Lucky you, because one thing's for sure, this Gov't is for you. If you're already very rich I mean. Even better if you're with Carlyle (a director maybe?) and all that funny paper you dropped on Bear won't meet the eyeballs of a federal bankruptcy trustee -- no doubt a godless liberal trustee at that! Whew, that was a close one. Heckuva of job, Paulie!
Take it easy man, you are not alone. Watch Jim Rogers on CNBC, or listen to Rick Santelli every morning. Some people just don't get it, no matter how many times you explain it to them. I guess it's their loss: http://www.youtube.com/watch?v=lTXEWh2yT_g
It allows more speculative exploration of new technologies than would otherwise be possible to happen. If money supply is highly constrained, as with a gold standard and full reserve banking, the number of loans that can be made is severely limited compared to fiat currency and fractional reserve banking. I.e... suppose that, given x in funds, a full reserve bank can make 1 loan to a speculative technology company. A fractional bank with a reserve requirement of 1/y can create a lot of money and bet on y different companies. Speculative technology, by definition, doesn't work out a lot, so the full-reserve bank is taking on a huge risk by betting on only one company. Most of the fractional-reserve bank's loans will fail, but there is a greater chance that at least one will succeed. When speculative technology succeeds, it generally produces spectacular results as far as gains in productivity and value production. As long as, in aggregate, the few speculative ventures that do succeed produce more new value than the many that fail, it makes sense to keep fractional reserve banking. By allowing many more such speculative ventures to run in parallel, the fractional-reserve system allows much faster technological progress. It only works to a certain point; that is to say, the point where the aggregate value created by the few loan successes still exceeds the value lost by the many that fail. So 400% GDP growth is not possible. Extraneous factors in every case. The first period of transition from agrarian to industrial (the 19th century in the US) is of course going to produce more dramatic gains in percentage terms than when the economy is already huge. Switzerland is a unique case, given their special status as a money haven to the world. They maintained growth by acting as a tax shelter and importing value from elsewhere. And Britain overextended itself trying to control its vast sprawling colonial empire, and bankrupted itself with military spending. R
Speculative technology should be financed by risk capital ie. equity and Venture, not bank loans. For a bank the downside risk is 100% for a fixed percent interest schedule. this is not good banking and banks getting in trouble through using loans to finance what shuld have been financed with equity was a factor in the Asian crisis. I am not saying that ST loans from banks ie revolving working capital loans are not important to technology companies. They are necessary and banks function is to provide this and make money from it.
Perhaps I misspoke by saying "speculative". The same thing applies to nonspeculative capital goods expenditure in general.. as long as the aggregate gain by the few successes outweighs the many losses, fractional reserve banking allows for vastly faster economic growth than full reserve. R
a full reserve system would be result in a snails pace of economic growth and massive stock market devaluation. it would cause astronomical lending rates because the money supply would be so tight. for a bank to lend money, it needs 1:1 in deposits, so it would need to offer high interest rates to entice depositors. with banks offering high rates, there would be no incentive to buy stocks. the double whammy is that with poor supply of credit, companies would experience slow growth thus hurting equity prices even more. and to raise capital, companies would need to issue bonds at even higher rates to compete with banks. if we converted to full reserve, i could see a dow crash that makes 1929-1933 look like a bull market
How does it allow more economic growth? The increase in loans in nominal terms is offset by an identical amount by the inflation in the money supply. For every new $1 billion loan financed by a bank creating money out of thin air, the amount of other loans is collectively reduced in real value by that same $1 billion due to inflation in the money supply. If that was not the case, then you could create real economic value literally out of thin air just by printing money. There would be no need for loans at all - just run the printing presses and everyone would become rich. Think about it - what does that new $1 billion do? It is just some paper notes. Whereas $1 billion of fully backed money represents accumulated capital - many man years of labour or real assets. The stock of real economic wealth is not increased by 1 cent, let alone $1 billion, just by increasing the amount of paper bills in circulation. You are confusing the nominal money supply with real economic value, and ignoring the cost in inflation which offsets the apparent economic "growth" for the bank and borrower who receives the loan. Adding a zero to the number of dollars in circulation makes no difference to real economic wealth. If it did, then we could magically create value overnight just by running the printing presses and handing out newly printed bills any time someone needed a loan.
