What exactly is Obamacare and what did it change?

Okay, explained like you're a five year-old (well, okay, maybe a bit older), without too much oversimplification, and (hopefully) without sounding too biased:

What people call "Obamacare" is actually the Patient Protection and Affordable Care Act. However, people were calling it "Obamacare" before everyone even hammered out what it would be. It's a term mostly used by people who don't like the PPACA, and it's become popularized in part because PPACA is a really long and awkward name, even when you turn it into an acronym like that.

Anyway, the PPACA made a bunch of new rules regarding health care, with the purpose of making health care more affordable for everyone. Opponents of the PPACA, on the other hand, feel that the rules it makes take away too many freedoms and force people (both individuals and businesses) to do things they shouldn't have to.

So what does it do? Well, here is everything, in the order of when it goes into effect (because some of it happens later than other parts of it):

Already in effect:

• It allows the Food and Drug Administration to approve more generic drugs (making for more competition in the market to drive down prices)
• It increases the rebates on drugs people get through Medicare (so drugs cost less)
• It establishes a non-profit group, that the government doesn't directly control, PCORI, to study different kinds of treatments to see what works better and is the best use of money. ( Citation: Page 665, sec. 1181)
• It makes chain restaurants like McDonalds display how many calories are in all of their foods, so people can have an easier time making choices to eat healthy. ( Citation: Page 499, sec. 4205 )
• It makes a "high-risk pool" for people with pre-existing conditions. Basically, this is a way to slowly ease into getting rid of "pre-existing conditions" altogether. For now, people who already have health issues that would be considered "pre-existing conditions" can still get insurance, but at different rates than people without them.
• It renews some old policies, and calls for the appointment of various positions.
• It creates a new 10% tax on indoor tanning booths. ( Citation: Page 923, sec. 5000B )
• It says that health insurance companies can no longer tell customers that they won't get any more coverage because they have hit a "lifetime limit". Basically, if someone has paid for health insurance, that company can't tell that person that he's used that insurance too much throughout his life so they won't cover him any more. They can't do this for lifetime spending, and they're limited in how much they can do this for yearly spending. ( Citation: Page 14, sec. 2711 )
• Kids can continue to be covered by their parents' health insurance until they're 26.
• No more "pre-existing conditions" for kids under the age of 19.
• Insurers have less ability to change the amount customers have to pay for their plans.
• People in a "Medicare Gap" get a rebate to make up for the extra money they would otherwise have to spend.
• Insurers can't just drop customers once they get sick. ( Citation: Page 14, sec. 2712 )
• Insurers have to tell customers what they're spending money on. (Instead of just "administrative fee", they have to be more specific).
• Insurers need to have an appeals process for when they turn down a claim, so customers have some manner of recourse other than a lawsuit when they're turned down.
• New ways to stop fraud are created.
• Medicare extends to smaller hospitals.
• Medicare patients with chronic illnesses must be monitored more thoroughly.
• Reduces the costs for some companies that handle benefits for the elderly.
• A new website is made to give people insurance and health information. (I think this is it:http://www.healthcare.gov/ ).
• A credit program is made that will make it easier for business to invest in new ways to treat illness.
• A limit is placed on just how much of a percentage of the money an insurer makes can be profit, to make sure they're not price-gouging customers.
• A limit is placed on what type of insurance accounts can be used to pay for over-the-counter drugs without a prescription. Basically, your insurer isn't paying for the Aspirin you bought for that hangover.
• Employers need to list the benefits they provided to employees on their tax forms.

8/1/2012

• Any health plans sold after this date must provide preventative care (mammograms, colonoscopies, etc.) without requiring any sort of co-pay or charge.

1/1/2013

• If you make over $200,000 a year, your taxes go up a tiny bit (0.9%). Edit: To address those who take issue with the word "tiny", a change of 0.9% is relatively tiny. Any look at how taxes have fluctuated over the years will reveal that a change of less than one percent is miniscule, especially when we're talking about people in the top 5% of earners.

1/1/2014

This is when a lot of the really big changes happen.

