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Bankers would not buy your produce, unless of course it's for onward trading to someone else, an end consumer.

The banker needs to eat. I am the only guy in our toy economy who makes food. Ergo, the banker will buy my products. Banks are not computers that only have balance sheets - they have real-world expenses (their employees have to eat and sleep, and their shareholders need to eat and sleep too...).

This purchase creates no new money. Your account in the banks's books is credited, and the bank's asset account is debited. The bank replaces an obligation from you to them, with ownership of an asset - the produce you sold them.

I don't follow.

Scenario 1: I pay the bank interest of - say - € 100 on my debt. This destroys € 100. The bank then pays its employees and shareholders € 100 that they use to buy my produce. This creates no new money. Aggregate change in the money supply: - € 100.

Scenario 2: I cut a deal with the bank when I take out the loan, saying that don't pay any interest, but in return I have to give € 100's worth of my produce to the bank's employees and stockholders. Aggregate change in the money supply: € 0.

But these two scenarios are functionally identical! The same stuff gets moved around in the same way between the same people. The only difference is in the bookkeeping. I realise that fiat money is kinda sorta fictional, but surely it's fictional in a consistent fashion?

The problem is that you are considering only the "working capital" of the economy ie the credit that oils the wheels of trade. You are assuming that money flows around in a closed loop. It doesn't. Gigantic amounts of credit are locked up in claims over productive assets: in excess of 60% of credit = money in the US and UK is tied up in land and real property.

I fail to see how this changes the scenario. If I have a secured loan of € 1 million and operating credit of € 100 thousand, then it just means that the effective interest rate I'd pay on the € 100 thousand in the above example would be ten times as high. The question here is where the interest payments go, not what happens to the principal, because the principal always nets out to zero when it's repaid, in terms of money created and destroyed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 02:15:39 PM EST
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