15 thoughts on “Paper Money Is Debt

  1. cb says:

    Thanks. An oft regurgitated story by the likes of daily reckoning. They are good at pointing out the obvious part of the picture.

    cb

    Comments on the article:
    A. The author asserts all money is debt. Not true.
    B. Just because dollars were introduced as debt does not mean they stay as debt.
    C. Dollars created as debt, which debt was defaulted on, does not maintain those issued dollars as debt.
    D. The author states “If all dollar-based debt were retired — all $88 trillion, public and private — each dollar would vanish into the nonexistence whence it came.” Yet the author doesn’t identify the most important question —- how many dollars exist to address that debt. In full,
    How many dollars exist, who owns them and where are they? And what does he mean by retired? Does he mean paid off AND defaulted upon. I own dollars that might never be used to pay down debt, because I have no debt.
    E. The author quotes Eccles, who said: “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” Doesn’t ring true. What abut all the dollars in existence when the FED was created? What about the dollars that were exchanged for gold? If all debt were eliminated, either through repayment or default or jubilee, why couldn’t my dollars still remain in my pocket?
    F. The author quotes Mr. Robert Hemphill as saying : “If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation.” …… Why do you have to have a bank deposit to have a dollar or coins in circulation? Answer – You don’t.
    G. The author quotes Griffin as saying: “It is difficult for Americans to come to grips with the fact that their total money supply is backed by nothing but debt, and it is even more mind-boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence.” That glorious word if… That questionable premise “if everyone paid back all that was borrowed” how convenient to ignore the dollars in my pocket that borrowers have no right to, or to ignore the huge loans which have been already defaulted on, or to paste over Griffins ignorance on the essential questions: 1. How much debt is in existence? 2. How many dollars are in existence, who owns them and where are they? 3. What is the duration (when due) of the existing debt? 4. How does the ownership of dollars line up with debtor obligations? 5. How does the transfer of assets take place when desperate debtors have to make deals with owners of dollars to retire debts secured by assets? 6. How large a haircut do creditors have to take when debt is defaulted upon (sorry Griffin and Eccles, but your bullshit implied premise of “if everyone paid back all that was borrowed” is just that ……….. wide eyed sensationalist bullshit. That does not have to happen. Is it even possible to happen? Are there enough dollars in existence to match debt in existence? How many dollars are in existence? Does anyone know? Is it an important question?

    1. Bill Terrell says:

      “Just because dollars were introduced as debt does not mean they stay as debt.”

      In which case we’re missing identification of some transformative act that would eliminate their debt nature. Wouldn’t that be something we’ve heard of?

      “Yet the author doesn’t identify the most important question —- how many dollars exist to address that debt.”

      This assumes that the debt is one of dollars. The debt is not dollars owed … the dollars themselves are debt. It’s not like A owes B so-and-so many dollars. That would be a debt of dollars.

      “How many dollars exist, who owns them and where are they?”

      That’s the subject of the article How Many Dollars Are There?.

      “I own dollars that might never be used to pay down debt, because I have no debt.”

      This highlights the fundamental misunderstanding of what is meant by debt based money. It does not mean money is owed. You can have a dollar in your pocket without owing it to anyone. But that’s not what we’re talking about here. The dollar represents a debt owed not by you, but to you.

      The dollar itself is a debt security. That’s why it’s called a Note.

      Let’s illustrate with an example. You lend an item to the bank. The bank gives you an IOU for the item. It says something like “ABC Bank Note”. It’s a claim check for your item, stating the bank owes you this item.

      The note may be a bearer note that entitles anyone who has the note to present it to the bank for payment. In which case it functions as paper money. You can trade the note to a third party, the third party can take it to the bank, and exchange it for the item.

      This note is a functioning currency. Whoever possesses it is owed the item by the bank.

      Notice that so far, no one owes anyone else any of the notes. Rather the note itself is a debt. What you ordinarily think of as debt is this second kind of debt … a debt where someone borrows the note and then owes the note. That’s a debt of a debt … a debt squared, if you want to call it that.