• No more "pre-existing conditions". At all. People will be charged the same regardless of their medical history.
• If you can afford insurance but do not get it, you will be charged a fee. This is the "mandate" that people are talking about. Basically, it's a trade-off for the "pre-existing conditions" bit, saying that since insurers now have to cover you regardless of what you have, you can't just wait to buy insurance until you get sick. Otherwise no one would buy insurance until they needed it. You can opt not to get insurance, but you'll have to pay the fee instead, unless of course you're not buying insurance because you just can't afford it.
• Insurers now can't do annual spending caps. Their customers can get as much health care in a given year as they need. ( Citation: Page 14, sec. 2711 )
• Make it so more poor people can get Medicaid by making the low-income cut-off higher.
• Small businesses get some tax credits for two years.
• Businesses with over 50 employees must offer health insurance to full-time employees, or pay a penalty.
• Limits how high of an annual deductible insurers can charge customers.
• Cut some Medicare spending
• Place a $2500 limit on tax-free spending on FSAs (accounts for medical spending). Basically, people using these accounts now have to pay taxes on any money over $2500 they put into them.
• Establish health insurance exchanges and rebates for the lower and middle-class, basically making it so they have an easier time getting affordable medical coverage.
• Congress and Congressional staff will only be offered the same insurance offered to people in the insurance exchanges, rather than Federal Insurance. Basically, we won't be footing their health care bills any more than any other American citizen.
• A new tax on pharmaceutical companies.
• A new tax on the purchase of medical devices.
• A new tax on insurance companies based on their market share. Basically, the more of the market they control, the more they'll get taxed.
• The amount you can deduct from your taxes for medical expenses increases.

1/1/2015

• Doctors' pay will be determined by the quality of their care, not how many people they treat. Edit: a_real_MD addresses questions regarding this one in far more detail and with far more expertise than I can offer in this post. If you're looking for a more in-depth explanation of this one (as many of you are), I highly recommend you give his post a read.

1/1/2017

• If any state can come up with their own plan, one which gives citizens the same level of care at the same price as the PPACA, they can ask the Secretary of Health and Human Resources for permission to do their plan instead of the PPACA. So if they can get the same results without, say, the mandate, they can be allowed to do so. Vermont, for example, has expressed a desire to just go straight to single-payer (in simple terms, everyone is covered, and medical expenses are paid by taxpayers).

2018

• All health care plans must now cover preventative care (not just the new ones).
• A new tax on "Cadillac" health care plans (more expensive plans for rich people who want fancier coverage).

2020

• The elimination of the "Medicare gap"

.

Aaaaand that's it right there.

The biggest thing opponents of the bill have against it is the mandate. They claim that it forces people to buy insurance, and forcing people to buy something is unconstitutional. Personally, I take the opposite view, as it's not telling people to buy a specific thing, just to have a specific type of thing, just like a part of the money we pay in taxes pays for the police and firemen who protect us, this would have us paying to ensure doctors can treat us for illness and injury.

Plus, as previously mentioned, it's necessary if you're doing away with "pre-existing conditions" because otherwise no one would get insurance until they needed to use it, which defeats the purpose of insurance.

Whew! Hope that answers the question!

When you're swimming, why doesn't the water flood your ears and kill you?

Lucky for you, your ear has a protective barrier called your tympanic membrane (eardrum). This keeps the middle and inner ear separated from the outside environment.

Even if your eardrum gets torn, your body has a connection from the ear to the throat known as your Eustachian tube so if you were to go swimming with a perforated eardrum (a bad idea since the risk for infection skyrockets), you'd still be alright.

How does weed get you high and what is actually happening to you when you are?

The active ingredient in weed is the chemical THC, a so called cannabinoid. The human body has its own cannabanoid called anandamide, which acts as a painkiller among other effects. THC mimics anandamide, and smoking weed floods you brain with cannabinoids, especially the hippocampus (interfering with short term memory) and basal ganglia (interfering with body movements).

THC is of course only one of many other chemicals, many others which also can affect one's high.

Real ELI5: Your parents give you one snickers bar a day to keep you happy, however you save up money and go to your local candy store and buy a whole bag of mars bars and eat all of them on the same day. Eating them all at once is really delicious!

