FRB as a double-blind investment fund.

[Voievod]

Let me define what I call a double-blind investment fund:

Let’s say I start a business where I tell some people: “give me money and I’ll always add to it a certain amount every once in a while. If you want your money back, you can come and request it, but know there’s a risk: you might not get your cash on the spot, or in the worst case you might receieve an IOU, but this scenario is very improbable, and if everything goes as planned you’ll always be on the winning side”.

Then I go and lend the money out with interest, and this interest is greater than what I’ll be paying back to those who entrusted their savings with me.

I call it a double-blind investment fund because those who give me money don’t know what’s going to happen to it, and those to whom I lend it to have no idea from where it comes.

What is the difference between this and FRB?

[Knight_of_BAAWA]

Yours isn’t mandated by law.

[Juan]

…or in the worst case you might receieve an IOU,

False. In the worst case you’ll get nothing. Or an IOU worth nothing.

but this scenario is very improbable,

False as well.

What is the difference between this and FRB?

None and since it is FRB it will fail in same way FRB fails.

edit : actually it’s not clear if your scheme uses fractional reserves or not, but the two comments I made above still apply.

[Voievod]

False. In the worst case you’ll get nothing. Or an IOU worth nothing.

You can always take the owner of that IOU to court, as well as me (the businessman).

False as well.

It is a fact that most people who put their money in a bank will get it back most of the time.

Just imagine that in each town in the civilised world there is at least 1 bank from each major banking company and people put their money there all the time.

How many bank runs that ended bad for the depositors have you seen in the past century? How many of those who used banks to deposit money were affected? 0.001% or less?

actually it’s not clear if your scheme uses fractional reserves or not, but the two comments I made above still apply

I can lend 100% of the money if I want. He depositor doesn’t care what I do with it in my scenario.

I think the difference between DBIF and FRB is that in DBIF there is no verbal guarantee to get your money back. You are aware of the risks and you don’t actually have “claim” to what you deposit.

You are aware that your money might or might not be available and there is only 1 person claiming ownership to the money that goes through the DBIF.

[Juan]

I can lend 100% of the money if I want.

Yes, which means that none of your clients can’t get their money back. The thing is, capital cannot be at the same time lent and available on demand. If you tell your clients that they can have their money whenever they ask for it AND at the same time lend that money then you are lying.

You are aware of the risks and you don’t actually have “claim” to what you deposit.

What do you mean I have no claim ? I made a deposit, not a gift.

[Voievod]

Yes, which means that none of your clients can’t get their money back.

I said I can. That doesn’t mean that I will. Actually I won’t. I will keep a pool of savings to cover my ass in case any of them want it back.

Of course I won’t be able to repay them in cash if they all come at once, but they know the risks, and they accepted them.

If you tell your clients that they can have their money whenever they ask for it AND at the same time lend that money then you are lying.

If I inform them of the possibility that in some ocasion they might not be able to get it right away and I make it so I won’t be put in this situation very often, then I’m not lying.

What do you mean I have no claim ? I made a deposit, not a gift.

Well, of course the guy who deposits money is the owner, but if the depositor comes to see how much dust has his money gathered he will discover that the phyical gold/paper is no longer there.

He can no longer claim ownership to the physical instance of the money he gave away. What he has is the promise he will get the same value back (+interest).

The opposite is true of the guy to whom I borrowed his money: he now has in his pocket/wallet depositor’s money, but I also have his promise that he’ll return it (+interest).

It is logically impossible for both people to own the same money in the same time since none of them is in posession what is rightfully theirs. One guy doesn’t have the object he owns, the other guy doesn’t own the object he has.

In my system both are aware of this, so how is this “creating something out of nothing”? If you insist that’s the case, then anyone who lends someone else’s property ‘creates something out of nothing’, while in reality the object simply switched hands.

How is it lying? If the depositor really wants his money I can always borrow it from another DBIF until the debtor pays back. Or sell a kidney. Or offer my daughter up to prostitution in Bulgaria. Whatever.

