Fiat currency and fractional reserve banking
- Thread starter Renegen
- Start date
More tools in the toolbox. Reserve banking should have a proper weight in an economy to keep inflation in check whereas true fiat currency has a greater hyper inflation risk.
Akuma
Akuma
i liked the idea in one of the vids, that banking could be a non-profit public service
so instead of supporting an arguably wreckless and in many cases predatory lending industry, all money is lent by the govt as a free public service
dollars are free for the government - why aren't they free for the people? what value does the banking industry add for the end users of money in return for interest paid on thin air loans?
so instead of supporting an arguably wreckless and in many cases predatory lending industry, all money is lent by the govt as a free public service
dollars are free for the government - why aren't they free for the people? what value does the banking industry add for the end users of money in return for interest paid on thin air loans?
Hi Gregg,
In logic, a strawman argument is the informal fallacy of creating an artificial image to attack. This is exactly what the creator of that video does. He mixes some facts from the distant past with his own misconceptions and deliberate distortions of the current state of the financial system and especially the banking system.
Strawman arguments collapse right on the face of those who create them by simply offering an example that violates their conclusion.
In this particular case, the conclusion that money is created as debt is built on a tower of cards that collapses when one simply realizes that there are many people who own hard currency. I have many friends who have substantial amounts of hard currency in a safe deposit box just because they feel insecure.
The fact the there are people, corporations and even governments (notable example is China) who own substantial amounts of hard currency disproves the conclusion of the strawman argument of the video creator.
Yes, it is true that banks issue loans, it is true that the system is leveraged, it is also true that there are a lots of people on debt but it is also an undeniable fact that there is a huge amount of currency circulating in the form of tangible notes and coins.
My impression is that the video creator does not understand that the modern definition of money is not limited to money backed by gold 100%.
Yet, another fact that contradicts the conclusion in the video is that when someone owns cash there is no obligation to return it to anyone. Thus, money is not debt. Debt is debt but money is not debt. Of course some people live on debt. But unless they work and earn hard currency they cannot repay it and go bankrupt sooner of later.
Any conclusion that follows from a seemingly sound logical arguments can be shown to be invalid if a counter-example is demonstrated to hold true. I offered two such counter examples.
Finally, it is ridiculous to try to deny the importance of the time value of money as it is done in the video by its apparently confused creator. Try to imagine a financial system where money has no time value. You'll be surprised what comes up...
Ron
The video prompted a question that I hope that someone could answer :
A hypothetical situation -
1-Mr Joe Average works for a credible company that gives COL raises to offset inflation/devaluation of say, 3%.
2- His biggest debt, like most middle income families, is his house, which he has a 30 yr loan on.
3- The loan payment amount never changes over those 30 yrs, and he's paying - say 6% to make the math easier me to understand.
So, after 2 years paying the loan, is the bank essentially getting zero interest, since the money it receives is now devalued 6%? And after that, is the money it gets paid actually LESS than the devaluation rate? Is this a good thing for Mr Joe Average, since his raises have kept up with the devaluation of his dollars?
It seems like it would, for every year that passes, his money supply increases by an equal amount that his money is devalued. Hence, the % of his total income that goes to paying off his house gets smaller and smaller. Granted, everything else in his life will get more expensive, but that should be offset by his COL raise and leave more 'cushion' for him to send his kids to college, etc.
And if this is right, wouldn't it make the most sense to continually take out home equity loans whenever you need to make major purchases? Assuming of course that one could borrow that money for a long term loan, again gaining the advantage of repaying with devalued money?
A hypothetical situation -
1-Mr Joe Average works for a credible company that gives COL raises to offset inflation/devaluation of say, 3%.
2- His biggest debt, like most middle income families, is his house, which he has a 30 yr loan on.
3- The loan payment amount never changes over those 30 yrs, and he's paying - say 6% to make the math easier me to understand.
So, after 2 years paying the loan, is the bank essentially getting zero interest, since the money it receives is now devalued 6%? And after that, is the money it gets paid actually LESS than the devaluation rate? Is this a good thing for Mr Joe Average, since his raises have kept up with the devaluation of his dollars?
It seems like it would, for every year that passes, his money supply increases by an equal amount that his money is devalued. Hence, the % of his total income that goes to paying off his house gets smaller and smaller. Granted, everything else in his life will get more expensive, but that should be offset by his COL raise and leave more 'cushion' for him to send his kids to college, etc.
And if this is right, wouldn't it make the most sense to continually take out home equity loans whenever you need to make major purchases? Assuming of course that one could borrow that money for a long term loan, again gaining the advantage of repaying with devalued money?
High inflation: wealth flows from lenders to borrowers
Low inflation: wealth flows from borrowers to lenders
That's the net effect of inflation as far as lending money. Inflation acts as a mechanism for redistribution of wealth. Since the only mechanism that should be allowed for (re)distribution of wealth is productive labor then inflation should be kept as low as possible.
Western economies should and will let inflation rise fueled by high energy prices. If they keep forcing it low wealth will keep flowing to already wealthy Arabs who are the major lenders at this time.
IMO, inflation will start rocketing up after the Arab (and Chinese) investments end. China just ordered 200 Billion investment plan. When they get their money back it will worth 10 cents to the dollar. They know what happened to Japanese investors in the early 80's but they got no other choice.
Ron