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>It has 1X but it's allowed to lend out upto 10X No, a bank cannot lend out 10X of it's deposits. That's simply wrong. Say a person deposits $1. The bank owes

>It has 1X but it's allowed to lend out upto 10X No, a bank cannot lend out 10X of it's deposits. That's simply wrong. Say a person deposits $1. The bank owes the person $1. If the bank thinks this $1 is unlikely to be withdrawn soon, it can lend out $0.90 (assuming a 10% reserve rate). End of story. This bank having received $1 cannot turn around and lend $10. Note that this point the bank has $0.10 of the original persons assets, owes that person $1, and is owed $0.90 by the borrower. The net position of all this is zero for the bank. Now, the borrower can deposit the borrowed 0.90 (assuming it's not spent somewhere else) into that bank, or some other bank. The process repeats. The net value to society is zero. Liquidity is added, debts are added, they balance to zero. If a bank lending money is creation of money, so is all lending. I lend Bob $10, he lends $10 to Fred, he lends $10 to Joe, and since we don't have fractional reserves, this is an infinite multiplier. However the chain of debts and assets still is zero sum. There is no difference between this and banks, except banks are required to hold some cash on hand to handle normal business transactions. >By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply. Not quite - a bank will loan any money it has at the highest rate it thinks is profitable (as would any actor in the economy). No bank loans are at the target rate the Fed sets. The Fed does not control the interest rate, they set the Federal Funds Target Rate, which is a target. They do not lend money at this rate [1]. Nor do banks, except to each other, and only overnight. Banks lend money to each other overnight to meet reserves, and each pair of banks sets a rate it thinks is worthwhile, like any open market transaction. The weighted average of these loans is the "federal funds effective rate". The Fed wants this number to be the Federal Funds Target Rate, and they use FOMC to buy/sell assets to try and get banks to lend to each other at the target rate. This has almost no effect on the multiplier, since it does not change the reserve requirements, and the usual fluctuations are tiny. Nowhere does the Fed set a rate and lend at that rate, or even force others to lend at that rate. It's a target. And no where does this force banks to lend or not lend to others. Banks decide to do this at whatever rate borrowers will pay. [1] https://en.wikipedia.org/wiki/Federal_funds_rate https://en.wikipedia.org/wiki/Federal_funds_rate

ww520 11y ago
Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X. See https://en.wikipedia.org/wiki/Fractional-reserve_banking#/media/File:Fractional-reserve_banking_with_varying_reserve_requirements.gif https://en.wikipedia.org/wiki/Fractional-reserve_banking#/me... Fractional reserve plus debt do create money. The accounting cancels out on the book but there are money circulating in the system. If accounting balanced to 0 means no money is created, then FOMC buying and selling treasury creates no money at all since it's net zero on the book at the end. Yet FOMC has the stated purpose to create/destroy money for the Fed. The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It would work if you hand $10 to Bob for safe keeping and he gives you a deposit slip while lends $10 to Carl. Now you have the deposit slip valued at $10 and Carl has $10 in his pocket. The deposit slip is very liquid since you can get back the money at any time.
- ChrisLomont 11y ago
  > If accounting balanced to 0 means no money is created Accounting does balance to zero. Debt and money are added, and they sum to zero. Proof: Let bank start at 0 (or pick any value). Bank receives X dollars from entity A. Now bank has X dollars in reserves and owes entity A exactly X dollars, so net position of bank is zero (X dollars in reserves - X dollars owed = 0). A started with X, gave it to the bank, and the bank owes A X. So A has the same starting position. Bank lends 0.9X = Y to B. Now B has Y, but owes Y, so B net position is 0. Bank lent Y, but is owed Y, so net change here is 0. This happens every step. It's most certainly every single time a net 0 transaction. If you care to continue to claim it's not net 0, please clearly demonstrate as I just did how it is not net 0. >Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X. No, in the limit it is exactly 10X. Proof: Let S = 1+0.9 + 0.9^2 + 0.9^3 + .... Then 0.9S = 0.9 + 0.9^2 + 0.9^3 + ...., Subtract (S-0.9S) and all terms cancel except the first 1, so (S-0.9S) = S/10 = 1, so S = 10. >The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It's exactly the same thing. The bank lending is no different from any entity lending. The bank does not print up new money each time - it's the same money as you put it. Bank IOUs are completely liquid either. All 10X money cannot be withdrawn at the same time - one is lent from someone else's assets, and this is only possible as long as everybody does not try to withdraw their assets at once. This is why there is a certain reserve needed - it allows normal withdrawals and deposits, which are around that fraction (10%) of needed assets. If everybody in the 10X wanted to withdraw their money, there would not be enough money. All the banks would need to call in all loans, and that is chaos. It simply is money that sits in zero sum on balance sheets. Ever wonder why there is a reserve? This is why. It's the expected amount of cash needed to let people with savings in the bank do day to day transactions. Bank runs used to happen (and still could) when reserves get too low, because all that 10X is not money that can be pulled out at once. The Fed provides a buffer against bank runs because it can provide liquidity as needed. But the money multiplier is not some magic source of money any more than lending money from friend to friend is. It's exactly the same process.

