I think I have an unconventional or unique take on money lending and this post is an effort to tell the story of how I got to this way of thinking about it.

• What’s debt?
• What’s money?
• How do you create money?
• What is the value of a sound human promise to repay?
• My personal experience with human promises to repay
• Lending in Thailand

What’s debt?

The conventional view is the one everyone already knows.

1. You get a job
2. You have a steady income
3. You buy things above what you make and take on debt
4. You make monthly payments on that debt
5. Your creditors report your payment record to credit bureaus
6. Credit bureaus establish a file on you and issue a score
7. You use that score to get more and better things above what you make, and take on even more debt

What you may not fully understand is that most money is made in the lending industry from those always hanging on by the skin of their teeth.

Those who use credit judiciously? They’re like the 99 cents ham & eggs at a casino or the gas pumps in front of a convenience store—loss leaders. If you don’t already understand what a loss leader is, that’s when a business sells something attractive at break even or even a loss, in order to boost the number of customers passing through, and some will be enticed toward the high-profit margin stuff.

Yep, you only paid 99 cents for your ham & eggs, but then you dropped $20 in the casino on the way out. You got the cheapest gas in town, then loaded up with junk food at a 300% profit margin. You get the idea. All simple stuff that everyone’s aware of.

Fundamentally: debt is a product you buy.

Where is the nuance? There’s lots and some not so obvious. So here we go. This debt thing get’s revisited with a surprise.

What’s money?

…I first began thinking of this decades ago while online discussing banking systems, tangible-asset-backed currencies (like gold), and fractional reserve banking, mostly with libertarians who tend to be knowledgeable.

Without going into deep detail, the classic way modern money got a move-on was that a bank note (cash) was simply a receipt for a specified thing in a warehouse or vault. You didn’t have to carry the thing around. Whoever held the receipt could redeem the thing. That made receipts…cash.

Everyone still operates under the notion that there’s something there, there. Well, because nobody thought much about what’s there, anymore, governments around the world beginning a long time ago realized there doesn’t really need to be any there, there, because it’s been supplanted by full faith and trust in the system qua government. (It’s particularly ironic since that full faith and trust that existed in 1900 means your full-faith-and-trust dollar is worth about 33 cents relative in 2022.)

This isn’t altogether bad (apart from the inflation tax), and it’s a point of contention I’ve had with “gold bugs” forever. Sure, it’s sound in almost every way if there’s a tangible there, there, but it’s also very limiting. If there’s no more there, there, then there’s no more money to lend you no matter how viable and profitable you may be as a borrower.

How do you create money?

You create it by multiplying debt, backed by promises to repay. The easiest way to understand debt is by first understanding what government central banks and masters of internal revenue do. They print it. Actually, that’s just a metaphor. Yes, governments print cash, but this is per demand of the cash portion of money already in supply, which is simple journal entries. Most basically, the annual budget fight is about what number to put in the journal.

That’s how the government creates money.

But lots of other money is created and here’s where I often part with my libertarian friends. It’s a million times more sound than the way governments creates it, by fiat journal entry.

What is the value of a sound human promise to repay?

This is where I supposedly go off the rails, because this is a confounding variable that is never accounted for by “sound money” types. Not by anyone, anytime, ever.

Yet it’s the most important thing. The banks and other lending concerns—sub-contracting to chartered banks—create money by lending according to a number of risk parameters, the two primary ones being do you have a job (steady income) and what is your history of repayment (credit score)? It says nothing about whether or not you will repay this loan being written today. This goes for both secured loans (like a house or car) and unsecured loans. I assure you that banks are not in the business of recouping losses via foreclosure of security. I have many stories of experience on that score but suffice it to say, security is generally pretty crappy.

Nonetheless, that’s how big swaths of money is created to expand economies, since there is a multiplier effect. Remember what I wrote first in the previous section, “You create it by multiplying debt, backed by promises to repay.” Three things to correct misunderstandings about money, debt, and banking.

1. The money you borrow is not from Peter to loan to you. It’s a journal entry, just like the government.
2. When you deposit it, about 90% can be considered backing to create more money and make another loan…to Paul, let’s say.
3. It’s money creation at 10% reserve from there, all the way down.

Wrap your mind around it because it’s actually beautiful. In technical terms, it’s called fractional reserve banking—the bane of many libertarians and gold bugs all over the world.

My view has always been that in their zeal for what they regard as sound money, they leave 90% of it on the table.

Think of it this way. Suppose you’re a renowned, proven property developer and you have a $1 billion project. Maybe you have a billion, maybe you don’t. If you don’t, you need financing. Maybe if you do have a billion, you’d prefer to keep that stashed and let the project pay for itself.

Where do you get the billion? Well, in the old days of Kings, Lords, warehouses, and vaults, you would have a fuck-ton of work to do and you’re almost certain to fail. That’s because real entities with real tangible assets would be putting it at risk for real loss. No sale.

