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A Dark Luciferian Agenda: Vegan Slut
No single entity owns all the money in the world. Instead, money is distributed among various individuals, businesses, governments, and financial institutions across the globe. Here’s a breakdown of how money ownership generally works:
People hold money in the form of cash, bank deposits, investments, and other assets.
Corporations and small businesses own money through revenues, investments, and cash reserves.
National governments control monetary policy and have access to money through taxation and borrowing. They also issue currency.
Financial Institutions
Banks and other financial entities manage large sums of money, facilitating loans, investments, and savings for individuals and businesses.
Wealth Distribution
Wealth is unevenly distributed, with a small percentage of the population holding a significant portion of global wealth. This includes billionaires and large corporations.
Overall, while money exists in various forms and is owned by many different entities, it is not centralized in one place or owned by one person or organization.
However, Someone actually does
I recently had a frustrating experience with my bank that prompted me to think about money, our perception of it, and who really “owns” it after all.
It was a fairly banal situation. I needed to pay for some car tyres at the garage down the road, but their card machine wasn’t working. The easiest alternative was to transfer the money through my banking app. As we’ll all know, there are several stages to go through when doing this: enter the transaction details, verify the recipient, confirm with two-factor authentication, and finally, after a strong warning, reconfirm. I did this and went about my day.
Later, I had a text message from the bank stating that its fraud team had flagged the transfer as a risk. There were extra security checks to go through, and I hadn’t completed these by the bank’s deadline. My online access was therefore shut down, and I ended up on the phone to a member of the team, trying to sort it out. If you’ve ever done this, you’ll know that you’re then asked various questions about the transaction and past activity on your account. It’s a process that’s clearly designed to safeguard bankers, but several questions in, I started to feel a faint unease. My bank had my money, I couldn’t get to it, and the situation was beyond my control.
Ultimately, everything was straightened out, the garage got its money, and I got my tyres. But the encounter did give me pause for thought. None of us really owns our wealth – we’re simply granted temporary access to it. And, as we’ve seen in Cyprus, this access could be taken away.
This all comes down to sovereignty. To all intents and purposes, you might own your money, your house, and your goods, but actually, this ownership only lasts for as long as the government and its agents respect your title to them. We’ve written before about inside money and outside money, and how this has affected people like Russian oligarchs, whose assets were confiscated due to the invasion of Ukraine.
Respect for an individual’s legal title to things was one of the cornerstones of the industrial age. Before this, under the mediaeval feudal system, all land belonged to the Crown and people were only granted permission to rent, manage or work on it. The economy later boomed because of the new ability to own things. People could work for their wealth, and have their land for themselves. It was a positive step that we’re still benefiting from today. That is, as long as people do respect this legal right.
Of course, the granting and removal of assets is painted to be only the extreme end of a scale (for now), but low-level “confiscation” is happening every day. Take tax, for instance. At its core, tax is legalised land grabbing (even if it is supporting civilisation). If the government taxes you at 45%, you might accept it because it’s the norm, but you’ve still lost almost half of your money. If you had £10 in your wallet, and I took £4.50, I doubt you’d be thanking me heartily for leaving the £5.50 behind. And that’s before we even get onto Quantitative Easing and inflation.
What we can see, then, is that we only really own things on a temporary licence basis. This is an uncomfortable reality, as well as being a risky situation for a business. For my business account, I have to go through the annual process of proving that I’m not a money launderer. There are various questions to answer in order to do this, and it usually goes smoothly. One year, however, I somehow answered a question wrong, and was told that my account would be closed within 30 days. I couldn’t speak to anyone, even through the bank’s chat function. Needless to say, it was stressful. It also exposed a weakness in this single point of failure: if the bank chose, it could break the entire running of a business.
This is a wider issue with sovereignty: at any point, the state could interfere. One interesting alternative to this is cryptocurrency. If you buy bitcoin, as long as you hold it yourself and not in a central agency like Coinbase, you have sovereignty over it. As we’ve discussed before, it’s decentralised “outside money”: money that lives outside a central system. It can’t be taken away, and you can have absolute confidence that it’s yours. But you do need to be careful about how you buy it, because even in this realm, governments are starting to get in on the action.
Central Bank Digital Currency (CBDC) is a government’s way of offering digital money within its own system. Just as your “real” money exists within a trust-based internal system, this would be crytocurrency that’s centralised and state-controlled. It would walk like bitcoin and quack like bitcoin, but it wouldn’t quite be the bitcoin we know. That’s because it could be subject to the same risks as any centralised currency; namely, that if the government wanted to start putting rules in place about how and where you could spend it, it absolutely could. Imagine not being allowed to buy certain goods – say a beer – on a Wednesday?