Well I didn't really mention what cannabinoids do:

First off, you might have heard of dopamine, a chemical that is active in the brain's pleasure and reward system. Do something that is feels good? Here have some dopamine. Eating delicious food? Dopamine. Listening to an awesome song? Dopamine. Get butterflies when you see a really cute girl, and eventually, if you play your cards right, have the best sex of your life with said girl? Dopamine, dopamine, dop...

Now you cant walk around in complete bliss all day so the brain has chemicals called inhibitors that eventually stop the release of dopamine.

Cannabinoids inhibit the inhibitors, allowing more and more dopamine to be released.

More cannabinoids -> more dopamine -> relaxation, stuff seems funnier and less important, you get hungry etc.

The Tor Project

So you have a message you want to send over the internet, but you don't trust your internet service provider (ISP). Maybe you're a political activist, or a criminal, whatever. If your ISP finds out, they'll tell the police, and the police will come and arrest you.

There are a bunch of people across the world who have keys to lock-boxes, and any lock-box can fit inside any other lock-boxes. Now you pick three of these people, Alice, Bob, and Chuck to relay your message.

First, you put your message in a lock-box that only Chuck has the key to. Then you put that lock-box in another lock-box that only Bob has the key to. Then you put THAT lock-box in another lock-box that only Alice has a key to. Then you pass the whole thing off to Alice.

Alice unlocks the outermost box and sees that the inner box can only be unlocked by Bob. So she sends it to Bob. Bob unlocks the box and realizes that the inner box can only be unlocked by Chuck, so he sends it to Chuck. Chuck then unlocks the box and sees that the message is going to Google (or whoever) and sends the message. If Google responds, it'll respond directly to Chuck. Then Chuck sends the response in a similar lock-box manner to Bob who then sends it to Alice who then sends it to you.

The idea is that in this chain of communications, no ISP (or country even) has full control. You and Alice might live in China, but Bob might be in Europe, and Chuck might be in the USA. If the Chinese authorities tap into your internet connection all they'll see are these lock-boxes going between you and Alice and Alice and Bob, but they don't have enough power to arrest all of the people with all of the keys, so they can't see any of the messages that are being sent or where the messages are actually ending up. (Although they can see that SOMETHING was sent).

Why are bugs attracted to the light?

Moths navigate and orient themselves by using the sun as a guide. For example, Mr. Sample Moth likes it on his left, means he's going the direction he wants to. Porch lights, street lights, etc, confuse them. They will fly in circles around it because they think they're flying straight. In their heads, the light is on the correct side, so they must be heading the right direction.

Why do the spouses of celebrities get so much money in the case of divorce when it's clear they wouldn't make near so much money had the relationship never happened?

Many years ago almost all families were simple: a man and a woman would marry when fairly young, and then the husband would get a job and go to work and the wife would have children and stay at home looking after them and doing housework.

If they got divorced the woman would be in no position to work: she would have no work experience, little education and she would be in a society where women working is unusual. What's more she would probably still have the children to look after. It made sense that the law protected the woman in this situation by giving her half the accumulated property from the marriage and half of the future income of the ex-husband. Half seems like a sensible amount, maybe even stingy, because she spent as much time working in her role as wife as the man did in his role as husband (maybe even a lot more), and it wasn't like she chose this split of responsibilities anyway.

That's why the law was written the way it is, but why hasn't it changed?

One reason is that there was never a defining moment when woman were suddenly considered equal to men and were able to get jobs as easily as men. Arguably this has still not happened.

Another reason though is that if someone stays at home to look after children (man or woman) then they are still contributing to the marriage, and if it ends have a right to some of the household income from that time. What's more they have a gap in their work experience, and may want to continue bringing up their children, so getting a new job at the level they would have if they'd never married would be difficult or impossible. So they have someright to the future income of their ex-partner.

How much is this "some"? This is a very tricky question, and it would have to be answered by politicians writing new laws. Politicians don't like tricky questions, because whatever answer they choose it will make some people very angry. Leaving things alone (or putting the question off) tends to not make people so angry. So politicians just ignore the problem, because it's easier.

