Interest rates.

[slider123456]

Quote from vv111y:

Question I have - for any econ guys - are the market fundamentalists / austrian school guys right that market determined interest rates are 1)better, 2)won't cause boom/bust cycles? As opposed to centrally controlled rates ala central banks.

Any interest rate will necessarily cause inflation unless a trade surplus evens it out.

The trade surplus is necessary to even out the loss which occurs because a %5 interest loan with an increase of wealth of %4 (or inflation) is a net loss of %1 per year for the country.

If a country has a %1 trade surplus at the beginning of this cycle no inflation will occur. This is what happened right after the great depression. If the country does not have a trade surplus or has a deficit it will go into debt which will equal at least %1 per year.

On a approx 70 year cycle depending on surpluses, deficits this could add up to a %70 loss minus any increase in the efficiency of production say %20. This will eventually lead to collapse with an exponential increase of debt at the end just like right now.
If we do not have massive trade surpluses to pay off this debt right now the result will be massive foreclosures and a default on the massive interest debt. Unless people are refinanced at %0 interest this will happen and already is.

After all these massive amount of foreclosures are defaulted on along with the massive amounts of accumulated interest debt prices will drop like a rock. This will result in a situation much like after the Great Depression.

 

[slider123456]

Quote from achilles28:

Insightful post.

Fractional Reserve Banking and Debt-based money is parasitic by its very nature.

Ever dollar minted is debt. So money supply must grow commensurate with interest payments or the System collapses.

This is why we have inflation. To keep debt payments serviceable.

In reality, this is stupid. There is no need to borrow something thats created freely.

Further, if all debt was paid back, under the current system, there would be no money supply and the economy would collapse.

Debt is money supply. And money supply is debt.

So what the Great Scammers bestowed on this Country is a life of financial servitude in perpetuity that ends in cataclysmic bankruptcy.

Debt cannot be paid back. It can only earn interest. And that debt (which earns interest) must grow every year to accommodate economic growth.

The whole scam will eventually bankrupt the entire Country and all assets will be forfeited to FED MEMBER BANKS. Heres a simple example to illustrate:

Every dollar minted costs 3% interest TO CARRY, per year.

Lets assume our GDP starts at 100$ per year and grows at 3% per year.

Year 1: 100 x 1.03 = 3$ interest.

Year 2: 100 x 1.03 = 3$ interest
..............103 x 1.03 = 3.09 interest

Year 3: 100 x 1.03 = 3$ interest
.............103 x 1.03 = 3.09$ interest
.............107 x 1.03 = 3.21$ interest


See whats happening here?

Each year, the money supply (aka debt) is only *serviced*, not paid in back full.

So by the end of year 3, the interest payments on each years cumulative and ongoing debt is now 8.6% of GDP. Not 3% from which we originally started. Taken to its logically conclusion, the eventuality is debt-service payments on M3 money printed from nothing or borrowed from foreigners will eventually cost the United States 100% of its GDP.

This is also why Income Tax has continued its rapid ascent since 1913 and will never come down. To accommodate the unstoppable ballooning of interest payments that must be made on the ever increasing money supply. Money supply which is 100% debt-based.

This is the scam.

It doesn't matter if FED Funds average rate is 1%. Sooner or later, the entire COUNTRY will be the property of BANKSTERS because the interest on all that paper created since 1913 only accumulates. The principle is NEVER paid back.

Its a mathematical certainty.

And very, very fucked up.

If enough people understand and know about this it will stop! The upcoming and inevitable depression is the time when change will have to be implemented. It is much harder to change the course of a stable system than an unstable one.

 

[riskfreetrading]

Quote from slider123456:

Any interest rate will necessarily cause inflation unless a trade surplus evens it out.

The trade surplus is necessary to even out the loss which occurs because a %5 interest loan with an increase of wealth of %4 (or inflation) is a net loss of %1 per year for the country.

If a country has a %1 trade surplus at the beginning of this cycle no inflation will occur. This is what happened right after the great depression. If the country does not have a trade surplus or has a deficit it will go into debt which will equal at least %1 per year.