My concern is that CBDC takes all the good elements of cryptocurrency but makes it into something worse. It’s a bit like the internet and news: when the internet started sharing news, it was a wonderful, free and immediate way of accessing up-to-date stories. Yet as time went on, media moguls and social media took over, and online news changed beyond all recognition.
CBDC is already being considered by the Bank of England, as well as every other government in the world. My suggestion would be to think seriously about where you’re buying your bitcoin in the future. When it comes to sovereignty, there’s a big difference between a decentralised system (i.e. not state-controlled) and a centralised one.
As for my bank account, I’m not going to stop using it (it’s not all bad, and it clearly has its uses), but I’m not going to continue putting all my eggs in one basket. We all need to take personal responsibility for our money – we probably wouldn’t feel comfortable placing all of our assets in a single company stock, or basing our entire retirement plan on a company pension, and this is really no different.
The simplest solution to my frustration is opening a second bank account. This removes the single point of failure and gives me slightly greater control (or the illusion of it?) over my money. After all, as Henry Kissinger famously said, “Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.”
What is a bank? For one thing, a bank is something that creates liquidity by issuing circulating liabilities. These include not only the deposit you now exchange electronically by debit card or bank transfer,1 but also instruments exchanged by hand historically, such as bank-drawn bills of exchange in early modern Europe, bank-issued notes in the 19th-century US, and bank-certified checks more recently.
Before it circulates in the secondary market, bank debt is issued to raise funds in the primary market. Thus, when banks choose what security to issue, they should take its secondary-market liquidity into account. In practice, banks commonly choose to issue securities, like banknotes and deposits, that are redeemable on demand.
But such demandable debt can be illiquid. Indeed, many bank panics and financial crises throughout history, from 18th-century London to contemporary Greece, seem to have followed from the failure of bank debt to circulate (see Section A.2). In such crises, convertibility is often suspended. This mechanically prevents bank runs—you cannot run a bank if you cannot redeem on demand. But it has been argued that it could also impede circulation—you could be unlikely to accept the debt as payment if you cannot redeem it on demand.2 Remarkably, however, this has not always been the case. To the contrary, bank debt sometimes resumes circulation when convertibility is suspended.3
Despite historical precedents, most current theories of why banks choose to issue fragile financial securities are not linked to their secondary-market circulation (e.g., Calomiris, Kahn, 1991, Diamond, Dybvig, 1983, and Diamond and Rajan, 2001b).4 To develop a theory based on this link, we model how bank debt circulates in the secondary market explicitly, following the search-and-matching literature (see, e.g., Lagos et al., 2017 for a survey).
We use the model to address the following questions. Why is bank debt so often redeemable on demand, regardless of the form it takes, from physical banknotes to electronic deposits? Why is demandable debt subject to liquidity crises? Given it is, why do banks still choose to issue it, exposing themselves to sudden redemptions, and making the financial system fragile too? And what should financial regulators do about it? In particular, does suspending convertibility necessarily come with the cost of impeding circulation?
By linking the financing role of bank debt in the primary market to its circulation in the secondary market, we uncover a new rationale for why banks do what they do. Banks choose to fund themselves with demandable debt to take advantage of a “price effect of demandability”: demandable debt trades at a high price in the secondary market, and hence decreases banks’ cost of funding in the primary market. But this high price is not always a good thing. Reluctant to pay it, potential counterparties may decide not to buy the debt at all, and therefore leave whoever holds it with something he cannot trade, but can only redeem on demand. Such redemption constitutes a new kind of bank run, a “money run,” resulting entirely from the failure of debt to circulate in the secondary market. However, banks continue to issue demandable debt. To do so, they exploit economies of scale that arise solely from the price effect of demandability. Specifically, they transform liquidity, transform maturity, pool assets, and borrow from dispersed depositors. I.e. they do something that looks like real-world banking. But, to do it effectively, they exacerbate their exposure to money runs. Suspension of convertibility can not only prevent runs in a crisis, but can, in fact, facilitate circulation.
