The Biggest Scam in History

[kevinquinnyo]

The concept of creating money "out of thin air," isn't as nefarious as it sounds.

Let's instead consider food.

I'm on an island, in a simple world, where food is the only thing people require. It's the currency. So food is the only thing people are willing to work for.

I own a large piece of land on this island, and I wish to grow corn. But I can't do it on my own, and I don't have enough corn presently to pay people to help me.

There are no corn banks to supply me with a loan to pay the laborers, so instead I promise to pay some laborers in future corn production if they agree to help me.

So instead of having them work the farm, I actually pay them to help me build a robot (why not) that can do all of the farm work on its own.

We complete the robot, the robot sets off to do grow the corn, and when the harvest comes in, I pay the workers the corn that I owe them.

Now that I have an abundance of corn, I can afford to pay people to make 3 new farmbots and maybe buy or lease additional land from other islanders. Instead of paying them in the future, I convince them to accept these very official and difficult to duplicate tickets that promises them future corn, once the farmbots are completed, and the harvest comes in. They accept the tickets.

By this time, there is a shop that sells plates and silverware for people on the island to eat their corn. The owner decides to accept my IOU tickets for future corn as payment, because he believes that I will honor my agreement, and transfer the future corn to whoever holds that ticket.

This is essentially how money works. I created "future corn tickets" out of "thin air," that can be used immediately, despite the fact that the supply of corn is lower than the supply of "corn money," at the present date.

We live in a world that travels forward through time, and the most efficient way to live in a world like that, is to accept that a value in the future can be an acceptable value today, if we accept that x, y, or z, will likely happen, in the future.

It's simple.

Yes, I said corn harvesting robots, come on, I had to make it more interesting.

 

[kevinquinnyo]

Actually, a more accurate parable to the banking system would go as follows:

I build a building on the farm to store the corn in. It's very secure, the most secure in town, and people trust me. It has a moat surrounding it, and vicious guard dogs behind a fence. (The dogs are robotic, so they are super scary looking)

People begin coming to me and saying, Kevin, I have all this corn, and I just can't carry it around with me, I'm worried someone will steal it, and it's just impractical. Will you hold it for me in your awesome secure fortress?

I agree, and decide I will hold the corn, and in exchange give him a very official looking ticket signed by me, that honors the amount of corn "deposited."

I perform this service for so may people on the island, that others begin to accept the tickets as the equal to corn. It becomes a currency, if you will. People are trading labor for corn tickets, shopkeepers are accepting is as "as good as corn," and everyone is happy with the system. But I realize I'm doing a lot of work for everyone in town, and I'm not getting much out of it.

But then some one approaches me and says, I want to open a clothing store, I'm great at sewing clothes, but I don't have enough corn tickets to get people to build an adequate shop for me. What should I do?

I think for awhile, and then I tell her, look, I will advance you some corn tickets, but you have to pay me interest on the loan. A small amount of corn tickets per month. We agree to do this transaction because I trust that her store will probably be a success, and she accepts the interest, because she can afford it, and has no other choices.

Pretty soon, I'm making loans left and right. And collecting interest. I'm creating corn tickets out of thin air!

But instead of loaning all of the corn tickets out, I save about 10% in the bank, under the assumption that I don't think there is a huge risk of a run on my bank. I assume there's a pretty good chance most people will not need all of their money at once.

Capitalism! Fractional Reserve Banking! What a mystery!

 

[Sceptic-PK]

Fractional reserve banking is what allows you and me to go out and get a loan for something we don’t have the money for right now. Forcing banks to hold 100% reserves would mean that only the very best applicants would receive loans, essentially making borrowing money impossible for the vast majority of consumers. It would also drastically increase interest rates as banks would be able to charge huge premiums on the few loans they would provide.

Just another conspiracy theorist who lacks the requisite knowledge to examine fairly basic principles.

