a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

tight friend groups often trade debt to each other (usually sans interest or risk)-- i got you for lunch last week so you owe me lunch but mark s got me for lunch today so if you two are hanging out together next week lunch is on you.

what's different is that in such situations mark s is usually not carefully calculating that the lunch you will buy him will probably be more expensive than the lunch he bought me and that he will thus obtain a free (portion of a) lunch-- while at the same time you (pinefox) hope that the lunch you will buy him (mark s) next week is cheaper than the lunch i bought for you last week-- while at the same time i smile smugly, already knowing that the lunch mark s bought me today was far tastier and more lavish than the lunch i bought for you last week-- thanks to my head for big meals

quantity becomes quality

I have heard this same thought expressed as "sufficiently large quantitative differences are qualitative differences". This is often mentioned in computer programming, in the sense that at certain scales, the type of solution you would use for a particular problem changes. For example, if you have to find all occurrences of a word in a document, you can use a word processor. If you have to find all occurrences of a word on the internet, you need to have a distributed map-reduce algorithm running on a large cluster of machines.

Difficult Hour, thanks for your post and droll commentary.

tight friend groups often trade debt to each other (usually sans interest or risk)-- i got you for lunch last week so you owe me lunch but mark s got me for lunch today so if you two are hanging out together next week lunch is on you.

Really? I cannot imagine this scenario happening.

Indeed, again, I cannot understand the logic of it. If you were to explain to me why it was my turn to buy lunch as per your example I would not be able to follow what you said.

In an old job, a group of coworkers who frequently lunched together and took turns paying the bill kept a spreadsheet of each person's tab. So you could pay down your tab by picking up the check, even though the person who had paid for your lunch might not be present at the lunch you paid for.

I appreciate this anecdote, o.nate.

But it then makes me think: if you are obsessive enough about who pays for lunch to start some kind of computer program about it, why not just everyone pay their own lunch?

Seems like a strangely complicated way to deal with the obsession, when the simpler solution is at hand.

pinefox, when you eat out with a group of friends, do you only pay for what you ordered or are you okay with an even split? not really related to the debt question, just curious.

why not just everyone pay their own lunch?

Frequently restaurants frown on splitting a tab too many ways. I agree it would've been about the same amount of work, except for the social opprobrium. Nowadays I think a group like this would probably settle the tab using Venmo, Zelle, or a similar payment app.

Also, it should be mentioned that even in those days of yore, no one ever carried cash. That would've been the simplest way, I guess.

Really? I cannot imagine this scenario happening.

― the pinefox, Thursday, November 10, 2022 7:37 AM (forty-two minutes ago)

the loan shark and car dealer scenarios posed upthread -- what about those scenarios?

Sarahell: that's different, though I have not personally experienced them. I accept that they, apparently, actually happen. Knowing nothing of them, I should not comment.

pinefox, when you eat out with a group of friends, do you only pay for what you ordered or are you okay with an even split? not really related to the debt question, just curious.

― 龜, Thursday, November 10, 2022

I don't express strong views about this. I don't think the difference between the figures is likely to be too great. Maybe if it is, then there could be reason for someone to object and want to split a bill more precisely.

often it is simpler to make debt fungible the pinefox, or at least it's more convenient and can dissolve problems. i am thinking of when i went to high school up the street from a burger joint, in the heady days of the early millennium:

1) 龜 and i walk down there after school; i'm skint so 龜 pays. don't worry-- i get my allowance tonight. burgers are on me tomorrow.

2) later that afternoon, 龜 buys a nintendo ds with many months of savings-- a long-planned and large-scale investment. between this and having to pick up the whole tab at the burger place, 龜 is now flat broke.

3) well, 龜 thinks, at least i won't go hungry tomorrow, since it is difficult listening hour's sacred obligation to buy me a burger after school, and i have been assured he will have the money.

3) but disaster-- when 龜 arrives at school i am not there! (i am at home vomiting because of this disgusting burger place we go to.) i will probably be back the next day and 龜 still has no doubt i will honor my debt then, but in the meantime 龜 must go burgerless. 龜's thumb already feels weaker against the crisp new nintendo ds d-pad.

