Changing the nature of money is dangerous

 

I’ve long been fascinated by money.  What is it, exactly?  It’s clearly not just little pieces of paper.  Now that we’ve dropped the gold standard, it’s no longer tied to any specific thing of any specific value.  You can use money to buy property, food, risk (stocks etc), avoidance of risk (insurance policies), communications (internet fees etc), transportation, all sorts of things.  You can even try to buy happiness with it (booze for adults or toys for children – whatever).  But again, what exactly is money itself?

You could argue that money is simply a tool to measure scarcity.  The more scarce something is, the more money is required to buy it.  Our complex economy would crash tomorrow if we didn’t have a means of accurately measuring real time scarcity of absolutely everything in the world.  This is why price-fixing is universally catastrophic.  When you intentionally sabotage money’s job of measuring scarcity, then money instantly loses its value, and people have to find other ways to barter, like black markets and such.

My secretary was in a good mood yesterday.  She got an email saying that the Biden Administration had forgiven her student loans.  She’s 42 years old.  She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance.

Which means that money is now being used to measure not how scarce something is, but rather how politically connected someone is.  This is obviously an important phenomenon for our political system, but I would argue that it is perhaps even more important for our economy.  When we use money to measure things other than scarcity, then money becomes less useful, and our economy becomes less stable.

I know that this is not a new concept.  Every government uses money to control elections in one way or another.  Using subsidies and wealth transfers to buy votes is not unique to America, and it will not go away tomorrow.

Still, I think that one reason that countries with strong centralized power systems tend to have unstable economies is that their governments use money for political purposes so much that their money becomes useless for measuring scarcity.

Inevitably (and quickly), chaos ensues.  Long-term investors don’t like chaos.  And with no long-term investments, then the only source of wealth is government.  And before you know it, the wealthiest counties in America are the suburbs of Washington D.C.

Forty two year old secretaries start getting emails saying that they just earned $1,500 by doing nothing.  Then, before you know it, entire industries are created or destroyed based not on the production of their workers, but by the political connections of their lobbyists.  John Galt would argue that such an economy cannot survive for long.  Chaos turns to revolution.

Using money for political purposes is much more destructive that it may appear, for many and varied reasons.

The only flaw I can see in my thought process here is that I have no idea what I’m talking about.  Although if my President doesn’t feel constrained by such concerns, then neither will I.  If you disagree with such reasoning, you’re a dog-faced pony soldier.

But I am hoping that those who have a better understanding of money, economics, and finance will chime in the comments – does my argument make any sense?

What do you think?

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  1. DonG (CAGW is a Scam) Coolidge
    DonG (CAGW is a Scam)
    @DonG

    Dr. Bastiat: She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance. 

    The problem with socialism is that you eventually run out of other people’s money.

    • #1
  2. Dr. Bastiat Member
    Dr. Bastiat
    @drbastiat

    DonG (CAGW is a Scam) (View Comment):

    Dr. Bastiat: She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance.

    The problem with socialism is that you eventually run out of other people’s money.

    That’s true, although I’m trying to make the point that using money to purchase political power is not exactly socialism.  I’m starting to think that it may be something much more destructive.

    • #2
  3. David Foster Member
    David Foster
    @DavidFoster

    Benjamin Franklin:

    There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice—the love of power and the love of money. Separately, each of these has great force in prompting men to action; but, when united in view of the same object, they have, in many minds, the most violent effects.

    See my post Paying Higher Taxes can be Very Profitable (which needs an update, some of these incomes much higher now)

     

     

    • #3
  4. Globalitarian Lower Order Misanthropist Coolidge
    Globalitarian Lower Order Misanthropist
    @Flicker

    I’ve wondered about what money is, too.  And funnily, most economists don’t seem to have a good answer either.  I consider money to be a document and a measure of value for the energy, or the labor, and for the result of producing good things that people want, and even the amount of time taken out of your life that you surrendered to do so.

    When you give away money, you transfer your time and energy to the receiver, and they get credit for it.  This is fine if it’s voluntary, but (should I say it?) slavery if involuntary.  Giving away tax dollars is giving away part of the tax payers’ lives.

