Posted by: graemebird | October 30, 2008

Decisive “Real” Investment Funds Versus Ineffectual Ponzi-Lending.

When the idea of 100% backing is first introduced to some people they are of the impression that it would lead to a dearth of investment funds. They imagine that all this cash would stay locked in the vaults and could not be lent out, and that therefore the resources left for investment would be less.

Actually they would be more. Although in the first instance the nominal loanable funds would likely be less its true. Since the banks cannot make loans until such time as people lend them money at term. And no-one would lend the banks money at term until they had built their cash balances in line with the new dispensation of tighter credit and cash that grows in value.

Now for one thing resources to be used in the improving of business do not only come from individual savings. They also come from the retained earnings of businesses. So the initial fall in the nominal amount of loanable funds, ahead of growing savings, isn’t quite so drastic as it might seem.

But there is also the issue of investment money being decisive in its capacity to create wealth as opposed to investment money being ineffectual in this regard. A great deal if not most of the ponzi-loans that create new money are ineffectual as to their wealth building whereas under capitalism nearly all money lent would be powerfully effective in creating wealth. That would be the case at least once the inevitable period of cash-building deflation has come to an end.

The best way to explain why this is the case is through a hypothetical example. 

More Later.

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Responses

  1. […] They also come from the retained earnings of businesses. So the initial fall in the nominal amount of loanable funds, ahead of growing savings, isn’t quite so drastic as it might seem. Decisive “Real” Investment Funds Versus Ineffectual Ponzi-Lending … […]

  2. Mr Bird,

    A question. If we have 100% backing it will be necessary to pay banks to hold your money am I correct since they can’t use it an must just store it? This will surely be the impetus to loan at term where they will actually pay you.

  3. Yes if its not in a term deposit they will probably charge for storage. On the other hand they might not. Since to make much money they need to attract people with high cash balances. They need customers with high cash balances that may later be persuaded to let the bank have some of these funds AT TERM.

    You see if the bank doesn’t have people saving they have no business. Under 100% backing the banks business doesn’t begin until someone is ready to lend them some money AT TERM. Hence they could well offer free storage in order to get people in a position where they will be ready to put some of their cash under term.

    E-Gold has practically no competition yet it only charges 1% per year and their transaction costs are much cheaper than other outfits.

    Another consideration that might lead to storage costs being nearly free is that with computer banking you can be really specific about how long you don’t really truly need the money for. So supposing Thursdays payday. By Saturday I’ve got most of the bills paid. And the balance I have on Sunday I reckon I won’t need access to it until Wednesday. It would be helpful for the banks cash-flow if you studiously locked up a chunk of your cash even for such short periods. In this case only four days. A lot of people doing this would be advantageous for the bank and you might wind up getting out of storage costs that way.

    But what you lost in storage costs you’d make up for in cheaper prices, less debasement and better interest terms for term deposits.

    It would be very good to be able to lend silver at interest. Rather than just having it sitting there as is the case now with a silver investment.

  4. The opportunities to make very good real interest earnings are far better under this system. Suppose the opportunity to make good interest earnings falls in the banks lap. He has to come to you to get the money AT-TERM. So he only gets a cut of that interest. The offer has to go to you.

    But under current conditions he can just make the loan. He doesn’t have to get the deposit off the customer.

    When you take out the inflation and add back some extra interest for fairly short-term term deposits you are going to make a lot more money out of the banking system under 100% backing then under the current system.

  5. A great deal if not most of the ponzi-loans that create new money are ineffectual as to their wealth building

    I agree.

    Take for instance the bank that lent you money to buy a house. Where is the wealth building from that?

  6. Well thats true. And thats a typical example at that. The house was inflated in price. So I didn’t have the wherewithal to renovate it much, thus creating wealth. And furthermore its not a wealth creating investment on another level since it didn’t improve cash-flow. And it didn’t improve cash-flow even if only interest is involved.

    A lot of ponzi-money winds up going into credit card purchases. Hardly wealth creation there either. Under 100% backing your bank will not want to extend you credit card debt. Since if you get addicted to credit cards you will not have a high cash balance and hence you won’t be able to lend them money at term. But their business doesn’t even start until someone lends them cash at term.

    So we get Keynesian types thinking that there won’t be much loanable funds. But they have to think in terms of real resources.

    I did add value a bit. It was a dodgy neighbourhood so I invested quite a lot in hardening the place up and making it more secure. So that probably makes a difference to my tenants who are three women. But its no great shakes for wealth creation and thats for sure.

    The ponzi-money inflated the value of the house, reduced the yield of the house, and hence robbed me of my capacity to create wealth in this case.

  7. Hang on graeme, doesn’t the ponzi lending lead to reduced interest rates? And doesn’t that mean people borrow that money and invest in factories and stuff that are nprofitable in the long run because the interest rate is too low?

  8. Can you clarify what it is you are driving at?

    You are picking up on some aspect of the Austrian theory of the business cycle? Is that right?

  9. Goodness me nugent. Here I was thinking I had the opportunity to lay forth on matters economic and you won’t come good with the clarification.

  10. I’m sure if it was Ted Nugent he would have asked the right questions, laid forth on double-tapping agressers in the chest with his firearm, given a series of tips on guitar-playing and talked about the importance of not killing more venison than you can eat with a detailed description of the effect of venison on ones stool and various tips on dealing with the fuzz.

    A Nugent clamming up like that. Well I never.


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