You can’t borrow from the future!

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“We are borrowing from the future” is a common phrase you might hear from economists musing about the state of the economy; about the behaviour of individuals, businesses and especially of government.

These statements arise in discussions about ageing, stimulus, social security, public investment, public debts, health, education and almost every other public policy topics in which economists self-declare some degree of expertise. To really drive home the entrenched nature of such thinking in economics, here’s Satyajit Das saying “Debt allows society to borrow from the future” and here’s something purporting to be an economics text saying the same thing.

Oh, and it’s a favourite line the double-speak repertoire of Tony Abbott and Joe Hockey.

All of this is truly odd. It’s nonsense really. Perhaps expected from politicians, but not from a profession that usually ‘looks through’ the veil of money to the utilisation of real resources in the economy.

The confusion rests on a conflation of money with resources; if money equals a claim on resources then borrowed money, or debts in general, therefore equates to resources borrowed from the future. Will Ricardian Equivalence never die?

All debts are transfers of purchasing power for current resources, despite new bank-issued debts not requiring current funding from a third party (as in the loanable funds model). In a direct credit transaction (peer to peer lending or credit channels including loanable funds) one party gives up their current purchasing power to another, with repayments and interest being a reversing of the transaction over time. No borrowing from the future there.

When new money is created through lending from the banking system, the same thing occurs, except that the society as a whole transfers resources to the entity spending the new money through inflation via their newly available purchasing power. This is usually known as by the concept of seniorage, though rarely is new lending discussed in these terms.

The whole point is that future resources don’t exist yet, so they can’t be consumed in the present! There is no transfer of resources – no hover boards are removed from the future and brought into the present via lending.

Which brings us back to often hotly debated idea of counter-cyclical fiscal policy, which is fundamentally used to increase demand for current production outputs, increase labour demand and employment and inflation, and invest in capital goods to be used in future period to produce those as yet uncertain future products.

Luckily there are some common sense economists out there. At least there was back in 1961 when Abba Lerner wrote this note about the impossibility of shifting burdens onto the future for society as a whole in response to a rather confusing article attempting to say the opposite in the American Economics Association’s most prestigious journal in 1960. Some of the ‘new generation’ are feeling the need to repeat this mantra in blog form.

If all of this isn’t enough, here’s the clincher – if today’s debt is borrowing from future generations, can’t we simply use tomorrow’s debt to borrow from later future generations indefinitely for the infinite future? Yes, yes we can.

Money and debt are mere tools of social goals. They are not the real resources of the economy but records of transaction and ownership claims. We can change the rules at any point to suit our social desires – debts can be forgiven, defaulted on, inflated away, or they can be used to justify war.

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Comments

  1. “.. if money equals a claim on resources…” Ah, but it’s not, is it! ( Because money has become a ‘resource’ of itself; a purpose for which it was never intended. So if ‘borrowing from the future’ is ‘using today what we must replace tomorrow’, then yes, we do borrow from the future…)

    • You can’t borrow from the future, but you can fail to plan for it.
      We have the demographics today that allow us to invest for the retirement of a future demographic bulge. That would mean investing in things like roads, hospitals, transport, and aged care. Instead of investing today we have consumed, which means the working age population will have to toil that much harder in future. That sounds like borrowing from the future to me.

  2. I very much liked the note by Abba Lerner in which the point was well made that it is the destruction of productive capacity, not whether an abstract notion such as debt or inflation, that incapacitates a future generation in relation to the present.

    Yes we can change the rules that relate to all the paper lying around, but getting back the factories and trade skills will take at least a generation — so the debt ultimately paid by future generations is not monetary, its productive — bye bye top soil, bye bye indigenous mineral and energy resources, bye bye efficient transportation routes…

    Consider yourself followed (@rumplestatskin)

    • “Yes we can change the rules that relate to all the paper lying around”

      Which “we” is that?

      I see this idea bandied around often, including by the article’s author in conclusion. But the reality is, “we” the debt serfs do not make, nor change the rules.

      The usurers (via their muppets in Parliament) do.

      The end game of usury-based money is total control, of all the real wealth of the world. The global wealth inequality stats clearly show that this end game is well nigh here already.

