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Please note, that this is the second revised, improved, and edited version of the same essay, which

I published here on Scribd yesterday, on March 3, 2013. The first revision took care of semantic and grammar discrepancies. The second revision entailed the inclusion an addendum concatenated to the end of the article. This addendum aims at providing a mathematical proof by induction as well as a popularized but more in-depth explanation that shows why the loan interest stays as "debt" indefinitely in the economy Andrew Szemeredy ============================== When I first came to Canada, as an immigrant, I was staggered by the burden that businesses, that is, privately owned businesses must bear. I had lived in a communist country, and the economic system was vastly different there. What made me wonder about Canadian capitalism is this: After paying income tax on revenue, after paying supplies, materials, capital costs, and property taxes or rent, after paying employees, after paying administration consts, after paying some involuntary benefits to employees, either to them or to the government; after transportation costs and marketing, after research and development, after educating the employees, after all that, they have to make money on top to pay the shareholders or the owners. This is across the board, from multi-nationals down to the last match-seller on the street. The amount of costs, overhead and fees are proportionally comparable. The match seller has a much larger share of his income generated than what he must give away, and the industrials have a very tiny share of their income they can keep, yet somehow the idea is that it's better to be an industrialist tycoon, say, to be an oil baron or steel czar, than to sell matches on the corner. Anyhow. The burden is big, and after the burden has been distributed, the people and corporations who get their share of the burden, in terms of income for them, also have their own burdens. And after what is left after paying the burden, they buy the oil and the steel from the czars and barons, and yet the economy is sliding along finely, like a well-oiled piece of steel shoots down the factory floor made of steel. This was dazzling. I never understood how this could happen. I was mainly taken aback by the reciprocity of the miniaturizing of after-tax profit. I saw the system made up of entirely similar businesses, and since every business owner's profit was, say, 5% after taxes, and since in each transaction

businesses had to pay 100% cost, on which the seller saw the aforementioned 5%... I figured this would be a progressive series type mathematical progress. If the seller makes 5%, then the next seller who pays 100% also makes five percent... and so on, then by the time you get to the fifth seller in the series, he will make 1/(.95*.95*.95*.95*.95) dollars on 100 dollars. This is an incredibly small amount, which would translate to almost zero income. And yet the system was thriving. Obviously I was overlooking a funcition in the system, and my model was not at all applicable. I could not find the fallacy of my reasoning. When I asked others how this could be possible, I could not explain my concern, since my command of English was at best that of a student in kindergarten. Then I forgot about it. Now many years later, when we, humanity, wakes to see the entire world in the throes of debt, this paradigm described above reappeared, in a slightly different form, and in a non-fallacious form. I have to state three assumptions I will use in this theory, in which I explain why everyone is in debt, and why debt is so huge and debilitating for every economy on the globe. Debt both public and private. Assumptions: 1. Money was invented as a valuable symbolic. The amount of money in an economy has no bearing on the economy, as the economy is based on what's available, and what's available is what people and firms manufacture. Money is an extremely useful way of making it easy who can take how much of the produced wealth. Money is not a commodity or service. It is a symbolic to use in securing and paying off debts and it is of a symbolic value which can be offered and accepted in contracts. 4. The value of money; both its purchasing power and the value of how wealthy one feels when one has it, has a powerful psychological impact on human's minds. One example of this is the stock market. Stocks are worth money, but their price is not reflecting their worth. Stock prices reflect the trust that investors have in their worth, nothing more, nothing less. This trust is influenced by many variables; such as how many assests the company has which it can sell easily at any time; how its past, present and future earnings are predicted to be; at how much the prime rate is set by the government; how much people will think they will earn in dividents and by selling the stocks in the future; and hype. How much a stock will be worth in the future is simply and unabashedly mere