ww520 11y ago

Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X. See https://en.wikipedia.org/wiki/Fractional-reserve_banking#/media/File:Fractional-reserve_banking_with_varying_reserve_requirements.gif https://en.wikipedia.org/wiki/Fractional-reserve_banking#/me... Fractional reserve plus debt do create money. The accounting cancels out on the book but there are money circulating in the system. If accounting balanced to 0 means no money is created, then FOMC buying and selling treasury creates no money at all since it's net zero on the book at the end. Yet FOMC has the stated purpose to create/destroy money for the Fed. The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It would work if you hand $10 to Bob for safe keeping and he gives you a deposit slip while lends $10 to Carl. Now you have the deposit slip valued at $10 and Carl has $10 in his pocket. The deposit slip is very liquid since you can get back the money at any time.

ChrisLomont 11y ago
> If accounting balanced to 0 means no money is created Accounting does balance to zero. Debt and money are added, and they sum to zero. Proof: Let bank start at 0 (or pick any value). Bank receives X dollars from entity A. Now bank has X dollars in reserves and owes entity A exactly X dollars, so net position of bank is zero (X dollars in reserves - X dollars owed = 0). A started with X, gave it to the bank, and the bank owes A X. So A has the same starting position. Bank lends 0.9X = Y to B. Now B has Y, but owes Y, so B net position is 0. Bank lent Y, but is owed Y, so net change here is 0. This happens every step. It's most certainly every single time a net 0 transaction. If you care to continue to claim it's not net 0, please clearly demonstrate as I just did how it is not net 0. >Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X. No, in the limit it is exactly 10X. Proof: Let S = 1+0.9 + 0.9^2 + 0.9^3 + .... Then 0.9S = 0.9 + 0.9^2 + 0.9^3 + ...., Subtract (S-0.9S) and all terms cancel except the first 1, so (S-0.9S) = S/10 = 1, so S = 10. >The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It's exactly the same thing. The bank lending is no different from any entity lending. The bank does not print up new money each time - it's the same money as you put it. Bank IOUs are completely liquid either. All 10X money cannot be withdrawn at the same time - one is lent from someone else's assets, and this is only possible as long as everybody does not try to withdraw their assets at once. This is why there is a certain reserve needed - it allows normal withdrawals and deposits, which are around that fraction (10%) of needed assets. If everybody in the 10X wanted to withdraw their money, there would not be enough money. All the banks would need to call in all loans, and that is chaos. It simply is money that sits in zero sum on balance sheets. Ever wonder why there is a reserve? This is why. It's the expected amount of cash needed to let people with savings in the bank do day to day transactions. Bank runs used to happen (and still could) when reserves get too low, because all that 10X is not money that can be pulled out at once. The Fed provides a buffer against bank runs because it can provide liquidity as needed. But the money multiplier is not some magic source of money any more than lending money from friend to friend is. It's exactly the same process.