 

[kevinquinnyo]

i know that was a bit corny, but there's a kernel of truth in there

I'M SO AWESOME

 

[The Norseman]

i know that was a bit corny, but there's a kernel of truth in there

I'M SO AWESOME

I love puns (especially when they're in-grained). I also think that you made a wonderfully clear explanation of the stalk markets, corny or not. Hoe you know all that is beyond me.

 

[MG1962]

I love puns (especially when they're in-grained). I also think that you made a wonderfully clear explanation of the stalk markets, corny or not. Hoe you know all that is beyond me.

music to my ears

 

[timhau]

This thread is going to seed rapidly.

 

[Bob Blaylock]

I think se7ensnakes would find the information here to be extremely useful and relevant.

 

[Mojo]

The concept of creating money "out of thin air," isn't as nefarious as it sounds.

Let's instead consider food.

That scam has been going on for even longer than the banks! BIG FARMA creating food out of nothing!

 

[Aepervius]

Yes, you are clearly evil.

Depends, we have to get photo to see if she/he has the 3rd breast. Or is that witchery ?

 

[learner]

I couldnt be asked to read it. Was there any mention of Banks opening sundays? Its the best day for me but they still resist.

 

[Ian Osborne]

tl;dr

+1

 

[SezMe]

And as far as I can tell, this is not a copy-and-paste. If someone knows the source, please provide it. If not, we must assume it is original.

I picked a random sentence ("Lets say that you owned a Movie theater") out of the 2nd paragraph and asked Prof. Google where it came from. The only url was this thread.

 

[Tippit]

The concept of creating money "out of thin air," isn't as nefarious as it sounds.

Before you start patting yourself on the back for your analogy, I will explain why it's poor.

Let's instead consider food.

I'm on an island, in a simple world, where food is the only thing people require. It's the currency. So food is the only thing people are willing to work for.

I own a large piece of land on this island, and I wish to grow corn. But I can't do it on my own, and I don't have enough corn presently to pay people to help me.

There are no corn banks to supply me with a loan to pay the laborers, so instead I promise to pay some laborers in future corn production if they agree to help me.

This is fine, it represents a private debt transaction. If you can secure employment by the voluntary acceptance of your own unsecured private debt, that's your prerogative. Don't confuse this with the fractional reserve, fiat money system, however.

You could, alternatively, secure a loan in the currency of the realm from those with a surplus, and who are willing to lend you the funds.

If you and your plan are creditworthy, you may have no problem doing either.

So instead of having them work the farm, I actually pay them to help me build a robot (why not) that can do all of the farm work on its own.

We complete the robot, the robot sets off to do grow the corn, and when the harvest comes in, I pay the workers the corn that I owe them.

Now that I have an abundance of corn, I can afford to pay people to make 3 new farmbots and maybe buy or lease additional land from other islanders. Instead of paying them in the future, I convince them to accept these very official and difficult to duplicate tickets that promises them future corn, once the farmbots are completed, and the harvest comes in. They accept the tickets.

What do you mean "instead of paying them in the future"? That's what you did in the first example, and that's what "promises them future corn" means. This still represents unsecured debt, not money. If you offered to pay them tickets that were redeemable in corn today, then you would have a fiduciary money system (a promise to pay, on demand). If your fiduciary corn receipts became as ubiquitous on the island as corn itself, you could begin to issue more receipts than you actually have corn to redeem, and this would be an example of fractional reserve banking (which is I guess what you were attempting to illustrate). The problem with this, is that it is based upon a fraud. It is impossible to redeem all of your corn receipts should everyone desire to at once, and the fact that you are charging interest on corn-receipt loans based on corn that you don't have entitles you to a fraudulent income stream. Even if you issued a disclaimer, saying "i don't really have enough corn to redeem if everyone did so at once", it's still unethical, in my opinion, and should be illegal. We don't allow indentured servitude, even with the consent of the slave, nor should fractional reserve banking be legal, even with the consent of the depositor/borrower. The external costs for society are too high.

By this time, there is a shop that sells plates and silverware for people on the island to eat their corn. The owner decides to accept my IOU tickets for future corn as payment, because he believes that I will honor my agreement, and transfer the future corn to whoever holds that ticket.

