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A very clear explanation, Chris. It is the "gearing" of fractional reserve banking that fixes the game in the lender's favor. Owning a thousand bucks lets the lender loan out ten grand, at interest, and away we go. Perhaps deficit-based finance WAS the closest thing to a perpetual motion machine ever invented.

But it has its limits, and as you say it is meeting its limits in the shortage of limitless, cheap energy.

I often muse about what will be owned in future? What will be ownable by any individual person?

Perhaps the very notion of "owning" a million acres of rainforest as personal property will one day be considered outright insanity, on the basis that those million acres are vital machinery in a thousand human lives. It will be considered as crazy as saying you own two percent of those thousand people's noses.

Thank you for spelling out what I was writing in watercolors.

Frames exist within larger frames. Draw a larger frame around your opponent's frame; he will appear wrong or insufficient. This is how wizards play.

by Antifa (antifa@bellsouth.net) on Wed Jan 17th, 2007 at 02:27:48 PM EST
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Owning a thousand bucks lets the lender loan out ten grand, at interest, and away we go.

no regulated bank can have a ratio anything like 10X. they have to maintain a liquidity reserve and also have assets on the books equal to most of the rest.  Ordinary banks cannot print money.  

If you hold to the gold bug theory that fractional reserve bank are somehow a fraud on the world, just how would you propose to have a 100% reserve bank work?  Just a vault service charging you fees to sit on your gold or other specie for you?  There isn't enough gold in the world to replace fiat money with.  Barter?

by HiD on Fri Jan 19th, 2007 at 07:21:56 AM EST
[ Parent ]
no regulated bank can have a ratio anything like 10X. they have to maintain a liquidity reserve and also have assets on the books equal to most of the rest.  Ordinary banks cannot print money.  

True--it is the Federal Reserve that does the printing.  As a bank, all I can do is borrow money from the Fed to loan out on an overpriced McMansion, which would show up as collateral to balance my books (hopelessly overvalued collateral, it is true) and actually, I would be in a tight spot for doing something so insanely stupid, except that I bundle the loan with others like it and sell it to a security company, which will resell it to some (sucker of an) investor,  and the money supply is now larger to the amount of one absurdly overpriced box of chip-board and chicken-wire.  

Which is what is meant by flooding, and yes it is a form of inflation, far more byzantine but essentially equivalent to firing up the printing presses.  

The Fates are kind.

by Gaianne on Fri Jan 19th, 2007 at 08:51:47 AM EST
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what you describe may well be a terrible banking practice and will lead to a recession when the bubble in real estate pops.  But we still have 55% equity in our homes.  Far cry from 10X gold buggy hysteria.
by HiD on Fri Jan 19th, 2007 at 05:48:56 PM EST
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but it makes more sense if we are thinking in terms of the multiplier effect (a standard concept of classical macroeconomics).  

The Fates are kind.
by Gaianne on Fri Jan 19th, 2007 at 10:35:54 PM EST
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