I’ve had an argument with my brother about the method of the Bank of England creating money from nothing, he says it’s wrong for them to charge interest when loaning it to Banks and the Government, as this expense is passed down to the consumer and is essentially us being taxed twice. He said we should just get rid of the central bank and let the government loan out the money without having to use interest. I said that this is just a normal feature of any business expense and it’s just a fact of life, but I couldn’t really justify a debt based economy being a good thing. Should it be different?
Interest isn’t a tax. and as far as being “taxed twice” goes, I don’t think that holds water either. A person or organization is taxed. Money is not taxed.
On that basis, the government ought not to be taxing banks at all - because the tax is simply passed on to the consumer. In fact, it shouldn’t tax any business.
Unfortunately, that’s a terrible idea.
The government bank loans out money to ensure that the price of such loans is not too large, its function is to keep interest rates down. Of course it wants to keep the loan level at a realistic level, so as to avoid problems, such as inflatio, and such as being unable to function.
His argument is that the effect of it being implemented is akin to a stealth tax imposed upon the majority of the population in order to service that interest repayment.
Also, you’re paying for a service which was created to generate money into the economy. They (The central bank) create money out of nothing and profit from it by charging interest? Why?
I disagree with the whole* ‘it’s a conspiracy to get rich in spite of the poor worker’ *But since I don’t know much about this area of finance, I’ve had difficulty in disproving this theory he has in a coherent decisive manner.
My brother states that we’re living in a debt based economy, and that we’re all essentially debt slaves and that the money we have is tied to debt and not worth much.
has your brother also used the word “sheeple” recently?
Well, THAT’s not true. While a lot of the economy is debt-based, it’s less than 50%, possibly much less (though I’m not going to be troubled to look up the numbers).
It’s true that there’s a lot of debt out there, but no one is forcing people to enter into it. Debt comes about when people, governments, businesses, what-have-you wish to function beyond their own economic abilities. That’s it, in a nutshell. If one wished to live debt free one could simply decide to live within one’s means. That might mean working harder, more hours or finding a better paying job or - more realistically - limiting one’s standard of living.
It’s not a debt culture in which we live, it’s a consumer culture. There are pressures - and the international economy requires - a certain high level of consumption on the part of the average person. There are arguments for an against having a consumer culture - I personally am opposed - but there are arguments for it as well. The economies of most major industrialized nations are founded on the consumption of goods and services to help offset the production of same by businesses. Recessions and depressions occur when those two things - production and consumption - get misaligned.
Which brings us around the the role of central banks in the equation.
By loaning money out - by being the creators of money - central banks have a means by which to control the money supply in a given nation-state. By doing so - raising rates and therefore slowing the growth in available money or lowering them for the opposite - the control the speed at which either consumption or production can grow and therefore central bankers attempt to balance the two sides of the equation out to control either the occurrence or severity of economic contractions - again, recessions or depressions.
Now here’s a fact that a great many - possibly most - people fail to realize and should be a central thesis of anyone arguing economics: money and wealth are separate things. Dollars, pounds, francs, whatever are not wealth. They’re merely the accounting device by which wealth can be transferred. Wealth is goods and service. My iPhone here on my desk is wealth. I own it, I can use it to do certain tasks. Ditto the art on my wall and even the house and land I reside in/on (though that last is encumbered by debt).
Which person is wealthier:
A) A person with a home and land yet no money to spend.
B) A person with a billion dollars and no place to spend it.
Money requires the persistent belief that it has value. Without that belief - as occurred in some nations undergoing hyperinflation (the situation in which the central banks allow production and consumption to get truly out of balance) - the money in wallets, change jars and banks becomes worthless and the goods have immense value.
To be playful, Richard III and his pitiful cry of ‘A horse, a horse! My kingdom for a horse!’ shows another fine example of a time at which the demand for a good far outstripped supply.
In short, your brother doesn’t know what he’s talking about. But it’s a common rant for those so misinformed.
If you follow the line, all taxes are paid by the bottom feeders, down here where you and I live.
Look. My dentist, in order to live his glamorous lifestyle, needs to make $200 for pulling a tooth. But he is in a 50% tax bracket, so he charges me $400, pays his taxes, and has $200 after-tax. I just paid his taxes, in addition to my own when I earned $500 in order to have the $400 take home to pay my dentist. I just paid $300 in taxes, out of the $500 I earned, including the taxes of my dentist who is spending his weekend on his sailboat.
The idea that today’s central banks create money “out of nothing” is confused … except in the same sense that commercial banks create money! Here is a readable (pdf) discussion of money creation in Britain; the U.S. is similar.
Anyway, some of your brother’s remarks ignore that we’re in a period of low inflation and low inter-bank interest rates. In fact the European Central Bank is, in effect, offering banks 0.20% to take money! :smack:
The idea that consumer spending, and thus debt, are encouraged by the powers-that-be, in part to keep people “debt slaves,” is a left-wing theme that may have some validity. But the solution to that “problem” would NOT be to make loans even cheaper and thus more accessible to consumers. 
Mmm.
I’d challenge that it’s a ‘left wing’ theme, septimus. I’ve certainly heard even of the goldbug and libertarian crowd offer that the system as designed is intended to create artificially inflated debt with an eye toward establishing control. And honestly, I wouldn’t characterize those folks as ‘left wing’. The right might not wish to claim them, but they tend to lean more than way that toward the left.
You may be right. It’s a theme of “business and government are conspiring and out to get you” thinking. I associated it with Michael Moore types rather than libertarians who, I think, are generally pro-business.
