Calling All Hackers: How money works (2024)
phrack.org
phrack.org
Kudos for taking the time to put it all together.
People who don't understand the very basics of finance and accounting shouldn't write about finance and accounting.
In the context of this post, does it matter? He’s not teaching bookkeeping here. He’s explaining the time value of money.
As such, it's a self indulgent piece of writing, not a helpful one.
Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.
It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.
I agree completely on your "thorough grounding" comment. I spend a lot of time explaining to finance people how tools like python, SQL, AWS stuff can be leveraged in simple ways for analytical purposes, and I spend a lot of time explaining to technology people what all the finance and accounting stuff is really about. In both cases my experience is it always comes back to explaining fundamental ideas or concepts over and over, but applying them to different situations and contexts (I do so much more confidently when explaining accounting and finance stuff since I have deeper education & experience there).
A lot of times these fundamental ideas and concepts can be explained very simply and intuitively using toy examples. the problem is it can take years and years to build up enough experience to really separate the signal from the noise and see clearly what is truly fundamental (yes that's where formal education is helpful but it can be hard to really grok absent experience imo... In the same way learning a programming language can be easier if you just try to build something).
A deep understanding of fundamental concepts is what allows you to pick apart very complex and novel problems into it's component parts. A deep understanding of fundamental concepts is one of the things that separates professionals from non-professionals in my opinion.
Common and/or various ways the two groups misunderstand each other, and how you help them to anchor to the underlying base concepts? Yes please. For example, we know that interest accrues over time, but we still use shorthand for the annual interest as a step function because it makes intuitively more sense.
See also https://en.wikipedia.org/wiki/Archegos_Capital_Management which had Goldman Sachs as a counterparty and was not bailed out.
All the examples I brought up are about counter-parties owing money to GS.
> And I don't think goldies lost money on archegos.
At most trivial amounts, yes. Goldman got out of the position really quickly. But your earlier claim was a bit more universal than that.
Goldman ain't stupid: if there were a treasury 'put' on Goldman's counterparties (and Goldman knew that), then Goldman would exploit that and monetise that 'put'. Instead of getting out early as they did in real life, they would demand and get ridiculous compensation for staying in the position, and then enjoy the bail-out.
(Disclosure: I used to work for Goldman for a few years, but not as a proper banker. I liked the place, but I also think they are much less important than people think they are. And I suspect Goldman is partially playing into the perception, because being a villain is cooler than being a middling also-ran bank.
You might like the book 'What happened to Goldman Sachs'. They have never been the same since the IPO in the late 1990s.)
Why not critique the entire work?
Anyway:
I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.
However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).
When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.
However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.
All those interests will also end up in additional accounts related to probably banking.
I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.
What gets on my tits is assertions such as "People who don't understand ..." with no working.
Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.
Also you would not be "in debit"; the liability is on the credit side of your balance sheet.
I might be guilty of abusing an industry term or two 8)
And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.
I see the reasoning for accountants keeping future liabilities off of the balance sheet. I do this myself in multiple contexts.
Still, when making decisions about whether to take out or grant a loan (personal or business) I need to consider future "value" and cash flows. To someone running a business this is probably more important than the balance sheet. So I think the interest recording criticism is valid but relatively minor in the context of the whole article.
The vast majority of the article is trash. It's wrong in many situations. The only reason the accounting issue was brought up is it's early, and so incredibly stupid that it renders the rest of the thing untrustworthy. The rest is bad. If you don't think so, you don't know the subject and are learning from bad sources.
1. Only the portion of the principal that is due to be paid within the next 12 months is considered a "current liability".
2. Interest is a "future cash flow" that becomes a liability as it accrues over time.
One month in 25 years, my partners and I didn't pay ourselves. That's as close as we have got to having issues. We keep six months payroll, corp. tax and VAT in readies. The property mortgage is nearly paid off.
I'm no hacker and I treat finances as a means to an end - no more and no less.
It's just another confident fool spouting off about a topic they don't understand. The article is 90% trash.
The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.
are those who can pay people who understand it*
Nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).
In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.
Calling All Hackers - https://news.ycombinator.com/item?id=41306128 - Aug 2024 (253 comments)
Interesting perspective, I feel like I see this much more attributed to someone working on a meaningless problem for a paycheck at a large company. I guess it speaks to the difficulty in finding purpose in any endeavor in your twenties.
Nice conclusion on what to truly value.
Founders usually feel they're missing out on all or most of these. And some of them probably feel like they don't really have a choice - maybe their specialty/resume is one that's difficult to get hired but skilled enough to make money on their own.
However, plenty of jobs take all your time and still feel meaningless. Many (most? - median personal income in USA is $42,000) don't pay enough for people to really socialize much anyways or do most of the hobbies they might enjoy or travel at all. Generally, having the choice of "HOW should I 'waste' my twenties?" is a fairly privileged one.
Fun is you enjoy doing it. Playing video games and watching TV is fun.
Valuable is it makes money. Importantly, it's what other people are willing to pay you money for, not what you think is important or even good.
Meaningful is it's spiritually enriching. These are things you would regret not doing on your deathbed. Spending time with your family or going to church are common examples of things that are meaningful to people (and potentially fun). This one is defined based on one's internal compass and varies significantly from person to person.
You can come up with activities that are pure fun, value, or meaning. Measuring activities against these three axes has been a valuable mental model for my time management and life design.
There's jobs that are fun and meaningful, but don't pay much. This is like charity work or passion tax industries such as game dev, music, or art.
There's also jobs that are fun and valuable, but are meaningless. Working at a trading firm/hedge fund is a common example (though some people may find that it's all three or only one). Another example is being a successful startup founder working on the wrong problem.
Finally, there are jobs that are valuable and meaningful, but maybe not all that fun. To me, this is what being a startup founder (working on the right problems) or how I imagine a professional athlete is like.
The grand slam would be having all three, but in my experience these are exceptionally rare. If it's fun and meaningful, everyone wants to do it, and supply and demand pushes the value down. Most of these cases are due to unusual personalities that let one find fun or meaning in activities others don't. This ties into the common startup advice of paying attention to "founder-problem fit" and "what are your unfair advantages".
I think there is yet some other thing which has a bit of both your Meaningful and Value. Stuff that you decide you should do not precisely (or maybe precisely and this comment is just not well enough considered) because it's meaningful to you but because you just feel it should be done.
Maybe because you just recognize that someone has to do it and you should at least take your turn if not make it your whole life. Maybe because you want to live in a world where it gets done, even if you live in a society that doesn't provide for it to get done. (no one will pay you or anyone else to do it)
Phrasing these things as meaningful makes it into something someone else can say is simply your choice. If it's important to you, you can do it. And let you shoulder the entire burden for something they absolutely benefit from and should be pitching in their fair share towards in some form or another, if not tax money then time or effort, something.
It is definitely meaningful for some people, the people that are so moved that they actually give their time & energy, but those are people for whom it's actually a large part of their life & identity. I'm not like that. I am not going to volunteer for whole shifts anywhere. I care about a strangers problems intellectually. I care in the sense that I want it dealt with humanely with dignity as if I had the problem myself. I don't care directly and personally, emotionally, unless they are somehow close to me. But I would happily pitch in my fair share if we all were, because it would be small.
It's partially value because we all get value from living in the better world thanks to the various thankless tasks some people perform.
Eh, maybe I'm arguing up the wrong tree and what you expressed already covers this.
I am thinking something like "This thing should get done not because I derive meaning from it.", but really maybe what you're talking about isn't even trying to deny that. The point would still be that I might choose to commit a certain amount of my life capital towards something, because of a certain amount of value and meaning that I, let's say recognize not derive or get, from it.