This is essentially how money works. I created "future corn tickets" out of "thin air," that can be used immediately, despite the fact that the supply of corn is lower than the supply of "corn money," at the present date.

You created credit out of thin air, not money. Your private credit isn't liquid or fungible like money. Not everyone is presumably willing to accept your credit, nor can you practically redeem enough of your bonds to service the island's economy. Furthermore, your private credit arrangements have associated risks that are bourne by those who agree to them. The depositors in a fractional reserve system have counterparty risk which does not exist in a 100% reserve system, and which is the essence of the silly and dangerous reality of "too big to fail".

We live in a world that travels forward through time, and the most efficient way to live in a world like that, is to accept that a value in the future can be an acceptable value today, if we accept that x, y, or z, will likely happen, in the future.

It's simple.

Yes, I said corn harvesting robots, come on, I had to make it more interesting.

We live in a world where people would rather be paid today, than tomorrow. Money has a time value. The free market coordinates time with interest. Your future promises to pay represent a private debt, not money by any reasonable or practical definition.

There are essentially three types of money corresponding to their relationship with things of intrinsic value. Commodity money, which represents the immediate payment of something intrinsically valuable, fiduciary money, which represents the promise to redeem something of intrinsic value on demand, and fiat money, which represents no intrinsic value (other than paper/artistic), and no promise of the redemption of anything, other than perhaps other denominations of fiat money.

If instead you decided to issue corn receipts (redeemable on demand) instead of corn debt, you would have a private fiduciary currency. This is still a far cry from Federal Reserve Notes, and thus your analogy is flawed.

More importantly, federal income tax and legal tender laws force the Federal Reserve Note into circulation, unlike the voluntary acceptance of your corn bonds. Also unlike your bonds, which eventually mature and are payable in intrinsically valuable corn, Bonds denominated in Federal Reserve Notes are only payable in more Federal Reserve Notes, the supply of which is practically unlimited.

So we have the voluntary acceptance of privately issued debt payable in a valuable commodity with intrinsic value in your example, versus a fiat currency which is foisted on the public through income taxation and legal tender, which is redeemable in nothing at all, is debased perpetually, and exists in a fractional reserve system which itself is unstable, and unethical, and directly responsible for the business cycle and the mess we're in now. These are not analogus.

 

[rjh01]

I picked a random sentence ("Lets say that you owned a Movie theater") out of the 2nd paragraph and asked Prof. Google where it came from. The only url was this thread.

I did that too. Odd paragraphs are cut and paste, but most of it appears to be original. Not hard to work out which paragraphs are cut and paste. They are the bits where he quotes other people.

 

[kevinquinnyo]

Before you start patting yourself on the back for your analogy, I will explain why it's poor.



This is fine, it represents a private debt transaction. If you can secure employment by the voluntary acceptance of your own unsecured private debt, that's your prerogative. Don't confuse this with the fractional reserve, fiat money system, however.

You could, alternatively, secure a loan in the currency of the realm from those with a surplus, and who are willing to lend you the funds.

If you and your plan are creditworthy, you may have no problem doing either.

Right. Not necessarily explaining fractional reserve banking here, just How you can increase the money supply in various ways that also aren't the BIGGEST SCAM IN HISTORY.

What do you mean "instead of paying them in the future"? That's what you did in the first example, and that's what "promises them future corn" means. This still represents unsecured debt, not money. If you offered to pay them tickets that were redeemable in corn today, then you would have a fiduciary money system (a promise to pay, on demand). If your fiduciary corn receipts became as ubiquitous on the island as corn itself, you could begin to issue more receipts than you actually have corn to redeem, and this would be an example of fractional reserve banking (which is I guess what you were attempting to illustrate).

Understood. No I wasn't describing fractional reserve banking, just a way that I can increase the money supply through a loan/debt agreement. The other parable is more relevant to specifically Fractional Reserve Banking. Of course it's still silly and simplified.

