Credit and debt necessarily balance out. If I lend you $20, you owe me $20. Everbody does that. It is not ex nihilo, cuz if I am not paid back, I've lost $20 in purchasing power. This is private extension of credit, and there is a debt on the other side.
If I ship you $500 in goods at net 30, you owe me $500, and I have an accounts receivable, an asset, worth $500. If you don't pay, I am out my income, and the books I sold you. This is commercial extension of credit, and there is a debt on the other side.
That's all just credit. And debt. At no interest. All good.
Now, sometimes, some people would extend their $20 at interest. In most of history, this was illegitimate, if not illegal, since lending any amount at any rate of interest for any duration causes damage. People lending at interest had no recourse to courts for enforcement, any more than a casino operator can enforce gambling debts (hence extra-legal enforcement of gambling debts).
In any event, credit is good, but it can be abused by adding interest.
Now banks, where gold and silver were stored, at first could not lend out their stores, for example, it was illegal in ancient Rome. In time things change, so just like I might lend you $20, a bank could too. OK, if the owner of the deposit agreed.
But the temptation to lend money out at interest is of course just too strong. So that happened. It distorts an economy, but that is not as bad as it can get.
Instead of releasing gold as a loan, the depositor could write a note stating the note-holder was as good as gold. These notes could move around, the proto-currency. Nothing wrong with that. It's a loan, and there is an asset on the other side. But of course it also could have interest attached.
One currency happened, bankers figured out they could write more currency than there was gold, initially a crime that carried the death penalty. We call this fractional reserve banking now. In the measure there is only a fraction of reserve backing loans, that measure is ex nihilo credit. If your bank holds 100 pounds of gold, and you write 200 pounds in currency notes, then you have a 50% fractional reserve. Of course this is fraud, and "bank runs" followed discovery. If ruined depositors did not kill the bankers, it was only because he authorities hanged them first.
Things change. It's quite common for what is criminal among citizens becomes de riguer for the Hegemon. Now our entire banking system worldwide is built on fractional reserve, hard to say exactly, but best estimates is 3%. 97% ex nihilo. Fractional reserve is so dicey it is stupid without some insurance premium so to speak, and that is interest on the loans of the fractionally reserved credit.
So imagine that. For the portion of the economy which depends on bank credit, some 97% is ex nihilo credit. There is a debt on one side, but no asset underlying credit on the other side.
It sounds like there is. Ford got credited ex nihilo for the Mustang of which title was transferred to you, upon your promise to make payments, in ex nihilo credit, plus interest, out of your income stream, largely tallied in ex nihilo credit. Whole lotta ex nihilo credit going' round. Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments. What's wrong with that?
Before I explain what's wrong with that, let me translate the previous paragraph from reality to capitalism.
You get a loan from a bank for the money to buy a Ford Mustang. Ford gets that money for the Mustang and transfers title to you, upon your promise to make payments, in money, plus interest, out of your income stream. Ford is zeroed out, the bank is zeroed out, you've got a Mustang and payments. What's wrong with that?Well, it's not money. (But experience the social conditioning: the second version sounds correct, but it is utter fiction.) It's ex nihilo credit. It suggests a wealth that is not there, and people calculate economic decisions in prices, prices that are not denominated in money, but in ex nihilo credit.
Ex nihilo credit has no rational limit. Ex nihilo credit appears to be wealth. People who would not qualify for asset backed loans certainly qualify for ex nihilo credit. They want more better cheaper faster, and as ex nihilo credit-based demand grows, Ford can deliver, at least what is advertised as such.
What's wrong with that? Well, as Bastiat noted, there is the seen and unseen. We like what we see. And as I note, we all love a system that works for us.
Ex nihilo credit is paid into the economy, causing inflation, and an appearance of wealth that is not there. People overextend.
With false wealth, the most egregious borrowers are necessarily calling forth what array of goods and services we see. The least perspicacious are the most powerful economic actors, given the leverage ex nihilo credit offers. A Dick Cheney tells us "deficits do not matter" (ex nihilo credit is also deficit spending) as he gleefully prosecutes criminal wars with impunity, and immunity. The poorest person in USA can whip out his EBT card to pay for a couple of corn dogs and a supersized Coke at a gas station. There is no difference in kind between those two people, only in scale. Neither has any money. Both are dependent on ex nihilo credit. Both are economic actors. Both simply put their purchases on the tab denominated in ex nihilo credit. It all adds to the power, denominated in ex nihilo credit tallies, of the bankers, etc.