[Juan]

I said I can.

Sorry, it was a typo/mistake on my part. I actually meant

“Yes, which means that none of your clients can get their money back.”

That doesn’t mean that I will [lend 100% of the money].

But you made my point. If you lend 100% of your ‘reserves’ then no one can get their money back. If you keep some reserves then your ponzi scheme, sorry, awesome financial engineering will last a little longer, but will collapse anyway, sooner or later.

If I inform them of the possibility that in some ocasion they might not be able to get it right away and I make it so I won’t be put in this situation very often, then I’m not lying.

The wording is irrelevant. Again : if something is lent it can’t be available on demand. That really shouldn’t be hard to grasp…So, what you should tell your customers is : your money is NOT available on demand. A reduced number of customers might get their money back but there’s absolutely no way I can avoid a run on my bank. That would be a honest statement, but bankers don’t seem to know what honesty means.

Now, IF the money is available on demand then you’re just warehousing it and you can’t pay interest. If you pay interest that’s because you are lending the money away, so it’s not available on demand. There’s no way around it, except on the minds of financial ‘geniuses’…

In my system both are aware of this, so how is this “creating something out of nothing”?

So…why not just use timed deposits, eh ?

If you insist that’s the case, then anyone who lends someone else’s property ‘creates something out of nothing’, while in reality the object simply switched hands.

Well that’s the problem. When A lends something to B, A can’t use it. Let’s say I lend you my car on the condition that it’s ‘available on demand’. Now, you use it to travel to the next town. I pick up my phone and say : Please I want my car back now…What’s next ? Either your plans are upset or my plans are upset.

It would be much more sensible if we made an agreement such as "you can have my car for two days which means I want it back by monday 8:00 AM " . Whether the property being lent is a dollar, a car, or a billion dollars, the problem is the same.

If the depositor really wants his money I can always borrow it from another DBIF until the debtor pays back. Or sell a kidney. Or offer my daughter up to prostitution in Bulgaria. Whatever.

Well, that might hint how practical and sound your idea is…

[hayekianxyz]

Let’s say I start a business where I tell some people: “give me money and I’ll always add to it a certain amount every once in a while. If you want your money back, you can come and request it, but know there’s a risk: you might not get your cash on the spot, or in the worst case you might receieve an IOU, but this scenario is very improbable, and if everything goes as planned you’ll always be on the winning side”.

From what I’ve understood of your original post, those people who are lending their money to you, are doing exactly that, they are extending a loan to you (albeit an unusual one, and one that is silly from the point of view of the creditor). This is where the differences lies between your “system” and FRB. In FRB banking, the despitor gives his money to the bank for nothing other than safekeeping, this is the essential purpose of the contract. However, the banker then begins to treat this as if it were loan, in which not only the physical units of the good were lent to him but the complete availability of the goods is tranferred to him. Hence, he uses this money for his own investments, extending loans to other individuals. Both the individuals to whom the loans are extended and the depositor believe that they have the legal claim to the money. Hence, credit expansions follows.

This isn’t the case in your scenario. In your scenario those extending loans to your are aware that the nature of the deal is a loan contract, in contrast to a safekeeping contract. Indeed, the loan contract in this case is rather precarious and any individual doing it would be aware of the large likelyhood that you will more than likely be unable to pay them back. But it is radically different to the irregular monetary deposit contract.

As for your ability to pay them back? Well, more than likely you’d become insolvent very quickly. You’d have to keep last sums of reserves to be able to pay people back upon demand and once you started being unable to pay people their cash your IOUs would become worthless. People would cease investment others would try to withdraw their funds and you’d soon go bankrupt.

[Voievod]

once you started being unable to pay people their cash your IOUs would become worthless

They’re not my IOUs. They are IOUs from the people to whom I lent money.

They have the same validity even if my credibility is 0% or 100%.

[shawn77]

If your customer holds a demand deposit meaning they can withdraw 100% of their money out at any time. If you loan 1/100th or 99/100th of their money then that would be the definition of frb.