Score, part 4

So once you hoard enough wealth respect worthiness money, your (I’ll say it again — intrinsically worthless) cash goes through yet another phase change. But let’s set up the scenario with an example using standard checking accounts:

Let’s say about half — give or take twenty percent depending on the economic weather — of the US working population has checking accounts that, in typical hand-to-mouth fashion, are damned near emptied every month. The average daily balance is a few hundred dollars, and, in order to recompense themselves for the chore of holding such paltry amounts of cash, the bank takes maybe ten bucks per month, maybe more, from these struggling folks, not counting any $30-$40 wads per infraction for overdraft fees should the accounts ever touch bottom. Call it $75 to $150 per year per account charged to the enormous ranks of the not-exactly-wealthy.

But once your account passes some magic minimum balance, you are allowed to request that you earn interest on your balance — because by now you’ve discovered that the bank takes the total amount of all the money on hand, from accounts with $50 in them all the way up to accounts with hundreds of thousands of dollars in them, and loans that money out to other people who, if all goes according to plan, pay more money back than they were loaned. Interest on your checking account balance is no more than you are due, just a tiny slice of the pie, seeing as the bank couldn’t make money without having your money to loan out….

To be honest, there’s nothing about that minimum balance that makes you special. A thousand accounts with a $50 balance gives the bank as much lending ability as ten people with $5000 on account, and it really is just a matter of “screw the poor people — this will encourage them to find a way to give us more money to loan out”. But the upshot is that a standard bank makes plenty of money by taking small amounts from large groups of poor people. By the bottom line on the spreadsheets, it’s a good way to do business. It’s a stable population just by dint of being so large. Wealthy people come and go, are harder to manipulate, and aren’t so used to just taking it when they get screwed.

So cross that magic threshold and you get to start pulling away from the ranks of the chumps.

But … that’s only the start of the phase change I mentioned.

There are a zillion ways to gravitationally attract more money with the mass of the money you’ve already amassed, much of which basically amounts to gambling. Well, scratch that weaselly “basically amounts to” phrase. Is gambling. Make bets by taking out insurance policies on, well, eventualities. But one of the more more magical ways is to actually become a bank.

Say I have $100 and I loan it to you. According to our agreement, you bring it back to me with an extra $10. Now I have $110 to loan out… but that’s not exactly how the math works for real banks. That’s only how it works for loan sharks. Once you make the magical transition to being a bank, you can loan out far more than that $100, as long as you keep that $100 in reserve just in case something bad happens to a bunch of your lenders simultaneously. And if you loan out too much, you will need to increase your reserves until the money comes back. But you can borrow from other banks without much trouble, because your credit is good. You’re a bank after all…. You’re a money spigot and a money sink.

You write checks for more money than you have, basically creating a divot, a hole, a well that needs money to fill it in. And then people take the fake money you give them, buy materials, improve the materials with labor, sell products for enough money to stay in operation, and then pay the money you magically created back to you.

You don’t have to be a systems analyst like me to spot the feedback loop here. It should make the hair stand up on the back of your neck, if you can spot it.

Be that as it may, as a bank, it’s your job to only dole out the magic fake soon-to-be-real money to the deserving — i.e., those with the highest likelihood of actually paying it back. Which means probably not chumps.

And that’s the critical part of balancing money creation with money destruction so that the money supply doesn’t increase to the point of uncontrollable inflation, which makes everyone’s money worth less, or deflation, which, while good on the surface, is a symptom of there not being enough money to allow for goods and services to flow. Also, it means collateral for loans becomes eventually worth less and less, meaning that more and more people will default and not pay back their loans — which is what just happened with the mortgage market…

…which just goes to give a little evidence for how busted things are for people to ascribe value to something that can so easily be created or destroyed to the point that they hoard it — and reward people for hoarding it by stacking on a little extra now and then — until hoarding something worthless becomes a substitute for a worthwhile occupation.

And then you can use the interest-income from that hoarded fake wealth to sway legislators into thinking it’s an industry when it’s pretty much the opposite for every shade of meaning of the word, and that it should be protected.


December 8, 2010 · by xalieri · Posted in Everything Else  


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