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kingludite | 4 years ago

I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

Anyway, if you sign a contract that says you shall pay me every month for 30 years OR ELSE I get to sell your house (and whatever else you own, seize your income etc) then the document with your signature IS the value created and I can sell that document for what it is worth.

So the bank creates money not entirely out of thin air but against this contract.

This is a fantastic deal for them as there is almost no risk.

The seemingly few percent interest per year over 30 years quickly ads up to 2 or 3 times the initial sum.

I suppose this would be a reasonable amount roughly around the point where 3 out of 4 houses and the ground under them would just vanish in thin air with their owner stopping all payments after about 5 years on average.

The reality was that some people still had to pay rent for their flooded home.

So we are all suckers for putting up with the scheme, welcome to the club.

discuss

order

imtringued|4 years ago

The system makes some sense because your fiat isn't completely worthless paper as many people think but there is something missing. It's that promises inherently have a tendency to lapse so we artificially introduce inflation. Well, the problem with inflation is that it requires you to borrow more money so you replace the lapsed promise with an empty promise that is bound to lapse as well. If we were truly serious about letting promises lapse then we would consider having negative interest rates rather than inflation.

Rather than have 0% interest and 2% inflation there would be -2% interest and 0% inflation. Less need for endless debt growth and government stimulus.

gruez|4 years ago

>>Charging 0% interest means the bank is losing money.

> I don't get how people can keep saying this. Is it that people are told banks lend out money from depositors in school?

They don't? Where is the money from? Due to complicated reasons (ie. bundling mortgages into mortgage backed securities and selling them), it might not be the case that the mortgage issued by Bank A is funded by Bank A's depositors, but it is the case that it's funded by depositors/investors somewhere.

imtringued|4 years ago

From a technical perspective you need deposits but from a practical perspective deposits never leave the system except in the case of a bank run where everyone tries to withdraw their money. If we assume a cashless system then banks can never run out of deposits and deposits never limit loan creation. Saving doesn't increase the number of deposits, it just shifts them around. Borrowing money increases the number of deposits.

https://www.investopedia.com/articles/investing/022416/why-b...

However, saving does have one important function. It creates a hole in the economy and that hole can then be used for investment spending (motivated by a borrower taking on a loan) without causing inflation.

dragonwriter|4 years ago

> Where is the money from?

It is created ex nihilo, limited by reserve concerns (which include hard requirements for some banks)

Note that the most of the money never exists in the form of currency, it is just accounting entries in the banking system.