When Debt Masquerades As Money

There is an amazing amount of confusion, or more accurately obfuscation, in the world of money, finance, and economy. The ‘powers that be’ at the Fed and the drp 影響 Treasury claim that one needs at least a PhD, if not a Doctorate to understand what is going on in the economy.

This is the worst kind of rubbish possible! At bottom, at the root, economics is actually simple, easy, and ‘common sense’. To clarify our understanding, we just need to have a clear grasp of a few basic concepts and the words used to describe them. For example, there is much talk about ‘debt money’… but this is a grievous contradiction in terms… debt and money, like fire and water, are poles apart. Just as water extinguishes fire, so money extinguishes debt.

Let us define debt and money before going any further…

‘Debt; the exchange of a present good for a future good’.

‘Money; that which extinguishes all debt’.

To understand what these definitions mean in real life, let’s look at a simple example of credit… or debt. Suppose I call my friend Joe and ask to borrow a pound of sugar; he agrees, and I write him an IOU that says ‘I owe you’ a pound of sugar, and I promise to give it back next week when I go shopping.

I am now in debt to Joe for a pound of sugar, or what is the flip side, Joe has extended me credit in the form of a pound of sugar. The sugar is a present good, and the IOU or debt paper, a future good… the promise of a present good. Come next week, I give Joe back the sugar, he rips up the IOU which is now fulfilled, and the debt has been extinguished… by the present good… as promised. Pretty simple and straight forward. So far, I don’t see any need for that PhD.

But suppose I forget to buy sugar, and when the debt comes due, I cannot pay it back; instead, I anxiously call my friend Jill, ask her if she has a pound of sugar, and if she is willing to lend it to me; she says yes, so I give Jill’s sugar to Joe, and transfer the IOU to Jill… to whom I now owe a pound of sugar.

Clearly Joe is out of the loop, that is he has been ‘paid’… but the debt has NOT been extinguished, merely transferred… I now owe the pound of sugar to Jill. This is exactly how so called ‘debt money’ operates; debt is merely shuffled around, never extinguished. More on this in a second, but the question is since sugar extinguished debt, should it be considered ‘money’?

Remember, the definition says money extinguishes ALL debt, not just some debt. If the debt your company owes you for your week’s work were to be paid to you in sacks and sacks of sugar, you would not be a happy camper… or if you tried to buy a TV set and showed up at the electronics store with sacks of sugar, you would not get very far. Sugar is a commodity, an item of positive value, a present good… but it is not money. It is not able to extinguishing all debt. To understand his concept, one does not need a Doctorate… does one?

SO, how does ‘debt money’ operate in today’s world? Very simple; the Fed or any other central bank issues ‘notes’ called Dollar bills, or Euros… and these bank notes represent a liability on the bank’s books, just as my sugar IOU is my liability. When we ‘pay’ a debt with Dollar bills, or any other bank note, we are NOT repaying or extinguishing the debt, merely shuffling the Fed’s IOU’s to someone else. Debt is not extinguished, merely transferred.

 

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