Model preview. Because we want to show how banking can arise endogenously, we start with a single borrower B with a single investment. Ultimately, multiple borrowers will form an institution that assumes features of real-world banks. But, for now, B resembles a bank only insofar as its debt plays a dual role. To capture its role in raising funds, we assume that B is penniless and needs to fund an investment from a creditor C0">0 (i.e. a depositor). To capture its role in providing liquidity, we make two assumptions. First, C0">0 could be hit by a liquidity shock before B’s investment pays off, as in Diamond and Dybvig (1983). Thus, C0">0 could want to trade B’s debt to get liquidity. Second, C0">0 must trade bilaterally in a decentralized market, similar to those in Trejos and Wright (1995) and Duffie, Garleanu and Pedersen (2005). We assume that to acquire B’s debt from C0">0, a counterparty C1">1 must pay an entry cost k">𝑘 to enter and bargain with C0">0 over the price. Likewise, if C1">1 is shocked, a counterparty C2">2 must pay k">𝑘 and bargain with him to trade, and so on. The terms of trade between counterparties depend on how B designs its debt. In particular, B can make its debt redeemable on demand. In this case, B chooses a redemption value r">𝑟, for which a creditor can redeem before the investment pays off. To pay r">𝑟, B has to liquidate its investment (so r">𝑟 cannot be greater then B’s liquidation value).
Results preview. Our first two main results capture a trade-off of increasing the redemption value r">𝑟. First, a high redemption value has a bright side: it allows B to borrow more and more cheaply as C0">0 is willing to pay more for demandable debt, even if he never redeems in equilibrium. The reason is that C0">0 values the option to redeem off equilibrium, even if he never exercises it, because it provides him with a valuable threat (i.e. outside option) when he bargains with C1">1, a threat that is more valuable if he can redeem for more, i.e. as r">𝑟 increases. As a result, he can sell B’s debt to C1">1 at a higher price. Anticipating selling at a higher price in the secondary market, he is willing to lend more to B in the primary market. This result contrasts with existing models of demandable debt as liquidity insurance, in which, roughly, you do not need the option to redeem debt on demand if you can just trade it in the secondary market (e.g., Jacklin, 1987). Here, in contrast, you do: just the option to redeem on demand props up the resale price of debt in the secondary market, even if the option is never exercised. We refer to this as the “price effect of demandability,” because it works entirely through the secondary market price, not through actual redemptions.
Second, in contrast, a high redemption value has a dark side. Although it increases the price C0">0 can sell for, it symmetrically increases the price C1">1 must pay. This makes C1">1 less willing to enter. Thus, for high r">𝑟, C0">0’s option to redeem on demand can undermine itself, putting him in such a strong bargaining position that he has no willing counterparty, and ends up redeeming on demand.
Our third main result is an equilibrium characterization. We show conditions under which B chooses to borrow via demandable debt and sets the highest possible redemption value, even though doing so makes him susceptible to a new kind of run. Like fiat money, B’s debt could stop circulating due to a sudden (but rational) change in beliefs. But, unlike fiat money, B’s debt can be redeemed on demand in a bank run.
Hence, the fragility of B’s debt in the secondary market leads to the fragility of B itself. In contrast to the literature following Diamond and Dybvig (1983), such a run can occur even though B has only a single creditor—there is not a coordination problem in which multiple creditors race to withdraw; rather, there is a coordination problem in which a creditor cannot get liquidity in the secondary market and must withdraw as a result. We refer to this run as a “money run,” given it is the result of the failure of B’s debt to function as money in the secondary market.
For our fourth main result, we turn to a policy that has been used to prevent runs historically: suspension of convertibility. We show that it not only mechanically puts an end to bank runs in a crisis, as in Diamond and Dybvig (1983), but it can also potentially restore the circulation of bank debt and, thereby, even increase B’s borrowing capacity. The reason is that it lowers its price, and thus makes counterparties more willing to enter. We find, however, that a suspension policy must be sufficiently aggressive to be effective. A mild policy might not lower the price enough to restore circulation, in which case it does nothing but take away debtholders’ redemption option.
Our fifth main result is that if multiple borrowers can get together, they can exploit economies of scale that allow them to issue debt with total redemption value in excess of the total liquidation value of their investments. To show this, we consider N">𝑁 parallel versions of the model—we assume that there are N">𝑁 parallel borrowers, each of which borrows to fund an investment from one of N">𝑁 parallel creditors, each of whom trades bilaterally in one of N">𝑁 parallel markets. The only link between the parallel versions is that the borrowers can issue debt backed by the entire pool of investments. So now there are N">𝑁 creditors holding N">𝑁 securities backed by N">𝑁 investments, instead of one creditor holding one security backed by one investment. We assume that everything is perfectly correlated, so, unlike in Diamond and Dybvig (1983) and Diamond (1984), there is no possibility of diversification. Despite this, we find that getting together can still benefit borrowers, because they can give each of the N">𝑁 creditors the option to redeem for the entire pool.
Why does each creditor have a claim on the entire pool, rather than just a fraction
