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#21
08-11-2007, 11:37 AM
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Re: Why do banks give loans?
[ QUOTE ]
Yea, but most people dont conceptualize/understand how this works in practice. You end up with debt backed by debt backed by debt backed by debt. Let me give an example. Say someone takes a car loan of 10K, they buy a car and someone deposits that 10K at a bank. [/ QUOTE ] Isn't the seller typically paying off a loan? Even car dealers finance their inventory. So isn't this a zero sum? I.e. one new loan offset by one less old loan of the same value? 
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#22
08-11-2007, 03:04 PM
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Re: Why do banks give loans?
[ QUOTE ]
[ QUOTE ] Yea, but most people dont conceptualize/understand how this works in practice. You end up with debt backed by debt backed by debt backed by debt. Let me give an example. Say someone takes a car loan of 10K, they buy a car and someone deposits that 10K at a bank. [/ QUOTE ] Isn't the seller typically paying off a loan? Even car dealers finance their inventory. So isn't this a zero sum? I.e. one new loan offset by one less old loan of the same value? [/ QUOTE ] If its zero sum how will the car dealership show any profit? Anyway that example was just of the fly and simplified. I ignored that the bank can lend x10 amounts secured against deposits at the central bank. That way the 10K can be created from an initial investment of 1K by the banks original investors. This would mean that 1K can potentially create aprox 100K of debt based money.
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#23
08-11-2007, 03:07 PM
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Re: Why do banks give loans?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] Yea, but most people dont conceptualize/understand how this works in practice. You end up with debt backed by debt backed by debt backed by debt. Let me give an example. Say someone takes a car loan of 10K, they buy a car and someone deposits that 10K at a bank. [/ QUOTE ] Isn't the seller typically paying off a loan? Even car dealers finance their inventory. So isn't this a zero sum? I.e. one new loan offset by one less old loan of the same value? [/ QUOTE ] If its zero sum how will the car dealership show any profit? [/ QUOTE ] So it's actually the car dealership's profit that is expanding the money supply?
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#24
08-11-2007, 03:13 PM
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Re: Why do banks give loans?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] Yea, but most people dont conceptualize/understand how this works in practice. You end up with debt backed by debt backed by debt backed by debt. Let me give an example. Say someone takes a car loan of 10K, they buy a car and someone deposits that 10K at a bank. [/ QUOTE ] Isn't the seller typically paying off a loan? Even car dealers finance their inventory. So isn't this a zero sum? I.e. one new loan offset by one less old loan of the same value? [/ QUOTE ] If its zero sum how will the car dealership show any profit? [/ QUOTE ] So it's actually the car dealership's profit that is expanding the money supply? [/ QUOTE ] Well 10K of profit can lead to 58K of new debt. And the money that makes the profit of the car dealership comes from purchasers debt. So you still have the situation of debt backing debt backing debt. Anyway the point of my example was to show that any single bank can show a balance sheet of 10K/9K But the actual debt created can far outstrips 9k. How one arrives at the 10K is essential irrelevant.
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