Money Out of Thin Air

Promises only bind those who believe them

Photo by engin akyurt on Unsplash

The saying goes like this,

Loans create deposits

It might not sound like much, but this is how money is actually created. You’d think it would be printed as paper bills by a central bank or minted into coins. Not anymore, to a large extent. Paper money and coins are indeed “money”, but they make up only a small percentage of the reserves available in the economy. Let me try to break it down to you in a simple example.

I Promise to bay the bearer, etc.

When a bank grants you a loan, it basically credits your bank account with the loan amount, 10 000 dollars for example, and records a liability of the same amount on its balance sheet. You can withdraw this amount in cash or use it to buy a car. Or a piano. Or groceries. It is real money.

Now you might be a dreamer and believe in equilibrium, that in the grand scheme of things, banks use only the cash deposited by people, as loans to debtors. Well not really.

Banks are allowed to lend much more than the liquidity or capital at their disposal. That’s a net creation of money.

Out of thin air.

And don’t bother with the liability side, the minus amount in dollars recorded on the bank balance sheet. It cannot be used to fund anything. It cannot be withdrawn in cash. It is just an accounting entry on a balance sheet account. A reminder of the debt you own the bank. Nothing more. A promise if you will.

The bet at hand

The bet at the heart of the game is that loans will allow debtors to create enough value in due time to pay them back, through their hard work or the rise in value of their property or investments.

This bet kind of works out when the economy is fine, but not so much when banks lend money without decent credit controls, to people they know damn well cannot repay the loans.

It works even less when bankers are convinced that dot com compagnies of the early 2000s or the real estate market of the late 2000s have more value in them than what they are truly worth, and end up massively lending to people who are investing in such assets.

The bet is off in this case, quite obviously, since the debtors cannot create value out of thin air, be it called dot com or sub-primes.

The promise

In the end, this is how most of the money circulating in the economy is created. Legally. A number credited on an account, which retains its value as long as the promise behind it trustworthy.

And as we say in France, in a tongue in cheek expression, promises only bind those who believe them.

Can you believe that?

Let the board sound

Rabih

The Last Currency Standing When All Is Lost

Hint: not Crypto

Photo by Zlaťáky.cz on Unsplash

Some humor coming up, don’t take this seriously. Or maybe just a little bit.

Here I go.

Lose the crypto folks, it will soon be dust. Why? Because

Universal War is upon us

People! Universal War is coming up! You could have seen it coming since the sub-prime crisis in 2008. If that was not a wake-up call, then maybe the COVID Pandemic was? Global warming maybe? And now, the conflict in Ukraine? …

Universal War I tell ya!

A war following which no economy will be left standing. Dollars? Nada! Euros? Nada! Sterling? It was already doomed since the Brexit!

Crypto?

Nada!

Useless figures on virtual screens at some ex-central bank or defunct crypto exchange. Toilet paper at most.

The post-war currency candidates

So how will we buy bread in the aftermath of Universal War? Not with Crypto, that’s for sure. Ah! I see you coming! Guns you say? You’ve heard some smart ass saying that’s the most liquid currency in the world and you want to sound smart?

Granted, you can use one to get some bread. I doubt however you will be handing an AK-47 Kalashnikov to the baker, just like that, in exchange for a loaf. You will actually be pointing it at the lad and will leave with it and the bread. That’s no payment. That’s theft.

Armed robbery.

Unless you end up shooting something or someone in the bakery and think that lead is some sort of currency. You would have bought you bread with a bullet, that is if you are careless enough to leave the bullet or its casing behind. Come to think of it further, that is not payment either.

That’s first degree murder.

OK. We’ve established so far that guns are not currency in this new apocalyptic world. What is then? Gold you say? Indeed, gold would still amount to something in these dire times. However, would you be willing to hand the baker a gold coin in exchange for bread?

Hell no! Because “Sorry, no change”!

And you can bet the bloke will have a gun to enforce it.

The new currency

You need some tools. You need a metal grater. A steel file. Only then can you produce the exact amount of gold to pay for your stuff. Gold gratings. Gold dust. Like in the wild west back in the days.

If we take a shortcut, we might even argue that the actual currency will be the file. Gold becomes a proxy, for the real value is in the file itself. It does not even sound like a shortcut come to think of it. To me, it sounds like evidence. It is unescapable.

The new currency will be the steel file. Not gold. And definitely not Crypto.

Folks, let me give you an advice. A head start.

Storm hardware stores and stack up steel files.

You’ll thank me later. If you survive Universal War of course.

Now you might say it does not matter. Why stack up steel files when no one is going to stop you resorting to violence and guns for bread, in the midst of a total collapse of civilization?

In that case, I just hope we are not neighbors. I’ll stick to my steel files, hoping I have enough to grate for my daily bread. Sorry folks, I need to wrap this up. The hardware stores close at 8 around here and I have 7 more to visit.

Let the board sound

Rabih