National Debt - Who is the money owed to?

mathie

I guess this isn't just a question for the Irish economy but ...

1) Who do countries owe money to when they talk about national debt? It seems like everyone is in debt!

2) If the Fed can print money why doesn't it just print what it owes and wipe its debt?

Thanks
M

valuseeker

What the fed have not told anybody by priniting all this trillions of extra money the effect that it will have on world economies down the track.

Basic economics - supply and demand, more money in circulation will mean higher prices (inflation) in the long term.

How do economies reduce inflation? increase interest rates.

Banks know this and will try and increase interest rates in the short and mid term and we are seeing this happen with Irish Life Permanent ( the excuse they give, is in the short term to borrow money on the open market is more that the current ECB rate hence they have to increase rates so they dont lose more money).

Bankers, economists - agree or deny this theory with real facts

Read this thread in 5 years time and see who is right. So guys brace yourself for higher interest rates to come because we are a small open ecomony and will be able to do nothing. The euro saved us this time but because what happened with the properity developers, banks and the government it will not be able to save us from interest rate increases.

By the way I am not a banker or economist but did economics for my leaving cert 30 years ago and have lived through it. Even saw interest rates at over 30% yes 30% so a short period

ei.sdraob

money is owed to creditors

these are usually productive institutions/countries that make and sell things/services people want

and they want to invest that money, and government bonds are seen as "safe" investments

for example China who make anything and everything are owed over a trillion by the US, so china exchanged the fuits of its labour for american paper notes in hope that they pay back and to keep their currency artificially low

AARRRGH

mathie wrote: »

2) If the Fed can print money why doesn't it just print what it owes and wipe its debt?

Because without any debt there would be no money (nearly all money is debt, i.e. the money never existed in the first place, it was created out of thin air as debt.)

When debt is paid off, money disappears.

I know, it makes no sense. But that's our banking system for you.

fricatus

valuseeker wrote: »

What the fed have not told anybody by priniting all this trillions of extra money the effect that it will have on world economies down the track.

Basic economics - supply and demand, more money in circulation will mean higher prices (inflation) in the long term.

You're right of course, but you're only seeing half the picture. Remember that the banks increased the money supply over the years through fractional-reserve banking, but then when it had been driven to unsustainable levels and the sub-prime crisis brought the credit crunch around, the money supply contracted (fractional-reserve banking going into reverse).

This contraction had a deflationary impact, which was countered by quantitative easing - in effect the Fed "printing" more money.

However, the mistake that people are making in fearing rampant inflation is that they assume that the money supply is being pumped up, whereas the reality is that it had already been pumped up. The money going in now is only going to keep it from deflating.

The risky part is that nobody really knows how much money should be printed to keep things on an even keel, so yes, there is a possibility that the money supply could grow too much and cause inflation. However it doesn't follow that QE will per se lead to inflation.

valuseeker

Take your point but there is only so much one can say in a post, but would you agree that the extra money banks put into the market previously went by enlarge to property investment. This was given to people who in normal banking circumstances would not have been given loans thus created a false economy. (I thought at the time this was only an Irish thing and did not realise it was also worldwide) Banks were happy to loan as they saw property value increasing and assumed that the value of the property would always be greater than the original loan. When the market crashed in the States property value dived, went into neg equity, the world wide credit crunch hit as the bank assets ( loan book) devalued on a scale never seen before and banks were not prepared to loan to each other. I know there were also other aspects to the crash but feel bank loan books were the main driver. My opinion is that with the current model of printing money, this extra money coming into the market to easie credit it will not go to property investment ( once burnt twice shy ). So where will it go? I feel it will go to areas that will drive inflation for instance consumer conmmodities and as property is no longer the king pin the impact of interest rates increases are likely as the banks will not be as exposed and will have more strigent loan criteria.

thebman

Realistically money only works because of trust. People that invest in Ireland Inc. trust that we aren't just going to go print more to cover debts and inflate our way out of problems.

Now that we are in the Euro we can't do this but the US has the same trust and its printing spree has damaged its reputation I think as can be seen from other countries asking for a new reserve currency.

GUIGuy

Well I don't know the total figure but on Prime Time one economist said that France & French institutions bought 70% of Irish bonds in the past year. That was in the context of a 'what happens if we say no again' question. Well you can probably guess the answer... they won't buy anymore and the govt wll either have to raise the yield on the bonds (Raise taxes to fund) or just do without and let most of the public sector go.

mathie

Thanks for all the replies.

Do all central banks have the power to print money like the US?
Does Ireland?

the_syco

Although we can print an excessive amount of money, there's no reason to do so.

We have a melon. The melon is worth €3 Making it worth €500 lessens the value of the euro, as in other countries, the melon may still be worth €3.

Thus, if we, or the US, bankrolled a lot of money, it would make the money we have worth less, putting more people into debt.

One thing about debt that I find amusing is the amount of money the US owes China. IIRC, in theory China could nearly claim vast patches of land in the US, if the US defaulted on it's debts to China. This of course won't happen, but it makes you wonder about how debt makes strange bedfellows.

Every country owes another country debt. Execpt China, I think.

mathie

We have a melon. The melon is worth €3 Making it worth €500 lessens the value of the euro, as in other countries, the melon may still be worth €3.

Thus, if we, or the US, bankrolled a lot of money, it would make the money we have worth less, putting more people into debt.

So should we do the opposite to printing money and make that melon cost 10 cents and be the envy of the world?

MeatProduct

the_syco wrote: »

Although we can print an excessive amount of money, there's no reason to do so.

We have a melon. The melon is worth €3 Making it worth €500 lessens the value of the euro, as in other countries, the melon may still be worth €3.

Thus, if we, or the US, bankrolled a lot of money, it would make the money we have worth less, putting more people into debt.

One thing about debt that I find amusing is the amount of money the US owes China. IIRC, in theory China could nearly claim vast patches of land in the US, if the US defaulted on it's debts to China. This of course won't happen, but it makes you wonder about how debt makes strange bedfellows.

Every country owes another country debt. Execpt China, I think.

By my, admittedly poor, knowledge of how banks and debt works it would seem it is not possible for the system as a whole to get out of debt.

Bank loans me €1000 at say 5% interest. So say I pay that back in a year, in full its €1050. So there's an extra €50 that has to come from somewhere. This seems grand on a personal level but when looking at the macro scale it is my understanding that the moeny doesn't exist to pay back all the interest/debt that is on the books.

Please someone more knowledgeable correct me on this as this would seem to be the crux of the issue of debt and the banking system. If this is the case then there is an absolutely enormous elephant in the living room.

Nick

ei.sdraob

mathie wrote: »

Thanks for all the replies.

Do all central banks have the power to print money like the US?
Does Ireland?

Ireland cant print money

but ECB can and is effectively doing that with the low interest rates

and the 60billion in Quantitative Easing