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In your analogy, the food is the reserves the bank has. You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the g
by RobertoG 6y ago
In your analogy, the food is the reserves the bank has.
You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the grocery store and get more. Never mind how much food you eat, for the purposes of your fridge, the grocery store has an infinite supply.
So, independently of how much you eat, you can always fill your fridge. You don't stop eating because you are afraid you can't fill the fridge again.
- eru 6y agoWell, if food prices go up too much, I will moderate my eating. Or change from meat to oatmeal. Similar for a bank. If deposits or interbank funds become to hard to come by, they'll curtail lending. In any case, it seems like we mostly agree on what's actually happening. (Though just to make sure, do you understand and/or agree on the scenario where there are no legal reserve requirements?) Our main difference is in whether we treat 'banks lend deposits' as a valid description. Btw, you are right that strictly speaking banks don't have to have reserves on hand in the logical second when they make the loan. But they do almost immediately need the reserves (eg deposits) when the debtor starts spending.