Wednesday, February 25, 2009

You Can't Borrow What Hasn't Yet Been Produced And Saved

Do a little mental experiment with me. Imagine that we don't use money to help us exchange goods and services. Imagine, hard as it is, that we exchanged goods and services with each other through barter alone. Put aside for a minute that we do use money, and forget for a minute about the fact that not using money to facilitate exchange would be mightily inefficient. None of that matters for the point I want to make.

Now, with money out of the picture, could you borrow something that had not yet been produced and saved? Clearly, you could not. Guess what; when you put the money back into the picture, that basic truth is not altered even one iota. You cannot borrow what has not been produced and saved.

But once we have a banking system that can create money independently of production of real goods and services, it SEEMS like you can borrow what has not been produced and saved. But you cannot, and I suspect that anyone reading this instinctively understands that point.

Through the magic of fractional reserve banking, one seems to be able to borrow what has not been produced and saved. Fractional reserve banking makes it seem like aggregate borrowing can exceed aggregate saving. But it cannot. Once you define the scope of the system---whether a country or a trading region or the whole planet---aggregate borrowing cannot exceed aggregate saving within that system. Saving, by the way, is producing something that is not consumed. What we save is called capital.

Capital, not borrowing and credit, is what drives the economy, drives its maintenance, and drives its growth. The media, BHO, and most of the supposed experts of finance are all telling us that it is more credit that we need. It is the paucity of credit that is the problem. If that strikes you as insane, you are correct. It is not more attempts to borrow that which has not been produced that will save us. It is saving some of that which has been produced that will rescue the economy.

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