    Creating money by printing more of it and giving it away is falsely giving away documentation of life and energy and giving credit for surrendering one’s time and energy when actually the neither the giver nor the receiver has surrendered any at all.  In other words, it’s turns out to be fake money.

    But since you can’t differentiate fake money from real money, the more fake money there is, the more it lowers the credit or value allotted to each other unit of real money.  And thus misallocation of value, and a false estimate of overall productivity, as well as requiring more money (a mixture or fake and real) to exchange for real work and products.

    • #4
  5. Percival Thatcher
    Percival
    @Percival

    In the future, access to your money will depend on your social credit rating and when that  has been accomplished, you will be a slave.

    • #5
  6. Al French Moderator
    Al French
    @AlFrench

    @markcamp ?

    • #6
  7. David Foster Member
    David Foster
    @DavidFoster

    High inflation creates a sense of dislocation.  This is well captured in Hans Fallada’s novel ‘Little Man, What Now?’, which follows a struggling young couple in late-Weimar Germany. Inflation is now under control–the current problem is unemployment–but the mental scars from the great inflation remain.  The couple’s landlady:

    Young people, before the war, we had a comfortable fifty thousand marks. And now that money’s all gone. How can it all be gone?…I sit here reckoning it up. I’ve written it all down. I sit here, reckoning. Here it says: a pound of butter, three thousand marks…can a pound of butter cost three thousand marks?…I now know that my money’s been stolen. Someone who rented here stole it…he falsified my housekeeping book so I wouldn’t notice. He turned three into three thousand without me realizing…how can fifty thousand have all gone?

     

     

    • #7
  8. OldPhil Coolidge
    OldPhil
    @OldPhil

    $3 a month? $3?

    • #8
  9. Full Size Tabby Member
    Full Size Tabby
    @FullSizeTabby

    Like Globalitarian in comment #4 above, I have never seen a theoretical definition of money that made sense to me. But, apart from theory, what you’re noting here is the practical effects.

    Dr. Bastiat: Still, I think that one reason that countries with strong centralized power systems tend to have unstable economies is that their governments use money for political purposes so much that their money becomes useless for measuring scarcity. 

    Whether or not “measuring scarcity” is what people think of or is even correct, people seek to use money (or currency – are they different?) that is perceived to be stable. And money that is politicized is inherently unstable, leading to the chaos you note in the following paragraph. 

    • #9
  10. Dr. Bastiat Member
    Dr. Bastiat
    @drbastiat

    OldPhil (View Comment):

    $3 a month? $3?

    That’s what she said. 

    She obviously had no interest in ever paying it off.  And at $36 a year, why would she? 

    • #10
  11. kedavis Coolidge
    kedavis
    @kedavis

    Dr. Bastiat (View Comment):

    OldPhil (View Comment):

    $3 a month? $3?

    That’s what she said.

    She obviously had no interest in ever paying it off. And at $36 a year, why would she?

    Well at least in theory, having outstanding student loan debt can be a problem with credit rating.  But I’m not sure how that would be affected by such low payments on such a low balance.  Sometimes just the EXISTENCE of a thing has a “value” of its own in these matters.

    • #11
  12. Mark Camp Member
    Mark Camp
    @MarkCamp

    Al French (View Comment):

    @ markcamp ?

    To me these are very  interesting and important questions. I’ve spent quite a bit of my life thinking and reading about them.

    I’m glad to see them discussed.  My input would be unwelcome and unhelpful, so I will just be a spectator.

    • #12
  13. Ekosj Member
    Ekosj
    @Ekosj

    Money features large in why in never finished my PhD in economics….

    One day in a doctoral level class in Macroeconomics our professor had build a giant model of the macro economy.   The dense thicket of math covered the front blackboard and wrapped around to the blackboards on the side wall.  It incorporated 2 standard assumptions.  

    (1) Rational expectations…. Without getting into details, a particular set of assumptions about how economic actors form expectations about the future.
    (2) The Natural Rate hypothesis… we don’t specify what the % is, but we assume that there is some unemployment rate below which you can’t push the economy.   These are 2 gold-plated bits of orthodoxy.   The authors of both Rational Expectations and the Natural Rate won Nobel prizes for these ideas.   They are as mainstream as it gets.

