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Real Bills (loans) are Harmful

Interest-Rates / Fiat Currency Nov 03, 2010 - 06:29 AM GMT

By: Shelby_H_Moore

Interest-Rates

Best Financial Markets Analysis ArticleAnd analogously saving at interest rates, insurance, and all other forms of futures contracts (promises and surety) are harmful.

Someone recently attempted to distill Real Bills, but missed the key essence of the problem with Real Bills:


http://financialsense.com/contributors/robert-blumen/real-bills-distilled

I will apply my ability to boil complex issues down to their bare, succinct, lucid essence.

Real Bills are short-term credit, wherein the producer of a good has insufficient capital and creates a promise to pay (the "Bill") from proceeds of the good thats will be produced. From this Bill, the producer gets the loan to go produce with. When the goods are ready and sold, then the Bill is paid back with interest.

There are some other details. The Bill is actually sold by the producer to the person who wants to loan the money. The Bill holder will receive all the proceeds of the sale of the goods, thus the producer got his profit up front before the goods were even produced.

Dr. Fekete tries to make a distinction between debt and "value-added", but the distinction is a syntactical strawman, because he also misses key semantic essence of the problem with futures contracts which are always a form of debt (promise to do something):

http://www.financialsense.com/contributors/antal-fekete/real-bills-and-gold

The problem (nasty effects) with Real Bills is the same as with any futures contract or insurance:

http://www.marketoracle.co.uk/Article21650.html

The problem is that futures contracts create personal failure, macro-economic waste, misallocation (aka overproduction), and ultimately cause socialism to spread. Let me better explain the math. My prior attempts to explain this math were not as lucid as they could be.

The problem with any form of debt is that it allows people to risk other people's capital. The lender is supposed to be compensated for this risk by the interest rate, which is supposed to match the lender's opportunity cost.

However, there are two [url=http://lists.w3.org/Archives/Public/www-style/2010Oct/0563.html]orthogonal[/url] mathematical problems:

1. A higher interest rate to compensate the lender for NPLs due to personal failure of individual producers, does not rescind the RISK-FREE (!) losses in the macro-economy.

2. No interest rate (whether fixed or adjustable) can anticipate and thus compensate for force majeure. Not even adjusting the aggregate interest rate to compensate for the historical rate of force majeure losses can compensate, not even when diversified, as some cases of force majeure impact all sectors.

If even a small percentage of producers fail, regardless whether it be the "normal" failure rate or even some calamity such as periodic bad harvest, the mathematical problems above manifest and spread like a cancer that does not stop until the entire macro-economy becomes intertwined in RISK-FREE socialism. And socialism is not risk-free in the end-- rather it is guaranteed failure in the end, because it enables people to waste their capital and charge it to the aggregate opportunity cost, i.e. interest rate or insurance premiums. Thus, I hope you also realize now that insurance is mathematically analogous to loaning money, in that it causes risk-free waste (misappropriation) of capital, and thus leads to socialism and guaranteed failure.

Dr. Fekete argues that the risk of default for the providers of (probably fractional reserve) capital (i.e. the lenders) is so low, so as to be near enough to zero. This entirely misses the point that the risk-free losses accumulate, regardless how small they are initially and incrementally, until eventually the society itself is on a fractional reserve of savings and the human capital has been wasted over a generation(s). Every society in history rebuilds from a prior destructive socialism wipeout, repeats this same insidious mathematical cancer that leads it back to socialism wipeout again over many generations.

The #1 problem causes RISK-FREE overproduction, because producers are not risking their own capital, but rather risking the capital of all of humanity collectively in the form of higher interest rates. Thus the system does not anneal towards optimum production types and levels, but diverges towards increasing usury as personal RISK-FREE failure begets more personal RISK-FREE failure, because the failed person still has no savings and needs to try again and can try again RISK-FREE (credit ratings don't stop people, because people can try again via proxy, and even with a 666 system of credit, there would be the math problems with a centralized decision, i.e. rating, system).

The #2 problem aggregates losses to society, thus if the losses eventually become too great for the lenders, the problem becomes the government's problem, as what we see now in the western world.

The short-term nature of the Real Bills does not limit such negative effects. Any risk-free failure, whether it happens in the short-term or the long-term, is accumulative in terms of waste of finite capital.

Many people don't understand that money is not capital. Moving money around in risk-free paradigms causes a destruction (waste) of capital. Capital is the human life, and it is finite. In the macro perspective, if each of us waste it, the society gets into a demographic quagmire, i.e. complete failure of the macro-economy. When people are in their child bearing age, and are motivated to delay or not have children, because there is nearly unlimited risk-free opportunity, then the entire society pays the price when that population retires-- having wasted their production years (aka capital) with insufficient youth available to sustain the economy. Look at much of the western world with declining populations, sans immigration. We even have females who think they are men, because they undertook hormone transfiguration (aka birth control pills and IUDs), some even starting as teenagers.

In short, futures contracts, debt, savings at interest, and insurance, are all forms of subsidies, where society steals its own capital from itself.

By Shelby Henry Moore III

antithesis@coolpage.com

short bio, I have published articles on FinancialSense.com, Gold-Eagle.com, SilverStockReport.com, LewRockwell.com. I am the sole or contributing programmer of numerous (some million+ user) commercial software applications, such as Corel Painter, Cool Page, WordUp, Art-O-Matic, etc.. I have an education in engineering and math.

Disclaimer: My writings are my personal opinions, not to be construed as statements-of-fact. Do you own research. Licenses to think and communicate have never interested me too much, so I am not a licensed research, journalism, investment, legal, nor health professional. Please consult the proper authorities for all matters covered in my writings. I disclaim all liability for what you do after reading my writings. No one can predict the future, and if there is a physical world investment that never loses value, I haven't found it yet in my 44.1 years here on Niribu.

© 2010 Copyright Shelby Henry Moore III - All Rights Reserved


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