| student |
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I'm trying to figure out how loans work... Let's say there's $100 in the money supply. I ask the govt for $50 so I can go to college. The fed "prints" the $50 as national debt and gives it to my school. There's now $150 in existance. I graduate and get a job and get $60, which I pay back to the federal reserve to pay off the loan plus interest. Where does that $60 go? It seems like $50 of the $60 would have to be destroyed in order to balance out the fed printing the first $50 in the form of my loan. If it isn't, we have inflation of 50% and a national debt. If it is destroyed, we have deflation since there is an equal amount of money ($100) and more people/productivity clamoring for it. Please don't delete! |
| ryan foreman |
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Not sure what you mean by "destroyed". Also, the vast bulk of federal money should not be considered as just printed. Most is either tax revenue or borrowings from people, corporations and governments at low interest rates. I guess all money is ultimately just created by the Fed. But there is substance behind it, albeit less than before. Yes the Fed is doing radical stuff with "Quantitative Easing" but you shouldn't say that any and all federal government money is just printed. Because then of course we really would have hyperinflation. But we don't. I can only answer your question with the obvious. The money you pay back goes to the treasury. The interest is recorded as government revenue. As far as I can understand you, I think you are generally right. Just that the answer lies somewhere in between so that there is only a reasonable amount of inflation. That is what the existence of the Fed is all about (or should be)- Maintaining a stable money supply. If more people are clamoring for the same amount of money, the Fed simply increases the money supply and inflates the economy by buying back treasuries from banks. |
| student |
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Mr. Foreman, thank you for your reply. I often disagree with you on a lot of issues, but I think I see where you're coming from on this one. This also brings up a whole bunch more questions. "the vast bulk of federal money should not be considered as just printed. Most is either tax revenue or borrowings from people, corporations and governments at low interest rates. I guess all money is ultimately just created by the Fed" I don't understand this entirely. Is the government really borrowing from people? I figured this used to be the case, but with interest rates on govt bonds being essentially zero (so that the people's invested money would go towards businesses who cant print money as opposed to the govt who can, if I understand correctly), it seems the government doesnt have much money (for my loan) being lent to them by everyday people, although i suppose other countries (China) are supposedly buying lots of US bonds, which I'll never understand. "The money you pay back goes to the treasury" Wasn't there no money in the treasury in the first place? It seems this was why the fed had to print the money for my loan. And I'm hesitant to believe that the loan came out of real existing tax revenue, although I guess it's all the same expenditure in the end anyway. It is definitely a complicated system, and one that I don't think many people entirely understand. |
| student |
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I guess my more direct question is this: The national debt is some astronomical number, so let's simplify it to 100. This money was "printed" by the fed. The existing money supply before we went into debt was 100, so now it's $200. Let's also assume there are only 10 people in the US. Everyone makes $20/year and is taxed $2. They then have $18 for living expenses. Once we're out of the recession/depression/call it what you will, we start paying off the debt by generating a tax surplus. So all 10 people are taxed an extra $10 ($100 total dollars) to pay off the debt. Now we're out of debt, but there's only half as much money, so either 50% of people lose their jobs or everyone gets a 50% pay cut. If the population doubles, everyone gets another 50% pay cut. So it seems we need to keep printing money and going into debt, no? How can the fed increase the money supply in order to keep up with growing population and productivity without going into debt? I guess the storing of gold to back the dollars would make it possible, but we stopped doing that a long time ago. The more questions I ask, the less I understand. |
| Federal Loans |
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Aren't Federal Loans just loans from private institutions that are backed by the government? As far as I know, the money doesn't come from the government and your loan payments aren't made to the government. The government is just a facilitator and backer. |
| uncompetitive |
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you are correct. Ryan Foreman is an idiot. |
| monetary |
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However, those banks are still lending out money that they don't have, money that never existed before the individual signed their name on the loan document. That's the craziness of fractional reserve banking. The end result is exactly the same as the federal reserve printing bills, an increase in money supply as a form of debt. And once the debt is paid off, all of the created money lies in the hands of the people who brought the money into existance, the banks. Unless of course people go broke and suddenly stop paying their big loans, ie the housing bubble and credit crisis. |
| ryan foreman |
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Wrong. Some federal loans like Pell grants are loaned by the government. Others like Sallie Mae are made by private institutions but the Federal government subsidizes the risk. In other words it is corporate welfare. Its kind of like our healthcare system. Its a confused patchwork of programs. To student. U.S. treasuries are being bought at close to zero percent for two big reasons: The U.S. - unlike corporations and countries like Greece - have control over their currency and they have a printing press. That means they can effectively guarantee they will pay the loan back, if for no other reason than that they can ultimately just print the money and give it to you. And where else are you going to go to park money in an ultra safe, liquid asset. Europe? There is no runaway inflation because the world economy is in a deflationary trend if left to its natural course. Its only by governments frantically artificially inflating the economy through radical stuff like Quantative Easing that we have just moderate inflation. The deflation comes from people not spending money or investing so much. For the good reason that they simply don't have money to spend for one reason or another. Wages and benefits have been cut, businesses have gone bankrupt. Moreover there is a fundamental lack of trust coursing through the economy so banks don't want to lend to each other unless the Fed effectively makes them do it. Who knows exactly what China is thinking. But generally they bought US debt for many years in order to prop up the value of the dollar and conversely devalue their own currency so they could employ their huge labor force through an export economy. Now China and the U.S. are joined at the hip in the current financial mess. China has as much to lose as the U.S. if everyone flees US treasuries.