(One last thing is that the law was also probably not written with the excessively super-rich in mind, although I'm not sure why since very rich earls and suchlike did exist.)

How Trust Funds actually work

It’s a essentially a bank account with a babysitter.

Pretend we have three friends: Al, Bob, and Charlie.

• Al is rich and his parents give him lots of money.
• Bob is poor and his parents can’t afford to give him any money.
• Charlie is trustworthy; everyone knows Charlie would never steal a dime from his friends.

Al, being a VERY nice guy, decides he wants to help Bob out. So he decides that he’s going to take $50 he’s saved up and give it to Bob. However he’s worried about Bob. Bob has never had money before and if he gives him the $50 all at once, then Bob might blow it on stuff like candy and soda within a week, when what Bob really needs is lunch money for the rest of the school year. Al is also a little lazy. He doesn’t want to bother slowly handing the money out himself, so he decides to give the money to Charlie to dole it out for him.

This relationship is called a TRUST because Al TRUSTS Charlie to do what has been asked of him and not steal the money. The money is called a TRUST FUND, because it’s the whole point of the TRUST. So now everyone benefits: Al gets to be a good Samaritan without all the hard work, Bob gets money as he needs it, and even Charlie benefits because he’ll loan the money he hasn’t given out yet to other kids and they’ll pay him back with interest, which he’ll get to keep for himself!

Stocks and the Stock Market Explained

** Part One : Stocks **

First, let’s imagine that down the street there is a toy store. Mr. Jones owns the toy store, and he has owned it for the last ten years. The toy store is a company which sells toys and all the kids love to get toys from Mr. Jones’ toy store.

Let’s suppose we wanted to buy Mr. Jones’ toy store from him so that all of the kids would buy toys from us instead. Would we be able to buy it for a dollar? No, of course not. It is worth a lot more than that. How about ten dollars? A hundred dollars?

Well, how exactly would we find out how much we need to pay in order to buy Mr. Jones’ toy store? The most important thing to consider is simply how much money is the toy store making. If the toy store is making $100 every day, that means it is making roughly $3,000 (30 days of $100) every month, or $36,000 every year (12 months of $3,000). Let’s suppose we are able to figure that the toy store should be able to keep making this much for the next ten years. Then we could consider that the entire toy store is worth $360,000 (which is $36,000 for ten years).

Now, in practice this is a lot more complicated. But the basic principle is simply to figure out how much money a company can be expected to make in a certain time frame. Fortunately, we don’t have to figure it out ourselves. There are big companies whose job is to figure out how much other companies are worth, and they do all of the hard work for us. They will tell us just how much Mr. Jones’ toy store is really worth, and then we can decide to buy it or not.

So, let’s consider that the toy store is worth $360,000. If we want to buy it (and if he is willing to sell it), we can pay Mr. Jones that much money and now the toy store is ours!

Now, this is all well and good if we have $360,000 and we want to own the entire company. But let’s suppose we only have half that much, we have $180,000. What can we do now? Well, as long as Mr. Jones is willing, we can buy half of his company instead of the whole thing.

This means that we will own 50% or half of the company, and he will own the other half. That means that instead of all of the money from selling toys going to Mr. Jones, half will go to him and the other half to us.

Another way of saying that we own 50% of the company is to say that we own 50% of the stock in a company. When a company is set up in a way that you can buy pieces of it, those pieces are called stock. There are two ways to think about stock: percentages, and shares.

What we just talked about are percentages. We can buy 50% of the shares in Mr. Jones’ toy company for $180,000. Similarly, we could buy 10% of the shares in Mr. Jones’ toy company for $36,000 (assuming the total value of the company was $360,000), or we could buy 1% of the shares for $3,600, and so on.

When you hear people talk about stocks, you will hear them talk about shares of stock. What exactly does this mean? Well, let’s imagine that Mr. Jones has a lot of people who want to buy a piece of his company. What he can do is say “Hey everyone, I have 100 different pieces of my company for sale.”