The problem with this, is that it is based upon a fraud. It is impossible to redeem all of your corn receipts should everyone desire to at once, and the fact that you are charging interest on corn-receipt loans based on corn that you don't have entitles you to a fraudulent income stream. Even if you issued a disclaimer, saying "i don't really have enough corn to redeem if everyone did so at once", it's still unethical, in my opinion, and should be illegal. We don't allow indentured servitude, even with the consent of the slave, nor should fractional reserve banking be legal, even with the consent of the depositor/borrower. The external costs for society are too high.

I don't think it's based on a fraud. AFAIK, banks are allowed to store as much of other people's money as they want, and disclose all of it. Is it not true that there is a minimum reserve required by law, and not a maximum? If you believe it's unethical, then don't bank with them. I'm sure that some banks have a higher reserve ratio that you might deem more ethical. But it makes the world go around, and it's a voluntary and transparent transaction between depositor and banker.

You created credit out of thin air, not money. Your private credit isn't liquid or fungible like money.

True, but I did increase the money supply, by issuing these bills. You're right that they aren't liquid, but my goal was really just to show a way in which you can create money "out of thin air."

Not everyone is presumably willing to accept your credit, nor can you practically redeem enough of your bonds to service the island's economy. Furthermore, your private credit arrangements have associated risks that are bourne by those who agree to them. The depositors in a fractional reserve system have counterparty risk which does not exist in a 100% reserve system, and which is the essence of the silly and dangerous reality of "too big to fail".

Which is true, and you're not required to deposit money in a bank if you so choose. There is also a presumably more risk to carrying around $20,000 in your wallet, or investing it in even less liquid investments of your choosing.

Whether people should be allowed to use alternate currencies is a different subject entirely, by the way.

We live in a world where people would rather be paid today, than tomorrow. Money has a time value. The free market coordinates time with interest. Your future promises to pay represent a private debt, not money by any reasonable or practical definition.

I think it is. The tickets have become currency. Money is worth what people say it's worth. If the shopkeeper trusts that the corn will be produced, and he voluntarily accepts the ticket for a pair of shoes, then that ticket has become a form of currency.

There are essentially three types of money corresponding to their relationship with things of intrinsic value. Commodity money, which represents the immediate payment of something intrinsically valuable, fiduciary money, which represents the promise to redeem something of intrinsic value on demand, and fiat money, which represents no intrinsic value (other than paper/artistic), and no promise of the redemption of anything, other than perhaps other denominations of fiat money.

If instead you decided to issue corn receipts (redeemable on demand) instead of corn debt, you would have a private fiduciary currency. This is still a far cry from Federal Reserve Notes, and thus your analogy is flawed.

Right. But it doesn't really matter, as I'm just illustrating a way that the money supply can be increased. As long as people are in fact not requiring immediate checking on demand of all notes they carry, then the money supply increases.

More importantly, federal income tax and legal tender laws force the Federal Reserve Note into circulation, unlike the voluntary acceptance of your corn bonds. Also unlike your bonds, which eventually mature and are payable in intrinsically valuable corn, Bonds denominated in Federal Reserve Notes are only payable in more Federal Reserve Notes, the supply of which is practically unlimited.

Different subject really. Whether currency by fiat is efficient or ethical is a different argument than whether increasing the money supply is ethical or efficient under the assumption there won't be 100% demand.

So we have the voluntary acceptance of privately issued debt payable in a valuable commodity with intrinsic value in your example, versus a fiat currency which is foisted on the public through income taxation and legal tender, which is redeemable in nothing at all, is debased perpetually, and exists in a fractional reserve system which itself is unstable, and unethical, and directly responsible for the business cycle and the mess we're in now. These are not analogus.

Your argument seems to be based on the evils of fiat currency more than fractional reserve banking. Am I wrong? Would you rather all money be backed by gold? Would you rather banks be required by law to hold 100% reserves?

Again, they are analogous only in that they are both examples of using the odd fact that we don't have 100% demand on notes, and we can use that fact to increase the money supply in various ways.