guesswork. Yet it influences one's idea how much worth he owns in his stocks portfolio, in terms of purchasing power. There are other influences, such as how many shares a share owner wants to dispose of for cash. This is a more precise factor, but it is even less predictable by the dilettante investor than mere guessing of future worth. For our discussion, the influence of the stock market on the economy is immaterial. The example of the stock market is used to show that humans who can make or break an economy, are extremely strongly influenced by psychological considerations, which may or may not have to do anything with the real economy. Most times in recent (back to 200 years, or so) history, stock market crashes were the most predictive of economical trouble. This is a fact. My opinion is, that the stock market crashes happened about 40% of the time for the reason of hype; and maybe the rest of the time due to recongnized economic predictors. The third assumption I make concerns itself with how money enters the economy as time goes on. There are more than one way to increas the amount of money in a closed economy, and I mention two that I can conceptualize, and then third way, which I can't. The two I can conceptualize are the elasticity of the money supply, and fictitiously created wealth; the one I can't conceptualize is the way the Franklin Mint distributes money that had not been there before. It is a fact that the money supply is increased, both in cash and by electronically conceptualized real funds. To wit, the USA had no more than two hundred million dollars in circulation in cash, and had no more than maybe twenty billion dollars in theoretically cashable securities in 1888. In 2008 the corresponding figures are much higher, in orders of magnitude. Cash or wealth creation: Elasticity of money supply. A body puts one hundred dollars in the bank, and pays another body with a cheque; that B body puts the one hudred dollars' cheque in the bank, and pays a third body, body C. Body C can do the same thing again, and there is all of a sudden $300 more in the economy as before. Ideally, this money "growth" has no limit as to its own multiplying, but everything must be paid off by everyone when the chips come down, that is, when the bank sends the cheque to its issuer to get it covered by cash. Cash or wealth creation: Another way I understand the increase of money is the fiction that influences people under the name of "speculation" which makes shares, that were bought for $20, be nworth $60 sometime later. The difference of $40 can be recouped by the investor by selling the share to

some other investor at $60 a share. One must be careful about this, though. The idea is not increasing the actual amount of money in circulation. When the investor put the $20 into each share he bouth, he paid this money to the seller. When he sells the shares for $60 each, another person or corporation must pay the $60. The stock market, therefore, is only and truly a gambling operation. It generates nothing, in terms of goods, services, or even a real increase in the amount of money in the economy. The wealth in stocks may rise, and rise by much. But to realize this money, the stocks must be sold, and when they are sold, a purchaser puts the corresponding money up. The purchaser takes money out of other parts in the economy, and gives this money to the seller of the stocks, so now the entire amount that the purchaser took out of other parts of the economy, immediately gets put back into the economy. At every transaction of stocks. This means that during each transaction, the same amount of actual money is lost and gained by other parts of the economy, and therefore the net money creating by the stock market is never positive or negative. The growth in the price of a stock only generates income for those who sell it, so no money, wealth, or strenght of the economy gets made. It is truly a zerogrowth industry, and it takes a refined mathematical mind to see it, and a better one than mine to explain this properly so it makes sense to others. Cash or wealth creation: The one way I assume I can't even begin to guess, is how the money supply gets increased. In 1888, there were, I am making an uneducated guess, say, 200,000,000 dollars in circulation in the US and in the world, and fictional wealth of the US, public and private, in terms of hypothetical cash value, was maybe twenty billion dollars. Assume that the chequing system did not inflate and kept the money supply inflated, bloated, and knowing that share prices never made money (in terms of printed paper money and metal coins), the money got in there via injections by the government. What I assume I don't know, is more than an assumption: I haven't the faintest how actual paper money gets into the tills and pockets of the nation. There are much more than $200,000,000 dollars in circulation. Maybe one hundred, maybe one thousand times as many. How did this happen? I don't know. I know, however, this: everything has a rational explanation. So I assume the cash supply is not happening due to a miracle. Money in the form of cash gets government-distributed. What I don't know is the details: who gets this money just at first when the trucks leave the Franklin Mint? I know, some people tell me, it's that bank deposits, which are not paper