In this example, there are 100 total pieces he has for sale, each one being worth 1% of the stock. To buy all 100 pieces would cost you $360,000 and this would mean you own the entire company. This would mean that whenever the company makes money, you get all of the money. But let’s suppose we only have $3,600 to use. This means all we can afford is one piece of his company, but that one piece is worth 1% which means that every time the company makes a hundred dollars, we will get one dollar.

So in this example, Mr. Jones’ looks at the situation and realizes it is very hard to find people to buy pieces of his company, because each piece costs $3,600 which is a lot of money. So he decides rather than just have 100 pieces, or shares, he is going to have a thousand pieces! Now it takes ten shares to have 1% of the company, but each share is only $360. That is a lot more affordable. He could even decide to make 10,000 shares which means that you could buy a share for only $36.

So this is the basic concept. Companies cut their value into pieces, or shares, and then sell the shares to people who will buy them. The people who buy shares are called “investors” and the act of buying a share is called “investing”. This means that they are buying shares in a company because they think that eventually they will make back more than what they paid, because they are getting a piece of all of the money that the company makes.

When a company is enormous, worth billions of dollars, even a thousand shares is simply not enough. They need to have many, many shares in order to make sure that shares are affordable. Some companies have millions of shares of stock.

Now, we have covered one aspect of what it means to own stock in a company. You are able to keep some of the money the company makes, based on how many shares you own. But when you own part of a company, you don’t just get some of the money it makes. You also get to make decisions. Everyone who has shares in a company has the right to vote for what the company will do next. The amount of voting power you have is equal to the percentage of shares you have.

Imagine that a company is owned by three people: Billy, Melissa, and James. Imagine that Billy owns 40% of the total shares, and that Melissa and James each own 30%, which is less than what Billy owns.

Let’s suppose that the toy company is trying to decide whether to sell a certain toy. Billy thinks it is a good idea, but Melissa and James think it is a bad idea. Well, even though Billy has more shares of stock in the company, and more voting power, he will still be out voted by both Melissa and James. This is because together Melissa and James have 60% compared to Billy’s 40%.

When a company has a lot of share holders (people who own stock in the company), they will have meetings called shareholder meetings. In these meetings, everyone gets to vote based on the shares they own. The company will do whatever the prevailing vote decides.

So then, this brings up a question. What if there are a lot of people who own shares, but one of them owns more than half of all the shares? Would that person be able to out-vote everyone else, no matter how many other people there are?

The answer is yes. If a single person owns more than half of all the shares, then they have what is called “controlling interest” in the company. This means that they can decide anything for the company and outvote everyone else.

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** Part Two : The Stock Market **

So by now you should have a pretty good idea of what stock is. Now let’s imagine that there is also a video game company owned by Mr. Smith. Now, Mr. Smith’s company is doing a lot better than Mr. Jones’. We had said that Mr. Jones’ company is worth $360,000 based on how much it is expected to make over ten years, but Mr. Smith’s is worth twice that! His video game company is worth $720,000.

Let’s imagine that Mr. Jones’ company has 100 total shares of stock, each valued at $3,600 per share. Let’s also imagine that Mr. Smith’s company also has 100 total shares of stock, each valued at $7,200 per share. This means that if we had $7,200 we could choose to either buy two shares in Mr. Jones’ toy company, or one share in Mr. Smith’s video game company.

Let’s suppose that we already own two shares of stock in Mr. Jones’ toy company. Our two shares are worth $7,200 which is enough to buy one share of stock in Mr. Smith’s company. We looked at both companies, and we decided that Mr. Smith’s company seems like it is doing the best, so we decide to sell our two shares in Mr. Jones’ toy company, and buy one share of stock in Mr. Smith’s company. And this is the basics of stock trading.

Now here is where things get interesting. How much a company is really worth changes constantly. Mr. Jones’ company has been making $100 every day for ten years, but all of last year his company was only making $50 per day! Is it still worth $360,000 ? Maybe it is losing value, or maybe it is just going through a rough period. If we owned stock in the company, we would have to decide which it is. If we decide the company is losing value, then we will probably want to sell our stocks and buy stocks in a company that is doing better.

