An economy with savings based credit
Hello folks,
I wanted to know the historical affordability of homes. In our times, there is no way, we can afford homes, cars, holidays without taking a loan.
Also, all those loans are not backed by real savings, thanks to the fractional reserve system.
I was therefore wondering, if we were to have an economy based on credit that is backed by real savings, would we have the same economic growth we have now, and the standard of living we have now.
No, we would not have the standard of living we have now. It would be much higher. Since loans would be harder to get housing prices couldn't soar out of reach of cash buyers. Prices of computers and electronics that have deflated despite our current system would probably be 10% of what they are now. Prices of nearly everything would be much lower than today. Nominal wages wouldn't look as good until you look and see what they would buy.Originally Posted by mohassan
The middle class would have more money and the banking elite wouldn't exist if credit had to be backed by something.
"No matter how noble you try to make it, your good intentions will not compensate for the mistakes that people make; that want to run our lives and run the economy, and reject the principles of private property and making up our own decisions for ourselves." - Ron Paul
How does fractional reserve system work? A bank is required to have deposits before they can make loans and those loans are limited to a FRACTION of the money they have on deposit. If I deposit say $1000, they can make loans of $900 on a ten percent reserve requirement. The ten percent is the fraction which must be reserved (hence the term). They are not allowed to loan out more money than they have in deposits.
What would you consider "affordability of homes"? At any point in time you have portion of the population which can afford then and those who can't. Aside from the recent housing bubble, the price of homes had pretty much followed growths in incomes and the overall rate of inflation.
Last edited by Zippyjuan; 11-01-2012 at 01:59 PM.
Freedom is a state of mind. Nobody can take that from you unless you let them.
Without credit, technology wouldn't advance as quick as it did. I am of the understanding that, if we have credit backed by savings, we would have a slower growth but a sustainable growth nonetheless. Do you think credit backed by savings can have the same pace of growth, as the current artificial credit?
No one said credit would not be available. It would be more scarce, but available. And if your savings-backed credit is accompanied by a pure free market free from government restraints then sure you could have the same pace of growth.
Yes they keep $100 of your money in reserve and lend out $900. The problem however, is that your account still shows $1000. The money is both available to you, and the other borrower. So hence why we have M0 money supply of $1000, and an M1 money supply of $1900. Fractional reserve banking is problematic because it promises depositors that they can demand their money at any time, when in fact, if everyone was to demand at the same time, there would be a bank run.
Its a bit similar to your local gym, which has a capacity of 200 members, but sign up 500 members, as they think all 500 members won't show up at the same time. All is well until they turn up at the same time. Morally questionable at best.
It's worked for pawn brokers for centuries :shrug:
Credit will always exist, jsut as money will always exist as a convenient middle ground to the limitations of bartering (the person you're bartering with might not always need what you have, thus money will always exist).
Back to the point, no you wouldn't have nearly the amount of people living beyond their means, but that's the way it should be... However this does not preclude a strong economy, which is far more important to general standards of living than is predatory lending.
The kids they dance and shake their bones,
While the politicians are throwing stones,
And it's all too clear we're on our own,
Singing ashes, ashes, all fall down...
I don't have the $1000. The bank does. They promise to give it back later. When they loan out $900, they have $100 and the borrower has $900 and I have zero. If I take my money out of the bank, they now don't have enough reserves. $1000 is still the total amount of money actually out there. They have to borrow money from somebody else or try to recall the loan.
If I loan $100 to my friend Bob and he loans $50 to Frank, Frank owes Bob $50 and I am owed $100 by Bob but is there $150 out there being spent? No- there is just $100. Frank has $50 and Bob has $50 and I have zero. $150 is owed- but there is not $150 circulating. The same $100 is being moved around.
Last edited by Zippyjuan; 11-01-2012 at 02:14 PM.
Freedom is a state of mind. Nobody can take that from you unless you let them.
Sorry I meant un-backed credit. Ok so you think real credit may well be scarce but if accompanied by a free market, we would have the same pace of growth. Im still skeptical about that.
As for the affordability of homes, if you look at home price to earning ratio (minimum wage).
1968 - Minimum wage - $10.34 per hour in 2011 US Dollars ($1.60 nominal)
1968 - Median home price - $161,594 in 2011 US Dollars ($25,000 nominal)
1968 - Price to earning ratio - 15628 hours = 390 working weeks of 40hours a week = 7.8 YEARS
2011 - Price to earning ratio - 14.6 YEARS
How would we decide what is affordable, how inflated are the price of homes?
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