The Ultimate Business Model

Discussion in 'Economics' started by sharkbites, Jul 11, 2008.

  1. The Ultimate Business Model

    1. Virtually risk free, actually it really is 100% risk free. (subtract cost bellow item 2)
    2. The product, lets say nominal value of 1 dollar per unit, costs nothing (ok maybe few hundreds of a penny to create total normal cost)
    3. The buyers are guaranteed, they must use it by law.
    4. On top of it, there is a premium charge for usage of the product per year.
    5. Ofc the more product required by the nation, users, the more income to the “producers ”

    For the ones who guessed it right, enter the federal reserve, banking system.
    The product is debt.
    1 and 2 above: what is the risk of creating debt? Few keystrokes, costs are virtually nothing. Money out of thin air!
    3 the gov has to use the product(debt) and virtually every American has to use it on an individual level.
    4 the premium charged is the interest on the debt paid out of the treasury, taxpayer is on the hook.
    5 Well we all know what has been happening (just this last war for example is over a trillion) The more debt issued the more income for the lender.

    Next of huge importance, the fractional reserve lending system allowed for banks in general.
    Take your friendly XYZ bank.
    To keep it simple, its reserves are mainly customer’s deposits, earning let’s say 3%
    The fractional reserve lending scheme, allows the bank to lend out a multiple of its reserves. Meaning lending out money that bank doesn’t really have. Let’s say at 5% reserve requirement, the bank is allowed to lend 20x
    So if there are 5,000 money (mainly customer deposits) the bank is allowed to lend 100k out at let’s say 9% interest rate, to buy a new house.

    A borrower could be the same customer that has deposits in that bank want a loan of 100k to buy a new house, and the bank writes it.
    Let’s examine this simple setup closely.
    The bank just created 95k out of thin air.
    The other 5k is really depositors money.
    The bank has very little into the deal, but it gets better.
    Two scenarios can happen:
    a. The borrower defaults and the bank ends up with the property. Amazing! Instantly money out of thin air is converted into real property. Bank sells the property at 50 cents on a dollar and now it has made a profit of 50k with virtually zero cost. The rest is shifting book entries and so on.
    b. The borrower keeps on paying the mortgage every year. The interest is income to the bank at nil investment from the bank’s side. Bank pays out 3% on 5k = $150, but earns 9% on 100k = $9000 per year. After 30 years of interest collecting, how much has the bank made? Multiples of the original loan. Not bad, not bad at all.

    Who benefits from increased creation of debt?

    A truly simple foolproof virtually riskless and amazingly profitable business model.

    Enough said.

    It’s been a great trading week. Have a great weekend all.
  2. Not sure I follow you. Where does the 100K come from, since homebuilders don't take "thin air"? A check has to be cut. If you have $10, you can't loan me $20 unless you borrow $10 more from someone. You may be lending "money you don't have" but in essence you do have it, you just borrowed it from someone else, and you are on the hook for it.

    Its been a long time since Econ 101, but the reserve concept means if you have 100K, a 5% reserve requirement allows you to loan out $95K.
  3. Lol week is over, should not look at the email alerts but what the heck

    Yes the bank writes the check for 100k and is only required to have 5k in reserves that’s what fractional reserve lending means. For every 5k in reserve they can write 100k check and so on.
    Where is the rest 95k coming from? Yes it’s a book entry, a keystroke. Created out of thin air.
    Otherwise the bank would be required to have100k in reserves in order to write a check for 100k
    The fractional reserve only applies to banking entities.
    The builder doesn’t care how the check was created , he deposits back to the bank goes out pays his people, buys some toys an so on.
    You or I cannot lend someone more than we have. But the banks can and do.
    I’m strictly talking banking system.. The 95K is truly money out of thin air. When the bank writes the check, the thin air becomes “real money”. The rest is shifting book entries.
    All I remember from econ now that you mention it, it is the accepted practice of bank lending. Back then I did not question it neither it seemed important lol, but what a beautiful scheme it is.

    A great income stream on someone else’s seed money, with a multiplier to boot.

    The ultimate business model indeed.

    Look at the federal reserve. Creating debt for uncle Sam over 100 billion last month?. Where did this money come from.? Did they borrow it from someone? ? No,! Where did the federal reserve find that money? National Debt is now 10 trillion? What entity has/had that kind of money in reserves stashed somewhere and was able to lend it to Uncle Sam?
    If you said money out of thin air then you are correct.

    Nice business, very nice!

    Bernanke said it best about the beautiful technology called the printing press
    “a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

    What he omitted to include is that the taxpayer is on the hook for the interest on that money. What is the debt service yearly on the national debt? It comes out of the treasury you know...

    Beautiful income stream for the debt producers.!