you are correct. Ryan Foreman is an idiot.[/quote] |
| rekrunner |
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The problem with your scenarios is you want to link a federal loan and national debt to the "fed" printing money. The debt and the money supply are independent things. First, despite the official sounding name, the Federal Reserve is not really a government institution, but some kind of quasi-mix of private and public institutions which only partially answers to the government. I'm not sure the "fed" prints money either -- the "fed" decides monetary policy, but isn't money printed by the Dept. of Treasury? The "fed" is an independent entity created by an Act of Congress, while the Dept. of Treasury is an "executive" agency of the president. Maybe I've oversimplified things, but the "fed" is not the government. Second, your federal loan, or any other national debt is just a promise to pay something back later. These promises take many different forms. There is no new money necessarily created with a promise. Any present money comes from previous tax revenues, or from the buyer of bonds, T-bills, or other obligations, or from the bank who actually finances the loan, with a promise of some kind of return. The future money to pay off this loan, debt, or obligation, will be financed by future tax revenues, a future buyer of bonds, or from a future loan. At no time during this process has the money supply necessarily increased or decreased. All that has happened is an exchange of promises, and an exchange of existing money, hopefully followed by a future exchange of future money. Independently, the government (and/or the "fed") could decide to print new money to pay off the national debt, but such policy decisions need to be taken carefully to avoid excessive inflation and devaluation of currency. The real way out of recessions/depressions is a genuine growth in productivity, usually measured by things like GDP. Monetary policy can help stimulate or accelerate this growth in the short term, but not the long term.
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| Racehorse |
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With students like this one, I fear for the future of this country. |
| ^ |
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Let's go back to where you borrow $50. Say you actually borrowed the $50 straight from the federal government. Now the fed doesn't have $50 so it issues bonds and borrows $50 from investors. This adds to the national debt. People have cash sitting around and want a safe place to park it so they buy the federal bonds. You get your job and pay back the loan of $50 plus $10 interest to the fed. The fed can give the $50 back to the investor plus $5 interest. The fed profits $5 from this deal which it can use to cover losses on those that can't pay their loan back. But that loan stays with these people foverer so the fed will probably get still get its money. Really this all done through an intermediary bank which will collect some of the profit and still be guaranteed payment form the fed. These investors could lend you the money directly but they feel much more comfortable getting a guaranteed low return from the fed vs risking a better return from lending you money. The fed will loan you money because they can get it cheaply and have a lot of power to chase you down. Or something like that. |
| rekrunner |
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Don't confuse "the fed" with "the federal government". |
| Hammerschmidt |
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They just go into the 'ether' - that's why we can just forgive student loan debt and not harm anyone. Yay for us! |
| rekrunner |
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Student loans are something else. Currently it's next to impossible for students to get any relief from their student loan burdens, and easy for lenders to bump the interest rates from 3% to 30% at the first sign of hiccup. Lenders make more off student loans that have "defaulted". Why shouldn't they be treated with similar terms and risk mitigation as with credit cards? |
| M.C. Confusing |
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However, those banks are still lending out money that they don't have, money that never existed before the individual signed their name on the loan document. That's the craziness of fractional reserve banking. The end result is exactly the same as the federal reserve printing bills, an increase in money supply as a form of debt. And once the debt is paid off, all of the created money lies in the hands of the people who brought the money into existance, the banks. Unless of course people go broke and suddenly stop paying their big loans, ie the housing bubble and credit crisis.[/quote] Do you understand how banks and loans work? Yes, most banks are Fractional Reserve so they dont have all the money on hand that is in their system...but its not like that money "never existed". They are taking money that their customers are depositing, and lending it to you. You eventually pay it back at a high interest rate. They return that to the original customers at a lower interest rate, they keep the difference. No money was created or lost. |
| M.C. Confusing |
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Pell Grants arent loans. They have nothing to do with loans. |
| dust |
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The level of stupidity on this thread is amazing. |