I'm leaving out fun. You can have fun cooking soup for the homeless. I can not imagine having fun cleaning someone who can't clean themselves and can't pay you to do it.
Is near universal to anyone in their twenties regardless of job type/sector. It's the start of most people's adult life, and without the lack of experience that age brings, it's natural to question if you're on the "right path" and/or be swayed by potential other opportunities you've not yet explored.
Hell, even with the experience of age, people still often ask themselves that very same question, and not just for their twenties either.
Thought experiment: you have three sets of 10 recent college grads. One set works as enterprise devs in a tier 2 city, one set works at BigTech and another set works for a startup, which group do you think will have the highest median income after 10 years?
I would much rather work for a “meaningless paycheck” (and RSUs in a public company), than bust my ass at a startup for below market wages and “equity” that is illiquid and will statistically be worthless.
Startups/entrepeneurs often don't even have that duality and live our single life entirely through work. I would identify with "wasting my twenties" in the sense that the life of the entrepeneur isn't really age specific, it would be quite similar to do business at 20 than to do it at 50. The only difference being experience. But there's not much use of my young body, or libido, strength, that is typical of youth experiences.
This depends a lot on jurisdiction.
Some jurisdictions give you a certain amount of dividend income tax free. Some jurisdictions tax your capital gains even when they aren't realised. Lots of other variants exist.
I doubt this is a common thing. Whereas the other case (dividends tax credit) is far more common. It impacts those of us in Canada. Our government disincentivizes buybacks and encourages dividends instead. Typically, if you're in a low income bracket, and have investments brewing for decades (with high amounts of unrealized gain) in an unregistered account, it is preferable to get dividends over buybacks.
If you buy regular stocks in a regular brokerage account, you do not incur taxes before selling (with profit).
Same for dividend-distributing ETFs.
Oh oh.
> It's about knowing where to buy estradiol valerate on the internet and how to compound injections
Oh no.
This is 5 paragraphs in, and I already red-flagged out of this, not just because of the time it would take to read this, but because I don't want to go crazy reading this stuff.
In case it isn't clear, it's not healthy to read indictments thinking how to avoid being caught by law enforcement and buying grey market hormones. Politics aside, at least get a prescription, it's not like they are not giving them out.
Hacking is a huge spectrum I know, but if we have to decide on some limits to what is open to be modified and understood by the lay(wo)man, and what is closed and left to professionals, wouldn't we agree that law and medicine would be such fields? (and possibly military?) Trying to hack medicine or law is as extremist as arguing that you don't have the rights to plant the seeds of fruit you buy. As far as rights go, sure people are given the rights to represent themselves pro-se and apparently to buy hormones online, but going beyond what's allowed, are you really willing to ruin your life just to stick it to the man or to exercise your right to do whatever?
I can't speak to his work on finance as a whole. Regarding deep time, his claims about pre-literate society from archeology are not widely supported, they use thin evidence to argue badly.
His anarcho-socialism isn't the concern. It's his lack of historicity, and inability to bring his peers with him on radical ideas which concerns me.
He's dead, he can't defend himself. So there's that.
As for Graeber being controversial: yes, though I vaguely recall "The Dawn of Everything" being (moreso) the trove of interesting historical anthropological hypotheses, rather than "Debt"?
Anyway, it's been a while, but my main point is that I wouldn't let Graeber's controversial-ness stop anyone from reading Debt. If anything, going in with that information makes you think harder about the topics he covers.
I saw this in the flesh at a book festival. Dale Spender, a notable feminist author who moved sideways into IT tech (she was involved with online learning systems) did a book talk and the majority of questions from the audience were "Gotcha" attempts about here philosophy and feminism, with nothing to do with the subject at hand.
I am not so certain about this. In particular being exceptional in cybersecurity does not make you good at playing political games or having the traits that a lot of bosses want from employees (I will attempt to avoid starting a discussion whether I consider such traits to be good or bad).
2. One example of a trait that many bosses desire, but is not a social skill per se is docility.
So, yes, such as doctor who excels at health science is very likely a really good doctor, but this does not imply that this doctor will excel in every position in the medical system for which doctors are hired.
This is very consistent with my claim that I don't think that "being exceptional in cybersecurity is a pretty good indicator that someone will be successful in other fields".
This is XKCD #793 all over
This is all spawned from insecurity that your prestigious degree or whatever can be replicated through independent learning
Here's one that better suits the title:
"Pricing Money: A beginner's guide to money, bonds, futures and swaps" (866 points)
PS: Hackers websites don't have to look this ugly. We do take care of attention to detail that the page have to be rendered for mobile devices as well.
I personally also don't love it, but fortunately, hackers have the technology to reflow legacy fixed-width text files to any format of their choosing :)
You conflate 'r' (the discount rate) with 'Rf' (the risk-free interest rate). In reality, for high-risk assets like startups, 'r' is defined by the Weighted Average Cost of Capital (WACC) or CAPM: r = Rf + Beta(Rm - Rf).
Even in a ZIRP environment where Rf -> 0, the Beta (risk/volatility) for a startup is massive. A rational investor would still demand a high 'r', leading to a low valuation. The fact that VCs ignored this and funded "blatantly bad deals" cannot be explained by low interest rates alone. It is better explained by the information asymmetry a.k.a principal-agent problem.
We have a system where capital flows from passive LPs through multiple layers of rent-seeking intermediaries (VCs, LPs, Fund Managers) who are incentivized by management fees rather than carry. The market failure described isn't "financial nihilism" and "financial short-termism". It's a breakdown of feedback loops where intermediaries face no downside risk for misallocation. When there is no market coordination, no real competition, just unrestricted collusion, then things start to not make sense from the old school financial/business perspective. I do not think this is the failure of economic theory or the financial models itself, rather just that nobody knows or tells, that the prerequisite for these things is at least some degree of fair competition, market based economy, informed, rational actors and restricted collusion.
Suggesting that technical founders can fix this by simply "being decent" ignores the systemic reality. This economic structure rewards extraction over value creation, "decency" is an evolutionary disadvantage. The "real hackers" in this story are the financial and business intermediaries who successfully reverse-engineered the economy to extract rent without generating value, similarly to all those entrepreneurs, CEOs, corpo drones in the business sphere who do not provide any meaningful value to society (and shareholders as well.)
What do you consider as a "high quality founder"? I guess people will haver very different opinion what makes a founder "high quality".
- It's backed by nothing.
- It's not a fair medium of exchange because it physically cannot circulate very far from 'money printers' (not many hops) before it's taxed down to nothing. This means that it's unevenly scarce based on social proximity; unfair by design. Cantillon effects on steroids.
- It doesn't even exist as a single cohesive concept; the US dollar in your bank account is not the same as the US dollar in your friend's bank account and it's not the same as the US dollar which European traders use to buy derivatives (e.g. Eurodollars)... There are literally thousands of different ledgers (banks, institutions, in different countries), each presenting its own interface supposedly showing their holdings of this mythical unit called 'The US dollar' which is actually thousands of different currencies, which happen to share the same name, scattered around the world and held together only by regulators whose only shared interest is to print more units for themselves than the next guy does. Slow and fallible human regulators represent the only layer of 'consensus' which exists for the entire fiat monetary system; they move at snails' pace in a world of high frequency trading.
Money is never backed by nothing, or it's worthless. It may not be backed by anything physical, but it's always backed by some form of trust. National currencies are backed by trust in the corresponding government and institutions.