money, but reperentations of money by electronic switches in a bank's computer. When electronic representations of money get cashed by the customer, the bank buys the paper money from the mint with the amount of deposit that the customer wants to withdraw. Assumptions over. Now on to tackling the debt. My first encounter, and which is still the very, and basically only, valid and logically sound idea I have and need to show you my theory on the field of debt, borrowing, lending, and repaying with a premium of "interest", was given in school by the story which went back to the times of the late middle ages. In those times kings and barons and lords fought wars. Those were expensive propositions, becaue they destroyed crops, and took away much needed production labour from farming. Production was very inefficient then, when compared to today's methods, and at certain times of the year, incredibly labour-intensive. So kings realized, that cash is better than peasant-turned-soldiers, when one is about to round up an army for an anabasis. Luckily, there was cash to be borrowed from Jews, who were not restricted by the commands of the New Testament to stay away from lendig and borrowing; and cash to be borrowed from the Flemish and Italian traders and from the safekeepers of the traders' gold, who had money to lend. You see, then, in those years, there was no elasticity of the money supply. The entire known world's trade that involved money hinged on gold and silver, and on gold and silver only. Exception to this, and a more frequent method of financial transactions were conducted in barter. For instance, peasants at the time paid their taxes not in silver and gold coins, but by giving wheat, flour, livestock, and other agricultural products to the lords and the king. The novelty of "cash" was then really that, and it was one of the reasons kings and lords borrowed money. It was like getting an invitation to apply for a credit card in today's world by a man who has had no credit before. It's impressive, says the human emotion to the human mind, to have control over such huge amounts of money, and the new credit card holder seldom thinks about repayment. Add to this that it was not easy to increase the money supply in the middle ages, because the only way to add to it was to find gold in the ground. This covers universal availability. Private money supply by kings and barons was easier to increase or decrease, by attacking with military force other, perhaps neighbouring kingdoms and landlords, and take their gold. Now, mediaeval kings and knights were not math whizzes. When the Jew or the Banker showed them a thousand gold thalers, and said, "at the end of the

year you pay me a fifty-percent interest," the kings were not thinking of the inelasticity of the money supply, instead, they experienced an emotional meltdown seeing all that gold. So they signed, without any hesitation, and in haste lest the banker change his mind, on the dotted line. Come the anniversary, they could not pay it. They would sometimes pay a little, and promised more payments later. The Jew or the Banker had to decide whether go against his better judgment and a miracle of future payments, or to kill the king right away. Or else to pardon the loan and allow it to default, because the king would have had an easier job of killing him, the banker. You see, you can't create money to pay off debt's interest, when there is no increase in the money suppy. This is the crux, the most crutial, and actually only point on which I can build my reasoning. It is not merely economically impossible to pay a debt's interest without creating money; it is logically impossible. If some king can pay the fiver hundred extra on a thousand thaler loan, then two other kings with similar arrangements will totally default. Provided they were both defeated in war and robbed of their gold by King One. Not even the basic loaned amount can be paid back by King Two and King Three. We laugh at them how could they have been that shtuppid, haha, that they did not see what was logically unavoidable. Haha, their schooling in math must have been worse than that in America these days. HAHAHA!!! Those stupid European barons. Yes, we laugh, and we don't notice that we are laughing at ourselves at the same time. We are our own laughing stock. We look around us, and see that all the nations and countries in the world are in trouble. In big, deep trouble. Because every person, every country, every city, and every king is in debt. Debt, you say. We live in a world of double-entry accounting, for every dollar a person or corporation borrowed, there must be a lender who lent the dollar. So for the outsanding debt, there must be an outstanding accounts receivable by investors. It now seems that there seems to be debt owed, without lenders having given the money of the debt. -----------------------

This is the proposition I wish to make. The proposition, and the main point of my argument, is that we no longer live in a world of balanced accounting statements. The combined balance sheet taken from each and every balance sheet at the same time, of all businesses, all corprotions, and all people, have a larger portion of liabilities than owner's equity. ALL BALANCE SHEETS. This is a proposition I make, without actually adding the figures, and checking the resultant sums. This ratio is independent of the amount of the assets, the sum of all assets on the same combined whopper of a balance sheet. Is this possible? No, if we all kept books honestly. Is this possible if we inroduce the debt reports and accept them to be true? Yes, this must be possible, although we can't figure out why or how. Something has to give. My idea is the that the "give", the amount in difference between money we own and money we should own, as a combined global unit, is explained by the inherent and unavoidable effect of not being able to match interests generated by the money the government infuses into the economy. My intuition says that debt is growing, even though governments keep increasing the cash and other monies' supply in the economy. Ideally, and this has a little more value than a mere axiomatic assumption, the government distributes each period exactly as much more money as is needed to be covered by interest amounts to be paid. You see, ALL the kings could not pay the 50% interest, but in reality ALL kings could not pay even a 1% interest, because the total amount of money was fixed in the world. There was no way to add that 1% extra money by all. The interest in anyone's intutitive reasoning, is easy to pay: one earns a thousand dollars in a period, he spends five dollars interest in the repayment schedule each period of his loan, big deal, he still has plenty of money to buy food, shelter, clothing, entertainment. It is so easy to conceptualize the system wrongly, that I believe so far everyone has done that. The psychological element here is that we think of interest payment as coming out of our income. Yes, it does, but interest payments come out of another bucket of money as well, in the economical sense. It comes out of the bucket of "total money". Because no matter how