      Your argument only identifies debt with people borrowing the notes from each other. And so that if everybody repaid their debt of notes, there would be no debt left, and therefore all the debt could be repaid and the notes would still exist. But although no one would owe anyone notes, the bank would still owe the the original items to holders of the notes.

      In other words, there is still debt because the notes themselves are debt!

  2. cb says:

    Finster said: ” You can have a dollar in your pocket without owing it to anyone. But that’s not what we’re talking about here. The dollar represents a debt owed not by you, but to you.”
    ————————————
    What am I owed for the dollars in my pocket that I own? Does the FED owe me anything for them? What does the FED owe me? Who owes me and what do they owe me?

    1. Bill Terrell says:

      Excellent question! This is where it gets interesting. The full answer is long and complicated … that’s why people like Griffin can write a seven hundred page book about it. But I can hit the high points.

      Remember my example where you lend “an item” to the bank? If it really mattered what the item was, then I wouldn’t have just said “an item”. What does matter is that it’s a “bearer” note … not only can you take it to the bank and get your item back, but anybody can. So you can exchange it to a third party, who knows that he can claim the item with it. What you got by exchanging it to the that third party is, as far as you care, what you were owed.

      The third party might then exchange it to a fourth, who exchanges it to a fifth, etcetera. That’s what makes it a medium of exchange. Ultimately though it can wind up back at the originating bank, who pays “the item” it borrowed.

      Historically that item might have been 1/35 ounce of gold. Today, however, for a Federal Reserve Note, it’s technically some portion of whatever the Fed has on its balance sheet. And that is mostly Treasury bills, notes and bonds.

      And Treasury bills, notes and bonds are … drum roll please … Treasury debt.

      In principle, then, what the Fed owes you is mostly Treasury securities. But in practice, you don’t go to Washington, find the Mariner Eccles Building, walk in, present your Federal Reserve Note at the window, and receive a dollar’s worth of Treasury securities. You instead exchange it to someone else, who passes it to someone else and so on, until someone in that chain of custody (for example a bank, bond dealer or even the Treasury itself) actually does trade it to the Fed for Treasury securities.

      When it finally is accepted by the Fed for Treasury securities though, it disappears. In practice, however, the Fed buys more Treasury securities than it sells, which is why its balance sheet is in the multi-trillion dollar range today.

      This is inflation. As the number of dollars grows, each is worth a smaller share of what is owed for them, their value decreases, and it takes more of them to buy the same stuff.

  3. cb says:

    A. The fact that a dollar “can” wind up back at the bank, does not mean it has to wind up back at the bank or ever will wind up back at the bank.
    B. I have no right to demand exchange of my dollar(s) to the FED for Treasury securities.
    C. “In Practice” the FED does buy more Treasuries than it sells, because it is able to create dollars at will, from nothing, and receive an obligation, on paper, from the US Treasury. The US Treasury also produces the Treasuries from essentially nothing (perhaps some paper and ink). The dollars created by the FED are a unit of account, issued by the FED as keystrokes, and accounted by way of a book-keeping entry and called a liability, even though they were used as an asset to purchase something. They are not a true liability at all, but are called such to bastardize the language and confuse. The FED can also create dollars and buy things other than treasuries.
    D. The only obligation of the FED regarding Treasuries is to return FED owned Treasuries, or cancel them out, IF the principal with interest is paid back to the FED. What the FED does with paid back dollars I don’t know. Do you?
    E. The FED creates dollars from nothing, exchanges them for an obligation of the Government, and gets paid back those dollars and more dollars in interest. Voila, something for nothing. Neat trick to put the word “Note” on dollar bills and call them liabilities. Nice slight of hand.
    F. Do the amount of dollars in existence exceed the size of the FED’s balance sheet?

    1. Bill Terrell says:

      A. Word play? It doesn’t matter whether it actually goes back to the bank. The issue was a hypothetical to begin with: If all debt were eliminated, there would be no dollars left.

      C. Whether dollars are used as a unit of account is immaterial. You could use any security as your unit of account. What is material is that they are a liability of the Fed. They are debt securities issued by the Fed, as plainly indicated on the notes themselves, and as they appear on the Fed’s own balance sheet.

