Money Changers, Part 3

Last time, I ended by posing a statement of what should happen to a lender's assets when you or I are granted a loan. Well, common sense and a simple understanding of mathematics would lead us to believe that a lender's assets would either decrease (assuming we deposited the loaned money elsewhere) or stay the same (assuming we re-deposited the loaned money with the same lender). Neither takes place - a lender's assets increase by the amount of the loan. Logic demands I ask the question, "How in the world can a lender's assets increase if I didn't give them anything!"

The truth of the matter is that EVERY time one borrows, he or she unknowingly and unwittingly gives the lender something…a contractual guarantee of your future earnings. Once you sign your name, you mortgage those future earnings and turn them into a negotiable instrument that you created out of thin air (aka Money Supply Expansion) by the stroke of a pen and the lender may sell it for cash or deposit it into their coffers as an asset. Don't take my word for it. Get a copy of your lender's Statement of Assets and Liabilities. On the asset side will be an entry, Promissory Notes or similar wording.

It's about this time that confusion sets in and one poses the question, "Wait a minute, I have a check in my hand. If I didn't borrow money, what just took place?" In the world of banking, a promissory note becomes "cash" to the lender. The lender "deposits" the promissory note. With this new increase in cash, they make a check payable to you for the same amount. In summary, you "created" the money to fund your own loan. Sound like hocus pocus? Stay tuned…the scriptural application is coming!

Gary Ellis, MBA, CFP
Association Stewardship Director