Category Archives: Banking

The Anatomy Of Debt

Living in a debt based economy has a way of obscuring reality, perhaps especially when it comes to the basics of debt.  So to get back to those basics, and right to the point, let’s look at 3 basic components of all debt:

  1. Something of value
  2. The lender’s past
  3. The borrower’s future

“The past” you ask? How can debt involve the past?  Well, let’s say you hit me up for ten bucks.  That ten spot doesn’t just pop into existence because you need it.  No, In order for me to have it, it had to be earned at some point in the past.  If I now lend it to you, with interest, I am in effect delaying the benefit of my past effort so that you may use it as a present benefit.  Of course I don’t forgo that benefit for free, I charge you interest.

This loan, in essence, was a transaction.  I exchanged, or sold, a piece of my past for a piece of your future, with a profit margin.  This is debt in a nutshell and there are perfectly logical and good reasons, both for the lender and the borrower, to engage in such transactions.

The purchase of knowledge, (education) a modest home and transportation are excellent reasons a lender might “invest” in someone’s future.  And the borrower, who uses the benefits of his future early, enables himself to profit from earning more for longer.

These kinds of transactions take place across the spectrum of scale everyday.  Even government gets in on the action, only it plays out much differently there.  While its transactions still have these three components, they become mixed up.  The politician confiscates the pasts of some, sells the futures of others, invests that capital into his own political future through vote buying schemes, and then calls the whole thing compassion.

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Related posts:

On Political Motivations

On Fractional Reserve Banking

On Saving/Borrowing

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Filed under Banking, Economics, Government, Politics

Gold, Currency, Fractional Reserves And The Tale Of The Goldsmith

The story of the town’s goldsmith helps to simplify our understanding of modern banking.  This goldsmith, so the story goes, having a secure place to store his own gold, began to be asked by the townspeople to store their gold too.  He obliged, and to keep an account of who had what in his vault he provided certificates of deposit to his customers.

In time the goldsmith realized that very few people actually ever claimed their gold because they were exchanging his certificates around town, instead of the actual gold, for goods and services.

With this in mind the goldsmith got himself an idea.  Since his signature was as “good as gold”, he began to make loans using only his signature on a piece of paper.  The net effect of this was that each certificate of deposit was actually worth less than it claimed to be worth.  Us moderns call that inflation.

The goldsmith however was confident that no one would catch on to his scheme because he was certain that they would not all want their certificates redeemed at one time.  Experience had taught him that, at any given time, there was always a fraction of the the gold, which was represented by outstanding certificates, sitting in his vault available for claim.  So he felt assured that as long as there was sufficient gold on hand to satisfy those who wanted to redeem their paper,  he was, as one might say, as good as gold.

This is what us moderns call  “fractional reserve banking“.  But instead of  actual gold, paper dollars themselves work somewhat, but not exactly like, gold. In addition,  in modern times everyone from your local goldsmith (the bank) to the federal government (via laws) to the federal reserve (currency makers) are all in on this action–for good and/or evil– with coordinated participation.

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Filed under Banking, Currency, Economics, Politics

Economically, Putting Money In The Bank Is Like Spending It, Only Better.

How can saving money be the same as spending it?  What? Do you think the banker just hides your savings in a big vault until you want it back?  In a normal and healthy economy your money would be put to use doing things like building stuff, or digging and exploring for new resources, or all sorts of things like that. It would in fact be working just as if you had spent it. What you are putting in the bank, you see, represents value: which is your work.  But rather than consume the fruits of your labor right away, you forego that satisfaction and save.  This means that the currency that represents something of value, your labor, is used for other enterprises.  Those other enterprises involve profits, of which you get a little, (interest) the banker gets a little, (interest) and the one who borrowed it gets a little. (profit)

Don’t be an economic moron. Take the time to watch this short video to understand how we are all much better off with a true banking system, and not just a spigot with a money printer at the other end.

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Hat tip:  Austrian Economics Addict

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Filed under Banking, Economic Science, Economics, Money

I’m Sure Glad Our Government Is Not Making Withdrawals From OUR Bank Accounts (Evil Laugh)

One has to appreciate the honesty represented by the Cyprus government in their consideration of simply making withdrawals from the people’s bank accounts.  The world could use much more of that.

There’s more than one way to skin a cat they say.  Cyprus’ problem is that they didn’t, or perhaps couldn’t, skin this cat correctly.  There is another way to make withdrawals from citizen bank accounts, and leave them cheering you on while lining up to stuff their votes into your ballot box in the process.  But this method requires the authority to print money.  Cyprus, unfortunately for their unhappy politicians, does not have that authority evidently.

But in America, why the printing presses are running overtime with the same effect of making withdrawals from the people’s bank accounts.  But we don’t get mad, we cheer. No one’s throwing a fit.  No wall to wall news coverage with indignant info-chicks whipping everyone into a lather.  Happiness abounds.  See Cyprus?  Now that’s how you do it; though again, I do appreciate your honesty, forced though it may be.  I wish our government could be that honest about its withdrawals.  But then again, if they were, then they would be in your predicament, wouldn’t they?

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Filed under Banking, Government, Money, Politics, taxation

Money and Economics

Money is a mind game. You get these little pieces of paper and other people give you neat stuff in exchange for it. But it’s not about the paper but the resources that it represents, and we’d all do well to remember that. Here’s one example, a person could buy a comfortable house in 1960 for $10,000. You can’t do that today. So what happened? Did houses (a) get more valuable? Even though modern construction techniques and innovations have made them much easier to build? Or, (b) did the money loose its value?

If you answered “b” you are correct! So how does this happen? There are many factors that govern the amount of dollar bills you must fork over to get neat stuff… like houses, but in this case the major culprit is a printing press. Let me explain:

Key to understanding economics is the word “scarce”. (see header for economics defined) No one is going to trade you anything for air because air is not scarce, much to Algore’s chagrin. If we colonize the moon then that would be a great place to set up an air store. On the same token, the more money that’s printed the less scarce it becomes, and so the less value it maintains. The real winners in this scheme are the printers. These guys get to spend the dollar bills before the poor slubs that are taking it in exchange for their stuff have had a chance to figure out that it’s not worth as much anymore.

Now keep in mind that there’s more than one way to increase the supply of dollar bills, and it’s not always wrong to increase them. But since I promised myself to keep these posts to less than 250 words thereabouts, I’ll have to talk about that later.

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Filed under Banking, Business, Currency, Economic Science, Economics, Government, Money, Worldview