10 ms·

You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents. They’re owed 90 cents from Bob, a

You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents. They’re owed 90 cents from Bob, and they will collect interest on the loan to profit. If no loans are made, the bank will eventually have more than $1.90 in reserves. There is risk here because you and bob might want your money at the same time, or Bob might default, but generally this doesn’t happen at scale. Now consider Tethers case. You give Tether a dollar. ???. Tether has $0.70 and you’re not even allowed to get it back.

gridlockd 7y ago
> You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents. There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air. Perhaps it's unfair to say the bank "invented" the money, but it did create it. > They’re owed 90 cents from Bob, and they will collect interest on the loan to profit. If no loans are made, the bank will eventually have more than $1.90 in reserves. If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest. > You give Tether a dollar. ???. Tether has $0.70 and you’re not even allowed to get it back. If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale".
- qaq 7y ago
  "There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air." I think you are confusing money supply and record keeping. The only spendable money is what bank actually has so if you and Bob where the only customers of that bank and bank loaned 90c of your 1 dollar to Bob the only money you could spend would be 10c. The only bank that creates money out of thin air is FED.
  - thinkmassive 7y ago
    The Fed is not the only bank who can loan funds at a fractional reserve. You might want to read a bit more about how banking works.
    - qaq 7y ago
      Fractional reserve does not create money it just specifies what % of money a bank can loan out.
      - gridlockd 7y ago
        https://en.wikipedia.org/wiki/Money_supply https://en.wikipedia.org/wiki/Money_supply
  - Zarath 7y ago
    That isn't true. You might want to take a look at this: https://en.wikipedia.org/wiki/Money_creation#Fractional_reserve_theory_of_money_creation https://en.wikipedia.org/wiki/Money_creation#Fractional_rese...
    - qaq 7y ago
      You might want to take a look at types of calculations that theory is applied to. It's used to model macro economic effects which has very little to do with what people imagine this means.
  - b_tterc_p 7y ago
    This is not true. You can spend up to a dollar, because you’re spending from your bank account and everyone trusts that you’re allowed to take up to a dollar. Dollars a fungible, so you’ll be taking someone else’s dollar, but that’s ok, because not everyone needs their dollar at once. Bob can spend 90 cents because he has 90 cents, though he is obligated to pay it back later. The bank can loan out (in this example) 81 cents of the 90 cent deposit from bob.
    - 7y ago
- b_tterc_p 7y ago
  > If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest. This is wrong. The bank will have $1.90 + interest. You have to pay back your entire loan. Yes, bob might default, but averaged out, the risk calculations set the interest rate high enough to cover that profitably. The fractional reserve part of the banking system is a temporary choice that happens continuously. But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt. > If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale". The difference is tether has no title to the missing 30%, and probably even more of it if we are going to be honest. The likelihood of repayment and the fullness of reserves are two separate concept. And banks win on both counts.
  - gridlockd 7y ago
    > This is wrong. The bank will have $1.90 + interest. Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (unless Bob takes up a ridiculously high APR and term just to loan a dollar). > But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt. This ignores that Bob has deposited his money at another bank which has used it as a reserve to make even more loans. The system can't stop, it would collapse.
    - b_tterc_p 7y ago
      > Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR). Assume that “the bank” in question represents all banks. And so depositing in any bank counts as depositing in “the bank” because this is illustrative. You give a dollar. The bank loans out 90 cents to bob. Bob buys something (I skipped over this) from Joe. Joe puts 90 cents in the bank. Bob pays back 90 cents he earned using the purchase from Joe. The bank now has $1.90. You’re right that the system would collapse if it stopped. But so would, say, the entirety of the national economy stop if we decided to just stop making loans. We like loans because loans enable growth. So you can, idk, buy better GPUs to mine poopcoins
village-idiot 7y ago
I think you messed that up a bit. You give the bank $1. The bank then goes ahead and loans $0.90 to Bob, who then uses it to invest in a business or a home. That $1 still exists, just most of its backed by the debt that Bob has to the bank. I don’t believe bob would take that $0.9 that the bank loaned him and put it back into the same bank.
- arcticbull 7y ago
  It’s so frustrating that the crypto folks are basically the antivaxxers of finance. They refuse to understand how it works and yet are sure they’ve got a better plan because the status quo is a scam. At least unlike antivaxxers it’s only their own welfare at risk.
  - jameskegel 7y ago
    Your shrill comment is emblematic of the problem it laments.
  - onefuncman 7y ago
    Actually, their electricity usage makes this everyone's problem, just like antivaxxers.
  - b_tterc_p 7y ago
    This is what I was thinking but I didn’t have a way to phrase it. Many people are convinced that fractional reserve banking is terrible without understanding the basics of how it work, writing it off as too complicated for people to comprehend and therefore bad... but their solution is a system which is orders of magnitude more complicated and, in all likelihood, will still result in fractional reserve banking entities popping up. Tether isn’t a fractional reserve bank. It’s far worse. It’s just taking your money and showing that that they “only” spent some of it. But people in this thread are comparing it __favorably__ to traditional banks.
    - gridlockd 7y ago
      I never said that Crypto was any good or that fractional reserve was bad. It obviously works for the banks (until it doesn't), it seems to work for Tether as well. I'm just pointing out the parallels, which are far more striking than the differences. People here point out that fractional reserves is backed by loans and securities of (supposedly) equal value, or that it's all regulated and insured, but it wasn't always like that, it's not a strict requirement for the system to work.

gridlockd 7y ago

> You give the bank a dollar. The bank loans 90 cents of it to Bob who puts it in the bank too. The bank didn’t invent 90 cents. There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air. Perhaps it's unfair to say the bank "invented" the money, but it did create it. > They’re owed 90 cents from Bob, and they will collect interest on the loan to profit. If no loans are made, the bank will eventually have more than $1.90 in reserves. If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest. > You give Tether a dollar. ???. Tether has $0.70 and you’re not even allowed to get it back. If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale".