    Ok.

    Model built.   Time to do some algebra…

    This cancels that…

    This bit over here can be re-written as that…

    That now cancels out this…

    Badda bing badda bang badda boom…

    All the variables that measure the money supply are gone.   Poof.    Vanished.

    Money supply can be ANYTHING!   Money supply = Zero?   Sure.   According to this model that’s a valid answer.   Infinity?   Sure.   That’s valid too.

    Me…interrupting class – “WTF?!?!?”    “This is a nonsense answer.”   “This is Galileo going to the top of the Leaning Tower, dropping two balls, and one of them falls UP!”

    Professor – That’s right Mr Ekos.   This is indeed an interesting  result.   Let’s pursue this further…

    He went on to demonstrate that not only this particular model, but ANY macro model incorporating these two standard assumptions will have the same result.    We are forced to conclude that Money doesn’t matter.

    Which is nonsense.   Thats the day I knew I’d never finish my doctorate.   If this was orthodoxy, and I was expected to add another brick in the wall, I was out.   If this “interesting result” was allowable then Clearly we had made some awful mistake somewhere.    But apparently no one cared but me.

    • #13
  14. Ekosj Member
    Ekosj
    @Ekosj

     

    Which is the long way around to say that I like your definition of money better than the one they tried to teach me in grad school.

    • #14
  15. kedavis Coolidge
    kedavis
    @kedavis

    Ekosj (View Comment):

    Money features large in why in never finished my PhD in economics….

    One day in a doctoral level class in Macroeconomics our professor had build a giant model of the macro economy. The dense thicket of math covered the front blackboard and wrapped around to the blackboards on the side wall. It incorporated 2 standard assumptions.

    (1) Rational expectations…. Without getting into details, a particular set of assumptions about how economic actors form expectations about the future.
    (2) The Natural Rate hypothesis… we don’t specify what the % is, but we assume that there is some unemployment rate below which you can’t push the economy. These are 2 gold-plated bits of orthodoxy. The authors of both Rational Expectations and the Natural Rate won Nobel prizes for these ideas. They are as mainstream as it gets.

    Ok.

    Model built. Time to do some algebra…

    This cancels that…

    This bit over here can be re-written as that…

    That now cancels out this…

    Badda bing badda bang badda boom…

    All the variables that measure the money supply are gone. Poof. Vanished.

    Money supply can be ANYTHING! Money supply = Zero? Sure. According to this model that’s a valid answer. Infinity? Sure. That’s valid too.

    Me…interrupting class – “WTF?!?!?” “This is a nonsense answer.” “This is Galileo going to the top of the Leaning Tower, dropping two balls, and one of them falls UP!”

    Professor – That’s right Mr Ekos. This is indeed an interesting result. Let’s pursue this further…

    He went on to demonstrate that not only this particular model, but ANY macro model incorporating these two standard assumptions will have the same result. We are forced to conclude that Money doesn’t matter.

    Which is nonsense. Thats the day I knew I’d never finish my doctorate. If this was orthodoxy, and I was expected to add another brick in the wall, I was out. If this “interesting result” was allowable then Clearly we had made some awful mistake somewhere. But apparently no one cared but me.

    Theoreticians only care about their theories, whether or not they’re useful or anything.

    • #15
  16. Globalitarian Lower Order Misanthropist Coolidge
    Globalitarian Lower Order Misanthropist
    @Flicker

    Ekosj (View Comment):

    Money features large in why in never finished my PhD in economics….

    One day in a doctoral level class in Macroeconomics our professor had build a giant model of the macro economy. The dense thicket of math covered the front blackboard and wrapped around to the blackboards on the side wall. It incorporated 2 standard assumptions.

    (1) Rational expectations…. Without getting into details, a particular set of assumptions about how economic actors form expectations about the future.
    (2) The Natural Rate hypothesis… we don’t specify what the % is, but we assume that there is some unemployment rate below which you can’t push the economy. These are 2 gold-plated bits of orthodoxy. The authors of both Rational Expectations and the Natural Rate won Nobel prizes for these ideas. They are as mainstream as it gets.

    Ok.

