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Very interesting explanation, but unless I missed something, the concluding statement is simply incorrect, which makes the whole thing wrong. > So now you're s
by guynamedloren 14y ago
Very interesting explanation, but unless I missed something, the concluding statement is simply incorrect, which makes the whole thing wrong.
> So now you're still growing apples, but instead of trading them for deer-haunches and shoes, you trade them for Loddars. So far, so good. Once again, you want some meat, except harvest time hasn't come yet so you don't have any Loddars to buy meat with. You call me up (cellphones have been invented in this newly-efficient economy), "Hey otherwiseyep, any chance you could kill me a deer and I'll give you ten Loddars for it at harvest-time?" I say, "Jeez, I'd love to, but I really need all the cash I can get for every deer right now: my kid is out-growing shoes like crazy. Tell you what: if you can write me a promise to pay twelve Loddars in October, I can give that to the shoe-maker." You groan about the "interest rate" but agree.
Did a lightbulb just go off? You and I have once again created Money. Twelve loddars now exist in the town economy that have not been printed by the central bank. Counting all the money trading hands in the village, there are now (a) all the loddars that have ever been printed, plus (b) twelve more that you have promised to produce.
"Loddars" are essentially dollars, a physical form of currency. The apple farmer does not have any loddars, but he promises to give twelve loddars to the hunter at harvest-time. The loddars come from people purchasing his apples, which have already been printed, thus are already in the system. Since loddars have been standardized by the central bank by this point, an apple farmer cannot simply 'create loddars' out of thin air. He can promise loddars, but that's very different than actually creating loddars. New money has not entered the economy.
- gaius 14y agoWell yes and no. You should read up on the different kinds of "money supply", referred to by pundits as M1, M2, etc etc.
- mmaunder 14y agoYou wouldn't have been able to create Loddars if you said "Well the value of an IOU from the apple farmer has been established at this point so you can't just create a Loddar". But Loddars were created because money is an IOU for anything. And so you can create new money by creating a new IOU even though Loddars exist.
- TeMPOraL 14y agoI keep wondering: When you create this new IOU you basically start to repeat the process that resulted in Loddars in the first place; you could theoretically repeat it with the new IOU. Isn't it getting recursive? :).
- rajivm 14y agoYes, and in fact this happens many times over: Greg gets a loan from the Bank for $5000. Greg gives Stacey the $5000 to buy her car. Stacey deposits the $5000 in the bank. Bob gets a loan from the Bank for $4500. Bob deposits this $4500 in his bank account to spend. Mark gets a loan from the Bank for $4000. And it goes on. In the United States: Of less than $11.5 million have no minimum reserve requirement; Between $11.5 million and $71.0 million must have a liquidity ratio of 3%; Exceeding $71.0 million must have a liquidity ratio of 10%. That means mosts Banks only have to retain 10% of their money as cash and can continue to recursively loan out the rest of it.
- jamesaguilar 14y agoRight. Also, in the real economy this note IS a dollar. This is because of fractional reserve banking.
- InclinedPlane 14y agoYou missed something. Look more closely. The deer hunter gives his dollars to the apple farmer. But he then BUYS SHOES WITH AN IOU FROM THE APPLE FARMER. And the shoe maker can then trade that promissory note to others if he desires as well. The point is that the promissory note is no different in function or substance than money. Money isn't a thing, it's just a universally recognized form of transferable debt.
- judofyr 14y agoAnd now the history repeats itself: - In the same way that apple- and potato-certificates could have different values, how do you know which IOUs you can trust? - Someone says: "Hey, instead of giving IOUs to each other, come to me. I'll figure out if the person is actually able to pay it back later and give him money." Instead of having the IOU accepted by everyone in the village (a seller won't accept an IOU unless he knows he can trade it with other people, so a buyer needs to prove his credit to everyone), there's only one person/system who needs to accept it.
- deleted 14y ago[deleted]
- rbn 14y agoThe Hunter should check the farmer's credit score