 

[The Man]

Yes, I said corn harvesting robots, come on, I had to make it more interesting.

Well, at least you didn’t say corn holing robots.



What?! It’s the robot that makes the holes in the ground to put the corn seeds.

 

[The Central Scrutinizer]

Before you start patting yourself on the back for your analogy, I will explain why it's poor.



This is fine, it represents a private debt transaction. If you can secure employment by the voluntary acceptance of your own unsecured private debt, that's your prerogative. Don't confuse this with the fractional reserve, fiat money system, however.

You could, alternatively, secure a loan in the currency of the realm from those with a surplus, and who are willing to lend you the funds.

If you and your plan are creditworthy, you may have no problem doing either.



What do you mean "instead of paying them in the future"? That's what you did in the first example, and that's what "promises them future corn" means. This still represents unsecured debt, not money. If you offered to pay them tickets that were redeemable in corn today, then you would have a fiduciary money system (a promise to pay, on demand). If your fiduciary corn receipts became as ubiquitous on the island as corn itself, you could begin to issue more receipts than you actually have corn to redeem, and this would be an example of fractional reserve banking (which is I guess what you were attempting to illustrate). The problem with this, is that it is based upon a fraud. It is impossible to redeem all of your corn receipts should everyone desire to at once, and the fact that you are charging interest on corn-receipt loans based on corn that you don't have entitles you to a fraudulent income stream. Even if you issued a disclaimer, saying "i don't really have enough corn to redeem if everyone did so at once", it's still unethical, in my opinion, and should be illegal. We don't allow indentured servitude, even with the consent of the slave, nor should fractional reserve banking be legal, even with the consent of the depositor/borrower. The external costs for society are too high.



You created credit out of thin air, not money. Your private credit isn't liquid or fungible like money. Not everyone is presumably willing to accept your credit, nor can you practically redeem enough of your bonds to service the island's economy. Furthermore, your private credit arrangements have associated risks that are bourne by those who agree to them. The depositors in a fractional reserve system have counterparty risk which does not exist in a 100% reserve system, and which is the essence of the silly and dangerous reality of "too big to fail".



We live in a world where people would rather be paid today, than tomorrow. Money has a time value. The free market coordinates time with interest. Your future promises to pay represent a private debt, not money by any reasonable or practical definition.

There are essentially three types of money corresponding to their relationship with things of intrinsic value. Commodity money, which represents the immediate payment of something intrinsically valuable, fiduciary money, which represents the promise to redeem something of intrinsic value on demand, and fiat money, which represents no intrinsic value (other than paper/artistic), and no promise of the redemption of anything, other than perhaps other denominations of fiat money.

If instead you decided to issue corn receipts (redeemable on demand) instead of corn debt, you would have a private fiduciary currency. This is still a far cry from Federal Reserve Notes, and thus your analogy is flawed.

More importantly, federal income tax and legal tender laws force the Federal Reserve Note into circulation, unlike the voluntary acceptance of your corn bonds. Also unlike your bonds, which eventually mature and are payable in intrinsically valuable corn, Bonds denominated in Federal Reserve Notes are only payable in more Federal Reserve Notes, the supply of which is practically unlimited.

So we have the voluntary acceptance of privately issued debt payable in a valuable commodity with intrinsic value in your example, versus a fiat currency which is foisted on the public through income taxation and legal tender, which is redeemable in nothing at all, is debased perpetually, and exists in a fractional reserve system which itself is unstable, and unethical, and directly responsible for the business cycle and the mess we're in now. These are not analogus.

tl;dr

 

[drkitten]

Before you start patting yourself on the back for your analogy, I will explain why it's poor.

Well, that settles it. Tippit has never been right about anything in his life. Particularly about economics.

So if he disagrees with the analogy, it must be spot-on.

 

[Loss Leader]

Gosh, I've missed 7Snakes and his utter inability to grasp the fundamentals of banking. I had almost grown complacent in my belief that people, in general, can process information.