4) rescue-- you, the pinefox, a mutual friend, have engaged 龜 in a passionate discussion of economics, and also you are feeling hungry after school. you invite 龜 down to the burger place, but 龜 is broke. no problem, you say (not wanting to interrupt the discourse)-- i can handle it! the only thing is that this weekend i, the pinefox, will be visiting a nearby mid-sized city that actually has decent bookstores, from one of which i am planning to buy an (already reserved) signed first edition of vol. 2 (a buyer's market) of a dance to the music of time, so i can't afford to spend too much this week. but you, 龜, can just pay me back soon, right? in the next couple days?

5) well, actually, 龜 says, i just bought a nintendo ds. it will be a while before i have treat-your-friends-to-lunch money. so no. but-- here it comes--

6) --difficult listening hour can. he owes me. he'll be back tomorrow, and he just got his allowance. buy me a burger now, and he'll pay you back tomorrow.

7) oh okay! you say, sure.

without the leap of the step 6) transfer-- in which 龜 offers to sell you my debt, for the price of a burger-- you, the hungry pinefox, would have to choose between abandoning 龜 now or cancelling your hold on the highly collectible volume of anthony powell. (龜, who is finding your company frankly more stimulating than mine and would also like to continue talking to you this afternoon, would already have chosen buying a nintendo ds over being able to do so, without even knowing that this, specifically, would be the cost.) with the step 6) leap, you can happily continue your conversation and be paid back tomorrow-- even though by then it will be 龜 who is home sick, or at least pretending to be, lying in bed playing the legend of zelda: phantom hourglass.

Difficult hour, I like the detail and passion of your narrative. Thank you.

Or imagine you are a gentleman of Venice in the 12th century. You have been obligated by virtue of your noble standing to purchase a Venetian perpetual annuity that pays you a steady fixed stream of interest payments, as required by law, year in and year out. You fall on hard times and need to raise some cash. A-ha, you say! Why don't I sell a piece of my future income so I can pay off the gondola repairman?

a perpetual annuity is also known as a "consol", which used to be issued by the english and american governments (but are no longer), and have made appearances in several books of literature, per wikipedia.

https://en.wikipedia.org/wiki/Consol_(bond)

References in literature
Given their long history, references to consols can be found in many places, including Pride and Prejudice by Jane Austen, David Copperfield by Charles Dickens, Howards End by E. M. Forster, Vanity Fair by William Makepeace Thackeray, Of Human Bondage by William Somerset Maugham and The Forsyte Saga by John Galsworthy.

https://www.immediateannuities.com/annuitymuseum/images/docs/10129-f-full-mid.jpg

I know the word annuity, but have not encountered one.

"You have been obligated by virtue of your noble standing to purchase a Venetian perpetual annuity that pays you a steady fixed stream of interest payments"

You are obliged to spend money on ... loaning money to someone?

So this is like the 'bond' discussion somewhere upthread but the law says you have to buy the bond? Which, as I recall, meant: loaning money to the government.

"Why don't I sell a piece of my future income so I can pay off the gondola repairman?" -- you've lost me there, o.nate. I don't have any future income. Only, at best, what money I have already acquired.

It was a reference to the history of the prestiti in Venice:

Venice introduced the prestiti in the twelfth century. Subscriptions were obligatory on wealthy citizens in proportion to their wealth, and the elites of Venice found forced loans preferable to outright taxation.

when you loan money to somebody, that is a form of spending money. xp

big Harold Skimpole energy in this thread

You are obliged to spend money on ... loaning money to someone?

this is like the antecedent to the famous scene in the history of the 2008 financial crisis where all the CEOs of the biggest investment banks have to come together and are forced to merge with one another and buy the worthless assets of the most failing banks

within the medieval set-up, the ruler or city-state demanding obligations of the rich and powerful was surely not uncommon: it's how fealty was manifested

(with the specifics of the obligation dependent on the circumstances) (the story of the italian invention of banking in this context -- with the church saying NO to usury and then winking at all manner of very obvious workarounds, bcz they too needed loans to get things moving -- is fascinating: look up why there's a LOMBARD STREET in every big european city and also many ports even in the US)

Just heard the last episode of UNDERSTAND THE ECONOMY. About banks.

One of the first things they said was: "the money in your bank account is loaned to the bank". I didn't understand that. Couldn't follow the rest.