It has value from the perspective of the oppressor I guess... I think this is where it derives its value.
https://www.textfiles.com/magazines/PHRACK/
Have "hackers" changed
If yes, how
Gold good, paper bad. But also, gold bad, because clipping.
If only there was a solution.
The modern world would collapse in about a week if banks were not allowed to loan out deposits.
The ability to satisfy needs now and pay for them in the future is why you can have a house, why governments can build infrastructure, etc. That’s the only reason that banks really exist. Keeping your deposit safe for you while providing convenient access via cards, checks and other rails is just a wonderful side effect.
After a few thousand years of civilization we don’t have anything better that could allow you to satisfy current needs with future income. Direct loans are just vendors acting as de facto banks, at much higher risk.
A bank product that doesn’t loan out your deposits is called a safe deposit box. There’s your solution.
The housing market has been greatly influenced by the ability to loan vast sums for housing, and without that we would have a very different housing market but we would still have one.
I think banks should lend but it's probably fair that we have controls on lending, and I think we should probably tighten them up especially around housing.
Why not, as long as they have the consent of the owner? And all banks have the consent of the depositors.
How can there be more money in circulation if we can’t create more?
Since wealth can increase (there’s more wealth today than 1000 years ago) why would you expect that money wouldn’t?
Or do you think there should always have been only $1 constant dollar for all time?
The problem is the governments can bail the banks out. After 2008, trust in paper IOUs (or their digital equivalent) should have plummeted, leading people to seek to store their wealth in other ways. But it didn't, because the governments stepped in and said, "nah, we need this to work, so we'll pay their salaries and bonuses with your taxes".
Bitcoin was intended to be a solution to this problem. There's nothing stopped people creating derivatives on top of Bitcoin and trading those. But nobody, no government nor anybody else, can just print more Bitcoin.
Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc.
The regulatory capital ratio determines how much capital they must hold to support the assets.
Loans are assets
And people wonder why finite natural resources skyrocket in value.
All kind of assets can lose value overnight, be it stocks or real estate.
Conversely, when you deposit cash to a bank, you are actually creating a liability on the bank's balance sheet - as you might want your money back one day!
That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions.
The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios.
Interestingly they barely held any reserves at all, perhaps 2% or less of assets.
These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.
You can't loan more than you have
Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking.
Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
There already are some gold pegged stablecoins
How do you know how much gold the government is holding? Ask them!
How do you know the government isn't lying? Ask this question loudly enough and meet people with guns!
If you buy eg a gold ETF, you can ask all these questions without any guns coming out. You can also go and exchange them for physical gold whenever you feel like it. Without any guns coming out.
If they break their promises, you can sue them. Without any guns coming out.
Providing you and they are in a country who is prepared to use 'guns coming out' to enforce the outcome of said suing.
You can also do jurisdiction shopping: many companies deliberately contract under eg London law instead of local law.
I think paxos and xaut have audits etc. from what I know/ I have heard.
Although having more audits is always a neat idea but I was just proposing that there are ways to invest in things like gold and have things like liquid gold perhaps via stablecoin or some other means too basically allowing you to instantly sell gold and gold is a pretty good hedge against stablecoin imo.
I actually once wrote about this idea of narrow banking discovering it accidentally where I wanted a bank which could invest in treasury bonds for inflation protected money or gold.
https://gist.github.com/SerJaimeLannister/c3db4eb84da96decfc...
Ah, yes, the almighty auditors.
Auditing proves you passed the audit. Nothing more, nothing less. The audit can be at any level that suits the person paying for the audit. In this case it's the company who has the vested interest in passing the audit.
Something backed by a volatile asset isn't, by definition, a stablecoin, though.
This is a nonsense claim. How many flat screen TVs could you buy for a pound of gold over a 'long time scale'? Cancer treatments? Acres of land in midwest? Hours of a normal person's time? The fact of the matter is that you cannot actually store labor or time for later, so the amount of stuff you can get your gold is gonna vary wrt the broader economy. Economic reality on the ground is what actually determines the 'value' of your gold. And look, if you want some asset that you're pretty sure you could still trade for bread after the apocalypse or whatever, gold isn't the worst choice. And its deflationary, as the amount of gold isn't increasing at pace with the productivity of the global economy. And people like to hoard it when the future becomes less certain, because of the aforementioned 'tradeable for bread after the apocalypse', so I guess its an okay speculative hedge?
You've attacked what could interchangeably be dollar or gold asking what it might buy or store, failing to recognize I was measuring relative stability rather than absolute stability.
The dollar has lost over 95% of its value since inception of the federal reserve (at which time dollars nature changed significantly) in 1913 against some imperfect measures of CPI. That gives you a 20x difference over time, downward. Gold has not perform nearly that bad at price stability.
We could go back further than that when the dollar was a lot more stable... but at that time dollar was backed by gold and there wasn't (mostly) a central bank nor gold possession bans that let them mess with the price quite in the same way they did later.
Look to Canada for a much stabler system that didn't have banking crisis all the time. See eg https://archive.is/v13TM
Communists can say "oh, it wasn't real communism." Classical liberalism and neoliberalism can make much stronger claims: a bit more neoliberalism (stochastically) gives you a bit more prosperity in the long run. You don't need the whole thing 100% to reap partial benefits.
I say stochastically, because in the real world there's a lot of noise from other factors, of course.
And in this case at hand: Canada had much lighter and more sensible regulation in this sector, and they did better. As expected.
Except in practice it always fail to materialize, neoliberalism has repeatedly been tried everywhere in the western world, resulting in decline instead of prosperity. And people blame the fact that not enough regulations were removed to justify why it failed. So exactly like Communists.
The reality is that the real world is too complex for simplistic ideologies to have positive effects. No matter what kind of ideology.
> And in this case at hand: Canada had much lighter and more sensible regulation in this sector, and they did better. As expected.
As if the only difference was regulations, and not the fact that Canada was at that point part of the British Empire
It's like the commies in the 30s saying that Communism was indeed better, as the USSR had by far the highest growth among industrial nations by then. Forgetting that this growth was mostly due to the fact that Tsarist Russia was lagging far behind before that, and that catching up is always going to cause higher growth.
Are we living in the same world?
All over the place, we see that more neoliberal places are richer than less neoliberal places. For example, Ireland is richer than Germany which is richer than Greece.
> As if the only difference was regulations, and not the fact that Canada was at that point part of the British Empire
You are right that there were more differences between them. Other people have done more extensive work on this, and I'm not doing it justice. The US had and has really asinine and heavy-handed financial regulation.
Their bans on branch banking are really something, too.
LKY basically in a nutshell said 'you get the free market * because I fucking said so and I am smarter than all of you'. Weirdly Singaporeans were smart enough to realize LKY was a one in a million years kind of leader that actually both actually was smarter than everyone else AND was not corrupted to the point he poisoned the whole attempt. If he'd have sought out the populace to vote on his policies they would have done the same thing as most other places in asia and slowly vote more things to themselves in the name of welfare until their position as one of the freest financial markets in Asia was no longer the case.
* Well not for houses, but like half of Singapore is immigrants that can be taxed to pay for the other half's houses so it works out for them.
> * Well not for houses, but like half of Singapore is immigrants that can be taxed to pay for the other half's houses so it works out for them.
The proportion of immigrants is lower than what you say, and we are not taxed more than residents. (I'm an immigrant to Singapore.) In fact, they once even gave me a 50% income tax one-off rebate just because in that year they took in more money than they needed. If I were a politician, I would have only given that one-off rebate to citizens, you know the people who can actually vote for you.
