Money As Debt II: Promises Unleashed Page #3

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This is done countless times

every day all over the world.

But there is a problem.

How can the borrower pledges collateral

something the borrower does not yet own?

If I wanted to borrow 10.000$ from you

to go on a luxury cruise to Europe...

would you accept my

neighbours car as collateral?

Of course not, because you know very well that I

have no legal right to give you my neighboor's car...

...no matter how much I owe you.

But if instead, I promised to buy my

neighboor's car with the 10.000$ you lend me...

...the situation is different.

You might agree to lend me the 10.000$

believing that I would buy the car...

and will pledge it as collateral for the

loan, once I obtain legal title to it.

However, until the transaction is completed your

10.000$ loan cannot be secured by title to a car.

The sequence of event's problem

could be very simply avoid it.

You could buy the car

and then sell it to me.

The bank can do it this way too.

If the borrower commits to the bank to buy the item

why doesn't the bank just buy it with its own money...

and then sell it to the borrower

on time payments and interest.

Well, the answer to that

question is also very simple.

Its because the bank, like the borrower,

has come to the transaction with empty pockets.

The bank fulfills its part of the so-called loan

transaction by creating an account for the borrower.

The truth is the so-called borrower has funded

his own account by fraudulently pledging a car,

he does not yet own as collateral.

And the bank, the so-called lender

hasn't put up any existing money at all.

And if all goes well, it never will.

Acceptance of the Fraud

The borrower believes the new numbers in his

account now represent his money in the bank.

He like the rest of us doesn't understand the

difference between existing money and a promise of money.

If you gonna spend it,

what does it matter?

So now, the question is: Will the seller of

the item accept the bank's promise to pay?

Well, some people may hold out for cash. Most will say yes to

a check or an electronic funds transfer from the buyer's bank.

Why? Because the seller

knows from experience...

that she can deposit the check at her bank

and it will increase her account accordingly.

So, what happens next?

Balancing the Promises

Well obviously the buyer's bank now owes

the seller's bank the amount of the loan.

So, you might be thinking isn't this

where the money comes out of deposit.

The bank's promise to pay the borrower has

just been transformed by the transaction...

into a promise to pay

the seller's bank instead.

So now the buyer's bank has to transfer some of

its existing money to the seller's bank, correct?

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