    Model built. Time to do some algebra…

    This cancels that…

    This bit over here can be re-written as that…

    That now cancels out this…

    Badda bing badda bang badda boom…

    All the variables that measure the money supply are gone. Poof. Vanished.

    Money supply can be ANYTHING! Money supply = Zero? Sure. According to this model that’s a valid answer. Infinity? Sure. That’s valid too.

    Me…interrupting class – “WTF?!?!?” “This is a nonsense answer.” “This is Galileo going to the top of the Leaning Tower, dropping two balls, and one of them falls UP!”

    Professor – That’s right Mr Ekos. This is indeed an interesting result. Let’s pursue this further…

    He went on to demonstrate that not only this particular model, but ANY macro model incorporating these two standard assumptions will have the same result. We are forced to conclude that Money doesn’t matter.

    Which is nonsense. Thats the day I knew I’d never finish my doctorate. If this was orthodoxy, and I was expected to add another brick in the wall, I was out. If this “interesting result” was allowable then Clearly we had made some awful mistake somewhere. But apparently no one cared but me.

    Wow.  Sounds interesting, frustrating, pointless, and the state of the art.

    • #16
  17. Ekosj Member
    Ekosj
    @Ekosj

    Technically, Doc, it’s PRICE that is the measure of scarcity.   Money is the unit of account in which price is expressed and the medium of exchange in which transactions are conducted.

    What your example highlights is money’s third supposed characteristic … money is supposed to be a store of value.   It is supposed to preserve value across time.   And it’s THIS attribute that is routinely run roughshod over.  

    This is why debtors love inflation.   They borrow a certain amount of value, represented by X units of account.   If money loses its value,  they repay X units of account but those units of account now represent less value than they borrowed.   So when government is both a debtor (27 trillion dollars today. 47 trillion a decade hence.) and has the ability to change the value of money; the outcome is certain.

    • #17
  18. Ekosj Member
    Ekosj
    @Ekosj

    Globalitarian Lower Order Misa… (View Comment):

    Ekosj (View Comment):

    Money features large in why in never finished my PhD in economics….

    One day in a doctoral level class in Macroeconomics our professor had build a giant model of the macro economy. The dense thicket of math covered the front blackboard and wrapped around to the blackboards on the side wall. It incorporated 2 standard assumptions.

    (1) Rational expectations…. Without getting into details, a particular set of assumptions about how economic actors form expectations about the future.
    (2) The Natural Rate hypothesis… we don’t specify what the % is, but we assume that there is some unemployment rate below which you can’t push the economy. These are 2 gold-plated bits of orthodoxy. The authors of both Rational Expectations and the Natural Rate won Nobel prizes for these ideas. They are as mainstream as it gets.

    Ok.

    Model built. Time to do some algebra…

    This cancels that…

    This bit over here can be re-written as that…

    That now cancels out this…

    Badda bing badda bang badda boom…

    All the variables that measure the money supply are gone. Poof. Vanished.

    Money supply can be ANYTHING! Money supply = Zero? Sure. According to this model that’s a valid answer. Infinity? Sure. That’s valid too.

    Me…interrupting class – “WTF?!?!?” “This is a nonsense answer.” “This is Galileo going to the top of the Leaning Tower, dropping two balls, and one of them falls UP!”

    Professor – That’s right Mr Ekos. This is indeed an interesting result. Let’s pursue this further…

    He went on to demonstrate that not only this particular model, but ANY macro model incorporating these two standard assumptions will have the same result. We are forced to conclude that Money doesn’t matter.

    Which is nonsense. Thats the day I knew I’d never finish my doctorate. If this was orthodoxy, and I was expected to add another brick in the wall, I was out. If this “interesting result” was allowable then Clearly we had made some awful mistake somewhere. But apparently no one cared but me.

    Wow. Sounds interesting, frustrating, pointless, and the state of the art.

    You can see where Modern Monetary Theory might come from.

    • #18
  19. John H. Member
    John H.
    @JohnH

    Was the ruble – or perhaps I should say the ruble economy – unstable?

    Unattractive, sure. But that’s different.

    Whatever the currency in the U.S.S.R., I bet folks there always had a keen eye for scarcity. It occurs to me just now, though, that in a “country” like that, supply was binary. A commodity was either abundantly for sale, or utterly absent. No “money” or for that matter “price” could reflect either of these states, or connect reliably to the commodity’s “value.”

