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"So, everyone spends money, no limits on it". Not true, there are limits (e.g. in the form of leverage ratio caps) and not everything borrowed is immediately in
by jiggunjer 9y ago
"So, everyone spends money, no limits on it". Not true, there are limits (e.g. in the form of leverage ratio caps) and not everything borrowed is immediately injected back into the economy (that might bump inflation too much).
Imagine if banks couldn't 'print their own money', then businesses would depend on people investing to get funding and demand far outstrips supply. So we'd have economic contractions on a massive scale.
- Scea91 9y agoHow does a regular bank print money?
- jiggunjer 9y agoThe parent comment alluded to this. They operate in a trust-based network with other banks. So when they add X to an account (e.g. a loan) and that person tries to spend it by transferring it to another account at another bank, the bank is effectively in debt with another bank. This inter-bank loaning system can run on this virtual cash mechanism as long as the person who borrowed X manages to pay it back over time. You can probably guess this puts banks in a very privileged position. Hence the high requirements for being able to start a bank of your own, and the government regulation intended to control inflation and fraud.