There are a lot of reasons to assume that a company is doing better, or worse. We might have heard a rumor that Mr. Jones’ toy company, even though it has only been making $50/day is about to start selling a really, really cool toy. We say “Wow, if he sells that toy lots of kids will buy it!” and so we decide to buy a lot of stock because we think that the stock is actually worth more than Mr. Jones says.

Similarly, we might have heard a rumor that an even better toy company is going to be opening up a store right next door to Mr. Jones’ toy store. In this case, we might say “Oh no, we have a lot of shares of stock in Mr. Jones’ toy company, and we better sell it fast! If we don’t, we will lose money because the kids will all shop at the new toy store instead.” You can see that emotion plays a big role in this.

Now let’s imagine that instead of two companies (Mr. Jones’ Toy Company, and Mr. Smith’s Video Game Company), there are hundreds of companies. Let’s also imagine there are thousands of people all trading stock in each company at the same time. Now you have what is called a stock exchange. If you take the value of all of the companies and add them together, and then divide that by the total number of companies in your stock exchange, you get an average that you can track over time to see how well on average all of the companies are doing.

Let’s suppose that all of the companies combined are worth a million dollars, and that there are only ten total companies in the stock exchange. Then we would say that the average value is a million divided by ten which is $100,000. Remember though that how much companies are worth changes over time, so the very next day it might turn out that all ten companies combined are now worth two million dollars, which means our average is now $200,000.

If we keep track of this average over time, we can create a graph. We can watch this graph to get a good feel for how the companies in the stock exchange are doing. This can also help us decide whether or not investing in more companies is a good idea, or a bad idea.

There you have it, the basics of stocks and the stock market. I hope you enjoyed it.

What libertarianism is

Every day, you go buy lunch in the school cafeteria and sit with all of your classmates. While you’re at lunch, you can do whatever you want with your food. You can eat it all, or you can throw it all away. You can trade it with other kids. You can give some of it to another kid who forgot his lunch money, or you can tease him because he doesn’t have any by eating it in front of him. Now, you can’t do something that would hurt another kid or ruin something he owns; you can’t throw food at him or steal his food, because if you do, you’ll get put in detention by the hall monitors. But as long as you aren’t being mean, you can do whatever you like. And these rules are the same for all the kids. Pretty great, right?

Now, what if you were in a school where many kids forgot their lunch money often, and didn’t have a lunch to eat? A lot of kids would go hungry, and that wouldn’t be good. So the hall monitors institute a new rule. Every kid must give up a third of their lunch money to the hall monitors. Then, hopefully, the hall monitors will fairly give it out to the kids who didn’t bring their own, so they can buy a lunch. Maybe those kids didn’t have any money, maybe they forgot it at home, or maybe they just stopped bringing money because they know they can get some from the hall monitors every day.

That’s not fair! You bring your own lunch money every day! Under these rules, you have to give up part of your lunch every day just because some other kids can’t take care of themselves. Now, to get the same amount of food, you now have to bring even more lunch money, which you might not have. If you were a nice kid, you’d surely help out someone who truly didn’t mean to leave his lunch money at home. You don’t need the hall monitor to be nice to someone. But because they took your lunch money from you, you have to hope that they’re giving your money out fairly. And they don’t always do the best job at it.

Why cannot Japan just print money

Okay, so, here’s what you need to understand: when the government prints money, they are tricking everyone into spending more money. People aren’t truly richer, because there isn’t more stuff. There’s just more worthless pieces of paper.

The second thing you need to understand is that when the government prints money, the main people they are trying to trick isn’t people like your mommy and daddy. They’re trying to trick companies. Here’s how it works: the government prints money and give it to your mommy and daddy. They spend some of it, but they also put some of it in their bank accounts. All the other mommies and daddies put some of the money in their bank accounts too. So after the government prints money and gives it to people, the bank ends up with a whole lot of money.

Now, let’s say that you’re thinking of opening your own lemonade stand, but you can’t afford $100 for a nice big neon sign, which would attract more business. One thing you might decide to do is go to the bank and ask them to borrow $100, and then you promise to pay them back later, plus a little extra for their trouble. That extra is calledinterest.

