Leveraged Returns
If a banker has $1000 “worth of” gold in his vault, and lends out $10,000 of bank money that is claims against that gold, the banker can earn interest payments on 10X more gold money than he actually has. If a banker can get 10% interest on all his outstanding loans, then if he issues 10X more bank money as loans than his actual capital, he can earn a 100% annual return on his capital: $1000 of interest earned on $1000 worth of capital, his actual $1000 worth of gold. The banker doubles his money every year in this scenario, and the borrowers pay it all, somehow, at least for a while.
Monopoly Game
And bankers take real wealth like businesses and houses and farms as “collateral security” against their loans of fictitious money. So when the borrower can’t repay his loan, the banker takes his farm. Compound interest and foreclosures is how big international bankers, and the monopolists to whom they lend big money at strategic times, come to own the Earth and everything and everybody in it.
A really good strategic time to have lots of money, and/or a friendly banker to lend you newly created money, is when deflationary depression collapses the price of real assets and debtors try to get solvent by selling their real wealth at bankruptcy sale prices. Wanna buy a Greek island, cheap? You can buy the world cheap during a deflation, if you have the cash or credit to buy and hold the assets.
Austerity Benefits Who?
“Austerity” policies are intended to reduce an economy’s total spending which causes economic contraction that reduces or collapses the prices of the assets that were pledged as collateral against bank loans (notwithstanding the nitwit claim that austerity will cause economic ‘growth’). Whose interests do you think are served by austerity?
Excess Money Creation
Banks create the money that buys the world. Bank lending and bond purchases are what “creates” bank deposits in the first place. Bank deposits are overwhelmingly our primary form of money. Borrowers spend their new bank money, and other people earn that spending as their income, which they deposit in their bank accounts. Excessive credit creation by banks, such as the recent real estate bubble, causes asset price inflation and money supply inflation.
Austrian economists blame “the government” for inflating the money supply and causing price inflation. If Austrians enjoy blaming the government for stuff, then I suppose it is in their interest to not know how money and banking work. But in fact the government is just another debtor to the banking system, because the banking system creates 9999 ten thousandths of the money supply by issuing credit money and banknotes, and the government only creates the other 1 ten thousandth by minting coins. Unless you want to argue that an excess supply of nickels and dimes is causing general price inflation, maybe you should recognize who is really creating the money in the first place.
Money and Value
Brad and Godfrey? They create no money at all. Maybe we can’t define what money “is”. But we can sure see what it “isn’t”. Money isn’t personal IOUs, not personal credits and debts between individuals. Ufs are not money because they can’t be spent buying stuff from strangers. Nobody “spends” their gold buying newspapers and paying their car insurance, not unless they first “sell” their gold to convert its asset value to actual money, so gold is not money any more than land or other durable assets are money.
Money is “spendable”. Assets have to be sold for money first, then you can spend the ‘value’ of the assets. And when it comes time to sell your assets for money, you may be surprised to find that the people who have money to spend do not ‘value’ your assets as highly as you do.
A million shares of stock are bought at $10 each during an IPO, so the share issuing company is “worth” $10 million. Over a couple of months 1000s of shares are sold for ever higher prices until the last trade was at $20 per share, establishing the “value” of the company’s shares at $20 each. Now the company is “worth” twice as much as it was a few months earlier, $20 million. But try cashing out all the shares and you will find that the more shares that are offered for sale, the lower the bids. So you can never actually convert the $20 million “worth of” shares into $20 million of “actual” money. The $20 million “valuation” is fictitious.
Circulation of Money
Money is what we all use as exchange media to pay for the stuff we buy and to receive for the stuff we sell. So money includes government coins that are legal tender money. But overwhelmingly money is the bank account credits and banknotes that are issued by the banking system and loaned to governments and the private sector economy. Banks issue money into existence. Borrowers spend that money into circulation. The governments and economies who use bank money owe the money back to the banking systems as loan repayments.
Our money is all owed to banks as loan repayments, so for some people (savers) to have money, other people (spenders) must have debt. Godfrey cannot have any money unless Brad “owes him” a favor. Brad “spends” an Uf by giving an Uf to Godfrey in return for Godfrey doing Brad a favor. Godfrey’s ‘money’, the Uf that Brad gave him, is Brad’s debt. If Brad had no debt, Godfrey would have no money.
The Uf that Godfrey is “saving” is the very same Uf that Brad “owes”. For Brad to get out of debt, Godfrey has to spend the Uf hiring Brad to do a favor for him. If Godfrey dies Brad is off the hook. If Brad dies the Uf is worthless. If savers hoard all the money and debtors have no way to earn it back by doing work for, and selling stuff to, the people who now have the money, and the economy collapses due to lack of money circulating, then all the money that was saved becomes as worthless as dead Brad’s Uf. If all the debtors die, all the creditors are holding dead promises.
Except in the real world Brad is not in debt to Godfrey. Brad’s banker created the money, and now Brad owes the money to his banker. Godfrey has the bank-issued money free and clear, and he can spend his money buying stuff from anybody else who has stuff he wants.
The Intermediation Myth
Banks don’t “intermediate” our debts with each other. Banks “create” our debts that are owed to banks. If debtors can’t pay then the banks are in trouble. But the people who have all the money can keep saving or spending or investing it to their hearts’ content, because the people who have the money are not the same people who owe the debts, and the banks have no power to take the money from the savers who earned money by selling stuff to the bank’s debtors.
The banking “system” may still be in balance, but there is an enormous “imbalance” between people who have money and people who owe that money as debt. If the debtors can’t pay because the savers won’t spend the money that they earned when the debtors borrowed and spent it, then the banking system and the debtors are in a world of deep doodoo, like now.
Shared Trouble
So the creditors and debtors are in a world of trouble together, but everyone who earned all the money that the banks created and the borrowers spent, is not in trouble at all. Nobody will pay us s___ for interest on our money, because the borrowers who used to promise high interest are all bankrupt or on their way. So we bid up the prices of all investment goods as we clamor to earn a bit of return. And I see in the harbor town next door the billionaires now have sleek helicopters parked on their transoceanic yachts, I suppose so they can fly over and see if there’s anything left that’s worth buying.
Meanwhile the insolvent bankers are using the Fed’s new money to place heavily leveraged bets against each other in the financial casino economy of rehypothecations and derivatives, like a last ditch Monopoly game where one bank will end up with enough money to cover its loan losses and all the other banks will be bankrupted out of the game.
And governments get another day older and deeper in debt as they bail out the bankers and try to make up for collapsed income tax receipts with new bond sales to the bankers who earn free spreads by creating money from nothing and earning 2% interest on the government debt they buy and hold. Desperate insurance companies and pension funds buy bonds that the banks sell into the secondary markets, hoping that somehow 2% interest will become the 8% they need to pay out their obligations.
Who Could have Seen This Coming?
In what innumerate fantasyland are there eternal springs of profits that can afford to pay 8% per annum forever and ever on money borrowed from insurance and pension funds to make those funding models appear to “work”? 2% doesn’t even cover inflation, so anybody who doesn’t need to pretend they’re earning ‘risk free’ returns looks for more fun ways to lose money.
Brad and Godfrey don’t worry about all these eminently foreseeable consequences of the operation of our stupid and/or evil bank-debt money systems. Brad and Godfrey are too busy bartering their excess junk with each other and trying to collect on each other’s Ufs. One of these days a piece of the bankrupt sky will fall on their heads and they’ll cry in woeful unison, “Who could have seen it coming?”
Welcome to the club, Brad and Godfrey.
