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So if you're wealthy and that dollar goes to pay off the loan - where does it go? The person you're giving it to will either spend it on consumption, or loan i

by nstj 10y ago

So if you're wealthy and that dollar goes to pay off the loan - where does it go? The person you're giving it to will either spend it on consumption, or loan it to someone else until (ultimately) it is spent. And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. It won't reduce the amount of money in circulation[0]. Side note: "How the Economic Machine Works"[1] by Ray Dalio (manager of one of the world's largest hedge funds) is fantastic in describing these concepts in non-academic-economics terms. [0]: https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/ [1]: http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf http://www.economicprinciples.org/wp-content/uploads/ray_dal...

dpark 10y ago
> So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person you're giving it to will either spend it on consumption Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. > or loan it to someone else until (ultimately) it is spent. The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) > And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... https://chaseonline.chase.com/resources/RateSheetForCons70219132016.pdf https://chaseonline.chase.com/resources/RateSheetForCons7021... > It won't reduce the amount of money in circulation. When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
- WalterBright 10y ago
  > The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.
  - dpark 10y ago
    Fairness is an irrelevant point of discussion here. The Fed doesn't pay reserve interest because it's fair. They pay the interest that they expect will drive desired market behavior. If fairness were the goal, they'd pay zero interest for the excess reserves that they don't require. Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really. This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.
    - WalterBright 10y ago
      Any organization relying on a 0.5% return on investment is going to go bankrupt due to inflation, taxes, and expenses. Hoarding money is not a viable business plan.
      - dpark 10y ago
        I'm not sure what the disconnect is here. It's not Chase's money sitting in reserve drawing 0.5% interest. It's your money. Chase makes money for free by just holding your money. There are certainly expenses associated with running a bank. Those expenses don't significantly increase for Chase if you deposit an extra $100K in your savings account, but Chase will make an extra $4K just for holding it. I'm not sure if you're under the impression that I'm claiming that holding reserves is the primary way banks make money. I'm not. The discussion about reserves is to answer the claim that a dollar deposited with Chase will automatically result in a 90 cent loan to someone else. It will not.

by nstj 10y ago

dpark 10y ago

> So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person you're giving it to will either spend it on consumption Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. > or loan it to someone else until (ultimately) it is spent. The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) > And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... https://chaseonline.chase.com/resources/RateSheetForCons70219132016.pdf https://chaseonline.chase.com/resources/RateSheetForCons7021... > It won't reduce the amount of money in circulation. When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...

WalterBright 10y ago
> The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.
- dpark 10y ago
  Fairness is an irrelevant point of discussion here. The Fed doesn't pay reserve interest because it's fair. They pay the interest that they expect will drive desired market behavior. If fairness were the goal, they'd pay zero interest for the excess reserves that they don't require. Inflation is also irrelevant. What matters is the spread between what they pay a depositor in interest and what the Fed will pay for holding the deposit in reserve. So long as that spread is positive, they make money just for holding your money. Can they do better by lending and increasing the spread? Sure. Do they have to in order to make money? Not really. This is also really odd stuff to choose to nitpick out of the discussion of how money of created in the modern economy.
  - WalterBright 10y ago
    Any organization relying on a 0.5% return on investment is going to go bankrupt due to inflation, taxes, and expenses. Hoarding money is not a viable business plan.
    - dpark 10y ago
      I'm not sure what the disconnect is here. It's not Chase's money sitting in reserve drawing 0.5% interest. It's your money. Chase makes money for free by just holding your money. There are certainly expenses associated with running a bank. Those expenses don't significantly increase for Chase if you deposit an extra $100K in your savings account, but Chase will make an extra $4K just for holding it. I'm not sure if you're under the impression that I'm claiming that holding reserves is the primary way banks make money. I'm not. The discussion about reserves is to answer the claim that a dollar deposited with Chase will automatically result in a 90 cent loan to someone else. It will not.