Show Me The Money
“School days” inexorably continue at the Gross household, not just because of grandchildren,
but because of the necessity to teach my own kids the complexities and pitfalls of investing.
As I get older, I fear I may unduly introduce them to a 1930s Will Rogers warning about
losing money: “I’m not so much concerned about the return on my money,” he wrote, “but the
return of my money.” “Don’t lose it” is my first and most important conceptual lesson for them
despite the Trump bull market and the current “animal spirits” that encourage risk, as opposed
to the preservation of capital.
Recently I also explored with them the concept of financial leverage – specifically that of
fractional reserve banking, which has been the basis of credit and real economic growth
since the system was blessed by central banks over a century ago. “It still mystifies me,” I
told them, “how a banking system can create money out of thin air, but it does.” By rough
estimates, banks and their shadows have turned $3 trillion of “base” credit into $65 trillion +
of “unreserved” credit in the United States alone – Treasuries, munis, bank loans, mortgages
and stocks too, although equities are not officially “credit” they are still dependent on the cash
flow that supports the system.
But I jump ahead of myself. “Pretend,” I told the “fam” huddled around the kitchen table, that
there is only one dollar and that you own it and have it on deposit with the Bank of USA – the
only bank in the country. The bank owes you a buck any time you want to withdraw it. But the
bank says to itself, “she probably won’t need this buck for a while, so I’ll lend it to Joe who
wants to start a pizza store.” Joe borrows the buck and pays for flour, pepperoni and a pizza
oven from Sally’s Pizza Supplies, who then deposits it back in the same bank in their checking
account. Your one and only buck has now turned into two. You have a bank account with one
buck and Sally’s Pizza has a checking account with one buck. Both parties have confidence
that their buck is actually theirs, even though there’s really only one buck in the bank’s vault.