I live in the western world. In a continent that gave ordoliberal (the German branch of the Mont Pellerin society) principles a quasi-constitutional values. And that continent has fallen behind both the government-debt pumped US and the state-driven China, down from a dominant position when the said principles were raised as supreme laws.
In fact, the very country that invented railways has now been unable to operate first-world level of rail service for three decades, with the collapse happening because of Thatcher's policies.
> All over the place, we see that more neoliberal places are richer than less neoliberal places. For example, Ireland is richer than Germany which is richer than Greece.
Ireland is a tax haven. And half of its GDP is entirely virtual. And again China and the US (which has roughly three time as much public debts as the EU and has had much more relax monetary policies than what the EU can legally due to the Treaty of Rome and its updates) fare better than the EU. But then again I'm sure you'll say that “it's not actual liberalism”…
> The US had and has really asinine and heavy-handed financial regulation.
The regulations put in place in the 30s after the great depression were relaxed by Reagan, and unsurprisingly it lead to the reemergence if financial crisis after half a century of financial stability.
China is poorer than the EU.
> The regulations put in place in the 30s after the great depression were relaxed by Reagan, and unsurprisingly it lead to the reemergence if financial crisis after half a century of financial stability.
The US had inane financial regulations right from the start. And I'm not sure what you are smoking: have you heard of the Great Moderation? See https://en.wikipedia.org/wiki/Great_Moderation
Per capita, so far. But it used to be a third-world country and it's now the industrial superpower.
> The US had inane financial regulations right from the start.
“FDR didn't exist”.
> And I'm not sure what you are smoking: have you heard of the Great Moderation? See https://en.wikipedia.org/wiki/Great_Moderation
Dude, the “great moderation” is about inflation, business cycles and macro trends more generally, not about financial markets stability.
They moved from dirt poor to middle income largely by strangling their economy quite as hard as the did under Mao. If they liberalised further, they could become richer.
> “FDR didn't exist”.
Huh?
They did move from durt poor to “higher life expectancies than the US” because the state made it an actual goal, with policies designed for that.
> If they liberalised further, they could become richer.
That's just your religious belief. But it has strictly the same factuality as “if you went to church, God would help you be happier”.
> > “FDR didn't exist”.
> Huh?
Maybe document yourself on the massive financial regulations tightening that happened under FDR before saying it has always been the same.
When your deposits are denominated in _current_ dollars, and that's what your customers can demand, then it doesn't matter that your expectation of how many dollars you are going to receive in 2035 is stable. It's about what our assets are worth right now, in case you need to liquidate them to satisfy withdrawal requests.
If you can contrive your deposits to be denominated in 2035 dollars, then long term treasury bonds are 'stable' in that sense.
Similarly, if your deposits are denominated in grams of gold, then gold is a stable backing for those.
If you have a mismatch between what you owe and what you own, then you need a thick equity cushion between your assets and fixed liabilities.
If you're worried about short term value then you can use shorter term bonds if you want, whatever. It doesn't make a difference to the reason I brought it up in the first place, because either option is more stable than gold.
No one is talking about bank reserves. I'm talking about assets.
It's not. The EMH has been empirically disproven in the 80s.
EMH comes in multiple different strengths. The strongest version would be something comical like 'market prices are omniscient and perfectly predict future prices'. That's almost certainly wrong. Very weak versions are something like 'Don't bother actively trading on the news as a retail investor, because by the time you've heard them, the folks over at Goldman Sachs and the hedge funds and their computers will have traded on them a million times over already', and these are almost certainly true. (But even somewhat stronger versions are probably true.)
The “weak version of EMH” has nothing to do with markets being “efficient”, it's a property of random markets. Assimilating the two just Fama's motte-and-bailey fallacy.
That's very, very related to being efficient.
> Assimilating the two just Fama's motte-and-bailey fallacy.
No, not at all.
“No, not at all”.
In situations where we still care about dollars, so no hyperinflation or total collapse of the United States, the current market value of a Treasury bond can't actually vary that much. And the amount it can reasonably vary is mostly proportional to how many years are left in the bond.
By the time your bonds reach maturity, you always have more dollars than you started with. Long term you always profit. And you get to choose what length of bonds you buy, so if you want to you can guarantee your dollars increase in the medium or short term on top of the long term.
> No one is talking about bank reserves. I'm talking about assets.
I'm saying you're too worried about "withdrawal requests" a normal bank would see.
Well, it was enough variance to bring Silicon Valley Bank down.
> By the time your bonds reach maturity, you always have more dollars than you started with. Long term you always profit.
I'd be very happy to have you as my investor in some long term bonds---with terrible below-market-but-barely-positive interest rates.
> I'm saying you're too worried about "withdrawal requests" a normal bank would see.
Silicon Valley Bank saw massive withdrawals, because their liabilities exceeded their assets.
> I'd be very happy to have you as my investor in some long term bonds---with terrible below-market-but-barely-positive interest rates.
Very funny. Look, that's one feature of Treasury bonds, not the only feature. They get pretty good yields compared to gold in the long term, and you can trust them a lot.
IIRC the fed said that narrow banking threatens the stability of the banking system since private credit expansion (and ultimately, the risks that come with that) is in their estimation desirable. Regulators want nothing but to crush the idea.
But why? I don't understand, I feel like certain exceptions like (credit cards?) or house loans can be built or some personal loans but we all see a disaster which will be billed by govt. thus impacting everybody
The govt itself can then buy ETF's once again / invest money from one way or other via pension funds or other funds (sovereign funds?) to the stock markets themselves or other avenues.
banks basically arbitrage the fact that they are FDIC insured and loans. Nothing wrong with it except the fact that most banks would keep most of the money with themselves and only give chump change to average person or even 0%. If that's the case, why isn't there a bank which can just provide 3% treasury funds or similar or (gold?) and then just help the average person.
I saw a lot of points I agreed upon the narrow banking website on and I'd love to discuss more about the harms of narrow banking compared to fractional and why regulators shot it down/just comparing the two of them.
TLDR: Cochrane thinks the Fed wants keep a lid on narrow banking because it believes it can cross-subsidizing lending to households and businesses from retail deposits.
Historically, the combination of fractional reserve banking and the classic gold standard was very successful. Just because your bank uses grams of gold as the unit of accounting (or something that's effectively equivalent to grams of gold), doesn't mean they need to have that much of gold in their vaults. Similar to how today a bank will give you dollar bills when you ask for them, but that doesn't mean they need to have their vaults stuffed full of dollar bills. They just need enough solid assets to sell for dollars, so they can give you dollars when you want to withdraw. (Having some gold or dollars on hand is just a convenience, so you don't have to wait for the bank to liquidate assets.)
About narrow banking: there's at least two different definitions of the idea. What your website describes might be called 100% reserve banking. The website is a bit silly: you can already get 100% reserve banking today, if you want it.
The website is also extremely misleading and dishonest about fractional reserve banking. You can eg just follow their own link to the Bank of Amsterdam and read up on it.
The second definition of 'narrow banking' can be seen at eg https://en.wikipedia.org/wiki/Narrow_banking
> Narrow banking is a proposed banking system that would restrict commercial banks to hold only safe and liquid assets, like government bonds, against customer deposits, while prohibiting traditional lending activities. Under this model, banks would function as custodians and payment processors, separate from the lending function performed by other financial intermediaries.
This is like a normal fractional reserve bank, but the only asset they invest in is government bonds. This can still go wrong, if you are not careful: Silicon Valley Bank invested mainly in government bonds, but had a maturity mismatch. Their long term government bonds lost in value (because market interest rates went up), so they went bankrupt. Alas, they still got bailed out.
