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> the finiancial world has been doing it for ages Well, not really. Financial instruments like stocks and bonds are real legal claims on the real assets of an

• tehsauce 9y ago
  >Well, not really. >Financial instruments like stocks and bonds are real legal claims on the real assets of an entity. They are not creating value out of nothing, they are transferring ownership rights. While an instrument making a claim to a real asset can't create value from nothing, it can create value from almost nothing. For example if the going price for a particular beanie baby is $100,000 a huge amount of speculative value has been created from a very small (basically nothing) real world value. In general it's poor speculation that causes problems, not necessarily the nature of the asset itself
  • JackFr 9y ago
    A beanie baby is a beanie baby. It's an asset and offers no other claims or rights. If I pay $1 for a beanie baby the manufacturer presumably captures the value of the difference between where they value labor and materials (< $1) and $1. I capture the value of the utility a beanie baby gives me (>=$1) less $1. If I then mark the beanie baby on my books as worth $1 million, because that's where I have seen other similar beanie babies trade, on my balance sheet I have captured $9,999,999 because I was able to get real property the market values at $1 million for $1. That is ludicrous, but it is real (though unrealized). Now I could sell it for the $1 million, and my gain would realized, and it would equal the difference between my cost and the (possibly irrational) utility the buyer placed on that beanie baby. That the buyer irrationally believes that a beanie baby has value beyond that of a toy, as a store of value, or a possible rising speculative asset is not prudent or wise, but it is real.
    • tehsauce 9y ago
      Ok so what if in that entire scenario above you replace "beanie baby" with "printed slip for a wallet containing 1 BTC". The value stored in cryptocurrencies do actually have a physical manifestation (whether it's the neurons in your brain, or a printed physical wallet that stores your password). It's just that it's physical existence is puny by comparison and very easy to copy/transfer.
      • pbecotte 9y ago
        That is kind of the point, however, the value isn't created by making the toy or the btc. The value is created when the perceived utility of the underlying goes up. Imagine you own a well. Later they discover a way yo get oil from that type of well. The change in perception is where the increased value comes from.
• gyom 9y ago
  Here is something to consider. Assume for a moment that people use rare Pokémon cards as a form of payment, because everyone plays Pokémon. You can buy a card with Pokémon cards. But these cards aren't being printed anymore and the supply never increases. If I issue some kind of "IOU" certificate, redeemable for a rare Charizard card, and people trade those IOUs instead of redeeming them (good thing because I don't have those Charizard cards in my possession at the moment), then I'm basically expanding the supply "things that people trade and commonly use to pay for goods" (i.e. money/currency). I didn't create any new Charizard card, but as long as people don't ask me to redeem them, it's roughly as though the market had 10 more copies of that card circulating. There isn't more "value/wealth" created, but there is now more "money/currency" circulating. You can imagine how something similar is happening with derivatives.
• namelost 9y ago
  Anybody can create dollars. If you take a loan out from a bank you are creating a dollar. If you make a payment on your loan you are destroying a dollar.
  • finnh 9y ago
    Banks can't loan out more then they have in deposits (unless they themselves have borrowed from someone else, and so on). In fact, they can't even loan out every dollar that's been deposited - there are reserve requirements that they hold some cash on hand to redeem, say, withdrawal requests.
    • manmal 9y ago
      Sure, but they just loan a lot of money from central banks which is actually made from thin air.
    • tonyarkles 9y ago
      I'm working this out on the fly here, but here it goes. People are labelled with single letters. Let's say that a bank is only allowed to lend out 90% of the deposits. - A deposits $300k Total deposits: $300k, total lendings: $0k, total lendable: $270k - Bank lends B $270k to buy C's house - C deposits $270k from the sale of his house. Total deposits: $570k, total lending: $270k, total lendable: ($570k * 0.9 = $513k, $513k-$270k = $243k) - Bank lends D $240k to by E's house - E deposits $240k from the sale of his house Total deposits: $810k, total lending: $510k, total lendable: ($810k * 0.9 = $729k, $729k - $510k = $219k) - Bank lends F $210k to by G's house - G deposits $210k from the sale of his house Total deposits: $1,020k, total lending: $720k, total lendable: ($1020k*0.9 = $918k, $918k - $720k = $198k) In this process, the bank has turned $300k into $1,020k, and has loaned out $720k, while never loaning out more than they have deposited. That's the magic of fractional reserve banking.
