Money, Banking and Finance 02

 

We manage the lifecycle not only physically but also economically. Sometimes in economic life we are in the long position of the General purchasing force of Money, while other times in the short of the “preferred liquidity.” Again, money as legal tender (U∙m) is a “unanimously current” means to the end of demanding for products (M∙U).  

             “Everywhere except for in Cambridge,” “the only raison d'être of money is in facilitation of trade”; while trade is no more consumption than productions is consumption. In the middle of the road, “Money is useless until a Time for Us to sing Con Te Partirò.”

             Now the real question: How for us to bridge between the short of money and the long of money? Whatever it might be named took a long run in classical times and a medium run in modern times; but it takes at present as short a run as touching the real sign “Final” or its nominal symbol often called emoji. Yes, the bridge is the loan from the “commercial bank.” One caveat: The bridge must be a two-way street dubbed as a “repo” practically and a “swap” theoretically.

 

The nature of a loan. When any of us is short of “money to get rid of” in the current period, she may go to a wealthier neighbor and ask for a loan of money in reverses of an IOU as “debt instrument,” as it were. She when “deal done” becomes a debtor while he is named as a creditor. The IOU is usually backed up by her credit based on the expectedly-real creative powers of human asset, yet sometimes together with the physical assets as collateral.

             In other words, buying a debt is with depositing a credit; where depositing means conditional abdication of the title to the relevant assets. As the case may be, the debtor loses the human “credit” and the physical assets. A loss of human credit renders the creditor the nominal feeling of vengeance; while another of physical assets transfers the real title. The vengeance, by the way, comes from the name “die Frau ohne Schatten.” (Literally, the human credit is the shadow of human asset, trade of which is never and nowhere legal.)

            In essence, the debt exists for the sake of convenience in the household’s allocation, between the short-run present and the long-run future, of money as means to the end of consumption. Incidentally, “trade” is another bridge of convenience from production to consumption of the product.  

 

Commercial bank as credit dealer. There is the public instrument of convenience called the (commercial) bank. The nominal job of commercial bank is making credit swaps or “repurchase agreements” as sometimes called. Specifically, the bank buys the credit of a “client” in return for money with the string of the latter’s buying the credit back attached. The repurchase price shall include the time value of money, needless to say.

             Where are the name “loanable funds” of the bank really originated from? In classical times, the only source of money was the deposited savings of clients. In other words, the bank buys the realized credit of depositors for the purpose of reselling it to the borrower (sitting on the debit). That’s the way the dealer, aka professional trader, of credit does the business. In modern times, partially under the auspices of the sovereignty, the bank can and do additionally prime-sell its own credit, which incidentally is as invisible as the “thinnest air.” 

            The business of credit dealing is usually called “banking”

            Heard of “monetary multiplier,” the rest of us are well aware that in all times each bank’s credit is so many times over all the depositors’ real savings. Unintendedly consequential, “Honey, I blew up the ‘I’ curve as many times over the ‘S’ curve!” Heard of “fallacy of composition,” we imagine that the scale of one might not necessarily be the same as of the other.  

            When in Eternity after all in all the reals, any dream comes really true, or so do some religious people say in real serious.

 

The nature of finance. Buying and selling credit is sometimes called in aggregate “financing”. Nowadays, however, the term “finance” is more often than not associated with financial instruments to financial markets to the discipline of Finance.   

             Financial instruments are created for the purpose of facilitating trade in debt instruments. Like any others, the securitized financial instruments are standardized as a marginal tradable unit. Better- and further-more, they are nominal (“m”) without real Mass (“M”) but usually of a higher credit with a greater security. All in all, financial instruments are incomparable to real assets in terms of  lower  transaction costs  of the smaller volume and mass.

             Uh, do we not have “high low” at the same time? Oui, c’est la vie en rose! 

             A collateral benefit in fine: We verify the conventional wisdom of “portfolio management with (securitized) financial instruments.”

 

La Vie En Rose