On a approx 70 year cycle depending on surpluses, deficits this could add up to a %70 loss minus any increase in the efficiency of production say %20. This will eventually lead to collapse with an exponential increase of debt at the end just like right now.
If we do not have massive trade surpluses to pay off this debt right now the result will be massive foreclosures and a default on the massive interest debt. Unless people are refinanced at %0 interest this will happen and already is.

After all these massive amount of foreclosures are defaulted on along with the massive amounts of accumulated interest debt prices will drop like a rock. This will result in a situation much like after the Great Depression.

"Any interest rate will necessarily cause inflation.."

In the current system, it is the other way around. Interest rate is a reflection of inflation, and inflation is a consequence of profits made by not laboring but rather just taking a difference between a borrowing rate and a lending rate (which is a result of labour) which causes a devaluation of the medium of exchange which called money. The savers then require a positiive interest rate. If you do not have the above difference, medium of exchange will not devalue and savers will be happy with zero interest rate.

 

[riskfreetrading]

Quote from gucci:

You are missing one function.

And perhaps we should start with some simple questions: What is economy? What is wealth? How can wealth be created?

1. What is the missing function? Note that barter is wider in my understanding than it might be in others minds. Barter is a mean to exchange (past, present and future) result of labor. This does not mean that this exchange should be thought of as is an exchange done on the spot (like cash market), but is also inclusive of transactions across time a-la- futures/forwards market to link present with the future.

2. I will answer the rest once I hear your answer.

 

[slider123456]

Quote from riskfreetrading:

"Any interest rate will necessarily cause inflation.."

In the current system, it is the other way around. Interest rate is a reflection of inflation, and inflation is a consequence of profits made by not laboring but rather just taking a difference between a borrowing rate and a lending rate (which is a result of labour) which causes a devaluation of the medium of exchange which called money. The savers then require a positiive interest rate. If you do not have the above difference, medium of exchange will not devalue and savers will be happy with zero interest rate.

The easiest way to understand how interest actually causes inflation is in the example I gave before.

If I get a loan on an asset I own that is worth a $1000 with %5 interest then pay the interest off I now have $950 to buy $1000 worth of goods. My money does not buy as much anymore. This is the fundamental cause of inflation.

Right now Japan is lending money at %0.5 and their core inflation is steady at %0.1.
If the banks did the same thing here the same thing would happen.

There economy was in much worse shape than it is here now and they corrected that by lowering interest rates. That should go to show that inflation follows interest not the other way around.

 

[achilles28]

Quote from slider123456:

If enough people understand and know about this it will stop! The upcoming and inevitable depression is the time when change will have to be implemented. It is much harder to change the course of a stable system than an unstable one.

Scary, actually.

I've read the Mandrake Mechanism in books. But last night, finally understood.

Its like a Trojan Horse in slow motion.

 

[Capablanca]

Quote from slider123456:


There [sic] economy was in much worse shape than it is here now and they corrected that by lowering interest rates. That should go to show that inflation follows interest not the other way around.

You don't seem to understand what happened in Japan. After the bubble popped, asset prices kept going down and down and down from their lofty heights. Wen consumers realized that what they wanted to buy would become cheaper the longer they waited it created a disincentive to spend and weakened demand. In essence what happened was that paper money became more valuable in relation to assets as time passed. It's the opposite of inflation. It was a deflationary spiral. To combat this and encourage people to spend money the Japanese authorities lowered interest rates to flood the economy with money. It's a radical idea. It should be noted that it is a reaction to the circumstances, not a cause.

Look up the term "liquidity trap" for more detailed explanation.

In the current situation in the US there is still a danger of inflation, so the advisability of lowering rates is not clear.

 

[achilles28]

Quote from slider123456:

If enough people understand and know about this it will stop! The upcoming and inevitable depression is the time when change will have to be implemented. It is much harder to change the course of a stable system than an unstable one.

My original example was wrong.

But the answer remains same for a different reason.

The entire outstanding money supply is used to calculate interest owed.

