>> 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 case in

>> 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 case in point was for a 'wealthy person' (not my term, I don't like it but let's roll with it) who holds the debt of a student borrower. The hypothesis of an above poster was that money repaid on loan service (from the borrower student to the rentier) would not result in increased consumption in the economy and that if the money remained with the debtor that they would be more likely to stoke consumption in the economy. My point was that if someone gives you money you can either spend or invest it (let's forget physical currency for now - in our current monetary system there's not that much central bank money [physical/reserves] in the economy as a percentage of gross domestic product, save for the US with USD1.46 trillion, owing to persistent current account deficits and the Triffin dilemma and other factors - but I digress). But let's take your argument as an example. If I hold $100k of a student's debt, and that debt is 'extinguished' then it doesn't change the money stock in the economy. If a debt between 2 individuals is "wiped off the books" then a dollar doesn't "leave 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. I'm not sure I really follow what's going on in this segment of your response. Banks take deposits. They fund assets (often loans) with those deposits. Those funds are then used at some point for consumption. >> 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.) Well, as much as I'd like to be able to change double entry accounting (and the laws of physics) this is not the case. The amount of lending a bank does is inextricably related to the amount of deposits they hold. If you 'deposit funds' with a bank, then there is a corresponding liability on their balance sheet (an entry on the right side). Other liabilities of banks include debt (both short and long term) and equity capital. Guess what? If you deposit money with a bank (or loan it money by purchasing its debt, or invest by providing equity capital) then whatever funds you provided the bank must be recognised on the bank's balance sheet. This new money you gave them goes on the left side (their assets). Now if you're a bank you can hold physical currency in your vaults (doesn't earn much interest, and there's a potential silverfish problem) or you can loan it out. You could loan it to the Fed[0] for 0.5% or you'd probably want to loan it out to someone else at a potentially higher rate (think mortgages, equities if you want to roll the dice, structured credit if you're feeling like it's 2007, you get the point). >> 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. Sounds like a money machine. Does Chase obtain all of their debt capital from depositors? Or is it possible that they pay more than 0.5% on some of their funding? > 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... http://www.federalreserve.gov/monetarypolicy/reqresbalances..... https://chaseonline.chase.com/resources/RateSheetForCons7021.. https://chaseonline.chase.com/resources/RateSheetForCons7021.... $100,000 * 0.04 = $4,000 (loans -> income) $800,000 * 0.01 = $8,000 (deposits -> expenses) -$4,000 (total profit) Losing $4,000 every year on a $100,000 loan book doesn't seem like the best move for a bank. Furthermore, I ask this one question - if they don't "loan out" every dollar deposited, then what do they do with the monies? Hoard them in a vault? >> 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. As illustrated above, a deposit with a bank is a liability entry in their balance sheet with a corresponding asset to match. The asset would either be physical currency if that is what you deposited (how old fashioned) or the debt of another banking institution (which I'm guessing would be netted out at the end of each day - or intraday if that is your central bank's kind of thing - and balanced, or exchanged for central bank money). By definition the money is "loaned" to someone. Now we could really get into the nitty gritty of credit creation and "high powered central bank money" vs "private bank money" but there's probably not the need to get that into detail. Anyways - I'm probably wrong with all of this though. It would be awesome if you could show the balance sheet entries which would correspond to the transactions which you're describing as then we could really just resolve any confusion using quantitative measures rather than long winded discussions :) [0]: https://fred.stlouisfed.org/series/WRESBAL https://fred.stlouisfed.org/series/WRESBAL