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The problem is that when you put a dollar in savings or a dollar in the stock market you are actually "creating" an extra dollar from an economic standpoint. I
by kneebonian 4y ago
The problem is that when you put a dollar in savings or a dollar in the stock market you are actually "creating" an extra dollar from an economic standpoint.
If I put a dollar in the bank the bank can then use that dollar to loan to someone else, but I still have "my" dollar. So where there was 1 dollar there are now 2. Once we start pulling money out of investment vehicles we aren't only removing that money but also the backing the loans that depended on that money had.
Thus the boomers pulling out for retirement result are the capital destruction event.
- nightski 4y agoNot with the stock market. When you put a dollar in the stock market someone else is taking a dollar out. For every buyer there is a seller and vice versa.
- rtkwe 4y agoIt doesn't just disappear though, the money goes into annuities/bonds or into bank accounts as cash. The funds that get taken out to spend then move through the economy into other bank accounts they don't just disappear into thin air.
- bitshiftfaced 4y agoSeems like a temporary problem. Boomers convert savings into spending. One man's spending is another man's income. That person now has money to spend or save, and then we're back to where we started.
- User23 4y ago> Thus the boomers pulling out for retirement result are the capital destruction event. No that’s just an asset swap. There’s no aggregate balance sheet contraction. Now bankruptcies on the other hand are very much debt deflation as is loan repayment.
- JumpCrisscross 4y ago> I put a dollar in the bank the bank can then use that dollar to loan to someone else This isn’t how banks work. When “a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money” [1]. Loans create deposits, not vice versa. [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- adamsb6 4y agoFractional reserve requirements limit the amount of loans a bank can make relative to its deposits.
- amanaplanacanal 4y agoThat only works if the requirement is above zero. Which it isn’t.
- iamdamian 4y agoAre there still fractional reserve requirements in the U.S.?
- MR4D 4y agoNo. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- JumpCrisscross 4y ago> reserve requirements limit the amount of loans a bank can make relative to its deposits Reserve requirements haven’t restricted lending for decades. It’s why they’re zero in most of the world, replaced by finer-tuned capital and liquidity requirements. (And deposits != reserves.)