Your view is also antiquidated. Banking is moving target, the technicalities of the reserve system change frequently. In modern banking the act of depositing

Your view is also antiquidated. Banking is moving target, the technicalities of the reserve system change frequently. In modern banking the act of depositing is completely severed from the act of lending. Banks lend based on capital ratios, availability of borrowers, and the Fed's interest rates. Deposits and reserves no longer matter. Effectively, when you deposit money, you deposit in a 100% reserve account with the Fed. The Fed as a completely separate action lends money to the banks. Thus last year when people panicked and decided to hoard more, the result was deflation, (not lower interest rates on business loans and mortgages as your model would predict). For further reading: http://www.winterspeak.com/2009/09/loans-create-deposits-how-banks.html http://www.winterspeak.com/2009/09/loans-create-deposits-how... http://www.moslereconomics.com/mandatory-readings/soft-currency-economics/ http://www.moslereconomics.com/mandatory-readings/soft-curre... http://reservedplace.blogspot.com/2009/04/easing-understanding.html http://reservedplace.blogspot.com/2009/04/easing-understandi... And the comment thread between RebelEconomist and JKH here: http://blogs.cfr.org/setser/2007/05/11/rising-deficit-in-the-us-rising-surplus-in-china/#comments http://blogs.cfr.org/setser/2007/05/11/rising-deficit-in-the... These folks actually work in banking, and make their living understanding how the system works. They are very much worth reading.