      • I disagree, which I have to admit doesn’t happen often with your comments Opinion:

        The paper game is easy to change, the only people who don’t think so are the bankers – I of course concur and acknowledge everything you said below re usuary and fiat debt generation/fractional reserve scamming, but if you really want to dig deep you will find out that the contract with the bank is in fact no contract at all since the bank does not put its signature (after banks don’t have signatures and have no standing in court of record), so its really just a unilateral agreement. If you wish you can later change terms of the agreement and inform the bank (I will now pay you 0% interest on $0 capital and consider the obligation discharge) — yes it’ll be fun in the courts but just put the monies owed into escrow and say the funds will be disbursed once settlement is reached etc etc.

        So the paper game is actually pretty easy, but the productivity destruction that goes with bringing fiat into existence so we damage the top soil with chemicals, pollute the water supplies, pollute the air quality, etc etc etc will be very real problems long after usury has been abolished and the debts forgiven.

        Do you see where I’m coming from here Opinion8red?

      • Yes, see where you’re coming from. But alas, having followed what’s happening in the courts in the USA, with homeowners attempting to do what you describe, it seems clear to me that the usurer class ‘owns’ the legal system almost as much as it does the financial system.

        I must admit to wondering how the kind of legal challenge scenario you describe would play out here in Oz with our full recourse mortgages, by contrast to the USA’s non-recourse mortgages .. ?

        BTW, could not agree more wholeheartedly with you on the environmental impacts of usury. It is deeply saddening to see the “green” movement obsessing over the wrong problems, and failing completely to identify the evil root that needs to be completely cut off (again).

      • “BTW, could not agree more wholeheartedly with you on the environmental impacts of usury. It is deeply saddening to see the “green” movement obsessing over the wrong problems, and failing completely to identify the evil root that needs to be completely cut off (again)”

        Bang on mate!!

    • “it is the destruction of productive capacity, not whether an abstract notion such as debt or inflation, that incapacitates a future generation in relation to the present.”

      Or the failure to invest in the renewal of productive capacity and additional capacity to reflect growing population and rising consumption.

      • Failure to invest is destruction of productive capacity, since you will have no capacity to produce – but yes exactly.

  3. Neat, clear and precise.

    Such ideas have more power politically – try getting the Tea Party and their chief idiot Sarah Palin, to understand. The notion of theft from the future is persuasive politically, as it can set up a us and them political meme especially for the group that sees itself paying for the rest of society and into the future.

  4. I’m not sure why it is necessary to create the ‘theft from the future’ narrative, when its clear that banks are collecting a huge fee from society:

    “When new money is created through lending from the banking system, the same thing occurs, except that the society as a whole transfers resources to the entity spending the new money through inflation via their newly available purchasing power. This is usually known as by the concept of seniorage, though rarely is new lending discussed in these terms.”

    Society transfers resources to the reciever of the funds, but because of interest, I presume we also transfer a percentage of the whole society’s resources to the banks?

    • “…but because of interest, I presume we also transfer a percentage of the whole society’s resources to the banks?”

      Bingo! Well done Dogbert.

      This is a fundamentally flawed article. It evidences a not untypical ignorance of the mechanics of Usury.

      From the article:

      “All debts are transfers of purchasing power for current resources…”

      “Resources”? Really? How is that defined? One can think of all manner of so-called “financial assets” that “money” (which by definition is ALL debt) can be and indeed is “spent” on, which could hardly be defined as “resources”.

      “In a direct credit transaction … one party gives up their current purchasing power to another, with repayments and interest being a reversing of the transaction over time. No borrowing from the future there.”

      This is where the ignorance of Usury’s mechanics is most clearly betrayed. I’ve argued this point previously, with HnH, who similarly asserted the utterly false notion that “debt is self-liquidating”.

      In our modern financial system, all “money” is debt. That means both a Principal, and a Usury component, is owed on all the “money” in existence.

      The Principal is created at the time of issuing the “money” / creating the new debt.

      But the Usury component is NOT.

      So, where do you get the “money” to make those repayments of Principal + Usury?

      From OTHER people.

      Who in turn have debts, owing Principal + Usury too. Whether it be via wages, business profits, dividends, selling your second hand goods on eBay, etc, all the “money” you receive as income first came into existence as a Principal debt … which is owed back to a bank, PLUS an uncreated, non-existent usury component as well.

      Even if you personally have no debts at all, the “money” that you receive, and spend, as a “financial actor” in the economy, all has its origin as an artificially-created Principal debt, owing itself PLUS an uncreated, non-existent Usury component to a bank.

