Fiat World Mathematical Model
Thursday, February 19, 2009
In a fiat world, money is printed into existence by the central bank - in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of it as real. It was printed (even if only electronically), therefore it exists.
In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.
It's pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.
Ponzi Financing
Borrowers have to pay interest on the amount borrowed. However, the interest and the debt cannot possibly be paid back except by an ever expanding Ponzi scheme of lending. That scheme can last only as long as everyone believes the debt can be paid back and the market value of that debt keeps rising.
Article continues:
http://globaleconomicanalysis.blogsp...cal-model.html