bank gave Terpe a £900 loan it created that money out of thin air.

When Terpe spends the loan Steve can still spend his £1,000 in account,

In a real sense, the bank loaned Terpe £900 that it created as a bookkeeping entry.

[Notavirusalso]

so we all rely on debt for the world to go around.. hummm except for a few people im guessing and that would be the people with the money who decide that we should all live in debt because it benifits them