Aug
17
Debt Vs. Real Money, from Gibbons Burke
August 17, 2016 |
The film "Money as Debt", produced by Canadian filmmaker Paul Grignon, presents the idea that money is created out of thin air when someone signs a 30-year mortgage—does anyone find that idea problematic?
Stefan Jovanovich writes:
Mr. Grignon's "idea" has a few problems.
The first is his notion about where the "money" comes in. When someone signs a 30-year mortgage, they don't get money; their escrow gets a promise to pay from the bank. What is created is a financial asset, secured by the real estate, for the bank and a liability for the borrower. The payment in escrow is itself an IOU that will be discharged when the escrow company's bank and the borrower's bank have their accounts cleared. Even then, there will be no money involved. Whatever is the net balance between the two banks will be handled by adjusting their reserve accounts with the Fed. (The bankers among us are asked to suspend their laughter; this is a simplified illustration, not a description of how financial institutions actually clear their credit transactions with each other.)
This process of clearing is at least 900 years old in Europe. Merchants were doing the same borrowing and lending by accounts at the trade fairs, in volumes that we can only guess at. What we do know is that in England and Wales alone there were 8 fairs and 169 markets as early as 1100 C.E. By 1516 there were 2761 fairs and 2443 markets.
The other part that poor Mr. Grignon does not understand is the fact that money has its origins, not in exchange but in sovereign taxation. Contrary to the textbooks, credit exists and even flourishes in barter economies. The medieval peasant, who never saw a coin, dealt in a variety of exchanges of promises with his neighbors and the local fief. Money only came into importance when the kings demanded tax payments instead of duties of service.
Money has always been the residual - the stuff people hoarded when they wanted to keep their wealth out of the hands of the government and other licenses and unlicensed thieves - as long as the money itself was "good". Hoarding bank notes made no sense; the government could literally abolish their status as legal tender, either by decree or by printing(Hello, Venezuela). Gold, silver, copper all had the virtue of being tangible; the government did not define their reality.
But, as soon as people find it safe to come out of hiding, they want to resume dealing in credit. Why? Because the profits from speculation can only come from exchange. Your hoard of gold is only worth something when you spend it or use it to create credit. The famous example of unopened cigarette packs being used for exchange in the ruins of post-WW II Berlin and Vienna is yet another instance where instruments of credit are described as "money". The cigarette packs were asset-backed securities; they could be broken up into tranches - i.e. individual smokes - whenever demand pushed the price of tobacco above the exchange price of the pack.
Comments
WordPress database error: [Table './dailyspeculations_com_@002d_dailywordpress/wp_comments' is marked as crashed and last (automatic?) repair failed]
SELECT * FROM wp_comments WHERE comment_post_ID = '11225' AND comment_approved = '1' ORDER BY comment_date
Archives
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- Older Archives
Resources & Links
- The Letters Prize
- Pre-2007 Victor Niederhoffer Posts
- Vic’s NYC Junto
- Reading List
- Programming in 60 Seconds
- The Objectivist Center
- Foundation for Economic Education
- Tigerchess
- Dick Sears' G.T. Index
- Pre-2007 Daily Speculations
- Laurel & Vics' Worldly Investor Articles