4 ms·

The bank IS printing new money. You are ignoring the money multiplier effect where the money lent by bank 1 is deposited into bank 2, bank 2 lends 90% of that d

The bank IS printing new money. You are ignoring the money multiplier effect where the money lent by bank 1 is deposited into bank 2, bank 2 lends 90% of that deposit, which is deposited into bank 3, ... repeating the process over and over. With a 10% reserve requirement, a 1,000,000 USD deposit will result in up to 10 times that much money being lent out. The formula is 1/r, where r is the reserve requirement.

ArnoVW 2y ago
interestingly, the Fed's page on Reserve Requirements states: As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. So in effect, the multiplier is infinity. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- gastonmorixe 2y ago
  I remember this. Have they ever rolled it back?
  - neffy 2y ago
    The Basel Capital rules dominate at the moment. If that ever gets rolled back... buy gold immediately.
    - gastonmorixe 2y ago
      Oh ok. So there’s a difference between reserve requirements and capital requirements. Capital requirements are still in place Basel III (Basel Capital Rules) 4.5% among other requirements https://en.m.wikipedia.org/wiki/Basel_III https://en.m.wikipedia.org/wiki/Basel_III
      - hgomersall 2y ago
        Basel III also specifies liquidity requirements, which basically means banks need to hold sufficient loan assets in the government or central bank (generally bonds or reserves respectively), which act as a backstop if other banks stop lending to them (i.e. stop accepting deposit transfers without also being given an equivalent asset).
- ta12653421 2y ago
  not really infinity: there are tons of balance-sheet-metrics which have to be aligned, in theory you are right; in practice, there are a lot differences.
neffy 2y ago
That´s not correct unfortunately, although it has been widely taught in economics text books, and you can blame Keynes for that. Keynes used that example to try and explain the process to parliament, and also to argue that the system didn't expand the deposit money supply over time. Ironically even the data (in the Macmillan report) he supplied contradicted him. It´s confusing as well, because the fundamental rules have changed over time. Banks can lend up to an allowed multiple of their cash or equivalent reserves (gold standard regulation), and in the Basel era are also regulated on the ratio of their capital reserves to their loans. This acts to stop hyperflationary expansion, but there is a feedback loop between new deposits and new capital so the system does still expand slowly over time. This may be beneficial. In engineering terms, Banks statistically multiplex asset cash with liability deposits, using the asset cash to solve FLP consensus issues that arise when deposits are transferred between banks. It´s actually quite an elegant system.
- itsoktocry 2y ago
  >Banks can lend up to an allowed multiple of their cash or equivalent reserves And what is the current reserve requirement in the US? Zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Edit: Whoops, someone beat be to it below.
  - tripletao 2y ago
    The important part is: > and in the Basel era are also regulated on the ratio of their capital reserves to their loans Reducing the reserve ratio to zero doesn't mean that banks can create unlimited amounts of money out of thin air. It just means that regulation by capital requirements has now fully superseded regulation by reserve ratio. In theory those capital requirements are a better and finer-grained regulatory tool, capturing the different risk of different classes of asset. In practice that can fail--for example, the SVB collapsed insolvent because it was permitted to value bonds above their fair market value if it claimed they'd be held to maturity. That failure was in the details though, not the general concept.
- deleted 2y ago
  [deleted]

ArnoVW 2y ago

interestingly, the Fed's page on Reserve Requirements states: As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. So in effect, the multiplier is infinity. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

gastonmorixe 2y ago
I remember this. Have they ever rolled it back?
- neffy 2y ago
  The Basel Capital rules dominate at the moment. If that ever gets rolled back... buy gold immediately.
  - gastonmorixe 2y ago
    Oh ok. So there’s a difference between reserve requirements and capital requirements. Capital requirements are still in place Basel III (Basel Capital Rules) 4.5% among other requirements https://en.m.wikipedia.org/wiki/Basel_III https://en.m.wikipedia.org/wiki/Basel_III
    - hgomersall 2y ago
      Basel III also specifies liquidity requirements, which basically means banks need to hold sufficient loan assets in the government or central bank (generally bonds or reserves respectively), which act as a backstop if other banks stop lending to them (i.e. stop accepting deposit transfers without also being given an equivalent asset).
ta12653421 2y ago
not really infinity: there are tons of balance-sheet-metrics which have to be aligned, in theory you are right; in practice, there are a lot differences.

neffy 2y ago

That´s not correct unfortunately, although it has been widely taught in economics text books, and you can blame Keynes for that. Keynes used that example to try and explain the process to parliament, and also to argue that the system didn't expand the deposit money supply over time. Ironically even the data (in the Macmillan report) he supplied contradicted him. It´s confusing as well, because the fundamental rules have changed over time. Banks can lend up to an allowed multiple of their cash or equivalent reserves (gold standard regulation), and in the Basel era are also regulated on the ratio of their capital reserves to their loans. This acts to stop hyperflationary expansion, but there is a feedback loop between new deposits and new capital so the system does still expand slowly over time. This may be beneficial. In engineering terms, Banks statistically multiplex asset cash with liability deposits, using the asset cash to solve FLP consensus issues that arise when deposits are transferred between banks. It´s actually quite an elegant system.

itsoktocry 2y ago
>Banks can lend up to an allowed multiple of their cash or equivalent reserves And what is the current reserve requirement in the US? Zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm Edit: Whoops, someone beat be to it below.
- tripletao 2y ago
  The important part is: > and in the Basel era are also regulated on the ratio of their capital reserves to their loans Reducing the reserve ratio to zero doesn't mean that banks can create unlimited amounts of money out of thin air. It just means that regulation by capital requirements has now fully superseded regulation by reserve ratio. In theory those capital requirements are a better and finer-grained regulatory tool, capturing the different risk of different classes of asset. In practice that can fail--for example, the SVB collapsed insolvent because it was permitted to value bonds above their fair market value if it claimed they'd be held to maturity. That failure was in the details though, not the general concept.
deleted 2y ago
[deleted]