So its pretty easy for me to understand why fraction reserve banking is inflationary, but why isnt insurance inflationary? I think ive read a little bit on it, but i cant remember what the authors (probably rothbard) said about it.
If an insurance company has a billion in cash to cover claims, but say 10 billion worth of insured property arent they creating 9 billion $ out of thin air just like a bank?
*i will probably have a follow up question depending on answers.
When people pay insurance premiums, they are paying for the right to be in a class of people, who if they meet the conditions of a legitimate insurance claim, can expect to get paid from the current state of that pool (in your example $1billion). They don't claim ownership to any amount of funds in the pool, insurance premiums are therefore hardly confusable with deposits.
Lets say, the insurance fund is wiped out by a statistically abberant number of claims. When someone who has been paying monthly premiums wants to claim also that month, but the pool of funds has already been consumed by his peers, he lements the inability of this full payment, his most recent insurance premium payment, did not do for him what he might have hoped for in expensation, but it is only this most recent payment was *spoiled* by the bad luck of the fund being exhausted. All the prior monthly payments made are not spoiled in the same way as for example a depositor who deposits monthly amounts into a bank might spoil if the bank goes bust. The relationship of the payer to the insurer is quite different to that of depositor to bank.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
The insurance company can't just print out the cash, the Federal Reserve on the other hand can, and when the Federal Reserve does print the cash it is then when inflation occurs. The insurance company actually needs the funds to pay out the full $10 Billion, they don't need it all on hand, the $1 Billion they have on hand is only for if they have to pay it out immediately.
They are creating a product out of thin air.
I think it was in rothbards fed book, he spoke about an illinois (?) wheat (?) silo that stored farmers wheat for them until they were ready to sell. Well that silo realized that at any given time they had never been below a 'x' amount of wheat so they started selling the extra wheat that they had on hand. Thus creating an inflation of wheat, and competed in prices against the very wheat farmers that they were storing for. Isnt insurance similar? and if that is illegal, as it should be, how can insurance companies not be forced to have at least 100% liquidity reserves? They are creating these products out of thin air.
In the context inflation doesn't seem like the right word to describe that. Wheat Silo guy sells a certain amount of wheat that doesn't belong to him because he believes he can get away with it, the actual amount of wheat hasn't increased, with the Federal Reserve however they can actually create the money out of thin air because all they need to do is print some paper. The Wheat Silo guy can't just make wheat appear out of thin air though. If Wheat Silo guys customers come to collect more than he expects, he won't actually have it, while the Federal Reserve will have it. There will be distortion for the prices of wheat because of what Wheat SIlo guy did, the prices will drop because people will believe the supply has increased but it actually hasn't. When the Federal Reserve prints the cash, the value of the cash will drop, because there is actually more cash in circulation.
Wheat Silo guy must actually have the wheat or else he will be screwed because he can't just create wheat out of thin air. The insurance company must also have enough assets to cover all of the things they insure. The Federal Reserve is in a interesting position, one much different than Wheat Silo guy and the insurance company, the Federal Reserve has the legal power to actually create cash at will.
ah! ya your right. it just wasnt making since to me. I wasnt looking at it that way. All good, i knew there was an answer out there. I was looking at it more like a 'loan' and/or deposit.