A while back I did a post about money and spoke of how little there is to go around and how horribly overpriced things are.. I didn't go into the why of it, just observed how little actual money there was in cash compared to how much pretend money there is in credit/debt.
So today I did another calculation - Do you remember those exercises you did in math at school about simple and compound interest? repetitive, dull and painful.. Here's a question I don't remember ever getting that I wish I had.. (Don't be scared, I won't use any numbers.)
"If banks started with no money and charge interest on loans (they do), how long before they own ALL the money ?"
My rough calculation for Australia says it's just 3 years* ..
My bad, I asked how long before.. I should have asked 'how long did it take them...' Now you may be scared.
That's the nature of interest - at some point the person lending money will eventually own all of it.
OK they won't actually *possess* the money, that'd be stupid - they need to keep loaning it to make more money.. and they also need to keep money circulating otherwise people would freak out and realise something was wrong - but they would still own it all.
you may think 'wait, I own money too.. this is BS!' - but do you? Well, how much cash do you own.. actually possess? I'll bet aside from $100 or so most people keep their money in the banks and use credit cards for most stuff now. If you owe the bank any money at all, that cash in your pocket belongs to them. Also, that money you keep in the bank is actually an unsecured loan to the bank. You essentially gave it to the bank on trust with no assurance that you'll ever get it back. If the bank goes belly up, you're just another creditor.. it's not like you can say wait, I gave them $100, I want it back - if the bank folds and the receivers can only recover 2c on the dollar (after 25 years of legal faffing about) - then you're only getting $2 back of the $100 you 'loaned' them - in 25 years. Odds are though that if the bank folds it'll be because they owe money and to be blunt, there will be no money for you. The same thing happens for anything you give to a bank - got anything is safe storage? the bank owns that. Got some gold or silver in holding? yeah the bank owns that too.. you won't get it back if the bank folds, it gets sold and the money raised becomes part of their assets for disposal.
I've said before that while governments are the only entity who can legally print money, banks are still free to 'create' money from nothing. When a person borrows money from a bank, they invent it on the spot. A lot of people don't know this, but the banks freely admit this is what they do (pdf)
So having the ability to invent pretend money allows them to inject money into the economy - which makes prices go up. They congratulate themselves and saying they're doing a Good Thing. It's supply and demand.. If someone is asking $30 for a bowl of soup and you can't afford it you walk away and go without. but let's say the banks make it easy for you to borrow that money then you just pay the $30. Soup seller thinks 'wait, maybe I can ask more' and puts the price up to $40. The bank happily lends you this - and so you pay $40 for the soup (as you do in Freo). Same deal for mortgages and house prices - they make it easy to borrow, the sellers ask higher prices, you borrow more - prices go up. You want more money to pay off your debts, you ask your employer, he borrows more from the bank and sticks up his prices - wages go up, prices go up. As long as the banks keep inventing money prices will rise.
Is there a limit to this? Of course not - no one is regulating the banks anymore (Thanks Paul and Bob /sarc) So the invented money spiral will continue up - until it fails.
When the banks were regulated they could not invent money - and the interaction between banks and the economy was much fairer. As I said above ' the person lending money will eventually own all of it' - it was a two way street back then.. Banks lend me money, I pay interest.. I lend a bank money (my savings) then they pay ME interest. Another way of looking at it in this fairer system is as though I were a shareholder in the bank. After the abovementioned clowns deregulated the banks, I ceased being a shareholder and became a customer and the banks stopped paying me for the money they borrowed and instead it only flows in one direction. well it did, now they own it all.
Sure deregulating the banks meant people could 'make' more money - by speculating (gambling) but they were now gabling with debt.. borrowed money. In gambling there's always a loser. This system though means everyone is a loser.. no one can escape this.
A lot of people bitch that the government is doing something wrong when wages are down and prices go up, or they earn too little, or houses are too expensive - but that's not the governments doing.. that's people and banks working together to bork the economy. Sure the core reason is the banks are unregulated - they'd argue they're regulated, but not the way they once were.
The very reason banks were regulated in the first place was because of this very problem - back across all of time the banks stuffed everything up by printing their own money and creating promissory notes - again, they were 'invented money' that wasn't linked to anything of value. In Australia the banks crashed in the 1800's, then they crashed the economy again in the 1930's.. and so we tightened the reins on them. Post '80's they're free again to own all the money. When governments minted gold and silver coins YOU got to carry your wealth with you in a form that could be exchanged anywhere in the world. Not so now.. it's more 'convenient' to be cashless.
But it *seems* like there's lots of money around.. it all seems to work just fine - I hear you asking 'So Mr pessimist, how can all this possibly go wrong?' .. Have you ever played musical chairs? lots of people, not enough seats.. when the music stops someone's left standing and they're out of the game. Dick Smith just went to the wall, Holden and Ford are leaving the country. You can blame mismanagement if you like - but why? Why can't they just keep borrowing and trade on? Because they are not viable, they were once - then they weren't. At the moment mortgages and house prices are high-ish (but they're falling) At some point they too will not be viable.
When they're not viable the banks won't lend as much money, prices will fall as they are doing, your 'wealth' will be eroded and you the mortgage holder will be left with a big debt for something that's not worth a big amount. You've seen it in the US - $250k mortgages on properties that dropped to a worth of $20k. That debt doesn't go away easily.. You are now a debt slave.
So I declare bankruptcy you say - well not so fast - there's a court hearing for that and in the US judges have been less inclined to allow bankruptcies to proceed and people don't get to write off the debts. They become debt slaves. Think dying will sort it out? Nope. Recently in the US there's been unsettling reports of debt being inherited - In the past you die in debt the creditors take what they can find until it's all gone and the remaining debt is written off.. but apparently some banks argued this wasn't fair. They lent the money in good faith (the money they goddamned invented) and they want it back - and so the reports are, deceased's heirs have been finding themselves lumbered with their parents debt They became debt slaves for debts that weren't even theirs.
So the answer is to go back to cash? Not so fast - there's still this 8 trillion dollar economy balancing on 32 billion in cash with the rest being pretend money or as it should be called - debt. There's no safe way back from this - too many people demanding their wealth be preserved, their house values stay high - it'll just end badly and we'll struggle through as best we can. My issue is debt/pretend money has never been this loose or easy before in all of history. When the wheels fall off it is going to be hard.
* Aus has 32 billion ($32,000,000,000) in printed currency.
the employment to population ratio - the percentage of people aged 16-64 who have worked more than one hour a week, is about 72% ..
Meaning only 46% of the all-age population work for wages.
From the age structure of Oz stats would have guessed that 15% of our population is borrowing big chunks of mortgage money, but the ABS says the home ownership rates are a split of owners, mortgage holders and renters is even at around 2.4 million. OK so let's say half of them are near paid off, half are near new mortgages - say 1 million are near new, and let's say they're for 500k a pop I've assumed a low interest rate of 4% this means for a 25 year mortgage 290k will be paid back in addition to the principal - But I can work this backwards - from the amount of money in circulation, the number of mortgages and the amount of interest to be paid in total
32 billion divided by (3 years of interest paid on 1 million mortgages at 500k each) = all the cash
the 3 years I got from using an online mortgage interest calculator and putting in 500k loan, 4% interest and fiddling the years to reduce the total interest to the right amount. $32k per mortgage.
11:53 a.m. - 2016-03-01
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Money and Pretend Money - 2016-03-01
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