Mark S would have understood the programme and probably found it too simple.

how would you describe the relationship between you, your monye, and your bank, pinefox?

a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

I guess the quasi-evolutionary explanation for why many such innovations sprang up in Italy, is that Medieval and Renaissance Italy, with its independent city-states, was kind of a petri dish for emerging forms of politico-economic organization, and the rivalry between the cities was a powerful evolutionary pressure, so these forms evolved more quickly there than elsewhere. xps

Poster, I wouldn't think about it much, but if it came to it, I might say something like "I put the money in the bank for safe keeping".

A bit like putting it in a box or a safe, except the box or safe isn't in my home but in another building.

If you ask: why do I have money in a bank? I don't know. The answer is simply: because other people do and I was told to do the same.

speculatively adding to o.nate's point abt italy that they were mostly seafaring city-states: https://en.wikipedia.org/wiki/Maritime_republics

the oldest acknowledged form of insurance (which is also functions as a kind of venture capital) is bottomry

right, I guess my next question, pinefox, is, why is it that you are able to keep your money in the bank for free? without being charged a fee?

imagine leaving other things of value with a third party, such as, for example, if you owned a gold wristwatch, or a rare first edition of das kapital, because you are afraid that if you keep them in your house they would be subject to theft or fire. wouldn't you expect to pay a fee to such third party, in return for keeping your valuables safe? why should a bank be any different? in fact, a bank will sometimes pay you money in the form of interest for keeping your money there! why?

I think banks do charge fees.

I like your example of DAS KAPITAL. I note that, probably unlike you, I do not understand that book - even in English, and even the first chapter which I have probably read about 8 times.

does your bank charge you a fee to keep your money there? if so, have you noticed that the fee goes away if you meet certain requirements - perhaps you need to make monthly deposits of at least £XXX, or keep a balance above £XXXX?

I don't know. I don't understand banks, including my own bank. It doesn't give me any money (which people say banks do), and it randomly changes my bank account in negative ways for no reason that I can see. I can't tell you why.

I suppose you might say: don't have a bank account. This sounds like a good idea. But -- a bank seems to be the only way to obtain money on which to live. Either through the electronic banking business of tapping things with a card from the bank, or, the bank has a machine that gives out cash.

I suppose in theory my employer could pay me in cash and I could store that and use it? I have never thought of this.

you certainly could store your money under the mattress! what would be the pros and cons?

also, I think you should consider switching banks, if your bank is treating you so unkind!

The majority of employers would simply refuse to pay you in cash

Even benefits like Universal Credit have to be paid into a bank account now

here is one potential con to storing your money, in cash, under your mattress:

https://www.latimes.com/archives/la-xpm-1989-05-04-mn-2339-story.html

BEIJING — The old Chinese habit of shunning banks has caused an 82-year-old farmer to lose most of his life savings to mildew, an official newspaper reported Wednesday.
When Zhang Dexiang, who had buried his life savings of about $1,200 in his courtyard five years ago, dug up the money recently he discovered it was moldy “almost beyond recognition,” the China Daily reported. The farmer in northeastern Liaoning province was able to salvage only $400, which he exchanged for new bills at a local bank, it said.

the other thing this guy said which kind of blew my mind was that you don't deposit money in a bank. the word "deposit" has no legal meaning. when your paycheck lands into your bank account what you're actually doing, legally, is loaning the bank money. and you can ask them to make good on that loan at any time, theoretically. (by "withdrawing".) they pay you interest on that loan. at an extremely pitiful rate, often something like 0.75%. but guess how much interest they want if they loan YOU money though, eh??

From upthread.

It's not like the bank is marking individual bills with "the pinefox" and putting them under a giant mattress. The bank is recording your money as an asset with a corresponding liability to pay you back. However, they now have your money and can in turn loan a portion of that money out to other customers who pay the bank interest. The reason a bank can't loan out 100% of the money you deposit with them is because by law/regulations, etc., the bank is required to keep a portion of their assets in hand to safeguard the system and prevent runs on the bank.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

Also the other problem that was noted ie: doesn't seem like an employer would pay me in cash so I would then have zero money.

Also - yes - the idea that the money would be physically damaged - a good point.

also, I think you should consider switching banks, if your bank is treating you so unkind!

This seems like a good proposal.

Maybe it is time to do it.

If I knew more about banks then I would be better placed to do it.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

also, it would be easier for someone to steal your money from you, leaving you with no money. Whereas it is much more challenging to rob a bank, plus, the bank insures your money that you have "stored" there.

Poster, I think the con would be that I would have to carry the cash around and couldn't do the thing of tapping a machine with a card to make a payment.