      The only way that the Principal and the Usury obligations can both be repaid, is if the banks continue to issue ever more and more “money”. As debt. Owing itself (the Principal) back to the bank, PLUS more uncreated Usury.

      Today the world is so saturated in pre-existing debt obligations, that there are insufficient new borrowings to keep the Ponzi going. The system itself is clearly unsustainable. A fact that humanity is now painfully slowly beginning to wake up to. AGAIN.

      This is why Usury-based “money” systems are a massive fraud on the human race.

      And why economists and commentators who presume to pontificate knowledgeably on the economic ills of the world are in truth doing little more than muddying the waters, obscuring the truth, and inadvertently acting as “useful idiots” for the Usurer class.

      The Money Myth: Jem Bendell at TEDxTransmedia2011

      “We’re in debt FOREVER. We’re paying compound interest FOREVER.”

      http://www.youtube.com/watch?v=X5uGLbV5zVo

      If you are ignorant of Usury’s “corrosive dynamics”, something that has been known and denounced by philosophers and wise men since the Bronze Age, then you should not be commentating on the economic sphere.

      http://michael-hudson.com/2000/03/how-interest-rates-were-set-2500-bc-1000-ad/

      • Jumping jack flash

        +100

        As you say, in the end, who pays the interest and how can it possibly be paid? To pay interest requires more money borrowed into existence (which also attracts interest) to pay it.

        A marvelous system. It makes perfect sense that controlling interest rates can control the economy to the degree that it does when all money is actually debt.

      • Thanks, I do try to explain this to people (not on the internet) as well, but its hard, people often don’t see the problem with it.

        I blame in part the visit that we did to the mint as school kids when we were told what money was and how it is created.

      • “In our modern financial system, all “money” is debt. That means both a Principal, and a Usury component, is owed on all the “money” in existence.”

        Government money is debt but it’s the government that is the debtor and they don’t pay interest, I don’t see where the Usury component come in with Fiat currency.

        Certainly most of our money is actually created by banks and is principal + usury.

        “This is why Usury-based “money” systems are a massive fraud on the human race.”

        While I agree about Usury being a major problem and I’m a fan of Michael Hudson; this makes it sound like you are advocating commodity money or gold instead of Fiat?

        Personally I can see big advantages to Fiat but I think the government should retain their monopoly on money creation and heavily restrict Usury.

  5. I’m sure the overseas lenders does not care about our ‘social goals’. They expect to be paid. Debt slavery is a social construct, but once it is in place, nothing short of a revolution will change it.

    • Good point I forgot to touch on that earlier.

      This is not money we owe to ourselves as future generations, its money with owe to other (present or future) — China, Japan, US, etc.

      This will be an BIG issue (think German war reparation) — but then theres the old adage – If I owe $10,000 its my problem if I owe you $10,000,000 its your problem.

      • If we can’t repay our foreign debt, we’ll lose our sovereignty. You can look to Greece, Spain, Cyprus, Ireland, etc. Their government is no longer working for their own ‘people’, they’re working for the foreign banks.

      • QED. Of course.

        Consider that perhaps there are no “Soveriegns” left with annihilation of Lybia and Syria et al

      • Australia only remains a “sovereign” nation by reason of the (temporary) beneficence of its creditors.

        We are and have long been owned, by the international usurer class. They’re just being nice to us, for a little while longer. Far easier to dig up and export our national wealth if the wider populace continues to imagine it is “wealthy” and “comfortable”.

        Hey look … we’re winning the Ashes!!! Better go buy a 50in flatscreen on my “credit” card.

  6. Thanks Rumples. If we really were borrowing from the future, we could pay the interest then too, not just accrue it. Debt is real and present tense. Just ask your friendly bankster.

    Australia’s astonishing appetite for debt suggests to me few understand just how closely balanced the interest versus capital gains equation is. And past good gains make future gains less likely, not more so.

    Don’t Buy Now!

  7. At some point in the ecological footprint each one of us makes, we have to realise that having more than 2 children is borrowing from the future. It’s much more than just debt, and, taken in totality, it’s not hard to form the opinion that the same characteristics that made humans dominant on the planet will be the ones that will act to their disadvantage in the future. We all understand the need to bale water out of the lifeboat when there are a handful of us in it. Scale up a bit and you see people still drinking in the bar as the Titanic starts to list…
    Prognosis? Hmmmmmm.