Fiat paper notes represent value in the abstract; of course they are not inherently valuable beyond what value people place in them - but the same could be said of gold or anything else. $1 billion of full-reserve specie currency doesn't represent any accumulated hours of man-labor; it represents a bunch of shiny yellow metal locked in a vault somewhere. It is linked to labor only because people choose to sell their labor for it. If they stopped doing that, it'd be worthless. The same principle holds for fiat currency - as long as people sell labor for it, it's valuable; when they stop, it's worthless. Fiat currency created by fractional-reserve banking functions as a kind of generic faith and credit in the economy as a whole, backed by the economy itself rather than by a finite supply of metal. As long as the economy keeps growing, so can the supply of money. The newly created money has to be used for sustainable economic growth, not just printed and spent. Most of it has to be used for capital expenditure and investment. If the money was just printed and passed out to random people on the street who spent it all on new cars and big-screen TVs, the inflation scenario you describe would happen. On the other hand, if it's used to start new businesses that create significant new economic value (beyond the amount lost by all the failing businesses who also receive loans and can't pay them back), then there is a net gain in value. This wouldn't work so well in a preindustrial economy since it would be very hard to do anything at all with a given quantity of money that would realize gains on the required scale, but it's possible with advanced technology - one machine/mechanized process can create many times its cost in new value over time, more than making up for the value lost to the failed businesses and also giving us all a new technology. Aaron Brown has an interesting section in his book "The Poker Face of Wall Street" on this concept. When they started a new town in the old west, it was very dangerous for people to bring lots of gold or silver out there, so there usually wasn't enough hard money available locally to circulate in the isolated local economy. There were plenty of people willing to work, even plenty of goods for sale and potential sources of new value (e.g. mines, farming, cattle, etc.), there just wasn't enough hard currency around to facilitate exchange. The solution was to set up an (illegal) soft-money bank. What little hard money there was was deposited, and the bank printed up its own private currency on the fractional reserve system for use in the town. They gave it out as loans to a farmer or miner, who would use it to hire labor, and thus produced actual new value. The laborers could then spend the money at the local general store, saloon, and so forth. If the bankers were honest and competent (i.e. didn't print up too much or too little money), this enabled the local economy to function in isolation. Some businesses failed, of course, and their losses were absorbed into the local currency's value. If enough failed, the town went bust, the currency became worthless, and everyone left. If enough succeeded, the town grew and attracted outside hard capital, and the bank usually converted into a standard legal bank. People who accepted wages in the local private currency were placing a bet on the success of the town as a whole. Besides allowing the local economy to function at a much higher level than would have been possible using only specie currency, this system also encouraged people who lived there to do things that would prove beneficial to the town as a whole - they were all in it together, so they all had a personal incentive to make it work. The same thing happens with fiat currency on a larger scale today, and I believe this is a major factor in recent US economic growth. The stagflation of the 1970s was a hangover from the attempt to maintain a gold standard during the previous period of massive postwar economic growth - with the benefits of high technology, growth vastly outpaced the increases in the amount of gold in the world (and gold held by the US government in particular, under Bretton Woods), just as happened during the Industrial Revolution, and ongoing deflation of the dollar was the result. Artificially fixed foreign exchange rates provided arbitrage opportunities and further damaged the dollar. It became vastly overvalued relative to gold and other currencies because of the fixed peg to $35 an ounce gold. When gold convertability was ended and the dollar was allowed to float versus other currencies, stagflation was the result - no new economic growth, but massive inflation as the dollar, now unconstrained by an artificial fixed peg to gold that had no relation whatsoever to the amount of economic activity going on and value being created, rapidly adjusted on the market to its fair value relative to the size/output of other economies. R
Now that the USA has shot itself in the foot yet again ( when will some people ever learn to mind their own business ) the new big boy on the block - China - may bail the US out. But at what cost. Their none too gentle reign in Tibet may be a taster of things to come !!