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Dead Capital: Money that is already in country
$9 trillion is already in the hands of the poor, they just can't use it due to poor property rights...
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Comment by Nick Gogerty on April 2, 2010 at 9:28pm
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The issue, is that property isn't properly registered. It is an unsexy problem, involving bad procedures and corruption. This explains it very well. http://info.worldbank.org/etools/bSPAN/presentationView.asp?EID=323...
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Risk and uncertainty push up the cost of capital. informal lending is usually very expensive and potentiall dangerous as the debt resolution is usually extra legal and extra judicial. ideally a clear and simple dispute and debt resolution mechanism is in place. In many countries the sheer length of debt dispute resolution in the formal sectors acts to eliminate capital access. One wishes to make lending safe, accessible and transparent. If those aspects are there, the capital will show up. Micro-lending informally works becuase social pressure as an informal group dynamic, but even micro lending is expensive. The world bank has a good page on business processes that is a start. http://www.doingbusiness.org/ Ideally they will do the same for bankruptcy as fast and fair debt recovery is just as important in helping get access to credit.
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I mean that the interest rate is high. Uncertainty in payback and risk, pushes up the lending rate, wether an informal or a formal actor. All banking is in essence fractional reserve in nature. Banking in a function of faith in the future and stability in the future. If people believe a 20 yr. mortgage will be paid back, banks or various private parties will lend against an asset or secured asset.
Finance is faith in payback. Sadly it can be abused by many parties, the lender, bank or even regulator, issuer of a currency. Zimbabwe via hyperinflation basically stole the assets of "savers" & institutions in the country.
Many bankers in the US issuing or buying questionable mortgages did the same. Building and establishing faith takes time.
In many developing countries the lack of due process and speedy procedure limits credit availability. The saying is that money goes to where it is treated nicely. Many small countries have assets and wealth held by the poor informally, but poor policy and bureacracy limit capital extension and formation.
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Interest and capital get paid back as value is added in the system via innovation or improvements. The best example of community lending in the US is the credit union system. They act as community lenders and stuck to basic banking. I wish more of the US banking system would have done this. Trustworthiness is very difficult to a****s and even trustworthy people can fail due to fate, storms, accidents, ill health, drought etc. can all cause issues. One of the advantages of larger systems is they diversify risk, so a flood or local drought, doesn't have to wipe out a localized banking system.
the introduction of crop insurance in the US helped significantly to this end. A great book on the evolution of banking and property is de soto's why capitalism succeeded in the west and failed everywhere else. It is an interesting look at the US in the 1700's when the demographics were similar to many 3rd world countries in terms of mortality and GDP.
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money is only a functional representation of value, a place holder if you will. there is more value than money, which is good. Money serves as a temporary representational function of value. It does expire and can be created. For example a firm issuing a note which is a form of value can exchange for something, that note has finite life. The functional value of that note lets say $100 with a 6% coupon may trade at a premium or a discount to its face value. The "money in terms of currency" outstanding is a very small functional all outstanding paper value. The multiplier effect of money is the function of value that gets extended relative to the "paper amount" of money, and yes I realize it is very circular logic, but basically currency is a temporary place holder for value. It is a collective belief system. I am not advocating for or against it, just stating how it functions. If significant amounts of currency are produced or faith in the fungibility of that paper diminishes the system fails. the currency is representational of value, but has no worth of its own accord. The trust is that the people who produce the notes (the fed) don't produce to much. paper money is effectively a loan to the fed with 0% interest assuming zero inflation, in exchange for the fungible function of that note. Kind of weird when you really look at it. But money is belief system, and yes I worked on a forex desk, been a hedge fund manager etc. so have a pretty cynical perspective on it.
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Comment by Iron Helix on April 3, 2010 at 1:53am
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Money is more than just a faith system. It's a requirement for paying taxes. It's legal tender, for all debts, public and private, so no, faith in it is not the be all and end all of a currency.
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Comment by Mark Mulkerin on April 12, 2010 at 2:03am
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Hey Nick, Thanks for putting a name to it for me.
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