Here is an interesting Ticker by Carl Denninger considering the issuance of debt free money.

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Issued for the wrong reasons, he claims can be a very bad thing with which I agree. As a free ticket for government deficit spending it would only add to the current disaster.

Of particular interest is his reply to one of the discussion posts I'll cut and paste here. Under the "Quote" is what the discussion poster had said. The rest is Denninger's reply.

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Quote:

Does not debt-based money require the money supply to grow simply to service interest on the existing money supply, which is all debt?

That's a nice premise however you assume that the debts are paid. Many of them are not and when they're not the created "moneyness" and its attendant interest disappear (the alleged "investor" loses their investment, of course.)

Quote:

In other words, isn't debt-based money inherently inflationary even without deficit spending? And thus, isn't debt-based money a form of wealth transfer from a population to the banks?

Not if you don't allow banks to counterfeit.

What happens in that case is that money becomes a pure medium of exchange; in that role the issuance of it occurs without effective interest (in other words the margin against the expansion of the credit and money supply is zero since there is no default risk in a pure exchange medium.)

Those who borrow for other than exchange purposes, of course, pay actual interest but some of them will be unable to pay since the expansion of credit on an unbacked basis cannot occur. That's how it's supposed to work -- if you borrow to consume you're setting yourself up for bankruptcy, and the person who lent you the money loses their investment (and accrued and unpaid interest) as well.

There's nothing wrong with borrowing if you can expand your economic output by more than the borrowed funds plus the interest expense. I have no quarrel with the government issuing debt-free money against the invariant-measured increase in GDP, but in a debt-based system so long as those funds are used only as a medium of exchange and there is no issuance beyond that invariant-measured economic output the interest cost on such a use is in fact zero.

The reason it is never zero in the modern monetary world is that the issuance has historically always been in excess of economic output expansion in said invariant terms. That is, the situation you describe arises precisely because people are abusing the issuance of said debt, and the worst abusers are GOVERNMENTS!

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Just thought his way of looking at it was interesting and worthy of displaying it here. He dose not seem to have a problem with issuance of debt free money as long as it is not used to fund government deficits, yet he also does not have a problem with the current system run properly.

John