Skip to main content

View Diary: Brinksmanship On the Debt Ceiling (54 comments)

Comment Preferences

  •  so the monetary mechanism (1+ / 0-)
    Recommended by:

    works like this-  money is created when it is loaned and destroyed when the loan is paid off?

    "Welcome to Costco, I love you" -- Greetings from "Idiocracy"

    by martinjedlicka on Thu May 12, 2011 at 05:29:46 PM PDT

    [ Parent ]

    •  Yes (1+ / 0-)
      Recommended by:

      That is correct.

      The US Government creates money when it spends, and destroys money when it taxes.

      Other than the government and the financial institutions, the rest of the actors in the economy are pure users of money.

      Theoretically, the government is unconstrained in how much money it can create and spend (not so in practice however.)

      The banks are limited in how much money they can create by their capitalization (and not their reserves) and the amount of risk they take. Bad risks lead to bank collapses (if they are not bailed out by the government!) Therefore traditionally, banks have been very conservative. However, widespread accounting control fraud has become endemic in the financial industry as a result of the continuing deregulation of the financial sector, and the total defanging of the watchdogs. This practice leads to very high short term profits (when huge bonuses are given to the perpetrators of the fraud) and long term bankruptcy (somebody else is left holding the bag!) -- this practice has resulted in the ballooning of the private debt that has been seen over the last 35 years

      See also Akerlof and Romer - Looting: The Economic Underworld of Bankruptcy for Profit

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site