OT
Qone0, let's stop this after my response. We can agree to not agree.
I'll try to be brief, but I have trouble with briefness. Your comments are in italics.
the FED is the only one who creates new money. I'll call this real money.
Hey, I made progress! We agree on who creates money. The word “dollar” is acceptable, and is much better than "real money".
Say you take out a loan at your ...
I've already gone over this with an example of my own. The initial 200k is not new money created by the Fed. Rather, it is old money that has already been used and re-used -- taken out of one account and put in another account with the net effect that only debt is created, not new money. But I’ll give you the benefit of doubt, as I think you only mean that it is your starting point in your argument. With a reserve ratio of 12%, the money will not expand by re-use more than about 7 times. I did a rough calculation, as I didn’t have enough time to think about a more accurate calculation. Now that I think about it, I think the exact formula is ((1 / 0.12) - 1), where 0.12 is the Reserve Ratio in decimal form. The exact answer then is a re-use factor of 7.3333. We could call that a money multiplier. Close enough? Notice that I said "re-use". By the way, economists account for the re-use of money in a value they call money Velocity (denoted by the variable V). No new money needs to be created for you to buy that house and for all that money to be spent over and over and over. Debt is created (asset on one side, liability on the other), and the same money is used over and over and over, to around 7.3333 times as I already wrote. No new money is required in normal times except to adapt to two major things -- population growth, and GDP growth. In normal times, the Velocity of money is relatively constant if there is not a lot of money coming in from outside the country. In fact, if the Velocity of money is too high and causes the economy to heat up, the Fed may actually reduce that Velocity by changing the Reserve Ratio while leaving the initial money supply the same. By increasing the Reserve ratio from 12% to, say, 13%, the money multiplier goes from 7.33 to 6.69. That’s a pretty big change for only a 1% absolute change in Reserve Ratio. The bank wants to make money but now they can’t make as many loans, because they have to keep more money in reserve, so they have to be more selective in their choice of borrowers, and they also raise their rates in response to Supply/Demand which remains the same for buying houses. And guess what. The bank decided to not loan you $200k for your house because they consider you to be too risky. Just a joke. The net result? Money was neither printed nor destroyed, and the bank has to keep more (legal tender) money in their reserve account. I repeat -- Money stays the same but money Velocity goes down, and this causes the hot economy to cool off. Did you get that? Here’s an equation that describes the whole thing: GDP = M * V, where M is the money supply, V is money Velocity, and GDP in this equation is not inflation adjusted.
So in reality, the Fed creates new money and destroys money in relation to the entire economic performance as measured by GDP and inflation expectations. And it only has to create a very small amount of money in normal times because the same money gets used over and over as I explained above. So, in a stable economy, you can buy and sell as many houses as you want as many times as you want, and no new money is necessarily required. And if all that activity of buying and selling houses boosts GDP too much then the Fed may decide to reduce the money supply, or they may decide to leave the money supply alone but change the Bank Reserve Ratio, which will have the result of reducing the Velocity of existing money. In this case, everything was brought back into balance by neither destroying money or creating money.
the money needed to pay back the loans with interest was never created.
That’s not a problem, and it’s not true in reality. Your interest costs are simply your expense for being able to use someone else’s money to buy your house. Think about that. They did you a big favor by allowing you to acquire material wealth with another person’s money, and they expect you to pay it back. I repeat, it’s someone else’s money -- it’s not new money. It’s not even your money after you borrow it. It’s a debt, and debt is not money. You may have something you can treat like money in one hand, but you will have a debt agreement in your other hand. Besides, that interest money is accounted for, along with all other money, and is buried somewhere in GDP. And, as I already wrote, the Fed will increase the money supply, or money velocity, to account for the growth in GDP. You can count on it.
One more point. I’ll temporarily take your view that money you borrow from the bank is new money. If money you acquire from the bank is new money, then it must logically follow that money paid back to the bank must destroy money, and both you and the bank were partners in that creation and destruction of money. You know what? That’s illegal. You could get arrested for that -- you were a willing participant in a Federal crime. Only the Fed is allowed to create or destroy money and it uses the banking system in implement that purpose, and that right was granted to the Fed by an act of Congress. You and your local bank are only legally allowed to use money. Neither of you are allowed to create or destroy money.
created by DEBT, fake money
Debt is not money (as in legal tender). Debt is a solemn promise made by you to pay back what you borrowed with (legal tender) money, and there is nothing "fake" about it. Debt is simply a mechanism for indirectly using money. Debt is a medium of exchange, just as is money; but debt is not legal tender, while money is legal tender.
Now this is where the problem with interest comes in ... The interest expense will exceed the money created for this loan in 30 years.
The problem is your interpretation of the value of money. Suppose the rate of inflation is 2.5% per year over that 30 years. Sometimes it will be much higher; sometimes it will be lower. Anyway, 2.5% inflation is nice and low, don't you think? The Rule of 72 says that a dollar today will be worth 50 cents in 28.8 years. Your last loan payment at the end of 30 years will be paid with money that is worth no more than half its original value. I reckon the bank knows that. Furthermore, it's quite a penalty for any lender to be stuck with a loan for 30 years. How would you like to be stuck with loaning someone money for 30 years? Don't you think that would be worth a few percentage points of interest paid to you? The bank also has expenses. Where does a bank get its money? Most of it comes from savings. Currently, a $1,000 5-yr CD pays roughly 3%. A larger CD pays more. That's just one of their expenses. How about building, equipment, utilities, salaries, insurance, dead debtors, and deadbeat debtors, etc. You think banks get rich? There are plenty of banks that go bankrupt or are forced to merge with other banks in normal times. The problem is you don't understand the banking business as a business. In normal economic times, the normal commercial bank stock only sells for a PE ratio of about 10:1. There's a reason for that.
Funny you mentioned the University of Idaho. I was out of college for less than two months when at my first job I was made project leader over a project which had been subcontracted to professors working at the University of Idaho. There was a political connection between the Chief of my section (within which there were 750 employees) and that university. After a couple weeks of evaluation, I proposed that all previous work be thrown out, and I submitted a different proposal for the whole project. It was accepted and I completed the job in less time than the professors at U-of-I used to produce trash. So, for personal reasons, I have no interest in reading anything produced at that university.
I think you ought to look at the legal stuff I just posted on the subject of money.
So … I guess this wasn’t so short. Warned ya.
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