little the payment is, if the money supply is not increased, or is not increased sufficiently, then the little or big interest payment creates, so to speak, a vacuum in some part of the economy. No matter which part, because money is transferable from conceptual bucket to conceptual bucket, so debt is transferable, too. I know I am not making a convincing argument to most people. This is an issue that requires a mathematical mind. I can't explain this to all people, to all of my readers. Perhaps finer minds than mine, can understand my point, and make it clearer so it's apparent to all. ------------------We know that the goverment creates money and puts it into the economy. Why the debt increase, then? Well, a short answer is that the government creates less money, fewer dollars, than it ought to. This can be elaborated on.

There are two basic reasons I can see why the monies are created in insufficient amounts. One reason for creating insufficient amounts of new additional money is done not exactly haphazardly, but in ways that are not in line with how many shoudl be created, due to a previous lack of understanding the effect of interest payment on loans. The other reason is that the government in the USA maybe, I don't know if this is true, increases the money supply by the amount of interest it pays on its own loans. This could be so because it has an idea how much exactly its interest amounts are, but it has no idea how much interest is paid between two second parties. Remember, any loan with any interest requires the interest amount to be added to the supply by the money creator, which is the government. Thus, if a worker asks his colleague to lend him ten bucks to buy lunch off he lunch truck, and promises $15 as a full amount of repayment, that five dollar interest payment is not registered anywhere, yet its has an equal and same effect as $200,000,000 new US government bonds have on the liabilityowners' equity ratio on the combined global balance balance sheet.

Other interest payments also don't get equal amounts of money injected into the economy by the goverment. For instance, maybe in the USA the government increases the money supply by the amount of its own interest payments. Maybe, I don't know. And why? Because it can. And probably not even that much, since it is considered dangerous to increase the amount of money in the economy too fast or in too large amounts. But states and municipalites can't print money. They can't add money to the economy. Their state bonds and city bonds bear interest, and that is one hundred percent unreinjected money. The third reason is that though interest payments are known, to all, the government still wouldn't add the appropriate amount of dollars to the supply. Such is the case in global money markets. Virtually all loans in the world are done in denomination of US dollars. Repayment is in US dollars, and therefore interest is paid in US dollars. The US government is unconcerned, because the dollars that these two foreing traders give or take between each other, are not assets of the US. But the damage is done; the interest paid in those transactions is not replentished into the total money supply. The debt evil is that. If the money is not poured into the money supply in the amount of all people's US dollar interest payments equal, then the debt interest will never go away, it will be represented as deficit, the deficit will increase each year, and the debt of the US will increase even faster each year. The same appies to all other currencies in the world, of course. -----------------I am not saying, or advocating, that the government must pay the interest amount on every loan payment. I say that the government must match the amount of interests paid in US dollars, with the money the government injects into the economy. Where, and to whom the extra money gets disbursed, is a secondary question, as far as the mathematical model of interest and growth of debt burden is concerned. They money has to be there, to be created, to be gifted, to the economy, otherwise there is simply not enough money in there to pay the interest. The point of injection of new, newly created dollars into the economy is of no concern, as long as it gets injected.

