Creation of Background Price Inflation
But First: ___Investment banks are mainly about marketing the financial assets they create on behalf of clients. They have lawyers who draw up these securities — which are bonds or company stock for the most part — but their core strength is selling the products they create, and they are about as scrupulous as might be expected of salespeople.
In more recent times, they have also taken to creating financial derivatives and marketing them. These are not a means of raising money for companies, but rather instruments of speculation, of gambling essentially. This sales orientation, especially of derivatives, is not really resonant with the ethos of banking.
For this reason, ordinary banks should be barred from doing ‘investment banking,’ or being linked in ownership with same. By law, investment banking should be kept distinctly separate from other banks (or other) deposit taking institutions which make loans. To avoid confusion, ‘investment banks’ should be called something else. ..Bank as a name should be confined to actual banks subject to banking law, firms whose core business is taking in deposits and making loans.
Monetary assets
Bank loans ..are a form of new monetary asset, of which a variety of other types also exist. Any new monetary asset is a form of credit creation that allows the acquisition of actual goods by means of it. ..As instance, a mortgage facilitates buying a house or other building, or land.
Leasing ..is another means of acquiring such items as vehicles or equipment. Many people lease their car or truck, for instance, rather than buy it outright. Some trucking companies lease their vehicles. Large aircraft are typically leased, as can be railcars or locomotives. A lease is another type of financial asset, one that often operates indirectly, as the lessor buys the item and provides it to the lessee.
A curious instance of leasing is the State of Arizona, which has several times in succession sold and then leased back its Legislative Building, likely to a large investment fund. ..I expect they have legislation requiring the State government to put any new bond issue to the public for approval in a referendum. So the sale and lease back is a way to avoid that — why risk getting turned down? ..Besides, holding a referendum is expensive.
Sometimes, though, it is the manufacturer who is the lessor, using the lease as an indirect way of selling the product that they make. ..The lease may then be sold to a third party, or used as collateral to obtain a loan. Having leases on the company’s books as assets may also induce new investment in the company.
<< A curious example is what became the Xerox company, who early found it difficult to persuade business executives to buy a photocopier, because most felt the machine would not be used very much. ..So Xerox offered such reluctant executives the option to lease a photocopier and pay a set amount per copy. ..Much to their surprise, their staff used the machine far more than they anticipated and budgeted for, so they bought a machine when the lease expired. >>
Most people become acquainted with leases when they sign one as a tenant when renting an apartment. Property leases such as these are good collateral that the landlord may use to obtain a bank loan
Think especially of a small apartment building, small office block, or little strip mall. Particularly with these latter items, the developer may be able to sign tenants while the building is still under construction and use those leases as collateral for a loan that helps finance construction to completion.
A new condo building will be similar except it is sales agreements for units that are used as collateral.
Similarly, somewhat pricey business equipment may be sold by a manufacturer using a schedule of payments lasting several years, typically with an initial payment and a series of further payments each quarter. Here also the sales agreement may be good collateral for the seller to obtain a loan. It is, of course, considered an asset of the company.
Such a sales agreement may be sold to a third party, a transfer of the asset to the buyer. ..Similarly, more general receivables of a business may be sold at a discount to a third party who then acts as the bill collector. Generally, this is done with receivables that are in arrears and may be difficult to collect: Better to get some of what is owed than risk getting nothing.
Evidently, financial assets created may after a time vary in quality dependent on the likelihood they will be realised in full. ..This is especially true of company shares, so to speak, as to whether they will drop below the price paid for them.
Stocks and Bonds
Stock brokers traditionally specialised in bonds and shares in companies, which are also created monetary assets. ..Usually they are non~specific as to the use of the money obtained by the company issuing them, though some bonds may be tied to specific physical property. ..The bonds and shares people buy as an investment are often enough later part of the collateral used for personal or small business bank loans.
A particular instance of this are the large number of shares the founders of a company get when it goes public with an IPO, an initial public offering through an underwriter.
The founders are usually instant multi~millionaires on paper, though barred from selling their shares for several years. ..Typically, they use them as collateral to obtain substantial personal bank loans in order to acquire big houses, expensive cars, and other symbols of their ‘newly rich‘ status. ..In short, they usually feel the need to demonstrate their great success, lest others think them nobodies.
All the foregoing are similar in this respect: each expands the total of monetary assets in an economy. And that expands the amount of credit that may be in use, credits that facilitate purchasing.
One consequence is a certain level of price inflation so characteristic of any credit~based economy — background inflation generated by the private sector in its usual working.
Besides the above, there are other instances of asset creation and clever sods readily enough dream up new types. Yet, none of these created assets figure in the quantity of “money” as measured by monetarist economists, so-called, (if anyone still pays attention to their nonsense).