Let's End the Money Racket (X)
Short- and Long-term Lending -- Saving Without a Financial Expert
Having completed our discussion of the market for real money we are now set to explain how this transformation of our nation’s money supply will effect the markets for borrowed money. Principal among these markets is, of course, the supply and demand for publicly and privately traded bonds. Let us begin, however, with the banking industry that controls the money supplies of nations around the world including our own.
Under the current system the marginal cost of lending is, practically speaking, flat.1 This is because what is lent costs next to nothing to produce, and the per unit cost of “production” does not rise with increased “production”. As the money supply is controlled by what is essentially a government sponsored banking cartel, the federal reserve system behaves as would a monopoly with constant returns to scale. As the demand for borrowed money increases, it increases both the price and quantity of what is borrowed and thereby increases profit to its member banks (see diagram).
This is not to say, that there is no cost to extending phony credit. Rather, it is to say that all producers are faced with transaction costs of one sort or another. But, unlike the banking industry, in addition to their cost of transaction, other producers make things that are subject at some point to decreasing returns to scale.2
Because many of us now live in a world of no tomorrow without a past — the end of history —, we keep plunging ourselves into debt, while those who supply us with the ability to live as if there were no tomorrow — namely, usurious credit — buy up the world’s productive assets with the interest on our debt and each new property foreclosure. It is for this reason that these charlatan creditors can be so brazen as to promise us, as they buy up and confiscate our property, that “We will own nothing and be happy” — unafraid of hunger as our diet turns to bugs, and unafraid of the threat of “climate change” as we are impoverished for lack of energy that is diverted to artificial intelligence used to better control us! It is a global scam beyond anything that humanity has ever before witnessed, and it is being underwritten by our nation’s own financial system.
Denying the banks the ability to lend money (purchasing power) into existence the currently perverted incentive system will be turned on its head, and even the poorest heads of household will once again have an incentive to save, grow their assets, and dream of a reasonable chance of realizing a better future for their children.
No longer will bankers be able to lend purchasing power into existence that they themselves do not have. No longer will they be able to pump up spending with an inexhaustible money supply, exhaust the available real inventories, and then watch as the economy collapses, because firms are unable to replenish their depleted inventories at a rate sufficiently large to keep up with the artificially created new demand. Alas, the elimination of statutory counterfeit and the so-called “business cycle” will not put an end to honest banking, nor will it destroy the real economy. In fact, it will provide lenders with an incentive to continue lending and deter borrowers from engaging in new investment and consumptive spending that cannot be sustained and inevitably finishes in their own and their neighbors’ ruin.
Under the current system the value of money lent is worth more than the value of what is returned. Under the new system this dichotomy will be reversed. The value of what is borrowed will be worth less than what must be returned. Bankers will still be incentivized to lend, but the amount of what they lend will be limited by its real supply. Further, many who would otherwise have been inclined to borrow will now be incentivized to save. For, the specie that they hold in their hand will collect rent just like the land whose landlord they despise. What is more, they will not have to go to college or pay a financial advisor to learn how to invest under market conditions in which it is foolish to save. In the end, it will be like holding a piece of land in your pocket whose value increases as the demand for it increases while the real economy grows. Not only this, but prices will fall and there will be more to save.
No longer will workers wages have to play catch-up to product prices. On the contrary, product prices will fall before wage adjustments become evident and necessary. Organized labor, where it exists, will then be able to argue for better working conditions and a healthier life-style and stop seeking to fix prices and tamper with real world, efficiently and justly allotted real wages! The demand for our nation’s goods and services will come from the middle and bottom and the perceived need for government intervention to stimulate a stalled economy will become outmoded. But, let us not jump ahead.
The aforementioned reversal will also cause bankers to favor long term, wealth-generating investments over short-term wealth-consuming, non-investment purchases. In effect, the cost of borrowing in the long term will decline, and the cost of borrowing in the short-term will rise. Bankers will no longer be so eager to incentivize credit-card debt, and the average worker, who will now experience an incentive to save, will find it easier to pay back what he already owes provided that he does not borrow any more. This is because he will have more left over at the end of each month as product prices begin and continue to fall as the real economy grows. And, once his debt has been paid back, what were once payments for what already he had consumed will become savings for what he might better consume in the future. No, I am not promising paradise on earth, but I am proposing a severe short-term and long-term improvement in life on earth.