You can approximate this kind of narrow bank for yourself, by just putting your money either in government bonds directly, or into a money market fund that only invests in government bonds.
> [...] I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.
> There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
Wise offers to keep your money in a fund and they transparently sell your fund shares, when you are buying a coffee with your card. They transparently buy fund shares, when money comes into your account.
See https://wise.com/help/articles/3luodUQFD9YWzNc8PvIfVK/holdin... and https://wise.com/sg/interest/ and https://wise.com/help/articles/74dYRhMCItIf2IBJLTpFQs/how-do...
---
Addendum narrow banking in the sense of only holding government bonds:
I think that should be legal for banks to do, and in fact it's a good argument in favour of eliminating deposit insurance. At least the (explicitly or implicitly) government backed deposit insurance that you have eg in the US. It creates a moral hazard where the incentives for monitoring risks are all but dulled.
People who still want the equivalent of deposit insurance should just put their money into a bank that only invests in short term government bonds: after all, a government backed deposit insurance can't really be safer than these short term government bonds anyway.
How does the taxation aspect of it work? Would I have to pay short term capital gains on each transaction that I then make?
They also provide daily interests which seem interesting and about on par with treasury rates so it technically sort of can act as the end result of narrow banking for what I wanted (instead of banks borrowing and spending and containing huge chunks of profit in between, it invests into a safe investment)
> In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.
Ah it seems that you are right but also that there are some inflation protected treasury but you might be right and I thought about it and doesn't it also bring a new set of problems that America faces.
Basically US can get real goods by giving debts and the real value of what US pays actually lessens over time because of inflation so in a sense, US is able to offset some costs by debt itself but it still has a vicious loop where you start borrowing money just to pay your debt and this starts cutting into your infrastructure hurting the poor the most but also reducing the ability of care etc. effectively making things private if govt cant fund it for many (healthcare) which would impact the poor the most
And this is really tricky as the current model really favours overconsumption and that makes more goods be easily sold and this is why other countries are willing to do this in the first place.
From what I could observe, the biggest winners would be corporations as US pays corporations get funding or the stock market looks more lucrative etc. Low real rates inflate asset values and this would disproportionately benefit the rich
It also starts to overconsume from other countries and just make it financially unable to operate at the same level combined with globalization to compete globally at everything but the software (doubtful, we will see what happens in the near future) and at the financial level.
So basically from my understanding, it increases inequality, increases overconsumption, benefits the rich and hurts the poor.
Also, basically US loses all major exports for this financial hack of sorts. Doesn't it fundamentally weaken the reality of US?
Another aspect is that since it favours the stock market or overvaluates them, these help vc funds and these vc funds trickle down to startups who can only compete at the software level so they end up subsidizing all costs (mostly human software engineering) plus hardware costs and make them able to offset/run at losses.
Now VC funds end up enshittening most solutions in order to extract maximum profit down the line usually basically impacting the end consumer and thus hurting the reputation of VC companies (and sometimes for good measure)
Theoretically this also subsidizes open source in a very minute way. Software engineers get rich and are able to enjoy the craft and there are subsidies of free storage and server access from basically github aka microsoft and others to basically streamline the whole process as well since these cloud/others also extract some values of open source.
But open source ends up creating better alternatives to VC funded solutions if those solutions exist in the most human-friendly way where profits arent even thought of usually and are run via donations.
Combine this with the fact that in India and China,developers are cheaper and they are having a boom in their VC industry/startup culture as well and they are willing to undercut America because they are simply leaner and usually pick less VC funding overall as well imo
So in a way US's software success can only be relied upon on full monopolies support considering open source and cheaper alternatives and also moral focuses where EU companies would prefer to support EU as US wreckballs into political disaster.
Also in my opinion, most of US software success recently aside from the monopolies or maybe even including them is so reliant on including "AI" and AI fundamentally lacks any moat most of the times and they are actively losing/making 0 profit while spending billions in hopes of beating the competition.
US's export of financial products basically loops this cycle back to probably an over-reliance on AI itself.
So US economy is so damn reliant on AI which is fundamentally unstable partially due to it "earning profit in the middle" or taking this lucrative deal.
Y'know what I feel the issue with this is? that in other countries there is a cap of the amount of destruction/reliance. Usually most countries suffer from the other side of spectrum but America has removed this cap because of it and this weird blend of hyper capitalism just converted into late stage capitalism.
So (when) the AI financial bubble explodes, How would America even rebuild itself?
I don't think there is a free lunch. Not even in this case, what ended up happening was that America took short term profits in long term structural losses and this hyper capitalism lured companies as well to outsource or build factories in china and other countries actively increasing the extent of the loss and there just wasnt any cap.
Something which is lucrative but not sustainable and now its starting to bite back.
A lot of issues I felt that were in America are now starting to feel intentional.
I mean one of my questions is that how can America even be optimistic at this state considering that everyone I talk to admits that AI is an bubble, so yea AI companies still make profits but long term everyone sees an impending doom. It's like a time bomb and I already feel at unease and I observe the same feeling of unease as well from other people.
Another point was that America helped foreigners into the American dream (by exporting a story) or perhaps the silicon valley dream (a lot of S&P companies are built by people who came to america) as it losses even that.
In a way America just incentivized a new form of grifting called financial innovation in this AI bubble era in my opinion by this decision. I am genuinely not sure what America can do at this stage.
I am sorry to say but the future seems bleak. I hope I am wrong but I wish the average american the best of luck and hope in a better future for the whole world combined but being honest, the future doesn't feel good for America.
Sorry, I have no clue, you need to investigate that by yourself. My jurisdiction doesn't have capital gains taxes, so I didn't look into this. Let me know what you find.
> Also, basically US loses all major exports for this financial hack of sorts. Doesn't it fundamentally weaken the reality of US?
Your view of exports is a bit too narrow. A 'trade deficit' mostly just means that the US 'exports' financial assets. The US is really good at producing financial assets. Eg when people globally buy into a hot US IPO that officially counts as widening the trade deficit, even though you could say in a sense that effectively the US is exporting Google shares. And they are really good at making new companies.
Btw, in aggregate the US earns more from their investments abroad than they send foreigners for their investments in the US. Despite the foreigners investing more overall. That's a pretty good deal for the Americans (in aggregate).
I agree that an unsustainable government deficit is bad, but that's bad regardless of whether it's foreigners or locals who finance the government.
> So (when) the AI financial bubble explodes, How would America even rebuild itself?
You can look at what happened in the past after similar episodes.
Btw, for an interesting history lesson look at what happened after 1987's Black Monday: https://thehill.com/opinion/finance/356376-black-monday-less...
> I am sorry to say but the future seems bleak. I hope I am wrong but I wish the average american the best of luck and hope in a better future for the whole world combined but being honest, the future doesn't feel good for America.
I don't live in America, but from the outside it seems like the place still has a lot of life and dynamism left.
The main thing that would keep me from moving there is their asinine NIMBYism in the big cities and car infestation of the whole country. I'm not too worried about their economy, and I have about 50% of my investment portfolio in US stocks.
I will look into it later, thank you. I don't think the stocks thing is available in my country but I will check
> Your view of exports is a bit too narrow. A 'trade deficit' mostly just means that the US 'exports' financial assets. The US is really good at producing financial assets. Eg when people globally buy into a hot US IPO that officially counts as widening the trade deficit, even though you could say in a sense that effectively the US is exporting Google shares. And they are really good at making new companies.
Y'know actually this is the crux of my comment as well.