Also the other problem that was noted ie: doesn't seem like an employer would pay me in cash so I would then have zero money.

Also - yes - the idea that the money would be physically damaged - a good point.

― the pinefox, Friday, November 11, 2022 10:16 AM (one hour ago)

so, I think, from a first principles basis:

the cons are everything you listed and probably a lot more. the pro is, you are not trusting a third party (in finance terms, a 'fiduciary') to hold onto your money. it could be dangerous for a bank to hold onto your money, because what if one day the bank goes under, and is unable to pay out the money that everybody has deposited to the bank? (or, to make the conceptual leap - unable to pay the money that everybody has lent to the bank.)

so, the question becomes - does my money feel safer under my mattress or in a bank account? if under my mattress, you could lose it for all the reason we have discussed - termites, mold, the vagaries of nature - a fire, a flood, a tornado or hurricane could blow it all away - your cousin fagin, who has heard from your aunt beatrice of the stacks of pounds you have under your mattress, could steal into your house while away and abscond with your savings.

if in a bank, it is in an institution that you feel you have no oversight into - you don't know how the bank is doing, it could go under any minute! (maybe you have this fear because you don't understand how the bank makes money, which is why you've come to ILX to read this thread).

the government understands this second concern, because it has happened many times over in history (https://en.wikipedia.org/wiki/List_of_bank_runs). a crucial financial innovation of the 20th century has been deposit insurance! (https://en.wikipedia.org/wiki/Deposit_insurance) whereby, the government has an interest that its citizens do not spend the majority of their days guarding the pile of cash under their mattresses like smaug, because that time could be better spent doing other activities that society deems useful, such as farming, or manufacturing goods, or, even, financial services. so, the government steps in and says, please do not waste your time sitting in front of your house with a rifle and eyeing every stranger who comes by, put your money in a bank and go out and life your life, because what we will do is guarantee every deposit made to a bank in our country (up to a certain amount, of course, but which limit is certainly adequate to cover 99% of the populace), such that if your bank goes under, the insurance will kick in and you will still have your money.

all of which establishes why it is better in modern society to keep your money in a bank rather than at home, but doesn't answer your question about why is it that we have "loaned" our money to a bank, instead of "deposited" our money.

to answer that question, you can imagine the world's first bank, where somebody said, instead of keeping your cowrie shells at home, which we have established is burdensome and detracts from your quality of life, give your cowrie shells to me and I will keep them safe, in return I will give you this clay tablet which marks how many cowrie shells you have given me, just bring me the clay tablet whenever you want to retrieve some cowrie shells and I will update your tablet. what's in it for you, you ask, surely you are not the world's first altruist. well, the world's first bank says, I will charge you a fee of one cowrie shell per every 6 cycles of the moon, because I need to rent a hurt large enough to accomodate all the cowrie shells I have collected from all my other customers, and to hire the guards with mastodon femurs who will stand guard over my hut, and so on and so forth, and all of that costs cowrie shells, which costs i will spread out over all my customers.

now, let's also imagine the world's first lender. the world's first lender has made some cowrie shells by lending out her own cowrie shells to others who do not have enough cowrie shells for an immediate need, and asking only for the initial amount of cowrie shells she has lent (the principal!), and a small amount of cowrie shells - perhaps as a proportion of the initial amount of cowry shells she lent to be assessed every 6 cycles of the moon, for the inconvenience of having lent out her cowrie shells (the interest! or - the world's first financial innovation). the problem for the world's first lender, however, is that the amount of cowrie shells she can make as interest is limited by the amount of cowrie shells she can lend out - if she has lent out all her cowrie shells, she cannot make any more loans, because she has no more cowrie shells left to loan out! (later on it will be found that her activities will have led to the invention of the concept of usury, which will be enshrined as a sin. https://en.wikipedia.org/wiki/Usury)

the world's first lender realizes that she could make even more cowrie shells as a lender, if instead of lending our her own cowrie shells, she herself borrows cowrie shells from others that she can continue to make loans with. why would others lend her their cowrie shells? the same reason that she herself lends cowrie shells out - because she will pay them back with more cowrie shells, aka interest! now, here is the world's second financial innovation - the interest she has to pay out to her lenders doesn't have to be as high as the interest she will collect when she re-loans those cowrie shells out. instead, she can pass along only a portion of the interest she will earn when she loans those cowrie shells out. now, you may ask, why would you lend your cowrie shells to her, at a lower rate of interest, than directly to one of her borrowers (let's call him Bob), where you could get a higher rate of interest? you'll make more cowrie shells!