    • #19
  20. KCVolunteer Lincoln
    KCVolunteer
    @KCVolunteer

    Ekosj (View Comment):

    Technically, Doc, it’s PRICE that is the measure of scarcity. Money is the unit of account in which price is expressed and the medium of exchange in which transactions are conducted.

    What your example highlights is money’s third supposed characteristic … money is supposed to be a store of value. It is supposed to preserve value across time. And it’s THIS attribute that is routinely run roughshod over.

    This is why debtors love inflation. They borrow a certain amount of value, represented by X units of account. If money loses its value, they repay X units of account but those units of account now represent less value than they borrowed. So when government is both a debtor (27 trillion dollars today. 47 trillion a decade hence.) and has the ability to change the value of money; the outcome is certain.

    So, are we OK as long as the US Dollar is the world’s reserve currency?

    And when it is no longer the reserve currency, can the holders of US debt transfer it to another currency?

    If they can, or think they can, it seems we’ll be in a lot more trouble here than we already are.

    Do the people controlling the money supply even worry about this possibility?

    • #20
  21. Ekosj Member
    Ekosj
    @Ekosj

    John H. (View Comment):

    Was the ruble – or perhaps I should say the ruble economy – unstable?

    Unattractive, sure. But that’s different.

    Whatever the currency in the U.S.S.R., I bet folks there always had a keen eye for scarcity. It occurs to me just now, though, that in a “country” like that, supply was binary. A commodity was either abundantly for sale, or utterly absent. No “money” or for that matter “price” could reflect either of these states, or connect reliably to the commodity’s “value.”

    Some of my classmates grew up behind what was then The Iron Curtain.   They said everyone carried a mesh shopping bag in their pocket or purse.   If there was a line at a shop you got in it regardless of what was on offer.   Whatever it was you either needed or could barter to someone who did.   Everyone had cash.   There was just nothing to buy.

    • #21
  22. Ekosj Member
    Ekosj
    @Ekosj

    KCVolunteer (View Comment):

    Ekosj (View Comment):

    Technically, Doc, it’s PRICE that is the measure of scarcity. Money is the unit of account in which price is expressed and the medium of exchange in which transactions are conducted.

    What your example highlights is money’s third supposed characteristic … money is supposed to be a store of value. It is supposed to preserve value across time. And it’s THIS attribute that is routinely run roughshod over.

    This is why debtors love inflation. They borrow a certain amount of value, represented by X units of account. If money loses its value, they repay X units of account but those units of account now represent less value than they borrowed. So when government is both a debtor (27 trillion dollars today. 47 trillion a decade hence.) and has the ability to change the value of money; the outcome is certain.

    So, are we OK as long as the US Dollar is the world’s reserve currency?

    And when it is no longer the reserve currency, can the holders of US debt transfer it to another currency?

    If they can, or think they can, it seems we’ll be in a lot more trouble here than we already are.

    Do the people controlling the money supply even worry about this possibility?

    If/When the rush for the exits starts, not everyone will get out.  Some will get trampled.   Who?   My crystal ball isn’t clearer than anybody else’s.

    Does anyone worry?   Only a few.   Most can’t see past the next election.

    • #22
  23. Muleskinner, Weasel Wrangler Member
    Muleskinner, Weasel Wrangler
    @Muleskinner

    Dr. Bastiat: But again, what exactly is money itself? 

    That’s the real question, the one that Macroeconomists assume but never answer. Microeconomics assumes money away and never has to wrestle with it. My working understanding comes from CS Peirce, that everything is a sign, and all thinking is in signs.  A sign is something that stands for something (an object) to something else (an interpretant). The dollars I hold represent to me my ability to command resources. A dollar bill is a sign, the object is a second McRib, and I interpret the dollar to be a McRib. All of the functional definitions of money depend upon how I, and billions of other people, interpret that sign and the infinite number of objects (not necessarily physical) that money can stand for.

    And surely it causes problems for the interpreter when money becomes a sign for  something different. For Biden it is a sign of political power, and he hopes that canceling debts is interpreted in a way that provides him with that power.