That, America is in this particular position where its only exports are usually finance. The issue is that its finances are extremely overvalued (even more so with the AI bubble), even investing in S&P 500 doesn't feel safe to me because its a matter of (when) and not if, that the bubble bursts.
This is what I am worried about, I am not American as well but when the AI bubble bursts and People panick essentially taking in a second all the "exports" that US economy made, This is the only thing stopping America from breaking all hell loose. And I don't think this is the right thing because this export of finance or just this nationalistic focus of financialization caused the AI bubble to exist in the first place.
At the end of the day, any technological innovation just gets wedded to finance and some of them are really really shady like the AI bubble and the crypto bubble.
I am not even talking about the global influence of this leads when companies will do so many immoral things that we are witnessing in the tech giants (google,facebook,twitter,amazon,microsoft)
I think that most americans who live there are actually really net negative and they are impacted the most out of this as I said, and this is part of the struggle because I feel like that the majority shouldn't be subdued by the minority's interests or have the idea of inequality persists which actively hurts the majority.
It's mostly their country and they don't even have a say in this arguably, the most important matter.
Perhaps this is capitalism and I don't have too much faults with the capitalism model Adam smith presented but I very much have a problem with this late stage capitalism.
Much of the system is inequal but the people there are taught to be on the good side of that line and let it continue. The social and moral effects of it are already visible in the country.
The baseline of a country even with finance is inherently linked to these factors as well which America's failing in. It's not visible in the graphs the things I said in the S&P because it can be at an all time high but this just goes on to show the decoupling of finance from reality and how it can come to bite again if things go bad because if things go bad, they will go really really bad and anything that can happen will happen and the current politics of US is fundamentally shaky as well and that reflects in their finance as well.
Overall, my heart just goes out to the average american suffering from all this. Whose budgets are being cut to please the large tax cuts of the rich and who suffers the most from inflation and the bubble bursting.
America's economy right now is shaky. Anything can happen, nothing bad has happened because people think that they are rich because of the S&P so consumption still happens and things are barely okay even if there are so many cracks in the system right now.
But when S&P breaks loose due to the AI bubble bursting. I genuinely worry that America can really go through a lot of internal turmoil because of it.
So at the end of the day, I feel like AI investments financially would lead to disaster and this might impact the world as well but it will really harshly impact America the most.
Also, no, if stock markets rise then the money isn't flowing in US govt bonds where the interest rates are low, this is the first time in many years perhaps I think during the tarrifs that people weren't putting money in either of these things and genuinely looked for other outcomes and the US govt had to pay higher interest rates which is very contrary to what usually happens and that was the sign of something bad and I don't know if I am able to make my stance clear but I genuinely feel like a country's major exports shouldn't really be finance.
all models are wrong but some are still useful. This model isn’t useful at all since the fraction was legislated to be 0 years ago.
However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around.
The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves.
If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.
Fractional reserve is a model only for textbooks, it is not an accurate model of how the banking system works in most western economies with a central bank and sovereign currency today.
>> The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold
Well this is usually the biggest of several limitations which impact whether a loan would be profitable to make for a bank or not so i don't entirely disagree but this is a legislative control, there's no "economic terms" here because in general no school of economics understands this or has anything to say about this control which you correctly point out exists and is central to loan decision making. People can argue about the degree of centrality because it's not the only factor so let me put it this way: it's central in a way which any notion of "fractional reserve" is simply not.
Your view of fractional reserve banking is rather.. unorthodox. Pray, tell me, why do banks bother with deposits, then?
It opens with the words "Money is created in the Canadian economy in two main ways: through private commercial bank loans..."
the introduction continues "... It also discusses how private commercial banks create money..."
And then it goes on to do exactly that in detail. I'm struggling to understand why you wrote that.
>> Your view of fractional reserve banking is rather.. unorthodox
Unorthodox is not the word to describe what has at this point been published by most of the central banks in western economies with a sovereign currency. From the Fed to the Canadian central bank, from the Bank of England to the Bundesbank and so on.
We're unfortunately living in a Copernican moment. We now better understand how money works but we're not permitted to say the earth orbits the sun just yet.
It's utterly ludicrous that the idea of Fractional Reserve banking is propagated in today's world as having any relevance to how banking works in these economies.
>> why do banks bother with deposits, then
Very simply - cost of funds
The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%.
Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit).
This is a popular myth, not “doing the math”.
What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
When I deposit a dollar, the bank records a $1 deposit liability. If the bank makes a $1 loan, it creates a new $1 deposit for the borrower.
If that dollar is spent and redeposited, deposits increase even though the amount of base money has not. It looks like multiplication, but what’s really happening is that loans and deposits are expanding together on the balance sheet.
The bank is not creating wealth out of nothing. It now has matching assets (loans owed to it) and liabilities (deposits owed to customers), backed by capital that absorbs risk.
With reserve ratios effectively zero, lending is constrained by capital requirements and risk management, not by reserves. Banks cannot recirculate a single dollar endlessly without sufficient capital.
I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth.
I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this. The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.
> I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth.
Alas, lots of people have very weird, and very wrong ideas.
> I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this.
Yes and No. From the bank's point of view fractional reserve banking works pretty much the same way you have described it here under eg a gold standard as well.
> The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.
I rather doubt the Cantillon effect in an economy made up of smart actors who anticipate that new money entering the economy. (Though experiment to illustrate: if the Fed announced today that they are going to double the amount of money in the economy in exactly 12 months, you would see prices going up today in anticipation. The Cantillon effect would require prices to slowly go up one by one starting at the earliest in 12 months as the money makes it way through the economy like some kind of hydraulic fluid.)
Btw, there are also plenty of shadow banks that provide similar services to the economy but are not regulated as banks. They serve as a release valve for the economy.
In a very loose sense my stock broker (IBKR) is a shadow bank: lots of people have uninvested cash in their brokerage accounts and IBKR lends some of it to me as a margin loan so I can buy more stocks. Money market funds are another sort-of shadow bank.
Banks loans may not create wealth. But they promise its creation to the society. The value of the money that they lend out comes from that promise.
And the people who borrowed from the bank create wealth when they repay their loans. The responsibility of the bank is to track it and ensure that it is created. OR that the money lended out is not spent. Either one should happen when the loan is repayed, so the bank does not care which one.
If the banks does not do it (ensure repayment or collect collateral), then all the people who worked for the money loaned by the bank, got their work stolen.
In other words, when you take a loan from a bank, you are actually borrowing from the society.
So watch your banks very closely.
It feels like you're trying to describe the "social contract" between private banks and the rest of society, but putting the full responsibility of "wealth creation" only on one party in the contract: The bank.
The other party, Society, is given access to capital when they borrow. The rate they're charged should be competitive since there is presumably more than one lender. By borrowing money they try to "create wealth", then to repay the loan principal along with a bit of the new wealth in the form of interest.
No, I meant to say that wealth is create by people. Banks are supposed to enforce it.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Fractional reserve banking has economic limits, even when there are no legal limits.
I know what you're thinking of here, but it doesn't mean anything like what you think it means.
So the US used to have a rule that every bank hand to have a certain percentage of its assets stored in its account at a Federal Reserve bank; it is this percentage which was gradually reduced to 0 by I think 2020. Note that only the funds in that account meet the requirement; a literal pile of cash contributes not a single cent.
The way banks are primarily limited nowadays is via capital adequacy ratio, which is essentially that you need to set aside a particular pile of capital that can be raided to guard against assets falling in value to 0. It's complicated because this pile of capital doesn't come from the money a customer deposits in their account (which needs to be held as an asset to offset the liability a depositor represents), but rather from income the bank makes in other ways. If a bank sells $1 million worth of shares, they get to issue ~$20 million more loans.