Before the government printed all the money and gave it to your mommy and daddy, the bank might have said, “well, we don’t have very much in our accounts right now, so we’ll have to charge you an extra $30 interest”. And you might have decided that $30 was too much, and decided not to buy the sign. But after the government prints the money and gives it to your mommy and daddy who then put it in the bank, the bank might say “well we just got a whole bunch of extra money in our accounts last week, so we’ll only need to charge you an extra $5 interest”. And that, you might think, is a great deal, so you take it and buy the sign.

Most businesses buy all their signs by borrowing money from the bank, and the less interest the bank charges, the more signs that businesses will buy [stepping outside of 5 years old here. Signs are a metaphor for all investment spending: building houses and buildings, factories, machinery, expensive computer systems, etc]. And since the government can control how much interest the bank charges by printing money, they can get businesses to buy more signs by printing money. If more people can afford more signs, then they’ll start more lemonade stands and other kinds of businesses, and more people will be able to get jobs at those new lemonade stands.

But, say you do some research in your neighbourhood and you find out that people aren’t feeling very good about how rich they are, and they don’t want to spend extra money on things like lemonade. Whenever the government prints money and gives it to them, they decide to put more of it in the bank instead of using it to buy lemonade. Maybe a lot of them don’t have jobs too. You realize that your lemonade stand probably isn’t going to be very successful, and so you decide not to borrow the $100, even though the bank only wants to charge you $5. In fact, you wouldn’t even want to buy the sign if the bank was only going to charge you $0. You decide it’s better just not to open a lemonade stand at all, no matter how little the bank will charge you to borrow money.

In that situation, the government is trapped. If the government lowers the interest that the bank charges by printing more money, then businesses might want to buy more stuff. But if businesses are so worried that they won’t even borrow money for zero interest, then the government can’t do anything by printing more money. In that situation, printing more money is kind of like spinning the tires on a car when it’s stuck in a ditch. It just digs the car in deeper.

And that’s the kind of situation that Japan is in.

The implication of cancelling all world debt

Okay, so let’s do a little exercise here. We’re going to build a money-based economy with fractional reserve banking from scratch. You’ll understand why in a minute.

In order to keep this simple, we’re going to stipulate a couple of things from the start. First, we stipulate that in this imaginary world we’re constructing, everybody tells the whole truth all the time. Second, we’ll stipulate — and really, this is just a consequence of the first thing — that everybody just takes everybody else’s word for everything. Those are the ground rules, okay?

Now, we want to have a money-based economy in this world. That means we need money, obviously. Money does not currently exist in this world we’re imagining, so we need to invent it.

Poof. Money exists.

There, that was easy. Money now exists in this world because everybody agrees that it does. That’s all it takes, literally.

But that’s just the first step. Because while we’ve all agreed that money exists, we haven’t actually created any money yet! Money exists, as a concept, but nobody has any. Walk up to any person on the street and ask him how much money he has; he’ll tell you that he doesn’t have any.

So clearly, now that we’ve invented money as a concept, we need to go about creating some money, so we can get it moving around.

To do this, we’re going to invent two institutions. The first institution we invent is called the treasury. Poof. The treasury exists. The treasury is an institution that we empower, purely by consensus, to borrow and spend money. That’s all it can do, okay? Borrow money and spend money.

How does the treasury borrow money? It borrows money by issuing bonds. A bond is, in essence, a promise to buy the bond back at some future time. For instance, I might offer to sell you a one-year bond for $100; you give me $100, and I give you my promise to buy the bond back from you after one year for $100. It’s essentially a very specific and formalized type of loan. (In the real world, bonds are sold with interest, but we don’t care about that right now.)

So we empower the treasury — by consensus — to issue bonds, and sell them, and then spend the money it raises by doing so. This is what the treasury does.

But remember, nobody actually has any money yet. So there’s nobody for the treasury to borrow money from; nobody can buy the treasury’s bonds. So clearly we aren’t done. We need another institution, which we’re going to call the central bank. Like the treasury, the central bank exists purely by consensus; poof. A central bank exists. And like the treasury, we give the bank certain specific powers: The central bank can buy and sell treasury bonds. And that’s all.