     

    • #23
  24. SteveSc Member
    SteveSc
    @SteveSc

    To quote Francisco d’Anconia – We are entering the period of the aristocracy of the pull……

    • #24
  25. Red Herring Coolidge
    Red Herring
    @EHerring

    Dr. Bastiat (View Comment):

    OldPhil (View Comment):

    $3 a month? $3?

    That’s what she said.

    She obviously had no interest in ever paying it off. And at $36 a year, why would she?

    She will pay in other ways– inflated prices for goods and services.

    • #25
  26. Red Herring Coolidge
    Red Herring
    @EHerring

    Ekosj (View Comment):

    John H. (View Comment):

    Was the ruble – or perhaps I should say the ruble economy – unstable?

    Unattractive, sure. But that’s different.

    Whatever the currency in the U.S.S.R., I bet folks there always had a keen eye for scarcity. It occurs to me just now, though, that in a “country” like that, supply was binary. A commodity was either abundantly for sale, or utterly absent. No “money” or for that matter “price” could reflect either of these states, or connect reliably to the commodity’s “value.”

    Some of my classmates grew up behind what was then The Iron Curtain. They said everyone carried a mesh shopping bag in their pocket or purse. If there was a line at a shop you got in it regardless of what was on offer. Whatever it was you either needed or could barter to someone who did. Everyone had cash. There was just nothing to buy.

    Went shopping in East Berlin once. The spouses had to buy East Marks at the customs entry about 50 feet from Checkpoint Charlie at 1:1 to enter. In uniform, we entered untouched through Checkpoint Charlie with our East Marks bought in the west at 10:1. Many stores were bare but not the record store. I stocked up on classical KPs for about $1.25 each. Plenty to choose from. Locals probably couldn’t afford stereo systems. We could. We could also afford a fine meal in a restaurant that had no tables available until you paid the bribe tip to the head waiter. We dined royally, along with the Brits and French, also in uniform, and folks in civilian clothes who happened to be speaking Russian.

    • #26
  27. philo Member
    philo
    @philo

    Dr. Bastiat: My secretary was in a good mood yesterday.  She got an email saying that the Biden Administration had forgiven her student loans.  She’s 42 years old.  She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance. 

    Won’t she be surprised when she discovers how much that $1,500 today will cost her in another 20 years.

    • #27
  28. kedavis Coolidge
    kedavis
    @kedavis

    philo (View Comment):

    Dr. Bastiat: My secretary was in a good mood yesterday. She got an email saying that the Biden Administration had forgiven her student loans. She’s 42 years old. She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance.

    Won’t she be surprised when she discovers how much that $1,500 today will cost her in another 20 years.

    I’m sure it already has, considering FJB-onomics.  She just doesn’t see it, and would likely refuse to even consider it.

    • #28
  29. Dr. Bastiat Member
    Dr. Bastiat
    @drbastiat

    kedavis (View Comment):

    philo (View Comment):

    Dr. Bastiat: My secretary was in a good mood yesterday. She got an email saying that the Biden Administration had forgiven her student loans. She’s 42 years old. She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance.

    Won’t she be surprised when she discovers how much that $1,500 today will cost her in another 20 years.

    I’m sure it already has, considering FJB-onomics. She just doesn’t see it, and would likely refuse to even consider it.

    She sees it.

    My secretary is extremely intelligent.  I have enormous respect for her.  She understands what’s happening.

    She’s a staunch conservative.  She hates what Democrats are doing to our country.

    But she’s happy to have her loan paid off.  Understandably. 

    I think Democrats are doing this student loan repayment not to woo students, but to woo middle class workers who are in debt.  There’s lots of those.  And unlike students, they vote mostly Republican.  So for Democrats, this is worth a try. 

    • #29
  30. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Dr. Bastiat:

    My secretary was in a good mood yesterday.  She got an email saying that the Biden Administration had forgiven her student loans.  She’s 42 years old.  She had been paying $3 a month for twenty years, and still owed around $1,500, until yesterday when the federal government paid off her balance. 

    You’re joking, right?  What non-demented person with a job would pay off a loan at $3 a month?  What lending institution would agree to that?

    • #30
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