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HOT TOPIC How does the economy really work? (Banks, loans, value, economics)

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thechosen1

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You pay it back through your increased productivity?
Right so, the debts cancel out and are slowly paid off by each side of the hierarchy, right?

So does that mean this system actually...works? I mean, issuing debt as a way to "keep up" with the value creation? But it does seem to mostly just inflate asset prices because that's what the intelligent people use debt for.
 

thechosen1

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Ok, so let's take a simpler scenario. I have a connection of mine who needs 1000 parts of whatever, and I have the know-how of how to produce them. Unfortunately, I don't have the cash. You on the other hand already have the raw materials I need. So I tell you, look, I don't have the cash to pay you, but give me these raw materials on credit (read, on TRUST), and I will pay you more than you want right now for allowing me to pay you later.

Now this simple transaction based on credit enables me to produce the 1000 parts, and, down the line, my connection to produce the 1000 cars he needed the parts for. Thus we're all 1000 cars richer. My debt to you is paid out of those 1000 cars. So credit/debt is repaid/settled out of increased production in the future. Without the credit/debit though, there would be no increase in productivity. And without the increase in productivity, there would be no way to repay the debt.

So yes, credit is a way to increase productivity faster and "inject" virtual money where the system needs it to facilitate the sort of exchanges that lead to greater productivity.
Nice explanation!! Yes, this makes perfect sense.

More people need to see how this works so they can understand credit and its productive role.
 

thechosen1

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What you are asking is more about monetary economics, how money runs in the modern economy.

Central banks create base money but credit/debt is generated by the private banking sector.

The banks can create far more debt than the money they own, through the double entry book keeping system.

When Jack the business wants to borrow one million dollar loan for business from Bank A. Bank A approved his loan by not taking from its banknote reserve. Bank A just key in digitally 1 million dollar in Jack’s account. Debt in the form of digital money is created. It is an asset for the bank, because Jack now owe 1 million dollar the bank. It is also a liability for the bank, because the digits represent the obligation to provide banknote once the owner choose to withdraw.

So whatever transfer of the money across account is simple a transfer of “promise to pay”.

Because most of the money is in this form rather than base money or money notes, we say when money is created, debt is created.

Jack the business owner wants to make a profit. He targets a 50 percent return on investment for the year through business profit. He spends the one million dollar away buying equipment and hiring staffs. One million credit is spent. For that 50 percent return to be possible there must be at least 1.5 million of credit in the system. It means new money/credit/debt must be issued other than the existing 1 million in circulation.

In short most people want to “make money”, having more credit/money, than yesterday. This means that banks have to constantly “create money” which is issue new debt into the system. Only then it is possible to have more money than yesterday. Only then it is possible for Jack to earn an revenue large enough to pay down its debt plus interest and have a profit. If banks all stop giving out new loans we will have massive bankruptcy and financial collapse.

Ideally banks in aggregate should expand credit proportional to the real economic growth (value creation), to avoid economic stagnation or massive inflation.
Thank you - this is exactly what I was asking about.

The question is how the banking and monetary systems work. Not how value or entrepreneurship work.

Great explanation - eye opening.
 

thechosen1

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There are two ways you can approach this. You can buy a used college textbook on monetary policy and learn all the money supply graphs and statistics on how printing money is great. Also, Funny how Woodrow Wilson was a college professor.

OR

You can learn all of this from what I call the “anti-brainwash” perspective. In other words you reject everything academia says and look at things from a fresh perspective. In that case watch the 1996 documentary “Money Masters” by Bill Still.

I already researched all of this. And my views align more with the second.

Banks create all our money and the loan it out through collateralized lending so some other schmuck takes the risk and they incur no opportunity-cost. Oh, and you don’t get “free money” loans if you are not in “the club” of private bankers.

Oh, and the federal reserve system is cleverly designed so that if shit hits the fan, they can blame someone else for it. Hyperinflation? What are you talking about?
I agree with you about the problems, about how they aren't taking the risks, and about how all of this is corrupt.

I agree.

But that doesn't answer the question.
 

thechosen1

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banks borrow $ from the Feds -- which is also a privately owned bank
I've heard this a lot, and the question I always come back to is - who owns the Fed?

All the Rothschild conspiracy stuff aside, this is a very convoluted and backwards banking setup, IMO.

It would appear we are all slaves to the Federal Reserve, at least on paper.
 

