I’ve been feeling in an awful populist mood today and as it often goes, a bunch of random thoughts have been cruising through my head as well. Having recently discussed the strange and fairly dubious system of fractional reserve banking, I came up with a new innovation; a complex financial instrument rooted deeply in the Swiftian economic tradition; fractional reserve payments.
Fractional reserve banking works like this; the government, or more specifically the Federal Reserve, will set a minimum requirement of cash that a bank must hold on hand, usually 10% of deposits. So if a bank has $10,000 in deposits, it must hold $1000 and can lend out the other $9000. All the while, the depositors can withdraw that $10,000 at anytime. Furthermore, the $9000 that was lent out will be deposited in other banks eventually, of which $8100 (90% of $9000) will be lent out. In the end, $10,000 of deposits, with a 10% reserve ratio, will turn into $100,000. The banks are basically lending money they don’t have. Or in other words, they are creating money with which to lend to their customers at interest. Very sweet of them.
The whole process creates inflation, panics and indebtedness, which I’ve discussed earlier. Forget about that for a second though. The key here is that if one group of economic actors can do something, why can’t another? If banks can create money out of thin air to lend, why can’t borrowers create money out of thin air with which to pay back said debts?
Under a Swiftian economic system, payback ratios and reserve ratios would be set equal to each other. If a bank must hold 10% of its deposits on account, than 10% of what borrowers pay back must actually be real money. Worried about that $2000 mortgage payment? Worry not! You can simply create $1800 out of nothing to pay back the bank with. Worried about the cost of printing all that money? Again, worry not! Paper money is so passe, it’s all done on computers these days. Just type a few keys and voila, you’ve created 90% of your payment. Easy as cake, and a lot more equitable too.