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Ok, so how are you making money to sustain your operation? Presumably you are a business, not a charity. Your vault isn't free, neither is the land it sits in,
by SonicScrub 5y ago
Ok, so how are you making money to sustain your operation? Presumably you are a business, not a charity. Your vault isn't free, neither is the land it sits in, and as you gain more customers your security costs are going to increase. Also your customers are going to want convenient withdrawal and deposit options, so you will need multiple vaults in different locations (plus security measures). Not to mention the overhead you'll need to run this business (accountants, HR, IT, asset managers, etc). Thus there is a degree of scaling to your costs. This is fine though, just subtract these costs from the revenue generated by your investments. Your simplified business model looks something like this:
Profit = Investment Returns - Operational Costs - Interest Paid to customers
Only you have to have sufficiently liquidity such that your customers can get withdrawals whenever they want. This means your investment pool is going to be conservative, thus limiting your returns. Now what happens when your nation's central bank craters interest rates, thus driving your investment returns down? Oh shit, now the revenue source is drying up. What gives? Profit, or your interest rates? Well profits have to be at minimum high enough to justify all this effort, so looks like the interest rates are going to drop and drop and drop as the cost of money goes down....
Congratulations, you are now in the same place as all those other institutions. Who would have guessed that an identical business model subjected to all the same economic push and pulls would end up at the same destination.
- beambot 5y agoSimple... digitize the dollars, e.g. through some crypto token. For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest. I shall call this a "fractional reserve" system.
- Armisael16 5y ago> to lend out and earn interest Who are you lending to? That’s the key - there’s a ton of money looking for returns but not enough people looking to borrow.
- zz865 5y ago> For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc
- nlitened 5y agoAs far as I know, that’s not how banks make loans. They don’t lend deposited money, the money they lend is created out of thin air.
- oblio 5y agoNo, he's right, that's the theory behind fractional reserve banking. At a 10% bank reserve rate, 10x the monetary base is created.
- spiralx 5y agoExcept fractional reserve banking is an incorrect model of how banks work, the poster you're replying to is correct, banks create money when they make loans. The Bank of England's guide to money creation makes this distinction clear on the first page, it's worth a read, https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- jazzyjackson 5y agoWhen a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking? Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around." [0] https://youtu.be/CvRAqR2pAgw https://youtu.be/CvRAqR2pAgw
- SonicScrub 5y agoAll that does is potentially reduce your overhead costs, not eliminate them. You will always have some costs associated with running your operation, and therefore could always be forced to have negative interest rates if stable investment returns plunge lower. And they can always go lower, even negative
- beambot 5y agoEdit via comment: I was drawing parallels to the system of central banks & Federal Reserve (i.e. those that create monetary supply), not just individual banks. The point was simply that physical dollars on hand << assets on balance sheet. At least with a crypto system, we would (theoretically) be able to account for all the tokens issued... Case in point: "Holding U.S. Treasurys? Beware: Uncle Sam Can't Account For $21 Trillion" https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-s-treasuries-beware-uncle-sam-cant-account-for-21-trillion/?sh=77fe256d7644 https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-... It's all immaterial anyway; someone already beat me to the punch: USDT, USDC, etc.
- Aerroon 5y agoYou could charge people money to hold their money. You know, like some banks do.
- deleted 5y ago[deleted]
- SonicScrub 5y agoThat's the same thing as negative interest rate, just by a different name. A flat-fee is effectively a negative interest rate that scales lower as balance is higher. Calling it a fee or a negative interest rate; that's all just marketing.
- quincunx 5y agoIt's not all marketing for the exact reason you state, it doesn't scale with the balance but is fixed. A flat-fee would be interesting for precisely the account holders with a large balance. There would be a bank-run-exodus of large accounts to such an impossible flat-fee bank.