  8. Your argument, that is Lerner’s argument, is based on the assumption that the economy in question is closed, and thus is rather narrow in today’s context. If the debt is not ‘interalized’ and is instead provided by ‘outsiders’, then the economy as a whole can indeed consume more today at the expense of consumption tomorrow (since savings will have to rise in the future). This has been the experience of a host of countries in recent times, most notably the US.

    If an economy is incurring external debt and purchasing goods and services produced externally, then the burden can obviously be shifted on to future society as a whole, since total consumption will need to fall in the future as the external debt is repaid, which is why Lerner strenuously emphasises that this not be the case. As an example, an overwhelming majority of Australia’s public debt is held by foreigners. If the government raises taxes to repay this debt, then it is not shifting purchasing power from one party within the economy to another, but rather from the Australian economy as a whole to the rest of the world. To the extent that public debt is owed to foreign lenders, demand for goods and services provided by public borrowing in Australia does represent foregone consumption in the future.

    None of this is necessarily to argue against public deficits (although I have a strong preference for public investment if this is to be the case, rather than tax cuts, for instance), but rather to highlight the irrelevance of Lerner’s note in numerous cases today (by his own admission if you read it closely).

    • I see your point, but the world economy is closed. My point is that debts are transfers between entities, which is exactly what you suggest – from one country to another. Just remember however, we can’t all be creditors.

      “If an economy is incurring external debt and purchasing goods and services produced externally, then the burden can obviously be shifted on to future society as a whole, since total consumption will need to fall in the future as the external debt is repaid ”

      Why does external debt need to be repaid? Exactly when is this future? Australia has run current account deficits (accumulation of foreign debts) for the entire history of the country. At what point will this accumulated bill need to be completely repaid? In whose interest is it for that to happen? Currently there is a global war to become external creditors through currency devaluation. If we begin repaying debts it means that those export dominant countries will have to start accruing debts (reducing their surplus). Why would they want to do that?

      Australia’s foreign debts will continue to grow because our policy makers are content with our position, and our much larger trading partners want to maintain their positions as net exporters and creditors in the global system.

      Sure, you could imagine political scenarios where repaying debts could conceivably occur. The Greeks are being pressure to do just that, but because of real resource constraint (decades of investment in things that can’t be used to produce exportable goods), the very act of doing so is punishing both themselves AND their creditors.

      It’s a bit like the old saying – you borrow $1million from the bank it’s your problem if you can’t repay. If you borrow $100million its the bank’s problem.

      • Nice thought. If payment was never intended, why didn’t the creditors make it a gift in the first place? I am amazed that a supposedly serious economist thinks with such unreal logic.

      • “Nice thought. If payment was never intended, why didn’t the creditors make it a gift in the first place?”

        Sure, for an individual within the economy, payment can be made in the future, and that’s the usual intention. But that doesn’t mean that the aggregate amount of outstanding debts can’t grow.

        The question is, why aren’t all debts ALREADY PAID? After all, today is the future. Back in the 1970s you could have made the same arguments, and 40+ years later you would still be waiting as Australia accrues ever larger debts to foreigners.

        You forget that some form repayment occurs immediately through an asset transfer – either a claim on future cash flows, or through direct ownership of commercial assets.

        “I am amazed that a supposedly serious economist thinks with such unreal logic”

        I’d be more than happy to hear your ‘real logic’ about debt.

      • so long as our capacity to repay grows with our debt, debt is indeed not an issue. it is not the absolute level, but relative level to our productive capacity that matters.

        the real logic is that debt is debt and not a gift because the creditors expect to be repaid. if they do not doubt your ability to repay, life goes on normally. but note that it is at creditor’s discretion whether we can continue to borrow or not. if you are happy for australia to be one day forced like greece to adjust our living standards, then debt is not a problem whatsoever. if you are, then why aren’t you concerned with the rising debt to gdp ratio, with gdp as an imperfect proxy for our productive capacity?

      • also, your logic is flawed because you ignore real political structures like countries. even within countries, you have different groups of people representing creditors and borrowers. economic and political problems between these entities are real and cannot be averaged away at the aggregate level. that’s why i am dissappointed that a talented person like yourself is distracted by the unreal elegance of the abstract aggregate.

      • Just Dismal 2 has just said this but; the foreign debt is fine provided it doesn’t accumulate at a faster rate than GDP growth over the long run.

        The foreign debt limit in theory would be reached when the entire profit share of GDP goes towards servicing the foreign debt (I think).