If a bank gets $1 million worth of new deposits, they get to issue... $0 more loans. Well, maybe less: if a bank gets $1 million worth of new bitcoin deposits, that probably reduces its capital ratio because bitcoin is such a risky asset.
Then it doesn't make sense for a classical deposit-lending bank to pay interest on those new deposits. They can't generate revenue from the new deposits since they cannot touch them to perform lending , and they are now a liability because they must perform banking services to the depositor, regulatory compliance, and insure against the risk something accidently happens to the money. Under your scheme maybe they could go park it at the fed and get interest that way but even that is technically a loan; they are giving up the notional money in exchange for interest in hopes they can collect it at a later time.
I'm with you in principle. But alas there's lots of regulation that muddies the economic waters. Eg reserves do limit lending in some places at some points in time.
> What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
Yes, indeed. People usually get a loan to spend the money (ie invest it). Otherwise, why bother with the expensive loan?
That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.)
Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.
The problem with that is they deny the existence of the time value of money, which is essentially a mathematical fact.
It's why Islamic banks come up with various workarounds to be able to charge the equivalent of interest.
Now let's biblical exegesis to define what is legitimate interest and usury.
The "good" (or "bad"?) thing about these holy scriptures is that they can be interpreted quite freely to fit a personal or institutional agenda.
> Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority.
I'm no expert but doesn't James 2:26 says "Faith without works is dead."?
Surely giving some money (that you had to work hard for!) to the greatest charity in the world (the Catholic church) should count as a good work?
(But I'm just playing devil's advocate here. I don't know what their official reasoning is.)
From an "axiomatic perspective" this means accepting much more encompassing axioms than the holy scripture; such a "proof" requires much more than "the Bible/Quran says" as huijzer implicitly used in his argument "That’s why the Bible and Quran are against usury.", but more like "the Bible says and we additionally accept the following axioms that imply that the Pope's interpretation of the Bible is the correct one".
And it's not like what the constitution says or what the bible says is completely useless, it's just that when it comes to conflicting interpretations, you look to the courts or the church for guidance.
The Catholic church's official position is a bit more nuanced. The Pope can declare things infallibly under special circumstances, but they place great importance on ecumenical councils, too. (And in fact, to avoid circular logic, Papal infallibility was declared at one of these councils. They might be dogmatic, but they ain't stupid.)
Take everything I say with a grain of salt. Culturally, I grew up in the heartland of the Protestant Reformation where Luther himself went around and preached; and philosophically I veer between being a dirty atheist and a cowardly agnostic, depending on how I feel on the day.
I just treat the theological discussion like Lord of the Ring fans or Warhammer 40k would treat lore discussions.
You might like the chapter 'When God is the Legislator' in David Friedman's 'Legal Systems Very Different From Ours' available for free at http://www.daviddfriedman.com/Legal%20Systems/LegalSystemsCo...
Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
What's that supposed to mean?
> I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements).
The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.
No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created.
Now you might argue that this is a bit unrealistic, but at least in principle you could artificially engineer a situation like that even in the current system by having large corporations agree to use the same bank for money created by a specific loan.
But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory.
This means there is no static limit to the amount of money that can be created. The limit is dynamic and depends on the interactions between banks. Specifically, it depends on the liquidity/solvency of a given bank. This means this limit is purely practical and more akin to friction, rather than a fundamental restriction in the math of banking/accounting. It's like how computers aren't turing machines because they have finite amounts of memory. There is no limit to how much memory a computer can have as long as you can manage to build a computer with that much memory.
> No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created.
Yes, monopolies are bad. I completely agree with your analysis here. That's one reason why central banks can get away with so much.
> But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory.
Here's where it gets interesting.
Assume there are n banks. Let's also assume for the sake of simplicity that transfers behave a bit like Brownian motion. That means on average we don't expect any bias in transfers between banks, but we also expect some random variance.
Say, our banks settle their net transfers at the end of the day. With a bit of math, we see that the expected variance for any bank proportional to something like gross transfers of that bank, and thus the standard deviation is proportional to the square-root of gross transfers. (It also depends on n.)
Our commercial banks settle by exchanging reserves, eg central bank base money or perhaps they ship physical gold. We can assume that they want to avoid being short of reserves when it comes to settling, but it's not infinitely, and holding reserves costs money. So in practice they'll settle on some multiple of the standard deviation as their precautionary reserves. If the amount of total reserves in the banking system is fixed, that'll place a limit on how much banks will want to expand their total balance sheets.
See https://oll-resources.s3.us-east-2.amazonaws.com/oll3/store/... for more on this topic and a better analysis.
The above was about reserves and how demand for pre-cautionary reserves limits the size of the aggregate balance sheet of all banks.
Now the other question is: why do banks bother with deposits?
So, let's assume that our bank makes a loan to a customer: they create a deposit / loan pair out of thin air that adds up to zero. Now the customer spends that deposit. On average we can assume (n-1)/n parts of the deposit go to other banks and 1/n stays with the originating bank (by the assumption that our average bank has a market 1/n market share.) Those (n-1)/n parts get transferred to other banks, and thus they drain our reserves in the settlement at the end of the day.
If we can attract enough deposits, we can make up for that outflow and have a nice 0 in the net settlement.
The above is all assuming there's no regulation that requires a specific amount of reserves or capital etc, and it's all set by each bank purely by commercial necessity. You are right that there's no one fixed limit, but the limits are also not arbitrary.
Instead of attracting deposits a bank can also sell of the loan it just made. Or it can borrow and use that loan as collateral. But economically, that's all basically equivalent to a deposit in different guises.
About liquidity: in a functioning modern economy, as long as you are solvent you can always get liquidity. (But conversely that means that your counterparties will treat any liquidity problems they see with you as signs of underlying solvency problems.)
You might also like https://www.cato.org/blog/diamond-dybvig-panic-1907 (or https://archive.is/uRtmw) on bank runs.
The misconception is that if a bank has a capital X, the law gives them power to create loans up to 10X.
What I'm saying is that without the law, the bank could create loans without a constraint, so say 20X, 100X 1000X.
The fractional reserve policy is actually a limit, not the source of lending in excess of capital.
Loans are money creation, and this creation is organic, it doesn't need a charter from the government.
Another misconception is that this money creation is monetary emission or that it somehow causes inflation. It doesn't, because it is gross money creation, not net money creation.
No, they couldn't, and they didn't when no such laws existed. Canada and Scotland had prominent episodes in their histories when banking was fairly lightly regulated and no such laws existed; and their banks did not create '1000X' loans from thin air.
> Another misconception is that this money creation is monetary emission or that it somehow causes inflation.
No, it would absolutely contribute to inflation. As a thought experiment: just imagine the government banned private money creation tomorrow. Inflation would totally crash and the economy would collapse from a lack of demand.
> It doesn't, because it is gross money creation, not net money creation.
What is that supposed to mean?
> Loans are money creation, and this creation is organic, it doesn't need a charter from the government.
I agree on the first and last part. I'm not what you mean by organic.
Regarding your theory of gold deposits being behind money creation is on Wikipedia as Metallism.
Regarding how banks worked before such laws existed, we could look at the period immediately before the creation of fractional reserve, I would predict that immediately before the rule was put in place, the banks were creating these 1000X (maybe 100X? I don't know) which caused a bank run. Without looking, the history of fiat money is quite recent, 1 century or maybe even less? So this shouldn't be too long ago. It is possible for banking working correctly for a long time without the rule, it might have been a short period, kind of like how soccer worked without offside rule for a long time, but it was put in place to stop some specific type of play anti-sportsmanlike play, not to enable another.
