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And when the recipients of those $2 trillion put that money into bank accounts, we're creating another $20 trillion in additional money supply. I sure hope they

And when the recipients of those $2 trillion put that money into bank accounts, we're creating another $20 trillion in additional money supply. I sure hope they end up in bank accounts as well, so we can create another $200 trillion. Hey, see that? I created an infinite money machine! Now that's a good argument for those original $200 billion being super useful when "put to work" by storing them in bank accounts, right?

lend000 6y ago
The formula to derive it is an infinite series that already takes that into account, so no, it's just $2 trillion total. This is not considered a controversial economic formula, but maybe you are on to something that could win you a Nobel Prize. Anyway, since the parent implied that "hoarding cash" (a.k.a. saving) was somehow bad, I wanted to clear that up. They would only be reducing the money supply if they were literally hoarding physical bills in a private vault.
- dragonwriter 6y ago
  [text deleted because mathematical claim from memory was wrong]
  - lend000 6y ago
    Here's a better explanation: https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
- Slartie 6y ago
  This is really interesting and cleared a lot of things up for me, thanks for that! I always thought that when people told me "Banks create money out of thin air in our monetary system" that would mean they get like $100 dollars from someone in a savings account, which then permits them to lend out a multiple of that, say $900, in "new money" to other people, as long as they can support the liquidity requirement of 10% in this example by having enough not-self-created cash for that at hand. I always wondered what would prevent people from taking those loans, sticking them into accounts at different banks, which then would be able to use that liquidity to again create a multiple of new money, effectively resulting in a system that constantly increases the total money supply. But then I took a look at what appears to be happening in recent history, found a constantly increasing money supply to actually exist in the real world and didn't wonder that much anymore, because of course that would happen in such a brain-dead let-banks-create-money-out-of-thin-air system, so I never happened to challenge my assumption as to how this money creation process actually works. So the actual trick is not that banks lend out more money than they have previously gotten as deposits, but that the fraction they lend out is eventually stored at different banks, while the original deposits that allowed for these loans to be created still continue to exist at the first bank and thus the loans practically are a duplicate of these deposits, hence "money was created out of thin air". As long as the banks all manage to keep the fraction of reserves above the pre-set limit, this indeed guarantees a maximum total money supply not to be exceeded.

lend000 6y ago

The formula to derive it is an infinite series that already takes that into account, so no, it's just $2 trillion total. This is not considered a controversial economic formula, but maybe you are on to something that could win you a Nobel Prize. Anyway, since the parent implied that "hoarding cash" (a.k.a. saving) was somehow bad, I wanted to clear that up. They would only be reducing the money supply if they were literally hoarding physical bills in a private vault.

dragonwriter 6y ago
[text deleted because mathematical claim from memory was wrong]
- lend000 6y ago
  Here's a better explanation: https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
Slartie 6y ago
This is really interesting and cleared a lot of things up for me, thanks for that! I always thought that when people told me "Banks create money out of thin air in our monetary system" that would mean they get like $100 dollars from someone in a savings account, which then permits them to lend out a multiple of that, say $900, in "new money" to other people, as long as they can support the liquidity requirement of 10% in this example by having enough not-self-created cash for that at hand. I always wondered what would prevent people from taking those loans, sticking them into accounts at different banks, which then would be able to use that liquidity to again create a multiple of new money, effectively resulting in a system that constantly increases the total money supply. But then I took a look at what appears to be happening in recent history, found a constantly increasing money supply to actually exist in the real world and didn't wonder that much anymore, because of course that would happen in such a brain-dead let-banks-create-money-out-of-thin-air system, so I never happened to challenge my assumption as to how this money creation process actually works. So the actual trick is not that banks lend out more money than they have previously gotten as deposits, but that the fraction they lend out is eventually stored at different banks, while the original deposits that allowed for these loans to be created still continue to exist at the first bank and thus the loans practically are a duplicate of these deposits, hence "money was created out of thin air". As long as the banks all manage to keep the fraction of reserves above the pre-set limit, this indeed guarantees a maximum total money supply not to be exceeded.