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Moneyness, Utility & Network Effects

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In the article you state, “So it’s ultimately about how useful that network is for practical living. Modern day banks have already settled the network effect. People will use their money just because it’s convenient and very secure knowing that there’s some insurance in the form of a court system backing it.”

Isn’t there a much greater cost associated with utilizing bank money vs government money? The first thing which comes to mind is bank issued credit cards. Is the convenience and security worth the across-the-board price increases? (I’m a bit under the weather so I may be thinking about this incorrectly.)

And I totally agree on the embedded nature of banks (and their products); it’s probably the most successful marketing scheme ever rolled out.

Thanks!

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Posted by (Questions: 20, Responses: 23)
Posted on 10/21/2017 4:46 PM
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I am not sure I follow. Why would bank issued money be more costly than govt issued money?

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Cullen Roche Posted by (Questions: 10, Responses: 1771)
Answered on 10/22/2017 2:46 PM
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Apologies in advance, I’ve got a nasty flu/cold thing going on so I may be totally off the mark.

A central gov introduces money into the economy through a bond mechanism; basically a no/lo-cost swap.
A bank, on the other hand, introduces money into the economy via their various profit-seeking products (i.e. loans).
Won’t bank created money be saddled with this “profit margin” (e.g. higher prices) vs the non-profit gov money?

Kind of like a cash transaction –gov money — incurs a 1% cost (all the man hours to physically count said physical cash, etc) but a credit card transaction — bank money — might incur a 3% cost (profit to the CC co’s and banks). Is the simplicity and ease of bank money worth the extra cost?

Or…how does the process actually work?

Thanks for your time.

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Posted by (Questions: 20, Responses: 23)
Answered on 10/23/2017 8:23 PM
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Money is a tricky term in these conversations. All money is a financial asset and liability. Things like cash are super short duration bills that are liabilities of the govt and assets for the non-govt. Deposits are similar though they’re bank issued. Things like T-Bonds or corporate bonds are cash like but have a longer maturity. Stocks are basically perpetual assets with money like features. In the current system most of the short duration instruments that can be used for purchasing goods and services are issued by banks in the form of deposits and most of the short duration notes issued by the govt (t-bills, reserves, cash notes, etc) facilitate the use of the deposit system. T-bills finance the transfer of deposits from pvt sector to the govt. Reserves settle interbank payments. And cash notes facilitate the transfer of deposits into physical form.

So our system is constructed almost entirely around the banking system’s deposits. It is incorrect for people to say that the govt prints money in any realistic sense. If anything, they print assets that facilitate the use of the deposit system.

Now, in theory, the govt could issue all of the money at issuance. This would require the govt to become the banker to the private sector. Would this money be “less expensive” because there is no profit motive for the govt? Probably. Would it also be “more expensive” in that it is riskier? Probably. The reason why is because the govt would not be nearly as good at underwriting this loan issuance as a profit motivated company will be. If you think bankers are reckless writing loans then just wait until you let politics motivate where the money gets issued. So yes, in a sense the private banking system is more expensive

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Cullen Roche Posted by (Questions: 10, Responses: 1771)
Answered on 10/25/2017 1:05 PM
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Cullen, I think your kind of down on having a “Public Bank” run by folks that are experienced in the banking industry, but instead, work for Uncle Sam and try to make a profit that goes back to the Treasury. Wait a second, could that be our own Fed? If they could expand their business to loans issued to the states, counties, and cities (public entities only), would that be inherently corrupt as well?

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Posted by (Questions: 26, Responses: 274)
Answered on 10/25/2017 7:24 PM
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Hi Dennis,

I am not really sure to be honest. A public banking system historically has not worked that great. There are definitely problems with private competitive banking, but it seems to be the worst model except for all the others. So I guess it comes down to this – are we really better off having the govt do all the loan issuance? I don’t know, but based on historical performance I am tempted to argue that private banking really isn’t as bad as some people make it out to be….

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Cullen Roche Posted by (Questions: 10, Responses: 1771)
Answered on 10/25/2017 9:40 PM
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Thanks, Cullen. I’m fine with private banking. I just think a public project could be funded by a national public bank. That’s all. I know full well this is not MR at this point. But is this idea worth any effort, or it is foolish? I am NOT thinking that “govt do all the loan issuance”. I’m sure you know folks are considering this–but they are going small (and are consumed by various conspiracy theories). A national public bank limited to funding public projects would not go overboard IMHO.
https://www.huffingtonpost.com/ellen-brown/why-public-banks-outperfo_b_6654046.html

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Posted by (Questions: 26, Responses: 274)
Answered on 10/26/2017 1:15 AM