>I agree on the first and last part. I'm not what you mean by organic.
I think a more standard term is endogenous, as in an emergent behaviour of private individuals, rather than exogenous, as in set by a central bank. https://en.wikipedia.org/wiki/Endogenous_money
>What is that supposed to mean?
You are right these are not standard terms, I meant gross money creation as money that is created with a corresponding liability. For example a loan, or a loan with a mortgage on land. The money base increases, but so does the size of the economy represented by that currency in equal increments. Endogenous money seems to map quite cleanly to gross money. Although not all exogenous money is "net" (as in creating currency without an underlying asset).
>No, it would absolutely contribute to inflation. As a thought experiment: just imagine the government banned private money creation tomorrow. Inflation would totally crash and the economy would collapse from a lack of demand.
One of the examples of exogenous money that does create inflation and I would say it's net money creation (for lack of a standard term I don't know about), would be seignorage, a term that comes from metal economies, where they would reduce the amount of valuable metal in coins, and the value of the coins was maintained by the trust, power and guarantee of the imperial seals imprinted on them, this gradually lead to fiat valuable metal was completely removed.
Nowadays it seems the term seignorage is still used to refer to the revenue created by the state whenever it 'prints' money without a liability. It is important to distinguish this from endogenous money creation like loans and clarify that the latter doesn't cause inflation, and if it does its effect would be minimal when compared to seignorage.
Huh, what? There's no gold deposits in a fiat system, and they still have money creation. And in eg in 19th century Scotland gold was the unit of account, but they scarcely had any gold in the country (yet alone any gold deposits), and they still had plenty of money creation.
> Regarding how banks worked before such laws existed, we could look at the period immediately before the creation of fractional reserve, I would predict that immediately before the rule was put in place, the banks were creating these 1000X (maybe 100X? I don't know) which caused a bank run.
Huh? When would that be? There was no banking system 'before' fractional reserve banking. And what bank run are you talking about? Historically, bank runs basically only happen when a bank has solvency troubles (or when a law pretty much compels bank runs).
> I think a more standard term is endogenous, as in an emergent behaviour of private individuals, rather than exogenous, as in set by a central bank. https://en.wikipedia.org/wiki/Endogenous_money
Sure, I agree that private money creation in commercial banks is endogenous in that sense.
> You are right these are not standard terms, I meant gross money creation as money that is created with a corresponding liability. For example a loan, or a loan with a mortgage on land. The money base increases, but so does the size of the economy represented by that currency in equal increments. Endogenous money seems to map quite cleanly to gross money. Although not all exogenous money is "net" (as in creating currency without an underlying asset).
OK. Technically even the central bank money is created with offsetting liabilities, at least for the mainstream economies and their central banks like the Fed, ECB, Bank of Japan, Bank of England etc.
I say 'technically', because the treasury can just create a T-bill from thin air, sell it to the market, and then the Fed will loan you newly created money against that T-bill.
There's an interesting debate to be had about seignorage and inflation, and about fiat currency vs fiduciary currency.
First, you don't need to print money without a liability to get seignorage income. When the central does a classic open market operation where they buy a bond yield eg 5% for newly created money (naturally yielding 0%, if it's cash), they earn a 5% interest rate differential for as long as that new money is in circulation. That's very similar to how any old commercial bank earns an interest rate differential.
Now this gets a bit more complicated with inflation and/or when the central bank pays interest on reserves held with them. At the moment the Fed pays 3.65% interest on reserves. (Source: https://www.federalreserve.gov/monetarypolicy/reserve-balanc...). But generally they still have a positive seignorage income.
Money created by the Fed and money created by commercial banks contributes to inflation in the same way. The Fed just measures the total inflation that's occurring (and tries to forecast future inflation), and then adapts its own policy instruments accordingly. They automatically take private money creation into account.
About inflation and seignorage: you might think that it's very straightforward and printing more money would lead to more seignorage income. However that's not true in general.
As we noted above, central banks mostly get their seignorage income from the interest rate difference between their assets and liabilities. (Cash and 'reserves' being the primary central bank liabilities.)
When inflation is high, people really cut back on how much cash they hold, at least in real terms. For an example: as the money printing in Zimbabwe really kicked off, people might have held more cash in nominal terms, but in real terms they wallets got lighter and lighter.
In contrast, Japanese people are famous for holding oodles of cash, partially because their years of mild deflation made holding cash relatively more lucrative.
(Turkey is perhaps a good example to follow along, because they want from relatively low inflation in the 2000s to much higher inflation since, but not nearly as catastrophic as Zimbabwe. Or you can look at real money balances in the US through the Great Inflation in the 1970s vs before and after.)
If all you want to optimise for is seignorage income, the optimal rate of inflation is something low-ish and stable. But details depend on how big your economy is, and how easy it is for people to switch to other currencies. So eg the optimal value for Singapore is probably lower than for the US. (Optimal just in the seignorage income maximising sense. Monetary policy typically has other goals.)
About fiat vs fiduciary money: you know fiat money already. Fiduciary money is where you promise to redeem the tokens in some underlying asset on demand. A classic example could be paper money that can be exchanged for gold on demand.
Confusingly, both intermix freely. What I mean is that in a fiat system, the central bank issues fiat money. But the private banks create fiduciary money: your bank typically lets you withdraw your deposit (fiduciary money) as cash (central bank fiat money).
Perhaps fiduciary money is a better term for what you describe as 'net money'?
https://cdn.mises.org/rae9_2_5_4.pdf has some good points on the distinction. (Though keep in mind that the target audience is 'Internet Austrians' who see everything but gold or silver coins as suspicious, and the authors are trying to convince them not to be so dogmatic.)
You might also like 'Those Dishonest Goldsmiths' https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709 about the myth that goldsmiths invented fractional reserve banking.
This guy gets it, okay devs, read this article
https://chatgpt.com/share/695e125f-1254-800a-8661-d7a046f4c2...
In practice, that prompt gets chatgpt role-playing as industry professionals: who knows if it's near or far from the real deal.
Also, reading long texts is good for comprehension. You don't learn with reading summaries, you learn with repetition and even further if write your own summaries.
There's a lot of stuff to talk about with how money works! Like, when I use my Visa card issued by a New Zealand branch of an Australian bank to buy something in Europe, there are zillions of moving parts there.
The fact that money doesn't actually move internationally but yet appears to, and the fact that currency exchange can be done despite that. And that 60% of everything is backed by US dollars (rapidly dropping now). How bank transfers work with and without a common central bank; the different mechanisms countries set up to streamline them.
And, the fact that it's not really centrally controlled, and anyone (like Satoshi Nakamoto) can make a currency and there's not really anything a government can do to prevent currencies it doesn't like, and despite that we do mostly have one government-issued currency per country.
Except. The main point of chemical trails, money or other implementations of the messaging bus of a complex adaptive system is THE COMMUNITY it creates. Think the Sapir-Whorf hypothesis, but instead of language determines what you think, expand that to "your messaging bus language determines how your community functions". Yeah there is lots of stuff about money, but how it determines the form and function of the community (as in CAS) is the important part.
The other primary thing to think about money - once you get that it is a messaging bus - is the idea of making money from money. When you understand the function of the system you can then understand that making money from money is not a good idea. This is not a new idea. The concept of throwing the money lenders out of the temple has been around for a long time.
If you understand money, then you will be able to answer this question:
why is making money from money a bad (dysfunctional) idea?