As I said, I think there may be a tiny bit of validity in it; I felt it was the “leftist” rather than the “libertarian” in me that felt that way. :rolleyes:
That’s not how US tax rates work. You don’t get taxed 50% of your entire income if you are in the 50% bracket.*
*Not to mention there is no such thing as a 50% tax bracket in the US (the highest tax rate is 39.6%, and that only kicks in on income over $400,000).
Not to mention - though I’m about to (why do we say that?) - that Dentist might be paying more for his boat that he would otherwise to pay taxes or to pay the workers who put it together.
To consider that all taxes are paid by the bottom is to misconstrue some pretty obvious facts. In fact, the vast majority of people pay taxes of one sort of another. While it seemed to be a meme during the 2012 election that X% of people pay no taxes it’s fundamentally untrue. Even the poorest - those with NO income whatsoever - pay sales tax, user taxes (sometimes called ‘fees’ to hide their nature), and other taxes. They just may pay little in the way of income taxes.
Trust me, we all pay as individuals. Do some people game the system? Or do some use existing tax breaks to lower their tax burden? Certainly. But that’s a policy discussion, not any other hidden plot or plan.
“We’re being taxed twice” was a talking point here in America nearly fifteen years ago, when it was the Bush Republicans arguing against the estate tax (which 99.5% of Americans will never ever have to deal with in their lives or after their death, but which the GOP still sold as a populist issue because everyone wants to believe that one of these days they’re going to win the Powerball, but I digress.)
The arguments that were valid then are still valid now - it’s the transaction which is being taxed and not the money itself, there’s no legal principle (either in the US or UK) that an object can only ever be taxed once, and if the end user were taxed directly for the equivalent value of all the taxes and excises that are delivered along the line it’d be much more burdensome and much worse for the economy than the status quo.
Yes he’s definitely got a libertarian bent which I want to hammer out of him with logic 
But it’s very difficult sometimes because he just barrages me with information that I have scant knowledge of.
Well, we provided some info for you.
Remember, though, that one cannot reason a person out of a position they didn’t arrive at through reason.
That’s not why. It sold because people thought/think it applies to all estates, not just those over $5 (?) million nowadays.
If only it were so. I pay about $20 a month, every month, to the county just to have my car. There’s no transaction taking place; the thugs-in-suits just need money.
Indeed, the boat builder may even need a tooth pulled some day. Wouldn’t it be easier if the dentist and builder just agreed to “volunteer” some labor and call it even, dodging the tax? That, of course, is the root of all tax avoidance, a fiscal curse that befalls governments every time a tax of any sort is instituted or raised. Politicians of a certain persuasion like to shrug off the Laffer curve like it’s nothing, but then this happens.
He managed to change the focus from his lack of understanding of macroeconomics to whether loaning money is even a good thing. Take a look at the tools of monetary policy. Monetary policy can reduce the swings in the business cycle and keep inflation relatively low and stable. That stability reduces risk for people making decisions within the economy.
As to why debt is a good thing. I have a great idea for a business serving a real need. My business plan is rock solid. People are clamoring for the good or service. It would be a good thing if I opened that business right? What if it takes 10 million to start the business… how do I do that without debt unless I am already fabulously successful? I borrow the money after convincing people I am a good risk.
[quote=“jtur88, post:8, topic:703311”]
If you follow the line, all taxes are paid by the bottom feeders, down here where you and I live.
/QUOTE]
Possibly but very very rarely does it work out like that. I’m going to change the example from Dentist because there’s all kinds of effects of hidden effects if you look at insurance rippling through multiple markets.
My example is shmoo pies, a tasty treat, and the government puts a 1 dollar sales tax on them to discourage people eating them. The old market price was 5 dollars. If there’s only one company that makes them, nobody makes any kind of reasonable replacement, and you’d buy/eat just as many if the price was $6 as at $5 … you are in effect going to pay the whole tax. That would be uncommon though. If every bakery can make a shmoo pie as good as any other and you’d never buy another if the price went to $5.01 the business pays the whole tax out of there share (or stops making the pies completely.) That result would also be uncommon. Usually what happens is a new equilibrium somewhere in between $5 and $6. Like the old market equilibrium the market eventually sets a price where people but every pie the bakeries are willing to make. In effect you pay part of the tax and the business pays part. Where that balance falls depends on the market.
Nevertheless, the dentist or the boat builder or the schnoo-baker are the ones who fix the prices, not the consumers. They all know that sooner or later, the tax assessor will come around, and they have to set their prices high enough to have their livelihood left over after taxes. The consumer has no such power. The consumer either buys the schmoo pies at the prevailing price (which includes the tax burden born by the producer, along with all his other costs), or stops buying them, in which case the baker overestimated the market demand, and suffers the predictable consequences of doing so.
Unless you have a dental market in your town where it customary for a person with a toothache to call around to the dentists and tell them “I’ll give you $200 to pull my tooth”, with the consumers thus setting the prices, and the dentists can take it or leave it.
Taxes are a cost of doing business. Sellers print the price tags, which reflect those costs. The consumer pays them. When you buy a roll of toilet paper, do you think that it is you who ultimately pays the cost of a carload of timber, but Kimberly Clark’s shareholders who pay the taxes on their dividends? Why the difference?
The dentist and builder are equally obligated to pay taxes on their barter though. The lack of cash transacted simply makes the evasion easier, but it’s not legally or morally any different.