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My understanding: bank credit isn't fiat currency. It can be paid back with other credit effectively. But at the end of the day, it's possible, of course, to ha

My understanding: bank credit isn't fiat currency. It can be paid back with other credit effectively. But at the end of the day, it's possible, of course, to have absurd debts and credits from banks that will be impossible to ever repay. If I loan you $1 at 1000% interest daily, then after a short time, you are just going to default on the loan, period. There's no way you'll pay it back. So, yeah… at some point, even if you got another loan to pay the loan and etc etc. the whole house of cards will crash at some point if it's too much credit based on nothing. That house of cards could be just me never getting paid back, oh well. But if I convinced tons of other people to give me products and services that I then had debt for based on the idea that I have this expectation of your payback… then the house of cards could reach through the whole economy eventually.

wu-ikkyu 9y ago
If bank credit isn't backed by fiat currency (fractionally reserved or otherwise), then does it have any real basis to it?
- quadrangle 9y ago
  It's still enforced legally but tempered by bankruptcy laws. It's backed by the supposed (hoped for) future productivity of the debtor. Or by real property (like a house in the case of a mortgage).
- jganetsk 9y ago
  It is backed by the fact there is plenty of demand for it. The demand comes from the fact that people need to attain bank credit to pay off their debts to the banks. This is very evident when you think of how banks used to work: they would actually issue paper notes denominated in the desired unit of account (the national currency). To pay back your debts (or else suffer the consequences), you had to acquire and return the notes to the bank. That generated demand for the notes. People who were not banks would start accepting the notes because of the demand. Then banks decided they could make money by accepting notes from other banks as payment (for a fee). At the end of the day, banks would exchange and retire notes collected this way.

wu-ikkyu 9y ago

If bank credit isn't backed by fiat currency (fractionally reserved or otherwise), then does it have any real basis to it?

quadrangle 9y ago
It's still enforced legally but tempered by bankruptcy laws. It's backed by the supposed (hoped for) future productivity of the debtor. Or by real property (like a house in the case of a mortgage).
jganetsk 9y ago
It is backed by the fact there is plenty of demand for it. The demand comes from the fact that people need to attain bank credit to pay off their debts to the banks. This is very evident when you think of how banks used to work: they would actually issue paper notes denominated in the desired unit of account (the national currency). To pay back your debts (or else suffer the consequences), you had to acquire and return the notes to the bank. That generated demand for the notes. People who were not banks would start accepting the notes because of the demand. Then banks decided they could make money by accepting notes from other banks as payment (for a fee). At the end of the day, banks would exchange and retire notes collected this way.