A friend was arguing that the Community Safety Society Banking and Loan System would generate unwanted inflation. This friend also said that the macroeconomic inflation equation did not apply or predict inflation on the microeconomic scale.
#1. MV = PQ. (money supply x velocity = price x real value
g(m) + g(v) = infl + g(y) . (growth rate of money supply + velocity = inflation + real output)
This equation says that as long as the growth rate of real output matches the growth rate of the money supply the system will not produce inflation.
#2. Mega FED-member Banks create most of the money in the US money supply through making loans via fractional reserve banking. The FED creates some money by selling bonds and then loans that money to a FED-member bank. The Mega Bank then can loan out 10 times that amount as home or business loans. Thus Banks create over 90% of the money supply out of thin air. This 10:1 ratio is called the money multiplier which was expanded (leveraged) to 50:1-100:1 via derivatives until the Basil 2 Accords (Basil 1 ruined Japan) contracted the money supply in 2007 busting the housing bubble.
#3. The HUD/FHA amortized mortgage produces inflation because the banks collect interest up front and the creditor doesn't build appreciable equity on the house unless they charge the next home owner a higher price for the same asset that has now depreciated in value or at least not changed in value. By definition, the amortized loan generates inflation. (increased money supply but not an increase in real output)
#4. The Safety Society System is a full reserve banking system. 100% of what is deposited is kept by the bank and not lent out. Banks become insolvent because they are fractional reserve and not full reserve. That means they only keep 10% of deposited money in the bank. And they don't keep the reserves as cash because of inflation but are forced to speculate and invest in bonds, stocks and volitile derivatives. If the derivatives or stocks crash then the banks lose their reserves and cannot lend and cannot pay depositors. The bank is then insolvent and goes bankrupt.
#5. SSS would have a totally separate credit and loan system from the deposits thus the depositors are not subjected to the risk of the borrowers. The SSS is full reserve and immune from stock market crashes and bank runs.
#6. The US Constitution Article 1 Section 8 says that Congess via the US Treasury is to "coin " all the money and regulate its value. Therefore, under SSS, an individual, community, corporation would go to their locally run and owned SSS to be approved for a loan to purchase or build or produce a real asset, real estate, land or commodity. The price would be negotiated beforehand and then the loan applied for. The money would then be created via the US Treasury and administered via the Community SSS. This new money doesn't need to be backed by gold because it is backed by the real asset, land, real estate, or commodity it is being used to buy, build, and produce.
#7. A gold standard is undesirable because gold is too rare, and it makes money scarce. Thus those with the gold have unelected Machiavellian power over the rest. Now that we can use technology to create paper currency that is difficult to counterfeit, we don't need to use the scarcity of gold as a medium of exchange. With paper, money can be produced and made available as much as is needed and is qualified for by credit-worthy individuals, communities, and corporations. Money would only be created in an "ask-and-ye-shall-receive" basis where value is assessed and price is negotiated and preceeds the money creation.
#8. In a perfect system, SSS would never create money that did not result in real output. Thus according to the Friedman equation, no inflation is generated. But in the inefficiencies of a real-world system there would be a small rate of inflation. Inflation can be easily controlled by taxation by the Federal Government through simple interest rates. Increased interest rates would take excess money out of the system.
#9. Local SSS would make money the same way local banks do today. SSS would charge a loan origination fee and a monthly loan service charge. These banks could operate as non-profits and collect enough fees to cover their overhead. Loan fees are how local banks make their money today as they immediately resell the loan to a bigger bank almost immediately who created the money out of thin air. If the SSS were allowed to compete, we wouldn't need the too-big-to-fail mega banks which were only allowed to back up the smaller fractional reserve banks who continually went bankrupt even in the days before the FED when US currency was gold-redeemable.
#10. The Federal Government generates revenue on these SSS loans by charging a prime simple interest rate. This Constitutional voluntary tax could supply the Federal Goverenment with all the money they could ever need because they would collect simple interest on all the money created in the money supply and not just a fraction of it as they do now. With the collection of prime interest on all money created in the US money supply, the Federal Government could do away with the involuntary income tax.
#11. In Capitalism, getting bank loans is such a bad deal, we need wealthy super-elite who amass huge amounts of money who we then turn to for loans for venture capital and for humanitarianism. We also depend on politicians for favors and pork-barrel money put into bills. If the Safety Society System were allowed to compete, and inflation were controlled, we wouldn't be as dependent on the ultra-wealthy elite or corrupt politicians to get monies for what we want to do or what we need. SSS is free-market without the capitalism. With SSS, we don't need to become financial sharecroppers and debt slaves to an ultra-wealthy elite class.
#12. SSS does not speculate or make money on money. Individuals and other financial institutions would do the business of venture capital and speculation. SSS is about being safe, full reserve, weathering any economic storm, and providing an equitable credit and loan system. Making money on money shouldn't be illegal but isn't right. Money shouldn't have any intrinsic value of itselt, it is just a contract, and its value is in the redeemable asset, good, or commodity that is backing it. In the SSS, all money is backed by something. But money should not be used to back more money creation. When money can be leveraged to make more money, it divides the people and pits the wealthy class against labor.
#13. SSS loans are simple interest, free-based loans and not compound loans that blow up exponentially. The borrower begins earning equity from the down payment and first monthly payments. In this way, with inflation controlled, the owner of the home loan doesn't need to charge the next home owner a higher price for the same home. SSS is about preserving value.
#14. Many people want to replace the FED and our current corrupt fiat currency system. But I would be careful not to act too emotionally and reactionary against what the corrupt Federal Reserve has done with paper currency. Going back to a gold-redeemable currency is not the best idea. We had this system before and we forget that the gobal elite still own most of the gold and have a De Beers-like monopoly on gold production. Thus gold prices can easily be inflated and crash just as they did beginning with the 1300's failure of the Gold Florin, up to the creation of the FED. By returning to a gold standard, the scarcity of gold would result in greatly limited economic growth potential. In a real way, returning to gold would would be like unwittingly accepting austerity measures.
#15. Others have suggested a system which requires that money-redeemable assets be sitting in a wearhouse first before money is created. However, this zero-sum system is, in the real world, slightly deflationary, and is a form of fractional-reserve lending. Also, the bank can only lend out enough money for people to re-purchase the goods in the wearhouse. So, its a kind of Merchantile Exchange and Bank at the same time. There really isn't enough money left over for other economic activity. Also, there is a problem of price fluctuations, regional price variation, and trading currencies with other banks that could make the bank vulnerable to failure. Money in this system would be very scarce, which would greatly hinder economic growth.
#16. Since the borrower builds equity from day 1, if the borrower misses a payment, the 1 missed payment does not result in the immediate default on the loan. Usually borrowers have paid faithfully for years and then come upon hard times, lost job, illness, and can't make their mortgage payments. In our current system, one missed payment means a family can lose their home and forfeit all the equity they have made. In the SSS, the borrower has equity from day one and a missed payment is just simply deducted from the individual's equity. Default does not occur until the borrower has lost all equity in the asset. The bank then would repossess, lease, operate, or resell the asset. So, the SSS loan becomes an immediate reverse mortgage at any time. In a way, it is a sort of insurance policy for the borrower and the bank. Added fees could also be assessed for missed payments if needed.