because, she'll tell you, when you ask for your cowrie shells back from her, she'll be able to pay you back no matter what - because people always owe her cowrie shells, since she is a lender, she just needs to collect from one of her other borrowers - whereas if you lend to Bob directly, who has borrowed the money to buy a farm, there is a chance that Bob will say, I spent your cowrie shells on my farm, and seeds and plows, but haven't you seen that a swarm of locusts have come around and eaten all the crops, and what the locusts didn't eat has withered and died because there has been a biblical drought, and what didn't die in the drought surely died when there was darkness for three days, and oh by the way I am moving to assyria, and I won't be leaving you my address?

you may ask, well that's all fine and dandy, but Bob's still a flight risk isn't he? she will reply - yes, that's true, but I haven't lent just to Bob, I've also lent to Alice and Cathy and Doug, who are not in the business of farming but in the business of pulling a rickshaw and building huts and crafting mastodon femurs, respectively, so I am diversified and it won't matter if Bob doesn't pay me back because Alice and Cathy and Doug will, also I will have enough cowrie shells to hire Eddie who will travel to assyria and break bob's legs and get me my cowrie shells.

so, given these choices, you may say, I'd rather lend my money to the world's first lender (let's call her difficult listening hour, because gender is a social construct) instead of Bob, because I have a higher chance of getting my cowrie shells back from her than from Bob. and let's say everything works out - the cowrie shells you have lent to dlh, are making you even more cowrie shells, in a safe way! so much so that, you go back to the world's first bank (let's call him 龜), and you say, give me all of my cowrie shells, I have been spending one cowrie shell every 6 cycles of the moon to keep them here but instead I could be lending them to dlh, where instead of paying 1 cowrie shell every 6 cycles of the moon, in fact I am earning 1 cowrie shell every 6 cycles of the moon, and dlh will also return my cowrie shells whenever I want, and is making enough from her lending to also hire guards with bigger mastodon femurs than 龜, and also her hut is bigger.

so, dlh becomes the world's second bank, and the world's first bank, 龜, goes out of business and starts going around the town square asking everyone, rather madly, "have you heard of the blockchain" before he is beaten to death by mastodon femurs wielded by large burly troglodytes.

so, that is why, when you deposit your money at a bank, you are actually lending the bank money, not "depositing" it!

(after 龜 is dead, a rumor will be spread that dlh has been using those cowrie shells she hasn't lent out to gamble at local cockfights. everybody in town, fearful that dlh has spent all of their cowrie shells betting on Big Bertha, will demand their cowrie shells at once from dlh. when dlh is unable to produce those cowrie shells, dlh will also be beaten to death by large mastodon femurs. this is the world's first bank run.)

Now do insurance!

the aristocrats!

xp - what you are omitting in this really great explanation is the role of the state and the repressive state apparatus, and that people create states to regulate themselves so that they won't constantly be beating themselves to death with mastodon femurs.

Like, this is all coming from an assumption that you, Bob, dlh, etc. have a certain assumed trust and sense of community, and aren't going to beat each other to death with mastodon femurs over cowrie shells. There is also the assumption that the cowrie shells that go back and forth are actually cowrie shells and not some lesser shell that is deemed worthless.

Like, you can also see the role of the bank in terms of utilizing the community's cowrie shells for the betterment and productivity of the community as a function of the state (as 龜 notes in their previous post) and compare it to the way the state stores, utilizes, and distributes physical force (e.g. weapons, soldiers, law enforcement). In order to maintain order and its authority, the state should have a larger collection of mastodon femurs than any individual or family or associated group within the state. The collection of cowrie shells for lending and borrowing is just another source of power for the state.

When my dad died we found a disturbing amount of cash hidden in coat pockets and such, he was a bit of a crank about banks and such

Vague stop repeating phrases challenge

Now do insurance!

― G. D’Arcy Cheesewright (silby), Friday, November 11, 2022 10:17 AM (thirty-nine minutes ago)

what kind of insurance, or just, insurance in general?

Idk whatever, I read something a while ago about police departments becoming uninsurable because of the pigs doing too much pig shit all the time and was thinking about how insurance may be the subtle engine of societal change