      If you want to convince people that these facts in writing – on the notes themselves and by the very institution that issues them – are false, don’t you see why you will need something more weighty than your opinion to the contrary?

      D. Yes I do know what happens to paid back dollars.

      They vanish.

      F. Oh yes, the number of dollars in existence vastly exceeds those on the Fed’s own balance sheet. This is due to the “money multiplier” effect we discussed before. Dollars deposited in a bank get loaned out, but the depositor still has a claim on them. As I pointed out then, this is one of the things that makes it impossible to nail down the exact number of dollars in existence. Even if you could state a number, an instant later it’s changed.

  4. cb says:

    “Just because dollars were introduced as debt does not mean they stay as debt.”

    In which case we’re missing identification of some transformative act that would eliminate their debt nature. Wouldn’t that be something we’ve heard of?
    ——————————————–
    debt nature????

    Bill, you are playing with words here. If I am issued dollars because I take out a loan, as soon as I buy an asset or service with those dollars I received, those dollars are an asset of the person I transferred them to in exchnge for the asset or service.

    and how about default? is that a transformative act?

    1. Bill Terrell says:

      Call it word play if you like, but it was you that claimed that dollars can be issued as debt and later become something that is not debt. I’m saying I don’t believe it … show me. The burden of proof is on you to identify such a transformation. Whether you can back up your assertion is a substantive point.

      None of those events magically transform the dollars from one thing into another. All that changes is who has them. If for instance I owe you $1000 and fail to pay up, I simply have $1000 more than I would have otherwise and you have $1000 less.

      But that’s all beside the point. You’ve gone back to confusing a debt of dollars with the debt that the dollars themselves represent. Please see again my reply of 0416 18:05: https://financology.net/2022/04/15/paper-money-is-debt/#comment-1034

      I get the feeling you’re looking for complexity and nuance where there isn’t any. It’s very simple. Dollars are IOUs. It’s not fundamentally different than if you dropped a barbecue grill off in my garage and I handed you an IOU for it. Issue a zillion of them and people can trade them back and forth for other things … which confers to them the status of currency.

      It’s only when we starting digging into the question of what exactly what they are IOUs for that things start to get a little more complicated. But that’s a separate question. Try getting your arms around the two issues one at a time and it’s a lot easier … you can’t even sensibly answer what they’re IOUs for while insisting that they’re not even IOUs!

    2. cb says:

      Bill said: ” Oh yes, the number of dollars in existence vastly exceeds those on the Fed’s own balance sheet. This is due to the “money multiplier” effect we discussed before. Dollars deposited in a bank get loaned out, but the depositor still has a claim on them. As I pointed out then, this is one of the things that makes it impossible to nail down the exact number of dollars in existence. Even if you could state a number, an instant later it’s changed.”
      ——————————————-
      Is it not possible to track all bank loans? and the number of dollars “created” therefrom? Is it possible to get a close approximation of dollars in existence? and why couldn’t that number be updated on a regular basis?

  5. cb says:

    by the second? do the amount of dollars in existence change with more volatility than stock market valuation or the amount or the amount of debt in existence?

    Does the FED published money stock data equal the number of dollars in existence?

    1. Bill Terrell says:

      Oh yes. How many banking transactions do you suppose take place in the world every day? I don’t know, but take a stab at it and divide by 86,400 and you’ll have an estimate of the number that take place every second.

      Meanwhile the Fed has an answer to your question; if you find a better one by all means feel free to share!

      I don’t know about the number, but the value of the dollar is comparable in volatility to the global stock market. Oh maybe about a fourth as volatile. But you don’t notice it directly if you use the dollar itself as a yardstick. See my reply to Sunpearl.

      This is one reason I developed the Financology Dollar Index. The FDI exposes not only the broad trends in the value of the dollar (usually down!), but also the volatility on as short as a weekly basis.

  6. cb says:

    Bill said: ” Word play? It doesn’t matter whether it actually goes back to the bank. The issue was a hypothetical to begin with: If all debt were eliminated, there would be no dollars left.”
    —————————————————
    Would there be any silver dollars left?

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