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The principal doesn't exist and costs nothing to create, so what is it that's being rented? After all, when it is returned, it gets destroyed. When you rent a car, you return the car and pay rental, but the car isn't destroyed by returning it, nor is it created by letting it. The car rental company has had to buy the car and finances that through the rental it charges.

Bush is a symptom, not the disease.
by Migeru (migeru at eurotrib dot com) on Fri May 11th, 2007 at 08:46:46 AM EST
[ Parent ]
In the old days, it required actual money. Then it requires the trust of the public, plus enough reserves to  be able to react to unexpected cash movements.

Nowadays, with regulatory oversight, it requires a capital allocation (8% or less, depending on the risk).

Not that different from a car, which only really requires the leasing payments or whatever scheme the rental company is using to have access to it.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 09:16:43 AM EST
[ Parent ]
If we complete the analogy with the car, cars being money, the lender wants (say) 10% more car to be returned, but since you are not allowed to build cars (that would be counterfeinting) you have to get some 0.1 car to return as interest and these 0.1 cars has to come from a car lender.


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by A swedish kind of death on Fri May 11th, 2007 at 12:15:11 PM EST
[ Parent ]
interest and principal are as different as rental payments and cars are different, thus bringing back payment in fractions of cars makes no sense.

When you borrow money, you rent "Capital" (à la ChrisCook) - you may money for that rental, and what you pay is a substantially different animal than what you use to repay the Capital.

Just consider Capital to be a more liquid form of machinery. Or consider the car you rent as a narrower form of Capital (which you use for a while for a speicfic purpose and then give back).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri May 11th, 2007 at 12:51:55 PM EST
[ Parent ]
"Secured credit" ie "deficit-based" but "asset-backed" finance is indeed a very different beast from unsecured credit.

"Ownership" of "Productive assets" requires the legal concept of "Property" and the conventional mechanism requires two conflicting legal claims over the same assets.

(a) the claim of the Financier;
(b) the claim of the user of the Finance.

These claims are irreconcilable in our current defict Money "paradigm" and it is the conflict between "Debt" and "Equity" forms of "Financial Capital" which is the faultline in our current system.

I believe the "Capital Partnership" transcends thisthrough giving rise to a single continuous "open capital" asset class of proportional "equity shares" in GROSS revenues

When you think about it, both the financier, and the user of finance are sharing the output (or the revenues from the sale of the output) from the productive asset, and the legal protocols of the  contract of Debt and the Joint Stock Limited Liability Company each give rise to imperfect sharing of risk and reward.

The problem is that the "Principal" provided by Banks is not based upon pre-existing "wealth" or "money's worth, but upon future "Money's worth" to be created by the asset.

Banks are literally providing nothing (other than a Guarantee) for something.

Renting an asset "owned" by someone is a very different thing to renting a guarantee.

The "value" that Banks provide is their Guarantee - backed by 8% of Capital. And there is no reason at all why that Guarantee should not be provided mutually, with bilateral "trade" credit managed by banks instead.

The "fair" or "natural" rate of "Interest" in respect of unsecured credit is the shared cost of administration and of defaults. Anything more is IMHO de facto inflationary.

A fair "Capital Rental" on the other hand is the proportion of production or revenues from sale of production, bearing in mind the certainty of that level of production being achieved.

If this return is based upon equitable sharing of risk and reward, the result is IMHO an optimal outcome for all stakeholders.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 11th, 2007 at 02:09:22 PM EST
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