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Lending is often talked about as "printing money" but isn't investing in anything other than money also able to do the same thing? Some seed investor puts a mi

Lending is often talked about as "printing money" but isn't investing in anything other than money also able to do the same thing? Some seed investor puts a million pieces of money into a company, that company starts getting a lot of customers, new people are willing to pay much more for pieces of that company. But now this company has gone from zero to lots of value, and so that first investor can behave like they now have a billion pieces of money instead of the million they had originally (whether that's cashing out a small amount, or borrowing against it). So if the economy grows in a non-zero-sum way, how do you avoid inflation? The total value in the system (due to the circulation of money and the productive activity) goes up, and lots of it isn't in the form of "pieces of currency." Is there so much difference between "lending money" - giving money on the belief that the counterparty will pay you back more over time - and "investing" - giving money on the belief that the share of the thing will be worth more over time? In the absence of regulations, even someone like a bank who's holding other people's deposits could do either sort of investment (and so is VC just a special sort of "bank")?

bb88 4y ago
The way I think of it is that when you make a purchase, the money just basically switches bank accounts. The money is still in the banks, and currency is not created or destroyed, just exchanged between players. When a bank makes a loan using it's customer's money, the balance in the account doesn't disappear -- and the money is still available to the customers. But now a loan for a car financed by a bank goes into the car dealer's bank account which then gets loaned out by that bank. This happens over and over again in a recursive manner. This is the Monetary Multiplier Effect as part of Fractional Reserve Banking. It's basically kind of a regulated shell game. The bank has to have so much in cash to pay out in case of a bank run, and the FDIC protects customers from bad bank management. But your money is literally replaced with a number in an account balance. And your $10k in the bank might generate $40k of loans in the economy based upon your deposit. An investment however removes cash from your account and replaces it with shares and that money is given to someone else. So it's an exchange of money and an exchange of shares. And thereby doesn't have the same multiplication effect. In this case value is created or lost which makes your shares worth more or less on the market. Again, value doesn't create money. Money is exchanged between parties for different amounts. A 1981 bordeaux doesn't create currency over time, just increases it's value.
matheusmoreira 4y ago
Fractional reserve banking directly inflates the economy via loans. If I deposit $1000 into my bank account, the bank will lend it to someone else instead of just holding it for me. That loan is new money created out of literally nowhere. It only becomes real money when the borrower actually extracts value from this world and earns real dollars in the process. The loan's repayment makes it real. Until that happens, the money doesn't actually exist, it's completely made up. So borrower goes out and buys the stuff they need to make it happen. That money eventually ends up right back in the bank as a deposit. Once at the bank, it is once again loaned, spent, deposited, loaned, spent, deposited... Quickly inflating $1000 into a whole economic system worth huge figures like $100,000, not one cent of it real until all of the aforementioned economic activity actually succeeds in generating some real value. Always at risk of the whole stack unwinding due to business failures leading to defaults on loans which could cause even more defaults and liquidations and foreclosures and losses and all sorts of problems. Multiplying that by an entire country's polulation results in truly mind-boggling amounts of money generation and therefore inflation. The actual money supply doesn't actually matter since it's a small fraction of the amount of money that's actually circulating. The funniest part is cryptocurrency exchanges have turned into banks. They offer bitcoin lending services, savings accounts. Finite bitcoin supply? It doesn't matter. Value can always be inflated away through loans.
- neilwilson 4y ago
  Fractional reserve banking doesn't exist [0]. The Bank of England explained this in 2014. Surely the myth should have died by now. [0]: 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-...
  - matheusmoreira 4y ago
    https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking > Fractional-reserve banking is the system of banking operating in almost all countries worldwide > under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers

bb88 4y ago

The way I think of it is that when you make a purchase, the money just basically switches bank accounts. The money is still in the banks, and currency is not created or destroyed, just exchanged between players. When a bank makes a loan using it's customer's money, the balance in the account doesn't disappear -- and the money is still available to the customers. But now a loan for a car financed by a bank goes into the car dealer's bank account which then gets loaned out by that bank. This happens over and over again in a recursive manner. This is the Monetary Multiplier Effect as part of Fractional Reserve Banking. It's basically kind of a regulated shell game. The bank has to have so much in cash to pay out in case of a bank run, and the FDIC protects customers from bad bank management. But your money is literally replaced with a number in an account balance. And your $10k in the bank might generate $40k of loans in the economy based upon your deposit. An investment however removes cash from your account and replaces it with shares and that money is given to someone else. So it's an exchange of money and an exchange of shares. And thereby doesn't have the same multiplication effect. In this case value is created or lost which makes your shares worth more or less on the market. Again, value doesn't create money. Money is exchanged between parties for different amounts. A 1981 bordeaux doesn't create currency over time, just increases it's value.

matheusmoreira 4y ago

Fractional reserve banking directly inflates the economy via loans. If I deposit $1000 into my bank account, the bank will lend it to someone else instead of just holding it for me. That loan is new money created out of literally nowhere. It only becomes real money when the borrower actually extracts value from this world and earns real dollars in the process. The loan's repayment makes it real. Until that happens, the money doesn't actually exist, it's completely made up. So borrower goes out and buys the stuff they need to make it happen. That money eventually ends up right back in the bank as a deposit. Once at the bank, it is once again loaned, spent, deposited, loaned, spent, deposited... Quickly inflating $1000 into a whole economic system worth huge figures like $100,000, not one cent of it real until all of the aforementioned economic activity actually succeeds in generating some real value. Always at risk of the whole stack unwinding due to business failures leading to defaults on loans which could cause even more defaults and liquidations and foreclosures and losses and all sorts of problems. Multiplying that by an entire country's polulation results in truly mind-boggling amounts of money generation and therefore inflation. The actual money supply doesn't actually matter since it's a small fraction of the amount of money that's actually circulating. The funniest part is cryptocurrency exchanges have turned into banks. They offer bitcoin lending services, savings accounts. Finite bitcoin supply? It doesn't matter. Value can always be inflated away through loans.

neilwilson 4y ago
Fractional reserve banking doesn't exist [0]. The Bank of England explained this in 2014. Surely the myth should have died by now. [0]: 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-...
- matheusmoreira 4y ago
  https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking > Fractional-reserve banking is the system of banking operating in almost all countries worldwide > under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers