Theory verses Reality

Misconceptions about accounting, though Account Receivables are an asset a person does not have more money.

Looking at what is going on in the business world; people want to defy reality with theories. A theory exists stating when a bank lends money they retain cash since it is an asset. Theoretically a bank can loan out the same $1000 to several people and make $3000. Once $1000 is loaned, though an asset in Account Receivables, they no longer have cash.

Sometimes it is difficult understanding the difference between math and reality. They speak influentially, yet when thinking of real life it is a faulty plan. It is good to think of real world models and professional experience when reviewing options. When someone loans $1000 to someone else, the person takes the cash and makes a purchase. Perhaps they want to buy a lawn mower to open a gardening business. The $1000 was turned into a lawn mower. They will pay it back in eleven months returning $1000 with interest; however, until that time $1000 is not in the banks possession. If the bank only has $1000 and then loan another $1000 they will have to get a loan that is a liability.

Some might think interest on loans is a scam to cheat people out-of-money, yet there are real factors affecting the Loan Industry. Banks have to buy property and hire employees to loan money. Even if looking at a simple loan between friends, a person has to think about what they are purchasing with a loan.

When a friend loans money to a friend wanting a lawn mower to open a business, they have an immediate interest in helping a friend. If the friend is successful then they no longer have to pay for two lunches when going out to eat. The loan is paid with money or labor like mowing the lawn for free until debts are paid. For several months the person giving the loan saves money on lawn care. This is not as convenient for major banks. How is an anonymous person going to do to pay off the loan besides money?

Magic Money Theory glorifies a promise that might leave Bankers demystified, yet there are people who want to help everyone have a better life and become self-sufficient. It is a miracle banks breakeven. They hire Cashiers, Loan Officers, Janitorial Staff, Technicians and so-on. Interest on loans will pay for this?

Luckily, most people who own or manage banks are aware of this shortfall. Saving Accounts allow banks to invest. Similar to insurance they only pay cash upon request. Most people want to keep money in the bank, because of additional security. In the meantime banks buy bonds that produce interest and make a variety of investments.

Why put money in the bank for a one percent return over U.S. Treasury Bonds with a three percent return? Banks have security. When successful, bankers might assist people with free checking accounts as a charitable contribution to society and provide loans to regular people; however, several people buy unproductive goods. There is no plan and they are charged high interests because they might not pay it back. When fees are applied they pay more than the sticker price for goods.

It makes sense in a mathematical sense, yet it does not make sense in real life. People who are struggling to pay for basic needs are charged fees: late fees, insufficient fund fees and other penalties related to being poor. Banks are protected with a national insurance to pay default loans. This sends costs to taxpayers. People with intentions to pay loans should think about what they are buying. Will it make life better or generate income?

Overtime the system is proven inefficient. People are offering quick loans and credit cards with absurd fees and interest rates and then banks act as though it is a favor. Living in a capitalist country, Government is limited in how much they can interfere; however, people are free to decline lines of credit and save money through other methods. I suppose an emergency credit card is helpful when unable to save money. It should be used for emergencies. Otherwise, it is a detriment more than assistance.

Magical Money Theory is bankrupting the United States. People think they have money they do not have. Wealthy, Middle-Class, Poor, Banks and Debtors are being extended beyond available resources. When attending a seminar or college class, review the information. Theoretically it makes sense, yet it is impossible to give the same $1000 to multiple people.