Enter fractional reserve banking where the product they’re selling is debt backed by a promise to repay (along with assets, if any, to attach to it…think mortgage).

They just make up the money to fund the project.

You say it’s unsound?

Ever look at city skyline recently? All created by made-up money backed by a promise to repay, with interest and whatever else sweetened the pot.

A human promise to repay is undervalued and overlooked.

My personal experience with human promises to repay

I recently wrote about financial systems to include my own failed effort to do a startup in P2P lending. What I didn’t include was my results in doing my own research on both the Prosper and LendingClub platforms.

I also included a control: Kiva.org.

I lent $1,000 each on the three platforms. Two of them are for profit and Kiva is charitable. The essential difference is that in the former, you get the interest and in the later, you get your principal but the interest goes to the local loan agents.

In short, in the 20 loans on each platform of $50 each (that is, I participated at $50 as one of many to fund the whole loan), enough defaulted on Prosper and LendingClub that I took a net loss. Earned zero profit and lost a little principle.

On Kiva, 20 $50 loans to people all over Bumfuck, Planet Earth, I didn’t earn any interest either…

But I got back 100% of principal. The whole $1,000. Zero defaults.

This was all from simple, struggling 3rd world people around the world who don’t have low credit scores, they have no credit scores. They have no security to speak of, unless you want to attach a herd of goats. They have no jobs. They’re self-employed entrepreneurs, though.

They had a little bit of capital assembled like livestock or inventory, they had an idea to expand a little, they had an evident passion and drive, and they issued a promise to repay.

And in my experience, every one of those 20 was as good as their word.

Lending in Thailand

If you look on the Kiva site, there is nothing for Thailand even though such a thing would be ideal here. I’m not sure if it’s government regulation or not much market. The burden of formality strikes me as one prohibitive thing, because I live here and get the vibe. Folks like it simple.

There are 1,000 actual entrepreneurs here for every wannabe in America, at least. Drive a mile and on each side of any road you’ll see more true entrepreneurs over that length that you have ever come close to talking to or meeting in the Land of the Free.

The most abundant job title in Thailand is self-employed and after that, small-business owner.

I’m not joking. Americans and Europeans grasp too infrequently that these people are really free and happy in heart and soul—though their struggles persist daily. It takes a while to gain this perspective. Most Americans deal with various corporate entities and franchises now—malls ought to make sane people vomit.

Fuck, even most downtowns generally suck and the more urban, the less gentil. My brother and parents live in Placerville, CA, and that’s what I call a downtown. I love it. Zero big corp. Google images and also, Main Street America. It’s human, not corporate.

Otherwise, everything is big corp and maybe you’re beginning to get some sense that they’re on the government’s side and the government’s on theirs; and in league, they require that you do what you’re told and purchase what you’re told to purchase.

There’s an eroding loss of soul in all of this. It’s a difficult thing for me because I’ve long been a basic free-markets, free-association guy. More recently, I’ve begun to look upon big corp as a great tool for a lot of things. Just not everything. And when it’s not the right tool for the job, then damage is done. All that’s needed is for people to recapture the heart and soul of doing business locally with your neighbors as much as possible.

Naturally, the small shop and roadside-stand entrepreneurs here have no access to traditional bank financing so they turn to private lenders and there’s tons of them. One sector of that is short-term cash loans of about 20 days at 20% interest. Yea, expensive as fuck and yea, you can do the same trick that’s used to besmirch payday lenders—just annualize the rate; which is non-sequitur, because it’s a 20-day loan.

So to the story, the significant other of my girl’s sister—I’ll call him M, since that’s his name—helped build my house out in Sisaket without pay, in exchange for one of the 4 bedrooms for himself, the girl, and kid. But he also had a side business going, doing that money lending.

The parameters are simple.

1. Retail customer-facing storefront of some sort
2. Cash business

They collect the payments in-person on the loan daily.

The basic logic is simple. If you can place bigger orders with suppliers you get a better unit price, so there’s a point where that discount pays for the interest cost of the loan. Easy peasy.

So I put my toe in the water and invested $1,000 of lending capital. Capital gets half, so I was getting 10% per month. Not per year. Per month. I gradually increased the investment up to about $5,000, in stages.

All was going great and I was getting $500 per month.

Then more Covid shit happened, and along with that, a home crisis with his parents. No bullshit serious. So, he does what he has to do and poof. So, both my income and principal are gone.

But he went back home to see to things, started again, and has been sending me money for a year now. It started pathetically small and slow, but I simply thanked him for each payment.

In the last two months, I’ve received nearly $1,000 and he’s nearly 1/3 of the way to paying it all back.

So the lesson is, most of the stuff you hear about banking and lending is designed for their computer systems and algorithms, and has nothing to do with any particular individual or their character.