        In reality, the limit would be reached when future trade surpluses plus GDP growth could not be expected to offset future servicing costs and therefore the foreign debt/GDP ratio could not be stabilized over time (I think).

      • retracting previous comment and replacing with the following.
        more on the real logic. political structures in the world and interest groups within a country representing creditors and debtors are real. the mathematical average of the agregate that elegantly hides the problems of debt is an abstract construct and is unreal. perhaps that’s why many economists cannot see the global financial crises coming, while many noneconomists have long wondered how long the credit boom could continue.

        between the entities, borrowing from the future is defintely real, as long debts remain debts, not gifts.

      • Most of the economic crisis in the world is caused by creditors refusing to ‘rollover’ the debt. So what happens to Australia when the foreigners refuse to buy our debt? The RBA can print, however Australia import most of our goods and refined oil (we’re on track to shutting down most of our oil refineries). How will Australia pay for those?

      • a simple and elegant solution also exists in such an event. the economist simply redefines depression as the normal state of affairs. easy!

  9. All consumption of non-renewable resources makes them not available to future generations.

    There might be beneficial residues, such as a building that has value if iron ore is consumed in the making of the steel that is used in the building, and some of the resource consumed may be able to be recycled such as the steel from the building being scrapped and used as feedstock for new steel. There might even be future technologies that might recover presently irrecoverable resources, but then again, their might not.

    Also some resources can be made unavailable or more expensive for the future such as by industry contaminating, soil, sediment or water today. The argument about the potentially harmful effects of fracking on water aquifers is a good example of this.

    Maybe depriving our children’s future would be a better saying.

    Taking a sound bite and trying to undermine the principles and processes that it represents on a literal and semantic basis is fundamentally flawed.

    We live in a finite world.

    Infinite exponential growth is not possible in such a world.

    • +1 That’s the point I hinted at earlier. The world will spend what they have now. They won’t leave anything for tomorrow. The rationale? If they don’t spend it someone else will. Tomorrow’s toxic wasteland is today’s opportunity to get rich.
      If you want to know the outcome of globalization, just think of the lowest common denominator. In a world with a much lower population density this wouldn’t have been such a bad thing. Where we are now however, and where we’re going with the attitude (you might also say necessity) that every effort we make is to support the sacred goal of growth, well, it ain’t going to be family villas in nice quiet suburbs I can tell ya.

      • On the other hand who gets to survive to be part of this “low population density” — will it be your and my progeny? Or the progeny of the mega rich that have essentially precipitated this very calamity?

        As always be careful what you wish for right?

      • I suspect, Migtronix, that the winning progeny will be of those whose lives are far harder than the soft, cushioned, politically correct equivalent led by the great entitled who, by and large, can’t see it coming. Hardship generates strength and determination in those who survive it. If we translate those two words into “competitive” then we see straight off that we’re in deep you know what. Of course, ironically, the first guys up against the wall are likely to be the rich!

      • One massive difference this time around my friend, and its a terrifying one – the coddled few who are to be lined up against the wall control nuclear weapons, chemical weapons, biological weapons, space-delivered kinetic weapons (basically dropping sh*t from space down on you!!!) – I’m not sure your backward, tough as nails, resilient and resourceful homo-sapien sapien can quite cope with that assault.

        As I said, terrifying.

  10. Interesting topic. Take two islands with two communities. Imagine what can be done to damage one community in 100 years time, and by contrast what can be done to boost the other one in 100 years time.
    Germany 1945 completely bombed-out. Look at it now.
    Australia 2013 with massive debt but not bombed-out. Is the future dim?

  11. Nice article. At any point in time, total debtors always equal total creditors; so if we really are borrowing from future generations, we are also lending to future generations by exactly the same amount.

    Don’t agree that seniorage applies to the banking system though. Any bank loan (regardless of how it is funded) involves a transfer of purchasing power from a single lender to the borrower.

      • All the principle can be paid out (no more creditor) but the outstanding interest still exists (still a debtor)

      • If someone still owes interest on a repaid debt. The other party still has interest receivable (ie. they are still a creditor because they are still owed money)

      • but its made up because the principal was created out of thin air, so when paid back its extinguished, goes back to nothingness — so for the total creditors to equal total debtors you either have real capital there as principal that you actually give away and get back, or if you are going to persist with inventing principal then get rid of interest payments.