      • perl4ever 9y ago
        The bank didn't somehow grab those three houses (C, E, and G) for free - the assets and liabilities balance out. So I don't think it makes any sense to say they turned $300K into $1,020K. C, E, and G already had existing houses, and the series of events isn't going to change the amount of deposits or loans in the world as a whole. It doesn't give the bank a profit of $720K. They get interest on $720K, but they have to pay interest on $1020K so obviously they need a spread in rates to do it. As far as I can tell, you're just describing the bank getting a larger balance sheet and they've got to raise more capital to do it which limits profits.
• usefulcat 9y ago
  > Seignorage is what the government does when it creates dollars (or when bitcoin is created). That truly is creating money for nothing. Institutions such as banks and credit unions are also able to create money 'from nothing', via lending. When they make a loan, it's not as though they deduct the amount loaned (or any part of it) from someone else's account, and typically they're allowed to make loans totaling many times (9x? 11x? I forget) the amount of deposits they possess.
  • kgwgk 9y ago
    When a bank makes a loan it will deduct it from it’s own account. And it will not loan more than it has in deposits, however it’s true that it only has to keep it its balance sheet (i.e. not loan) a fraction of the deposits.
    • usefulcat 9y ago
      I read up some more, and I see that I've over simplified it. I like your description better. I think I must have been assuming a situation along the lines of "bank loans out 90% of its deposits, and then all those debts are moved to other institutions", in which case I expect the bank would be left with 10% of its original deposits plus the loan agreements, the total value of the latter being equal to ~9x the value of the remaining deposits.
      • kgwgk 9y ago
        That description seems correct, if the bank has $100 in deposits (which are a liability for the bank, it owes that money to depositors) on the asset side it will have loans for $90 (the money owned to the bank) and the remaining $10 will be the reserves.
  • eli 9y ago
    How could they make loans multiple times the deposits they have unless they too are borrowing money from somewhere?
    • 9y ago
• lodi 9y ago
  Derivatives are not exactly zero-sum. a) Imagine a coin tossing game. We both put in a dollar and flip a coin; heads you win both dollars, tails I win both dollars. Truly zero sum. b) Consider a vendor selling me a $5 hamburger for $5. They lose $5 worth of goods and gain $5 worth of cash; I lose $5 worth of cash and gain $5 worth of goods. In an accounting and physics sense this is zero sum; no dollars or molecules were created or destroyed, the universe just slightly rearranged itself. But in economic terms, this isn't a zero-sum transaction; the purchase created value since at that exact moment I valued the hamburger more than the cash (due to hunger), and the vendor valued the cash more than the hamburger. We both improved our situation and created value "for nothing". After eating the hamburger, I satiate my hunger, and now value a second hamburger less than $5, which prevents a second trade from happening for a few hours. c) Let's say I'm a wheat-producing farmer and you're a wheat-consuming baker, and there are thousands of others like us in the economy so neither of us really has any effect on wheat prices. When the wheat price is up, I benefit, and when the wheat price is down, you benefit. At this point we have a zero sum situation. Now let's say we're both reasonably content with the wheat price being what it is right now, so we sign a "futures" agreement for me to deliver wheat to your bakery for the next year, locked in at the current price. By signing the contract, I'm choosing to forgo extraordinary profits next year if the wheat price happens to go up, but also insuring myself against extraordinary losses if the wheat price happens to go down. Your end of the bargain is the same thing in reverse. Like the hamburger example, in an accounting sense this is zero-sum. My potential profits are exactly equal to your potential losses, and vice versa. But in an economic sense, there was another quantity that was affected in this transaction: risk. Both of us reduced our wheat price risk to zero for the next year. Risk is something people intrinsically dislike, so it has disutility (i.e. negative value). Eliminating a negative therefore adds value. As a concrete example, let's consider what would happen if you couldn't sign the futures contract above--let's assume no modern banking or finance at all for this example--and had to just accept wheat price fluctuations. Overall, on average, the highs and lows should more or less cancel out. But on a short-term basis it's not unlikely at all to have a run of 3-5 years of bad prices (too low for me, or too high for you). To survive this potentiality, we'd both have to set aside a considerable rainy day fund just in case I had to cover 3-5 straight years of depressed profits or outright losses. Most of the time this cash will be unused, but the mere threat of a prolonged unlucky spell means we can't use that cash to buy more land or tools. The net effect on all farmers and all bakers is that everyone has a large chunk of their wealth sitting around in a completely unproductive state, which ultimately means less loaves of bread are produced and society is relatively impoverished. Likewise, other financial derivatives like options, swaps, etc., also create economic value. They might be zero sum in a cash sense, but they affect some more-abstract quantity like "risk" or "leverage" and therefore create value for both buyer and seller.