But wait. We just got through saying nobody has any money yet. So where does the central bank get money to buy treasury bonds? We give the central bank the power to create money to buy treasury bonds out of thin air. The central bank, then, is the source of all money. But remember we also said the central bank has the power to selltreasury bonds; that is, the central bank can exchange one of the bonds it’s holding for some money that somebody in the economy has. When this happens, that money — the money the central bank takes in exchange for the treasury bond — disappears. It ceases to exist.

The central bank, therefore, is both the source of all money, and a money sink. Money can come out of the central bank from nowhere, but any money that flows into the central bank disappears forever.

And that’s it. We’re done. We now have a money-based economy.

Well, almost. We have all the pieces, but we haven’t actually set them in motion yet. What we need to do is have the treasury issue a series of bonds, say $1,000 worth in total. Then we need to have the central bank create $1,000 and use it to buy those treasury bonds. Then the $1,000 goes from the central bank to the treasury, and then the treasury spends it. Thus does that money we created at the central bank go into circulation.

Once the money is in circulation, though — that is, once the treasury has spent it, by giving it to people in exchange for goods or services — interesting things continue to happen to it. Here’s a person, Alice we’ll call her, who gets some money from the treasury. Maybe she helps to build a road or something, and the treasury pays her $100 for her labor. Whatever. Point is, Alice gets some money.

Alice goes to the bank — not the central bank, but just an ordinary commercial bank — and asks to open an account. The teller says “Okay, how much money do you want to deposit?” And Alice says “One hundred dollars, please.” The teller — who just takes her word for this, because remember, everybody tells the truth all the time — says “Okay, now we have your $100, but you can come back and ask for it any time you want.” This is what’s called a demand deposit account. It’s an account into which you deposit money with the understanding that whenever you want, you can demand it back. Alice is happy with this, so she leaves.

The next person in line at the bank is Bob. Bob doesn’t have any money — he didn’t get one of those cushy government jobs — so he wants to borrow some. He asks to borrow $50, which he’ll pay back in a month. The teller says this sounds fine, so she takes $50 which Alice deposited and gives it to Bob. Bob takes that $50 and uses it to buy something from Carol, who then takes the $50 and deposits it in her own demand deposit account at that same bank.

Alice’s $100 — which she got from the treasury, which got it from the central bank by issuing a series of bonds — has now multiplied. In addition to the $100 Alice had in her account, Carol also has $50 in her own account, $50 that was created out of thin air when Bob borrowed it.

And those are the two ways that money is created in our economy. Some of it is created by fiat — that is, the central bank wishes it into existence and then uses it to buy bonds from the treasury — and the rest is created byborrowing.

But notice something. Every dollar that gets created in this imaginary toy economy we created is accompanied by a dollar of debt. The central bank creates money to buy treasury bonds, and treasury bonds are debt. Banks create money when they lend out their cash reserves, but those loans are also debts. In other words, every dollar that exists is backed — that’s the jargon term for it — by debt.

Which means if you just waved a magic wand and declared that all debts are forgiven … all the money would vanish. Every red cent of it, from everywhere, instantly.

Of course, if you have a magic wand you could also say that the debt disappears but the money doesn’t … but remember, it’s debt that’s backing the existence of the money in the first place. If you make the debt disappear, the money can linger — as a number in a ledger with a dollar sign on it, or whatever — but the thing that backedthe money no longer exists … which means the money is worthless. It would all revert to being unbacked, meaning it wouldn’t be real any more, in the economic sense. Having $20 in your pocket that’s unbacked by debt would be no different from just pretending you have $20 in your pocket. You might be able to find somebody who’s dumb enough to accept your pretend money in exchange for goods or services, but you aren’t guaranteed to, because your pretend money isn’t actually worth anything.

So long, long, very-very long story made short? If you waved your magic wand and made all the debt go away, you’d either explicitly or effectively be making all the money go away too. Because money and debt are two sides of the same coin; you can’t have a dollar without somebody, somewhere owing somebody else a dollar.