131–140 of 235 posts
Namely that if money is created only when you lend it to people, but they have to pay back what you created + interest, there is never enough money to pay all debts back. So bankruptcy is built into the system. It’s like musical chairs. It has to happen.
The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…
Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people to take out loans gets them cheaper than late comers and have more favorable pricing.
Business loans drive companies to leverage capital by taking out loans using their business as collaterol in order to capture market share (and rarely, creating new markets or shrinking existing ones through technological change). If they do not do this, they will be driven out of business.
Net on net, because the markets are not expanding at pace with interest, prices rise. I like to think of this as the accumulation of cumulative interest; effectively when every business in a supply chain has to pass its labor and material through a bank loan, the end product becomes much more expensive than production cost.
Cumulative interest acts as a tax on the velocity of capital, and when that stagnates, business revenues drop and companies\people begin to play a game of musical chairs of solvency.
What this is supposed to do, in theory, is kill off rotten businesses and ownership, and provide a capital market to ensure the economy can continue expanding and when you have commonwealth companies; companies that pay majority profits to employee's and put employee welfare and interests first; this works because employee's invest in the company during downturns to reap profits in upturns.
In practice, in every downturn, wages stagnate because businesses shed labor and do not have to compete for labor during the upturn. Governments are motivated to assure labor shortages are solved because paying staff more because they demand it never improves profitability of a business and is always a serious detriment. Because wages stagnate and do not recover, the profits from upturns are captured by ownership and investorship.
This cycle, historically, is not new, and tends to repeat until the people become so impoverished they lose their concept of self repect and dignity and actually think burning things and killing people are effective means to solving their problems which tends to break down systems of government and force governemnts to devolve to basal forms such as tyrranies, dictatorships or autocracies out of necessity.
E.G. Many western countries have negative fertility rates despite being the most technologically advanced societies in recorded history, and the way governments are assuring labor shortages do not occur is through replacement-level immigration which further radicalizes politics (it provides people making arguments about genocide with a lot of convincing empricial evidence in favor of their argument).
After starting to read this article, I had several random thoughts: * What makes this author's explanation credible? * Does anyone actually understand how money works, or are people trying to rationalize what we already have? * All that really matters (to me) is the value is relatively stable and it doesn't create a crazy imbalance of power. * Money does an okay job maintaining a stable value for some stuff (e.g. foo…
>* Does anyone actually understand how money works, or are people trying to rationalize what we already have? I would say, no.. considering the divergence of expert opinions. Limited consensus have formed around high profile economists (eg Keynes, Friedman) but generally erodes as history throws up new examples that don't fit neatly into popular theories. Monetarism is still the working understanding behind most cent…
I would disagree and think it needs more details. There is difference between just 'how money works' and 'how economy works'. The first question 'how money works' is mostly just insitutional and legal knowledge of existing processes of central and commercial banks.
OTOH, 'how economy works' is empirical field of knowledge about complex emergent phenomenon - the economy, and contains questions like how would economy reacts on specific monetary policies. That is what macroeconomic theories like keyensianism and monetarism are about.
>Suppose you have $100 in cash... Now if you realize that that $100 is a mere IOU from the U.S. of A. you may get a feeling you are onto something...
A hundred dollar bill has not represented an IOU since giving up the gold standard.
And honestly, that's really not so different than gold. Why would the gold standard work? What intrinsic value does gold have? Again it only has that value because we trust it. If we stopped caring about gold, maybe if asteroid mining were to quickly result in 10 times the amount of gold that's currently available, gold would quickly lose that trust; same as when a government started printing money with wild abandon. As long as governments are responsible about the money supply, money is just as good as gold. But only as long as they are.
Debt created by a bank through a loan can never truly be repaid. The debt is just passed on to another place in society, and the society as a whole remains forever indebted to the bank. Sinister in its very essence and a form of true evil.
This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…
Hey, author here. Your criticism is correct. Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. So it's incorrect for me to say that banks have _no_ special powers (still not even close to central bank's power though).
Yes, but that is relatively recent development. Bank money (and IOU-based money creation) is much older than deposit insurance.
The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…
That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it.
Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transactions alone; however, if the society as a whole loses trust in the currency, government will not be able to define it's worth. And when it tries, it just leads to black market, barter-based economy and even deeper economical collapse.
This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…
Deposit insurance is a fundamental difference but it's not the main difference. Individuals and most non-banks don't have access to Federal Reserve accounts and therefore access to reserves. The main distinction between a bank and a non-bank is the ability to create IOUs ultimately backed by reserves (whether they have sufficient amounts or not) which can only be created by the FR (and in this context) to back a bad IOU. Whether the new reserves go directly to backing up the IOU or indirectly via added liquidity is irrelevant. A bank can create a misguided IOU that defaults, which if too big to fail, is a liability that the FR and thus all holders of the IOUs, cash, and reserves must bear.
This article makes no sense? There is a fundamental difference between issuing a random "IOU" (like anyone can do) and an "IOU" which is universally accepted as payment (ie money - which banks do). I'm sure I could issue a OMGPWNIOU, but difference is, that no one will accept it as payment.
It's not black and white like some IOUs are accepted everywhere and some IOUs are accepted nowhere. For example, USD is not accepted as payment in Finland, where I live. In the article I gave a concrete example of non-bank IOUs which were effectively money. If you have an argument why the Full Tilt Poker IOUs should not be considered money, let me hear it.
In this case they were like a _Ponzi Scheme_ and not like a fractional reserve bank as they had _no assets_ to redeem the claims of their depositors with.
Pokerstars (from what you've described) was operating in a manner similar to a fractional reserve bank.