qaq 7y ago
"There are now 1.90$ credited to both me and Bob, where before there was only 1$ credited to me. The 90 extra cents are now part of the money supply. They appeared out of thin air." I think you are confusing money supply and record keeping. The only spendable money is what bank actually has so if you and Bob where the only customers of that bank and bank loaned 90c of your 1 dollar to Bob the only money you could spend would be 10c. The only bank that creates money out of thin air is FED.
- thinkmassive 7y ago
  The Fed is not the only bank who can loan funds at a fractional reserve. You might want to read a bit more about how banking works.
  - qaq 7y ago
    Fractional reserve does not create money it just specifies what % of money a bank can loan out.
    - gridlockd 7y ago
      https://en.wikipedia.org/wiki/Money_supply https://en.wikipedia.org/wiki/Money_supply
- Zarath 7y ago
  That isn't true. You might want to take a look at this: https://en.wikipedia.org/wiki/Money_creation#Fractional_reserve_theory_of_money_creation https://en.wikipedia.org/wiki/Money_creation#Fractional_rese...
  - qaq 7y ago
    You might want to take a look at types of calculations that theory is applied to. It's used to model macro economic effects which has very little to do with what people imagine this means.
- b_tterc_p 7y ago
  This is not true. You can spend up to a dollar, because you’re spending from your bank account and everyone trusts that you’re allowed to take up to a dollar. Dollars a fungible, so you’ll be taking someone else’s dollar, but that’s ok, because not everyone needs their dollar at once. Bob can spend 90 cents because he has 90 cents, though he is obligated to pay it back later. The bank can loan out (in this example) 81 cents of the 90 cent deposit from bob.
  - 7y ago
b_tterc_p 7y ago
> If Bob eventually pays back and the bank doesn't make any further loans, the bank will have 1$ (my dollar) and a couple of cents of interest. This is wrong. The bank will have $1.90 + interest. You have to pay back your entire loan. Yes, bob might default, but averaged out, the risk calculations set the interest rate high enough to cover that profitably. The fractional reserve part of the banking system is a temporary choice that happens continuously. But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt. > If I give Tether a dollar Tether has another dollar. I get a Tether token which I can exchange on the open market for whatever the market price is. It supposedly is possible (though inconvenient) to get Tether itself to exchange their tokens for actual dollars (of which they hold only 70%) but (just like a bank) Tether relies on that not happening "at scale". The difference is tether has no title to the missing 30%, and probably even more of it if we are going to be honest. The likelihood of repayment and the fullness of reserves are two separate concept. And banks win on both counts.
- gridlockd 7y ago
  > This is wrong. The bank will have $1.90 + interest. Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (unless Bob takes up a ridiculously high APR and term just to loan a dollar). > But if stopped, the bank would eventually have all of its cash because it has all of its reserves covered in debt. This ignores that Bob has deposited his money at another bank which has used it as a reserve to make even more loans. The system can't stop, it would collapse.
  - b_tterc_p 7y ago
    > Dude, check your damn math! The bank owes me a dollar. At the time of the loan, it has 10 cents and Bob has 90 cents plus an obligation to pay it back with interest. At the end of the loan, the bank has the 90 cents back plus some amount of interest nowhere near enough to make the total add up to $1.90 (that would be a ridiculously high APR). Assume that “the bank” in question represents all banks. And so depositing in any bank counts as depositing in “the bank” because this is illustrative. You give a dollar. The bank loans out 90 cents to bob. Bob buys something (I skipped over this) from Joe. Joe puts 90 cents in the bank. Bob pays back 90 cents he earned using the purchase from Joe. The bank now has $1.90. You’re right that the system would collapse if it stopped. But so would, say, the entirety of the national economy stop if we decided to just stop making loans. We like loans because loans enable growth. So you can, idk, buy better GPUs to mine poopcoins

village-idiot 7y ago

I think you messed that up a bit. You give the bank $1. The bank then goes ahead and loans $0.90 to Bob, who then uses it to invest in a business or a home. That $1 still exists, just most of its backed by the debt that Bob has to the bank. I don’t believe bob would take that $0.9 that the bank loaned him and put it back into the same bank.

arcticbull 7y ago
It’s so frustrating that the crypto folks are basically the antivaxxers of finance. They refuse to understand how it works and yet are sure they’ve got a better plan because the status quo is a scam. At least unlike antivaxxers it’s only their own welfare at risk.
- jameskegel 7y ago
  Your shrill comment is emblematic of the problem it laments.
- onefuncman 7y ago
  Actually, their electricity usage makes this everyone's problem, just like antivaxxers.
- b_tterc_p 7y ago
  This is what I was thinking but I didn’t have a way to phrase it. Many people are convinced that fractional reserve banking is terrible without understanding the basics of how it work, writing it off as too complicated for people to comprehend and therefore bad... but their solution is a system which is orders of magnitude more complicated and, in all likelihood, will still result in fractional reserve banking entities popping up. Tether isn’t a fractional reserve bank. It’s far worse. It’s just taking your money and showing that that they “only” spent some of it. But people in this thread are comparing it __favorably__ to traditional banks.
  - gridlockd 7y ago
    I never said that Crypto was any good or that fractional reserve was bad. It obviously works for the banks (until it doesn't), it seems to work for Tether as well. I'm just pointing out the parallels, which are far more striking than the differences. People here point out that fractional reserves is backed by loans and securities of (supposedly) equal value, or that it's all regulated and insured, but it wasn't always like that, it's not a strict requirement for the system to work.