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The economy's "balance sheet" isn't accounted for the same as the balance sheet of a company or personal finance. Fractional reserve allows a bank to lend out

by ww520 10y ago

The economy's "balance sheet" isn't accounted for the same as the balance sheet of a company or personal finance. Fractional reserve allows a bank to lend out N times more than what it has in saving deposit. With re-deposit of the lent out money, the bank can lend out more, with (N-1)/N times, and so on. Interest rate acts as a lever to limit the amount of loans people are willing to take. Higher interest rates will force companies to not take on more debt; however, the long term debt they got before with a lower rate is cheaper now compared to new debt so they would keep those.

deleted 10y ago
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IIIIIIIIIIII 10y ago
> allows a bank to lend out N times more than what it has in saving deposit. That is not quite how it works according to the Bank of England: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... A few summary excerpts > Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. > The reality of how money is created today differs from the description found in some economics textbooks: > • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. > • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. > In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money > Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. > ... > While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality > In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.
- ww520 10y ago
  I was mainly talking about the U.S. reserve system. While U.K. has no reserve requirement, it has the capital requirement [1], which serves the same purpose to limit the maximum theoretical amount of money in the system. Of course interest rate is used to further control the amount of money below the maximum theoretical limit since interest rate is an easier tool to use than the reserve/capital requirement. [1] https://en.wikipedia.org/wiki/Reserve_requirement#Countries_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...

by ww520 10y ago

deleted 10y ago

[deleted]

IIIIIIIIIIII 10y ago

> allows a bank to lend out N times more than what it has in saving deposit. That is not quite how it works according to the Bank of England: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... A few summary excerpts > Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. > The reality of how money is created today differs from the description found in some economics textbooks: > • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. > • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. > In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money > Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. > ... > While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality > In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.

ww520 10y ago
I was mainly talking about the U.S. reserve system. While U.K. has no reserve requirement, it has the capital requirement [1], which serves the same purpose to limit the maximum theoretical amount of money in the system. Of course interest rate is used to further control the amount of money below the maximum theoretical limit since interest rate is an easier tool to use than the reserve/capital requirement. [1] https://en.wikipedia.org/wiki/Reserve_requirement#Countries_without_reserve_requirements https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...