        That’s the whole point opinion8red is making here, the principal is invented and becomes extinguished it doesn’t stick around as real useful capital

      • It isn’t created out of thin air. The principal represents foregone purchasing power by the party sitting on the asset side of the transaction.

        Even if it was created out of thin air, it wouldn’t matter, because someone has to have taken up an asset whenever the loan was made.

      • It is created out of thin air. Look it up, fractional reserve banking — there is no forgone purchasing power, only a dilution of the existing purchasing power of the currency the loan/principle created out of thin air is denominated in.

        Believe me its a truth that makes one so angry one has an inclination to disbelieve it, but look through the videos posted above, or I can show where in the Melbourne Atheneaum to find the books detailing this (since the creation of the Bank of England)

      • “..there is no forgone purchasing power, only a dilution of the existing purchasing power of the currency the loan/principle created out of thin air is denominated in.”

        Spot on Mig.

      • It’s not created out of thin air. If a bank makes a loan and credits a deposit, they have to pursuade a lender to forego purchasing power and *hold* the deposit by the amount of the loan (the sequence of this is irrelevant)

        A government can do what you say and create their own credit by printing money. But debtors and creditors still have to net out to zero. Its just that the government has become a larger debtor (in nominal terms) by the increase in its consolidated balance sheet.

      • It seems we have confusion here, perhaps arising from insufficient definition of terms?

        Sweeper wrote: “At any point in time, total debtors always equal total creditors”, AND further that “Any bank loan .. involves a transfer of purchasing power from a single lender to the borrower.”

        First, and quite obviously, there are more borrowers than there are lenders. One lender (a bank) may have hundreds of thousands of borrowers. So “total debtors” obviously do not equal “total creditors”.

        Second, if what you meant instead (as I presume?) was that total debts equal total credits, this too is incorrect, for the reason explained at length above.

        The lender (bank) creates a loan of (say) $10,000 Principal, and credits that Principal to the borrower. On its own balance sheet, however, it claims both a Principal AND a Usury component value as Bank “Assets”. As “Liabilities”, it only lists the Principal value, which is the borrower’s new Credit of $10,000.

        The borrower now has that $10,000 credit balance available to spend. But he legally owes the bank both the Principal 10,000 AND a Usury component too.

        That Usury component has to be found by competing with his fellows for “money”. Which all has its origins in the same way; what he “earns” through wages, profits, dividends etc, is someone else’s Principal, which by virtue of its existing, must have and always has more Usury owing on it.

        As any student of usury knows, a usury-based system means that “money” is artificially scarce. Hence our wonderful “capitalist” system of ever-increasingly immoral and vicious, dog-eat-dog “competition” between human beings, rather than (oh, say) cooperation.

        I’ve deliberately refrained from going into the mechanics of banks creating loans here in Oz, supposedly “backed” by foreign borrowings. Suffice to say, once you pause to consider the fact that Net Interest Margin — the heart and soul of banks’ profit-making — necessitates the bank creating more Usury obligations to itself, than it has (or will have) Usury obligations to other banks, then it should be clear that the underlying principle explained in the simpler example remains true.

        In summary then, total debts do not equal total credits either. Thanks to the uncreated obligations of compound Usury, there are far, FAR more total debts than there are total credits.

      • I think there must be a confusion in terminology here, because I can’t believe this is even debateable.

        There is a usury component on both sides of the banks balance sheet. The bank is an intermediary matching lenders and borrowers. The usurer is the ultimate lender holding a deposit with the bank. The usury component is the risk adjusted interest they are charging and has to be positive otherwise the lender would hold currency instead.

      • Sweeper: Again, hold *what* currency? What you call currency is already an obligation on someone else! Unless its in coin form.

        Look at what we call Australian dollar bills, they’re not really Bills of Exchange they’re deposit slips for which all you can redeem is another bunch of deposit slips (unless you ask for coins).

        Government COULD create credit out of thin air without obligation but doesn’t, the banks can lend >>> much than they hold in deposit, that’s what we keep trying to tell you. Your money in the bank doesn’t go anywhere when I get a loan from them – why not?

        But like I said, and opinion8red, all that you call “hold the currency” is already an obligation to someone else. House always wins.

      • Sweeper,

        How does a bank make a profit?

        What exactly comprises that profit?

        Where does the “money” comprising that profit originate (ultimately come into existence)?

        HOW does it first come into existence … in what form?