All interest payments necessitate the increase of money in the economy, no matter how small or large the amount is. Not increasing the amount money to match the needed increase as per the interest needs for extra money, the debt will increase, because the deficit is simply the the difference between the interest payments and the new money injected. ====== Why is it necessary to erase the deficit, and bring down the debt? In purely scientific economic terms, this is not a necessary action. It has become a necessary action because people see debt as evil, as debilitating, since a personal debt of a person can debilitate his financial health and as a direct consequence, his mental health too. Many people see indebtedness in their personal lives as a bad thing. And it is indeed a bad thing. They must spend their money on interest payment, not on luxuries, or worse, on necessaries. Global indebtedness is a bit different. As long as panic or bad feelings in people and in investors can be avoided, the global indebtedness is a completely viable way to go. The kings in the middle ages did not have the luxury of the freedom that accounting principles afford to one now. The barons either caughed up the money, or they defaulted. Now there are ways currently available to not default: a government can borrow more capital to make payments on debt interests. And when that second loan is about to go into default, then a third loan could be picked up. Theoretically, there is no limit to this, and as a consequence, theoretically this would never affect the economy; neither at home, nor locally. But economy is not only numbers and logic, it is influenced in much larger parts by human and investor's attitude; their fear. Their fear will also affect prices on the stock exchanges, and though the real influence of stock trades ought not to influence the economy, in reality the fluctuation of stock prices hugely influence the economy. Since this pscyhology can't be counter-effected, we must erase the deficit, and reduce the loans of governments. -----------

In conclusion: The world debt is increasing, because interest amounts must be paid from money which is not part of the existing amount of money in the world. Money can be given to the world, and some governments do issue new money. This strategy would work if the newly introduced money matched the demand for more, newly injected extra money into the economy. The newly injected money is not enough, though, because the government adds money to match money-vacuum the interest-money creates ONLY in some types of loans and their interest, but not on all types of loans. The solution to erase the debt and solve the global debt crisis lies not in forgiving loans or erasing debt, but in injecting enough dollars into the economy that match the amount of dollars each period paid in form of interest between any two parties. I hate to say this, but the first person to realize this mathematical necessity may have been the man who commanded, "neither a borrower, nor a lender be." ------------------------Why can't debt go away when there is no money created in the amount of the interest payment of the debt? This is a perfectly valid question. I must answer it if I am to make people accept my theorem on debt. Best shown in a small scale version model of a huge economy, like that of the United States of America. Assume that there is a country in which nobody owes anyone else, and therefore the culture has not been set to increase the money supply at all. Out of two hundred million people, lender Leo finally loans ten dollars to borrower Bob. The agreement says that exactly one year later Bob pays back to Leo the ten dollars, plus one dollar in interest. My task is to show that if the supply is not increased by one, this dollar deficit is never going to disappear. So a year later Bob repays the loan, with the interest.

Otherwise Bob spends his entire post-tax income as he pleases. He has expenses he can't avoid, such as rent and food costs to keep him alive. He has expenses he voluntarily expends his money on, like drinking Friday nights, or going to the movies. He has plenty of money left after his expected common expenses that befit his lifestyle. He has money to bank. Bob's money in the bank is serving a purpose, too. The bank uses it to give it out as a loan, with, let's now assume, zero interest. Bob's money is accounted for. His voluntary expenses, and his banked money are all nicely represented on balance sheets and income statements. The bank has Bob's deposite money, and the bank has presumably a well-run business, in which they are fiscally responsible, and the employees do their jobs diligently. This means, that they have perfected the art of lending the money given to them for safekeeping by their customers. For the complete cycle in every accunting period, the amount deposited by customers is the same amount as given out as loans. The loans are not frivolous. They bear no interest, so the bank has the responsibility to not lose any money due to defaults. The money the bank gives out as loans are spent by those who borrow it, because all the borrowers are also extremely reasonable and responsible. The bank has therefore developed a schedule, according to which the arrangement of which borrower gets how much, is determined with exacting precision. One year, in the year following Bob's repayment to Leo, there is one dollar missing which the bank had counted on to have. But it's not there. What can it do? It can fill the gap of the missing dollar in assets by asking Leo to lend the bank that dollar, which is missing. Leo, like the bank and everyone else in this hypothetical country of exacting and stringent Protestant work ethic, has that dollar, and he does not have use for it, unless he changes his lifestyle. So he is happy to lend it to the bank, provided that the bank pays back him, after exactly one year passes, the dollar. Leo, like the rest of the agents and players in this purified, clean-minded

