Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: neolib who wrote (251501)	6/2/2010 5:02:13 PM
From: Skeeter Bug	Read Replies (1) \| Respond to of 306849

>>These are both based on my island, so USA banking laws and structure does not apply. The bank in example 1 determines credit ratings of individuals and decides to loan or not loan, and no interest is charged. I.e. lets keep it as simple as possible. The decision to loan is based on the applicants credit rating (as determined by the bank) and the banks overall evaluation of the total money supply. 1) A wants to buy $10 of boards from B but lacks the money, so goes to the bank and asks for a loan of $10. The bank looks at the total money supply, looks at A's credit rating and PRINTS $10 OF THE COMMON CURRENCY, hands it A, makes a debt entry of -$10 in A's account (A owes the money, but no interest and no demand date set!). How much money was created? $10! The $10 circulates in the economy UNTIL A takes $10 of currency back to the bank and cancels out his debt. At that point $10 of money vanishes from circulation.<< agreed. however, banking law allows the bank to create the $10 out of thin air - so banking law has to be a consideration. if there was 2,000,000 in currency circulating on the island, there is now 2,000,010 - +$10. >>2) A wants to buy $10 of boards from B, but lacks the money, so goes to B who agrees to sell the boards for an IOU of $10 from A. No interest and not specific demand date are set. How much money was created? $10! The $10 IOU circulates in the economy until A redeems it, perhaps with $10 worth of fish, at which point the money vanishes from circulation because the redeemed note is destroyed.<< ok, i see where the hang up is. you define the IOU as money with the idea that it is equivalent to money. the problem is that it is not equivalent to money. you want proof? try to pay your mortgage with that IOU - NOT GONNA HAPPEN. a farmer could $500k worth of apples on trees, but if there is not enough currency in circulation that allows him to trade those apples for the $2k payment on his farm, he'll lose the farm - and the bank doesn't have to accept an IOU from his neighbor as payment (and won't if they want your farm). you could have $500k in IOUs from your neighbor... you still lose the farm. we've had times in this country where farms had plenty of food that just rotted on the farm while other places had hungry people because there was no currency to pay for transportation and IOUs didn't cut it because they weren't equivalent to currency. i do see the where we've been talking past each other now. the IOU isn't a currency equivalent. it can be traded for currency, but that doesn't increase the currency of the system. >>What is the difference between the two above examples?<< i tried to explain it, above. >>The significant difference is that the $10 of common currency in 1) has a value controlled by the central bank and the aggregate fortunes of the economy. The IOU of 2 is subject to the fortunes of the economy, but also specifically the fortunes of A. If A suffers significant problems, the IOU might become worthless.<< and the IOU is not acceptable on payment on debts. you could theoretically have $2 million in IOUs and get foreclosed on a $30k home due to lack of currency. >>Your issue is the failure to understand the equivalence of the bolded sections.<< the IOU and the currency are not equivalents. the currency levels increase when the bank makes a loan and the currency levels stay the same with the IOU example. this is key because the banks have the ability to blow credit bubbles and then restrict the currency available to pay back the debts incurred during the currency bubble - and they don't give a rat's behind how many IOUs one has, they are gonna strip society of its assets since there is not enough currency to pay back the existing debts - and no amount of IOUs will change the aggregate impact on society.