So if money supply grows faster than real GDP - IOW, if debt grows faster than the ability to payback - then eventually, interest payments consume all GDP.

This is apparently the case.

Take FED Funds at 1%, money supply growth at 5% and GDP at 3%.

Should work out.

First Year

Nominal GDP 100 x 1.01 = 1$ interest paid from 103 Real GDP available.


5th Year

Nominal GDP 127.62 x 1.01 = 1.27$ interest paid from 115.92 Real GDP available.


10th Year

Nominal GDP 166.88 x 1.01 = 1.66 Interest paid from $134.49 Real GDP available.



Interest Paid as % of Real GDP

1st Year = 1 / 103 = .0097

5th Year = 1.27 / 115.92 = .0109

10th Year = 1.66 / 134.39 = .0123



That proves it. Holy Shit.

Each year, interest paid gets bigger as a percent of Real GDP.

Takes a long time. But its exponential.

The net effect is the difference from Real GDP and Money Supply Growth. That differential is the exponential multiplier.

What the fuck.....?!!


Lets use some real numbers next.

Average Money Supply Growth since 1913.

Average GDP Growth Real since 1913.

Average FED Fund Rate since 1913.


With that, we could predict when the United States will collapse, financially. More or less.

 

[slider123456]

Quote from Capablanca:

You don't seem to understand what happened in Japan. After the bubble popped, asset prices kept going down and down and down from their lofty heights. Wen consumers realized that what they wanted to buy would become cheaper the longer they waited it created a disincentive to spend and weakened demand. In essence what happened was that paper money became more valuable in relation to assets as time passed. It's the opposite of inflation. It was a deflationary spiral. To combat this and encourage people to spend money the Japanese authorities lowered interest rates to flood the economy with money. It's a radical idea. It should be noted that it is a reaction to the circumstances, not a cause.

Look up the term "liquidity trap" for more detailed explanation.

In the current situation in the US there is still a danger of inflation, so the advisability of lowering rates is not clear.

I understand what happened in Japan. They went through the same credit crunch as is happening here. Their debt load became more than they could sustain so the money supply choked up. After the necessary inflation deflation period they began lending money cheaply. The funny thing is they would be better of to give a small amount of money to everyone a sort of welfare to start the economy. Read some of the works f economist Clifford Hugh Douglas and you will see that our current economy is unsustainable especially the A+B theorem. I do not personally agree with all his ideas but even they are 100 times better than the current economy.

As for the interest it is not a good idea yet but if when we go through the inflation then unemployment cycle it will be.

 

[slider123456]

Quote from achilles28:

My original example was wrong.

But the answer remains same for a different reason.

The entire outstanding money supply is used to calculate interest owed.

So if money supply grows faster than real GDP - IOW, if debt grows faster than the ability to payback - then eventually, interest payments consume all GDP.

This is apparently the case.

Take FED Funds at 1%, money supply growth at 5% and GDP at 3%.

Should work out.

First Year

Nominal GDP 100 x 1.01 = 1$ interest paid from 103 Real GDP available.


5th Year

Nominal GDP 127.62 x 1.01 = 1.27$ interest paid from 115.92 Real GDP available.


10th Year

Nominal GDP 166.88 x 1.01 = 1.66 Interest paid from $134.49 Real GDP available.



Interest Paid as % of Real GDP

1st Year = 1 / 103 = .0097

5th Year = 1.27 / 115.92 = .0109

10th Year = 1.66 / 134.39 = .0123



That proves it. Holy Shit.

Each year, interest paid gets bigger as a percent of Real GDP.

Takes a long time. But its exponential.

The net effect is the difference from Real GDP and Money Supply Growth. That differential is the exponential multiplier.

What the fuck.....?!!


Lets use some real numbers next.

Average Money Supply Growth since 1913.

Average GDP Growth Real since 1913.

Average FED Fund Rate since 1913.


With that, we could predict when the United States will collapse, financially. More or less.

Any numbers like that seem hard to find. Even average cost to average wage over the last 50 years is impossible to find.