economy, has learned his lesson, he does not want any more income from lending money, but he wants his dollar back. The bank uses Leo's dollar in the year, and pays back Leo as scheduled, the entire dollar. Therefore the bank faces the new year again with being a dollar short to give out the loans it must to keep the economy going. This could be considered as the first, original iteration in series of potentially infinite iterations. Now, let's jump into the future. Since the one dollar interest that had been paid by Bob to Leo is missing from the bank's available funds to loan out, just like in the end of the first year when it repaid Leo, X years later when the money is still missing, then the bank must again ask Leo or anyone else for that matter, even corporations or businesses, to lend the bank the one dollar. this can be done only if the lender in this case has money that he can spare and not damage his own enjoyment level of life, by not being able to pay for all the needs that support his lifestyle. Whoever will give the loan to the bank in year X, the bank will again need to repay that person on the first day of Year X+1. And to be able to continue to carry out its own obligations, the bank must therefore on the day that it paid back the most recent lender of the one dollar to the bank, borrow another dollar from somebody -- anybody. Therefore please note, that the economy will continue running smoothly, without any damage done to it due the borrowing. The borrowing of the dollar the first time by Bob as a loan from Leo, please also note, is perpetuated ad infinitum in a precisely run economy. Therefore, as show by the proof of induction, there will be one dollar needed to repay a loan and that dollar amount is immediately needed to be borrowed from someone by someone, who currently owes the one dollar, upon paying the previous lender. This has been shown to be true in the first iteration from the origo, and at any xth iteration after the origo. The debt will not go away. The economy will continue running smoothly, and it will not be changed by the influence of the debt.

Nobody will be bothered by the debt, it will influence nothing in the economy, except that some work will need to be performed to change the lender.

If more money is lent out which bear an interest payment, that interest will always be a "hole" in the fabric of economy's tapestry. It will never be a dangerous issue, and there is no upper limit to how much money in the "hole" economy will be able to support and continue to work properly and without interruption. The "hole", however, can be calculated to its exact amount, and this amount can be published, and it can make people and investors panic, and that is exactly what is happening today in the world. Let's now roll the tape and introduce a change in year X+Y . Let's say that the total amount in this economy that is missing in form of the "hole", is still just the one dollar, which never had gone away, due to the reality of mathematical impossibity. (Which is not reality, really, but mathematical philosophy, but in practice in life nobody can tell the difference.) The reason I say that the existence of the "hole" is purely in the realm of mathematical logic, and not in the realm of reality, is that the existence of the "hole" does not in any way influence the operations of the economy in the real world, but as a mathematical necessity, it also lives for ever. Very unfortunately this does not make people realize that the debt is a paper tiger, so to speak, a dragon with no gas to fuel a foul breath that burns. It is a big white elephant that you must not think of, and as long as you can avoid thinking about it, the white elephant will have no effect on anything. Much like the fact that seven by six is forty two is such a reality, that is has no bearing on reality. Of course of you make six widgets each of seven days, you'll have forty-two widgets, but that's caused by your work. The forty two widgets are reality, and the fact that six times seven is forty two, is a conceptual representation of some of the mathematical reality. This is deep, don't go in there, unless you are sure you can float on top of seas of philosophical concepts that extend to deep, deep metaphysical depths. So what if the government, independently of anything, puts in a dollar extra into the economy? And in a the same way I imagine it does: the government delivers one physcial dollar to the bank's physical location, and places it in the cashier's till in the bank. Come next anniversary of the loan, the interest is simply given out the the most recent lender.

The bank will no longer need to borrow a dollar to cover all the funds that it must give out. There is one dollar extra in the economy, the same amount that Leo lent to Bob, any time ago, once, even fifteen hundred years ago if you like. The debt survived until the day the government increased the money supply by the amount that was circulating in a shortage, or negative existence, and which I called earlier as the "hole". One might say, "okay, this is in a precise economy in a precise world. But can it apply, and if it can, then how does it apply equally stringently to a world in which the banks handle the deposits in not so prudently precise way?" Well, interestingly, and rather very much so, I am unable to explain that. I will think about it for some time, and come back and revisit the issue if I can give you, my readers, something on that.