        Hint: Here’s NAB explaining How Do Banks Make Money –

        “They make money just like any other business. The difference is that their product is money. In other words banks sell money, mostly in the form of loans. Their profit is the difference between what they pay in interest on your deposits and what you pay them in interest for the loan they made you. Banks also charge fees for services.”

        http://learn.nab.com.au/how-banks-work/

        How does a bank make a profit from a positive Net Interest Margin (NIM), if (as you claim) total debtors equal total creditors?

        Where does each bank’s (many billions in) positive Net Interest come from?

      • Strictly speaking the net interest margin is the return on providing intermediary services.

        It’s not the same as a usury return, which is going to the ultimate lender simply because (as you point out) money is scarce.

        For example: Suppose currency did not exist. Safe nominal rates could fall below zero. Lenders could not charge usury (therefore usury would not exist). But banks could still collect a net interest margin even when they intermediated at negative rates. As before, the net interest margin would reflect the gross return on providing intermediary services and could not include a usury component because usury is no longer possible.

      • Sweeper: so let’s say I create an online exchange where people can trade contracts (bonds), the exchange takes a broker fee but on face value not copouns, isn’t that eliminating your banks role? If you did that and remove “money”/deposits from circulation the total outstanding interest would become mathematically impossible to repay because deposit deflation makes lending impossible and bank runs inevitable! This is exactly what happened with money market funds 07/08.

      • Sweeper: so let’s say I create an online exchange where people can trade contracts (bonds), the exchange takes a broker fee but on face value not copouns, isn’t that eliminating your banks role? If you did that and remove “money”/deposits from circulation the total outstanding interest would become mathematically impossible to repay because deposit deflation makes lending impossible and bank runs inevitable! This is exactly what happened with money market funds 07/08.

    • Sweeper, let’s consider that with regard to RE. For many years banks acted with a certain amount of prudence because population growth was comparatively low and the rate at which property prices rose was, mostly, comparatively low. The key change came with the realisation that you could create debt by relying on the old adage “If I don’t get it I’ll miss out”. To achieve this result you only had to offer a higher LVR to people, this would allow them to raise their stake in the auction, while at the same time creating a feedback effect that meant people perceived the “value” of property as increasing at a faster rate than historic inflation. Perfect. You’ve managed to lumber those who borrowed with a greater debt and you’ve cashed in without having printed a single note. The fact that it might make your asset balance rather precarious is irrelevant, you’ve got your pile, and even better, the politicians of the day have weighed in to help you through your providing the opportunity for personal and political gain (consider only the creation of negative gearing) and the same fear of instability (nice work with the guarantee Kevin).
      A work of genius.
      Of course, the vastly increased debt is a burden whose onward effects (and into the next generations) will include distortion of the economy, depression and social breakdown, all, as it happens, exacerbated by globalisation and the resultant pressure on employment. A lot of comforts available to previous generations are no longer open to you. I doubt the bankers can see that too clearly from large villas on some remote, perfect island.

  12. This blog proves that economics is indeed just dismal. Real problems can be explained away by redefinition. Only if that works.

  13. Borrowing from the future is a truly absurd concept. Could you imagine an engineering class where someone suggests that diesel to run an engine can simply be borrowed from the future. It’s a nice concept but it clearly violates several laws of physics including my favorite fall back the Second law of Thermodynamics. It is this law that ends all discussions on perpetual motion machines and I’d go so far as to say it is this law that truly governs / limits all real world economics.

    Just as no diesel engine can borrow today’s fuel requirements from the future, no economy can borrow real commodity inputs from their future. All real goods require real components that are produced by real mines and real factories. The only borrowing possible occurs when non-renewable resources are consumed, but since they belong to today’s generation they also cant possibly be borrowed.

  14. Great discussion, guys.

    As I came late to the party, I do not have much to add as for the conventional money.

    Some long time readers may know that I had been contending that energy should be the ultimate currency, more than dollar, more than gold. A unit of energy is underwritten by Physics and it can be converted to many useful things such as fresh water (via distillation of brine for example).

    Then, we CAN “borrow from the future”. In fact, we have been both “spending the past savings” (fossil fuels) AND “borrowing from the future” (nuclear).

    • Interesting idea dumpling and as long as its not “energy trading” ala carbon credits I’d be happy to look into it more technically.

      Basically at this stage I’m willing to give anything that isn’t based on the exponential function a go!