WJK

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I've heard this a lot, and the question I always come back to is - who owns the Fed?

All the Rothschild stuff aside, this is a very convoluted and backwards banking setup, IMO.
A very quiet group of private investors who take a nip out of dollars that they handle in our economy.
 

socaldude

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I’ve always wondered how the economy would work if the US government printed its own money over at the US treasury.

I guess printing money and buying government bonds is the only way to pass the risk on to taxpayers.

Even all throughout history wealthy families would bail out bankrupt governments.

Banks would have to go full reserve banking and taxpayers would pay less taxes.
 

thechosen1

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A very quiet group of private investors who take a nip out of dollars that they handle in our economy.
On further reading, it looks like it's owned by the largest member banks, like an MLM or hierarchy of banking.
 

WillHurtDontCare

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Food for thought:




Take the opinion of doers with a grain of salt, because there's only so much truth that they will want to share or admit to.

Take the opinion of thinkers who aren't doers with a grain of salt, because their lack of experience will limit what they can understand (though they can definitely understand a lot).

This one is also good, simply because economic beliefs are more often closer to religious beliefs when it comes to both capitalism and communism / socialism; so you will need help seeing through the distorting lenses that people view these systems through - The Sublime Object of Ideology - Wikipedia
 

Kak

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Can both of you stop this? Let's talk about ideas and our businesses. Let's help each other. We don't have to agree or think in lock-step. BUT we must respect each other!
I highly disagree. Respect is earned, despite that, I gave him years of respect. He was not even close to worth it.

J has a MASSSIVE people problem. The most important thing in business is making it bigger than you. Leadership. The leverage that gains you. Inspiring others. Lifting them up. Having value created in your name by as many inspired people as possible.

He does nothing, but shit on people. I simply don’t like people like that and I felt like speaking my actual mind instead of wasting energy coming up with some more “respectful” way of typing it. My patience and my filter on this has long been worn thin. Don’t blame him, I clearly threw the first punch here, I was aware he wouldn’t leave it alone when I did it.

Respecting someone, just because, is a ridiculous notion. I’m past that point in life where I need to be scolded about respect. To say I don’t care what J Scott thinks of me, my businesses, or my radio show would be an understatement. I don’t need his approval or respect (which he won’t give anyone anyway). I’m doing just fine without it.
 
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Kak

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Actually, we both know what this is about...

You like to pretend to be the most successful and intelligent guy in the room, and you can't handle being reminded that you're neither.

You try your best to talk a good game and you on put on this facade that you've achieved a level of success that you clearly haven't achieved.

You give advice about how to make money, but you haven't made it yourself.

You want so badly to be a thought leader, but all you do is regurgitate cliche crap that that has been said a million times before.

You think you're edgy and anti-establishment, and yet your entire schtick comes off as a fourth-rate wannabe pundit who conforms to every other wannabe anti-establishment pundit.

You act like you don't care what anyone else thinks, and yet it's obvious that what everyone else thinks is the *only* thing you care about.

Then one day, in a thread a long time ago, I come along and see through all your BS and call you out on it.

I lifted the veil on your truth, and from that day forward, you've worked hard to discredit me, because if you can get people to think I'm the idiot, they won't believe what I'm pointing out about you.

The problem is, I don't play into your idiot narrative very well. As you did in this thread, you even go so far as to try to discredit me BEFORE I say a word.

That's how desperate you are to maintain this facade you've created.

Look, I may be an a**hole, but I'm not an idiot. And people here know that. So when I point out your bullshit pseudo-intellectualism, other people start to wake up to it.

And you know this.

And you hate it.

And you hate me for it.

That's what this is about.

Bravo for doing exactly what I said you would do tough guy. You literally proved everything I said in my first post. :rofl:

There is a reason every single time you come here you feel the need to tell us all about how rich and bad a$$ you are, because you’re in some kind of fight where you need to prove your dominance. It is not my fault that it takes more than a dick telling me how great he is to respect him.

Here is your social handbook: Be a dick, tell everyone how stupid and awful everyone with a somewhat popular opinion is, take the opposing viewpoint and then tell everyone how great you are. That is a severely limiting way to live your life. Hey, I’m an introvert too, but this is next level shit.

I have contributed to this forum for 10 years for friendship, fun, and learning. Some people like what I have to say and some don’t. I understand that the world is a place of continued learning. I understand that I stand to gain by learning from others. I’m here to learn first and foremost. That has proven a good and profitable reason to be here. I have also made like a hundred amazing entrepreneurial friends that I talk to off of the forum.

