Thread by @ektrit

Money Thread

Money = Trade Imbalance

1/

There are only two trading modes:

- Barter

- Credit/Debt

2/

All trading in practice is Credit/Debt.

100% Barter is close to impossible to happen unless we are talking micro economy like you drive me to work and I buy you breakfast.

3/

In Full Barter Mode no money is created, as trade Imbalance is 0.

4/

Credit/Debt is psychologically hard for most people, barter is subconsciously preferred, if possible.

5/

As any trade beyond micro trading (3 cigarettes for a cup of coffee) is impossible to be full barter, 99.99% of global trade is partial barter to 100% credit/debt.

6/

Credit/Debt carries always positive interest because of the uncertainty if the debt will be paid or not.

The longer the payment period, the higher the Interest, as uncertainty increases with Time.

7/

Full Payment with Gold is de facto 100% barter.

Any full payment with any metal, is de facto 100% barter.

Gold is NOT money, gold is something usable, just like the stuff you are buying.

8/

Gold Coin payment = Barter

Silver coin payment = Barter

Anytime you don't create e trade Imbalance, it's barter.

Gold or any metal is NOT money, it's barter.

9/

To use gold as barter payment, you got to have..... gold.

Gold is scarce.

So, gold is useless to be used as means of payment for full barter, when there is no gold available.

10/

Credit/Debt = Partial barter or Full Credit/Debt

11/

In partial barter scenario, two trading sides create a contract about the credit/debt created.

The Lender and the Borrower negotiate the Payment Period and the Interest on credit/debt.

The Contract Created is called Money.

12/

All money is credit/debt always and at anytime.

13/

In complex economies, there are thousands or millions of such trading transactions daily, so people create something to regulate these transactions by creating and enforcing laws.

That something created is called ... Government.

14/

The Government takes over to legally guarantee all partial barter or full Credit/debt transactions.

The Government creates 2 options:

1) Instant full payment of partial barter by producing something called Currency.

Currency is Credit/Debt with 0% interest and no expiry.

15/

All Currency is Money.

Not all Money is Currency.

16/

For you to obtain the Currency, you must trade with the government, your time (working for the government) or selling goods and services to the government.

That is the legal and moral way that the government is supposed to create currency with.

17/

If the currency is gold or silver, it's still barter.

If the currency is paper or digits on computer, that is credit/debt with 0% interest and no expiry.

18/

The 2nd way that the Government regulates millions of daily partial barter or 100% credit/debt contracts is by legally allowing intermediaries which are called Banks.

They will intermediate your transactions for a fee.

19/

The Bank takes over the contract between Lender and Borrower, by instantly creating Money for the Lender, and instantly creating a credit/debt contract for the borrower, if it's profitable for it.

20/

The Lender sells the credit/debt contract to the Bank at X interest, and the Bank resells that credit/debt contract to the Borrower at X+Fee interest.

21/

The Lender is anyone who produces more than he/she or business consumes (aka savings).

The Debtor is anyone who consumes more than he/she or business produces.

22/

The Lender can convert Credit to Government issued Currency, thus switching from Interest bearing debt, to 0% interest bearing debt.

23/

The Currency, which the Government tells the Central Bank to create, is Credit/Debt.

By holding Currency, you have lent goods and services at 0% and no expiry to the country.

Also, the country owes you as holder of Currency, goods and services.

Currency = credit/debt

24/

Credit/Debt DISAPPEARS by paying it off, which means Money disappears once partial barter is paid off.

Which means that quantity of money is reduced as the partial barter is paid down.

25/

Credit/debt increases once interest is paid out, which means that money supply increases with interest payments.

26/

Currency on the other hand NEVER disappears by itself.

The issuer (The central bank on behalf of the government) solely has the legal right to extinguish Currency, whether Digits on Computers or Paper.

27/

So, the money supply keeps expanding and shrinking as credit/debt is created and paid down/off.

But, part of Money Supply which is Currency, does NOT shrink by itself.

Currency moves from account to account.

28/

The demand for Currency, either by people, or businesses or the Banks, causes expansion of what they call RESERVES.

Reserves = Currency, whether Paper or Digits on Computers.

29/

As we said, Reserves (Currency) is created by the Government (via the central banks) by selling something to them, thus obtaining that currency.

30/

Reversely, currency is extinguished when:

1) You pay taxes with paper currency and the Government (central bank) decides to shred them.

2) When government sells something to the market, aka US Treasuries.

31/

So, as you can see, money gets created and destroyed every moment as credit/debt is created/paid-down with Banks.

But, Currency requires the Government to create it and extinguish it.

Bank debt is Positive.
Currency debt is 0% interest.

32/

When money supply becomes abundant, then interest rates decline, as anything abundant which can be obtained easily, doesn't have to be borrowed for too long.

When far too much money is created, then interest rates become 0 by the Government, as money is instantly available

33/

In this case, the Bank accepts only 0% Lending from the Lenders, but imposes positive lending on the borrowers, which the banks intermediates.

34/

Since the Lenders now make 0% from lending to the banks, they do 2 things:

1) Shift their savings to riskier assets (as Bagehot discovered in 1862 when rates went below 2%).

2) Stop working, stop overproducing, thus breakdown supply chains (which I discovered).

35/

So, the Government now must reduce money supply, hence interest rates rise, as money becomes scarce, hence lenders restart overproducing, hence they can lend money at positive rates again.

And so on, lather, rinse, repeat.

36/ END

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