5 ms·

Not gp but I've so many questions! We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fin

Not gp but I've so many questions! We'll I'll just ask two: Suppose to buy my house the seller wants cash. I take out my cash and give it to the seller. Ok fine, but the bank is creating money out of thin air, where does the cash come from if lots of people do the same? Follow up: more realistically, I wire money to the seller, what actually happens between the banks? It seems like bank A creates money from nothing and sends it to bank B, what is stopping bank A from sending out an infinite amount of money to other banks?

chii 4y ago
> where does the cash come from if lots of people do the same? the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it. If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper. > I wire money to the seller Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks). > what is stopping bank A from sending out an infinite amount of money to other banks? The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).
- vba616 4y ago
  >They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements). I thought "reserve" literally meant to set aside part of your assets. If I have to set aside, X% of the money I create, how does that stop me from creating infinite money? I just create enough to reserve part of it.
  - chii 4y ago
    > I just create enough to reserve part of it. but you cannot create enough, because before you created, you did not have enough reserve to legally create the loan. The newly created loan cannot be part of the reserve to which you count towards your original reserve requirement to qualify to make the new loans! otherwise, this would just be a loophole in the reserve requirement laws. And these monies are not cash - they are loans. If these loans default, and the bank somehow cannot collect the collateral for it, the bank will lose equity. Aka, the shareholders of the bank takes the loss. If this loss is great enough, the bank becomes insolvent. That's why banks do not lend to risky people, or takes a larger collateral.

chii 4y ago

> where does the cash come from if lots of people do the same? the cash comes from the gov't printing it. It's a mere fraction of all spendable money. Banks store some amount of it, just for such cases where you wish to withdraw it. If everyone demands their deposit as cash, the bank would run out of physical notes very quickly. They would, in all likelihood, ask the central bank to print the cash (in exchange for the reserves they hold at the CB), in order to fulfill the withdrawal. This might take days, weeks even, depending on how many notes are to be printed. Note that this isn't printing new money - it's merely transforming digitally stored money into physical paper. > I wire money to the seller Bank A would have an account within Bank B, and vice versa. At the end of the day, these banks "settle" their accounts; aka, if there's more money in Account A (in Bank B), it means Bank A has sent more money to Bank B, and Bank B needs to owe Bank A. This is basically how international transfers work. For local banks, it's likely that the Central Bank would clear these transfers up (aka, Central Banks are the banks for banks). > what is stopping bank A from sending out an infinite amount of money to other banks? The same reason why a bank cannot just create infinite money and spend it on hookers and blow. They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements).

vba616 4y ago
>They are creating money only via lending, and there are laws regarding how much they're allowed to lend out (called reserve requirements). I thought "reserve" literally meant to set aside part of your assets. If I have to set aside, X% of the money I create, how does that stop me from creating infinite money? I just create enough to reserve part of it.
- chii 4y ago
  > I just create enough to reserve part of it. but you cannot create enough, because before you created, you did not have enough reserve to legally create the loan. The newly created loan cannot be part of the reserve to which you count towards your original reserve requirement to qualify to make the new loans! otherwise, this would just be a loophole in the reserve requirement laws. And these monies are not cash - they are loans. If these loans default, and the bank somehow cannot collect the collateral for it, the bank will lose equity. Aka, the shareholders of the bank takes the loss. If this loss is great enough, the bank becomes insolvent. That's why banks do not lend to risky people, or takes a larger collateral.