Inflation apart, your money is virtually risk free if you
lend to a responsible government: e.g. most North European governments. Plus if
government stands behind bank deposits, so your “loan” to a bank when you
deposit money there is virtually risk free.
But there’s a problem with all that, as follows. In the case
of banks, the investments and loans that banks make are not 100% safe: a point
that has become glaringly obvious in the recent crises. Though given the never
ending stream of bank failures over the last few centuries, it was obvious all
along.
In short, the only way of attaining complete safety is to
do NOTHING with your stock of money. I.e. lending is INHERENTLY risky, even if
the risk is small.
As for loans to government, the fact that such loans
combine interest and zero risk is a mirage. As to loans to government which
government uses to make investments, if those investments are incompetent and
the investments don’t pay for themselves the risk or loss does not vanish into
thin air: all that happens is that taxpayers foot the bill for the
incompetence, while those lending to government don’t pay a penalty.
And as to loans to government which government spends on
current consumption, there is no justification for that. Such lending is simply
a ruse that enables incumbent politicians to ingratiate themselves with the
electorate, while future politicians have to sort out the mess, as I explain in
more detail here.
Indeed both Warren Mosler and Milton Friedman advocated a “zero
government borrowing” regime.
Bank leverage.
Another form of risk free lending might seem to be involved
where a bank has such a conservative leverage ratio that there is no realistic
prospect of it failing. Let’s say a ratio of 50%.
Isn't that better than insisting on full reserve or 100%
leverage? The 50% ratio on the face of it induces people who don’t want any
risk to lend their money, doesn’t it?
Well the answer to that is that if 50% leverage really does
bring 100% safety, then there’s no need for government backing for deposits –
in which case depositors become quasi shareholders. Alternatively, if
government backing for deposits IS OFFERED, then that is quite clearly a
subsidy of banking!!!
In short, the argument for anything less than 100% leverage
is plain illogical. It’s self- contradictory. It’s in check mate. Or in the
words of Money Python, it’s a dead parrot.
Conclusion.
Loans which are apparently risk free are a mirage. They are
a confidence trick. All lending involves risk. That risk can be artificially transferred
to parties other than the lender, but that’s simply a cheat. It’s fraud. It’s a
misallocation of resources.
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