I am occasionally stunned when someone who I thought had a good grasp of reality and reason goes entirely off into left field, powered by a thesis that has run out of track.
Mish, unfortunately, has succumbed to this sin in his piece "Fractional Reserve Lending Constitutes Fraud"
He alleges (after waving his arms around):
Fractional Reserve Lending constitutes fraud. The case is irrefutable.
Bluntly: Bullshit.
Let us distinguish between two separate items: Money and Credit.
We shall first define them:
- Money: The product of either growing something, mining something or manufacturing something. "Money" is actual wealth, and comes into being only through creation. Ultimately, all money is traced to the only "free lunch" that exists in this solar system, that is, the power of The Sun, although in many cases (e.g. mining) the activity is in fact discovery of previously-created wealth (by the actions of The Sun) levered through human endeavor.
- Credit: The granting of purchasing power predicated upon a future promise to pay with money.
Mish’s (and others) claim that "all fractional lending is fraudulent" implies that one cannot pledge money to secure credit.
That’s obvious BS; let’s put forward a concrete example.
I walk into the forest (grow) and cut down trees (mine) which I then process into lumber (manufacture.) I dig up some iron ore (mine) and turn it into steel nails (manufacture.) With these two items I now construct a house (manufacture.)
That house (and all the products that I used to make it) are in fact money. They were the product of mining, growing, and/or manufacturing. Each of these acts is in fact the creation of money.
That house, has a representation of money in its utility value. That is, the shelter value that it has for a group of humans – it provides a place to eat, sleep, take a dump and