In general borrowing is inflationary - in as much as the banks create new money when they lend.
I have heard in many places that “leverage” is just another term for borrowing. But is it really the same type of lending? Looking at descriptions of the kind of leverage available to forex traders for example: it is not really clear whether new money is being created in the process. Also I am confused because it doesn’t look like any interest is being charged on the money borrowed for forex leverage. You see descriptions that imply that if you have 10x leverage then if what you are investing in goes up in price then you get 10x profits. Why isn’t it “10x profits minus the interest charged on the money you had to borrow for the leverage”?
You have $1mil, and I have $1mil. We make a bet by which I pay you $10k for every $1 move UP in the price of IBM shares, and you pay me $10k for every $1 move DOWN in IBM shares. We exchange $$ at the end of every day, depending on what IBM price did. We both acquired leverage without having to pay interest to anybody.
Derivatives (contracts) make leverage without borrowing possible.
In general borrowing is not inflationary. It is only inflationary when the borrowed money is owned by two people at the same time: The check depositor and the borrower. The same is not true if the ownership rights to the property are held by one person. If the in the example above the depositor put the deposit in a CD where there is a contract specifying when the depositor can withdraw then there is no inflation.
In the banking systems of the USA, Europe and Asia, almost all demand deposits: checking deposits, money market deposits, etc are lent to borrowers in some fraction so it is only because of the design of the system that most borrowing is inflationary.
Ok, that makes sense… so presumably that kind of leverage is non inflationary and would not contribute towards ABC.
Also presumably the kind of leverage that contributed toward ttulip mania and the bubble that preceded the great depression was the “old fashioned kind” where you genuinely borrow money (which you will have to pay interest on) in order to invest. Is that right?
What you say makes perfect sense and I’m sure you’re right… but it does mean that the descriptions of leverage (involving borrowing) that you see so often are highly misleading.