Because those who borrow — both entrepreneurial and consumptive borrowers — will become wary of the ever-increasing value (purchasing power) of their money, they will not engage in dubious investments and profligate spending! This will greatly reduce waste and better preserve the environment. Keep in mind that plant, machinery, and equipment (real capital), although often considered factors of production, are themselves the product of land and labor. Nothing physical can be created without taking something from the earth. Under the current system, in which banks flood the market place with money whose only real value is what it can buy, our money supply is completely detached from what can be made available to sell. This results in artificially created demand and excessive waste of the environment that inevitably suffers as a result. Simply put, the current money supply ignores the needs of the primary sector where lie the true stewards of the land.
There is not a student of economics who has not seen and understands the following equation:
Where
If we think of borrowing and lending — be it in the form of bank deposits and loans or the sale and purchase of privately issued bonds — as the practice of setting aside what we could consume today, but do not, so that we can invest and consume at least as much or more tomorrow, then the real rate of interest is the price that balances the market value of what is set aside (real savings) with the market value of what is spent to maintain and/or build (real investment) for a better future. When viewing the matter of the real economy from a monetary point of view, it should be clear that only those who save in the sense just provided have real credit to extend, and only those who maintain and build the economy — replace worn real capital with new, and add additional real capital to the system — have the wherewithal to pay back not only what they borrow, but the cost of having borrowed it. In short, consumptive borrowing, although it can and would surely continue to occur, would be disincentivized.3
Accordingly, we would expect the expected rate of inflation to be negative, because incremental price deflation would be the norm in a growing real economy with a form of specie (real money — i.e. real energy embodiments) as its money supply. This means that the nominal rate of interest — the amount that creditors would charge for the right of use of their real wealth — would be less than the real rate of interest. And, this makes sense, because the market value of what is returned would be worth more in real goods and services than the market value of what is lent.
Under the proposed real money regimen neither banks, nor government, would be permitted to add to the money supply by simply stuffing zeros to the left of the decimal point. What is borrowed and lent would have to be mined, refined, and minted — what is a costly process, but not nearly so costly as Bitcoin to maintain. Indeed, rather than the money supply growing faster than the rest of the economy, it would grow more slowly. Rather than the value of what is borrowed being greater than that of what is returned, the value of what is returned would be greater than the value of what is borrowed. Under a real money regimen, borrowers would be more hesitant to borrow, and there would be less waste. This said, interest rates would be more competitive and reflect much better the natural rate of growth of the real economy.
OK. We will pause here and address the bond market — including both privately and publicly issued bonds — in the next episode.
I am looking forward to meeting with you again. Please share and spread the word. We can do this. It does not require genius — merely common sense, a sound understanding of real world economics, and an indefatigable will to see our nation and the world grow and prosper.
In liberty,
Roddy A. Stegemann, First Hill, Seattle 98104
Author of Mount Cambitas - The Story of Real Money and “A Call for the Restoration of Monetary Order” (Parts I and II)
p.s. Part II of “A Call for the Restoration of Monetary Order” has been modified and the supply function for real credit has been more properly specified. Technical difficulty has prevented me from uploading it today, but as soon as the difficulty has been resolved, I will upload it. These matters normally do not require more than a day or two, and can often be resolved in a couple of hours.
Constant marginal cost simply means that for each additional unit produced the cost of its production remains the same. As the entire cost of new debt is one of negotiating new contracts, unless the cost of contracting is very large in proportion to the amount that is lent, the lending institution is only constrained by the supply of competent financial negotiators. Certainly, in the long-run it is unlikely that there would ever be a dearth of such people. Then too, in today’s world the decision to issue new debt is often decided by computer generated algorithms and easily collected and verifiable financial data provided with the permission of the desirous borrower.
Decreasing returns to scale is based on the notion that all firms are faced with fixed plant and equipment in the short-run, and that there is some optimal level of production beyond which hiring more inputs reduces the productivity of those already employed. So, one finishes by producing more with ever less efficiency.
When a lender lends his wealth for the use of another, he surrenders his right of use for an agreed period, after which what he lent must be returned. Not only does the lender forego the use of his own wealth, but he also assumes the risk that it will not be returned. As a consequence he expected a reward for his sacrifice.
Because the borrower must pay back more than he borrows, unless he is earning more in the future than what he is earning now, he not only transfers his future consumption to the present, but he diminishes both his current and future consumption by the amount of the fee. In effect, he makes himself poorer and believes that he is better off, because he gets what he wants NOW. This is a perversion of economic sagacity and long term well-being.