There is a common term used in business, "vendor financing." You give your customers 30 days to pay, and that is "vendor" (you) financing the buyer, your customer. Logically vendor financing predated barter and money.
As capitalism goes the way of communism, people are looking at alternatives, or something to fashion out of the wreckage. One idea is returning to "real bills" in finance. Problem is most people have no idea what they are talking about.
First let's make clear vendor financing is still alive and well. What has happened over several hundred years is banks got involved in secondary markets for these bills, and then used them as credit to create a further fractional reserve in credit and lend out this credit. The multi-trillion dollar derivatives chimera is built on this mischief.
Part of spotting the problem is to understand the terms. Today we think of "bill" as that which must be paid, such as a restaurant tab or a electricity invoice. "Bill" in the sense being used in "real bills" means "list." A "bill of lading" is not a freight charge, but a list of what was laden on the common carrier. This list, this bill, is important since the value is specific to what is on the bill, what is listed. By forgetting this point, bad actors can say "tea costing $25,000" is tantamount to "$25,000." It is not. It is tea not money. But by making the semantically shift, there is now $25,000 to borrow, and loan, and loan out on fractional reserve, with all of the mischief that follows.
Prior to say 150 years ago, one might await his $25,000 against a shipment of tea, and needing money may find someone to lend him some thing against the potential profits from the sail of the tea when it might arrive. Risky business that, but any risk would be limited to the immediate parties involved.
But then the courts made a huge change, and that is transferability. Prior to about 150 years ago, no court on earth would enforce a contract that had been transferred. Say you and I make a deal where I promise to pay you in $10,000 in 2 years. Today you could sell that promissory note to a third party. Never before. If two people make a deal, it could not be passed on to a third. To this day the letter of credit has this provision, no anachronism that.
But with a change in usury laws and recognition of transferability, banks could get involved in the "service" of brokering this paper on secondary and tertiary markets, and then lend against it, and build some fractional reserve into it, and charge usury on the whole thing. The result is the economic chaos we have today.
Those calling for a renewal of real bills are calling for a slight pullback from derivative madness to a time when things were not so bad. Problem is there is nothing short of eliminating government involvement that will work. Having state-backing of loans against paper and transferability inevitably leads to the present disaster.
Real bills only works in a free market. If you do not have a free market, you cannot have a real bills segment of the economy.
Feel free to forward this by email to three of your friends.
As capitalism goes the way of communism, people are looking at alternatives, or something to fashion out of the wreckage. One idea is returning to "real bills" in finance. Problem is most people have no idea what they are talking about.
First let's make clear vendor financing is still alive and well. What has happened over several hundred years is banks got involved in secondary markets for these bills, and then used them as credit to create a further fractional reserve in credit and lend out this credit. The multi-trillion dollar derivatives chimera is built on this mischief.
Part of spotting the problem is to understand the terms. Today we think of "bill" as that which must be paid, such as a restaurant tab or a electricity invoice. "Bill" in the sense being used in "real bills" means "list." A "bill of lading" is not a freight charge, but a list of what was laden on the common carrier. This list, this bill, is important since the value is specific to what is on the bill, what is listed. By forgetting this point, bad actors can say "tea costing $25,000" is tantamount to "$25,000." It is not. It is tea not money. But by making the semantically shift, there is now $25,000 to borrow, and loan, and loan out on fractional reserve, with all of the mischief that follows.
Prior to say 150 years ago, one might await his $25,000 against a shipment of tea, and needing money may find someone to lend him some thing against the potential profits from the sail of the tea when it might arrive. Risky business that, but any risk would be limited to the immediate parties involved.
But then the courts made a huge change, and that is transferability. Prior to about 150 years ago, no court on earth would enforce a contract that had been transferred. Say you and I make a deal where I promise to pay you in $10,000 in 2 years. Today you could sell that promissory note to a third party. Never before. If two people make a deal, it could not be passed on to a third. To this day the letter of credit has this provision, no anachronism that.
But with a change in usury laws and recognition of transferability, banks could get involved in the "service" of brokering this paper on secondary and tertiary markets, and then lend against it, and build some fractional reserve into it, and charge usury on the whole thing. The result is the economic chaos we have today.
Those calling for a renewal of real bills are calling for a slight pullback from derivative madness to a time when things were not so bad. Problem is there is nothing short of eliminating government involvement that will work. Having state-backing of loans against paper and transferability inevitably leads to the present disaster.
Real bills only works in a free market. If you do not have a free market, you cannot have a real bills segment of the economy.
Feel free to forward this by email to three of your friends.
0 comments:
Post a Comment