A long time thesis of mine has been the affect that fractional reserve banking has had on our society. The net of it is that it has essentially been a naked short on human labor, and especially on the labor of the individual. The result is that individuals who do not have the backing of some powerful entity can work like crazy and not get ahead while clumsy and slow corporate giants remain endlessly in power despite fumble after failure after colossal fuck up. Had they no access to credit, many large corporations would have gone under a long, long time ago.
The mechanics of this are simple: money represents stored labor and credit spends like money. Stored labor can be converted into capital (it is as if the labor which is stored actually had been used to build the capital equipment) which can be used to produce goods which can be sold for money. Those who control credit first can use it to get big very fast while those without access to it get completely ignored, live and then die without ever having their better ideas exposed to the world. The giant glare of the credit-infused corporation outshines the individual and the small company of individuals. With all of this corporate credit, the labor of the individual is marginalized - sold short. This is how it is devalued in the market place.
All of this seems like it is on a path to infinity but I assure you that it is all cyclic. Trees grow tall but they do not grow to reach the sky. The reason is the rise and fall of the credit cycle combined with the persistent forward march of technology. Obama said years ago that we live in a hyper enabled society. I agree fully. Proof of that abounds but in no place more than the space program. We now have corporations doing what only government used to be able to do: fly rockets into space. Likewise, with the advent of things like 3d printing and other new tech, individuals are able to do what it use to take a corporation to accomplish.
In the not too distant future (after the coming stock market collapse), new credit will be much harder to find and old debts will come back to haunt all those corporations which have saddled themselves with it. This is to the benefit of the individual and small companies of individuals who never had access to massive credit in the first place. It levels the playing field. With this foot lifted from the necks of the small guys coupled with their ability to innovate faster, turn on a dime in order to address market needs, and aided by vastly lower operational cost structures, the little guy and small companies will be the engine of growth as the credit Ponzi collapses.
Few if any that I read can put it into these words although some like Cognitive Dissonance are clearly sensing the sea change with their writings such as "The Individual Is Rising". People sense coming change even if they don't see how it all ties back to the money supply.
Credit is counterfeit labor.
ReplyDeleteSuccinct summary. It sounded so clear that I googled it. Guess how many hits it got?
ReplyDeleteZero.
But while I really like the way it sounds, I believe that it falls short of technical accuracy in one key way. The importance of having a concise yet 100% accurate model for it cannot be overstated for it is the model model which allows us to accurately predict the future.
Fractionally reserved credit (which is what I know you meant because there is also the non-fractionally reserved kind which is perfectly honorable) is not counterfeit money (and therefore not counterfeit labor) because something that is counterfeit is introduced into the economy and never withdrawn. Its goal is to circulate undetected and treated exactly the same as the real thing.
But credit, be it the fraudulent fractionally reserved kind or the honest, non fractionally reserved kind, is only temporary by definition. It is meant to exist, live, and then be paid off or defaulted on.
Thus, I insist that the correct characterization of fractionally reserved credit is that it is a naked short on the currency and thus a naked short on human labor.
I know that many know that fractional reserve banking is fraudulent but I am proud to have been the first that I ever heard of to express the essence of it in correct market terms that anyone can understand. Of course, I had to stand on some very tall shoulders to see this such as Ron Paul and Mish and others before them.
With the mood of the herd changing I bet we see a renewed interest in Austrian economics over the next 24 months. Just wait until the fake 401k and insurance annuity account value statements begin to collapse in locked step with the rigged but now too big to bail stock market. People will spit when they hear the word "Keynesian" and they will give their first born sons the middle names of "Hayek" or "von Mises".
; )
You are right. My choice of words left to be desired.
ReplyDeleteMy rationale is that, since that capital is the storage of excess value of labor, when credit is loaned out of accumulated capital, the value of past labor is put back into the economy. Since in this regime capital is scarce because labor is scarce, labor retains its value.
When credit is conjured up out of thin air, unbacked by any past labor, it cheapens labor, much like counterfeit notes cheapen bank notes. It artificially makes scarce labor, plentiful; hard labor, worthless.
What led me to this was a certain dissatisfaction with your maxim that conjured credit is a naked short on labor. I think that you are right in kind, but not in degree. Naked shorts do not decimate the value of its object, unlike counterfeiting. Perhaps counterfeiting is still not the best term, but I think that it expresses the degree of debasement of labor better than naked short.
Do you think that if credit were qualified as "conjured credit is counterfeit labor" would improve it?
"Naked shorts do not decimate the value of its object, unlike counterfeiting."
ReplyDeleteTotally wrong. Search the web for all of the small companies who complain about their stock being killed because more shares are in the float than the company has authorized. Other keywords for this are "FTD" or Fail To Deliver. It kills the share price for the same reason as counterfeiting and it is in fact a form of temporary counterfeiting. Yes, if it goes on long enough then the weak player can die due to denial of ability to 2po more shares if working capital is needed. Plus, who will loan a company with a $1 share price money at good terms. This is how naked shorting hurts small companies. But if the small company doesn't die as a result of this action then it will surge later on in the short squeeze.
And that is where the naked short on labor analogy wins. I predict that when the naked short on human labor has to be covered that labor will be revalued. The counterfeiting of labor does not allow for this possibility which is why I cannot accept it as accurate. I see no flaw in the naked shorting model.