You are here for neither friendship, fun, nor learning, unless your idea of fun is to cut people down and make them feel stupid instead of engaging in a friendly discourse. I couldn‘t care less, but too many people here are afraid of you. Information flow and learning screeches to a halt when you arrive. I really don’t like that. So, I choose to humanize you every so often.

My show is a cheerleader for the entrepreneur. A show for people that get enjoyment out of business and raising the bar. If I had two listeners, it wouldn’t change my lifestyle in the slightest. I host it, and very diligently, because I know I’m going to thank myself for it later. I have said as much on the show.

Congratulations, now you’re the guy that attacked a radio show you know very little about, that many people on this forum get a lot of entertainment value and enjoyment out of. You attacked a successful member of the forum. Have literally called me moneyless and unsuccessful with zero proof to back up your claims.

Notice, I’ve never said such things about you. My only narrative about you is that you're just a dick and your stories suck. I don’t doubt you have some money. But you’ve capped the shit out of your potential by being a total dick. I don’t need to call into question your success. I don’t care J. I seriously don’t.

All you have is hyperbole about how miserably poor everyone is but you.

I don’t ever opine on other people’s levels of success. I don’t ever cut them down. I’m encouraging to the brand new entrepreneur, just like I am to the seasoned one. If this was just about business, I would be happy for you and whatever successes you’ve had. I am the least jealous person on the planet. But this isn‘t about business. You’re a dick, and I don’t like dicks.
 
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thechosen1

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@Kevin88660 thanks, yours was possibly the best info so far on this thread
 

swerving2sucess

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Why don't you make this it's own thread? Makes for a good discussion. A lot of people don't visit the rant thread...
Agree. This should be a thread considering that the topic itself is quite delicate because of the amount of interepretations based on everyone's ideology.
 

peddletothemetal

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It’s important to have a plan like this and it helps if you know why it works or doesn’t work.
Yes fair call. Just easy to get sucked into the political side. You're right, if you can step back and see it scientifically (e.g. with states as mere actors) it can help business and investment decisions.
 

cebradley2011

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So I'm trying to formulate my idea of how the economy works and would like others to think about this too.

New money is created via debt - yes or no?

Banks lend out money, often in the form of either a business loan or a mortgage.

So let's say that I get a business loan and I hire 20 people. Those 20 people each get mortgages. Their work pays down my business loan over time, and in return I pay them wages or salaries, which they use to pay down their mortgages over time.

This would eventually cancel out my debt and their debt. New value and new wealth was created! ...Right?

Is that true? Can it really work that way across the board, or is more debt always necessary?

I'm trying to figure out how this all fits together intuitively.

Honestly, @JScott ... your expertise would be great for this question.

edit: guys...I know what value is and that it isn’t money. I’m asking people how the government, banks, etc actually function. I’m not asking for people to tell me my own ideology! I am already pro-capitalism and value :)
Great question.
 

CruxisKnight

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So I'm trying to formulate my idea of how the economy works and would like others to think about this too.

New money is created via debt - yes or no?

Banks lend out money, often in the form of either a business loan or a mortgage.

So let's say that I get a business loan and I hire 20 people. Those 20 people each get mortgages. Their work pays down my business loan over time, and in return I pay them wages or salaries, which they use to pay down their mortgages over time.

This would eventually cancel out my debt and their debt. New value and new wealth was created! ...Right?

Is that true? Can it really work that way across the board, or is more debt always necessary?

I'm trying to figure out how this all fits together intuitively.

Honestly, @JScott ... your expertise would be great for this question.

edit: guys...I know what value is and that it isn’t money. I’m asking people how the government, banks, etc actually function. I’m not asking for people to tell me my own ideology! I am already pro-capitalism and value :)
From a basic standpoint, economy is what happens when people work and exchange their work for other people's work. Economic activity is all about people working. The trick is in finding work that you love that you will stick with for the rest of your life and be a master in that other people find valuable. When you become a master in it then you can package your wisdom into a product so you start generating passive income through residual income or royalties. But what most people want is the passive income and problem is they haven't even reached mastery in anything yet. Edit: people think economy is about money, but economy in its most basic sense even during hunter gatherer times is all about work. So if you don't work you don't contribute to the economy and you don't get to take out from the economy. So don't be lazy and work, and best case scenario is do work that you love.
 

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