Sure auto payment delinquencies are up, but only to 2.6%. So what?
On the margin, much of the recent growth of auto sales has been attributable to sub-prime borrowers, which are now up to 31% of all loans. These loans carry onerous interest rates—often 20% or more—-and are available primarily due to junk debt financing of non-bank lenders. That is, fly-by-night start-ups organized by Wall Street and private equity funds.What is unseen is what that 31% would be buying if they were not
A. using credit or money to buy a car (public transportation? different car?)
B. forking over the 20% interest on their ex nihilo credit loan to the bankers. We'll never know. the only thing we do know, is they cannot afford to what they are "buying" with ex nihilo credit.
Their losses go on our tabs. Recall it is ex nihilo credit, the banks are out nothing. The delinquent buyer may have a note on a credit score, but Ford has the $35,000 in ex nihilo credit on the books as an asset. Where is the asset underlying the deal? Why, the Mustang itself, right? Well, it's been repo'd and sold for $20,000. That's a $15,000 difference. Is the bank out? No..... Is Ford out? No.... Is the borrower out? No.... well, then who picks up the $15,000 loss? If you cannot tell who is the mark in a poker game within the first 20 seconds, it's you.
Hi Ho Hi Ho, it's off to work you go... You have to work to pay down the tab of everyone from Dick Cheney to the delinquent Mustang short-faller to the unemployed fellow dining on corn-syrup dogs and diabetes-bev at the Mini-mart. That's capitalism.
What is unseen is what we would have without ex nihilo credit. Less war? Less surveillance? Better medicine, education, clothing, food, housing? More peace and prosperity? History says yes, but we see the Mustang in the driveway and say "what's wrong with that?"
We all love a system that works for us. 150 years ago the English would look at the Irish for whom the system did not extend, dining on the 1850s version of corndog and coke, and say they are genetically inferior. Today we look at those who do so and say the same things.
Ex nihilo credit distorts the array of goods and services we would reckon we could buy.
It retards true wealth creation by tapping into income streams with interest payments.
It concentrates wealth in ever fewer hands, by means of interest stream if no default, and titles returned to the lenders if default, who in turn then hold sway over those who borrowed ex nihilo credit (we've noted in your file), if not enslave them as with student loans.
What do we care? We have big screen TV, KFC, Mustang, iPhone and a house. And Romney/Obamacare. And poverty draft.
Well, you might not care, but the 1% are sure worried. There was no rational limit to lending ex nihilo credit at interest. But something that defies understanding, never seen before in history, is happening. An utterly irrational negative interest rate phenomenon. With wealth tallied in ex nihilo credit, an undoing could result in all tallies being marked to market. Pro rata? Or politically distributed (OK, I know the answer.) Or war? If the 1% is worried, you should, because they decide.
Inflation comes from printing too much currency. We have inflation in housing, medicine, education, some categories of food, and certainly equities. So what happens when you "print too much credit," or more accurately too much ex nihilo credit? That is the head scratcher. Deflation? We do see prices dropping in shipping, but that is overcapacity based on misallocation of resources and malinvestment due to reckoning prices in ex nihilo credit. Dropping prices is not necessarily deflation.
Perhaps deflation in relation to ex nihilo credit is not in the price of goods, but the price of debt. The negative interest rates are showing up in bonds, in other words, debt. So if we had hyperinflation of credit with ex nihilo incontinence, is the reverse hyper-deflation in debt?
Is negative 2/10th of 1% interest on a ten year bond an abberation, or just the beginning? We can see various actors chafing with ten trillion at negative 2/10ths of 1%. Has anyone studied the impact of negative interest rates to 2%, 5, 10, 25%? Is that the denouement? Deflation in debt, the debt on the other side of the balance sheet for ex nihilo credit?
If the hegemon's power is tallied in ex nihilo credit-based debt (for the one who holds the paper is in control) the debt deflation means a commensurate loss of power. Is that what is going on? You tell me, I haven't figures it out yet.
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