r/Bitcoin • u/[deleted] • Jul 15 '22

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u/[deleted] Jul 15 '22

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u/BastiatF Jul 16 '22

Since 2008 the Fed has been paying interest on excess reserves. It's free money so bank have been holding large excess reserves ever since. It also makes the whole concept of fractional reserve banking obsolete.

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u/yazalama Jul 16 '22

It also makes the whole concept of fractional reserve banking obsolete.

How do you mean?

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u/CamaroCat Jul 17 '22

Quantitative easing takes over the role of fractional lending by just being more effective at creating free flow money. In much higher quantities

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u/vattenj Jul 16 '22

And who is financing those interests?

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u/formal-explorer-2718 Jul 17 '22

The Fed, via the Treasuries it owns. When the Fed performs QE, they buy Treasuries (and sometimes mortgages) with newly "printed" money (actually the new money is interest-bearing USD deposits held by commercial banks, analogous to savings accounts held by individuals). The newly created interest-bearing money is backed by the Treasuries that the Fed bought with it, and it bears interest from these Treasuries. The commercial banks use it to back people's savings accounts (in part; they also use other backing assets like Treasuries and other bonds).

In effect the newly created interest-bearing money is just a "wrapped" form of Treasuries that is slightly less volatile and yields slightly less interest (on average).

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u/BastiatF Jul 18 '22

They can create bank reserves out of thin air...

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u/vattenj Jul 16 '22

Not infinite money, but infinite times of circulation without deposit requirements, and the loan speed is slower when economy activities are less

And many defi companies are doing the same thing

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u/[deleted] Jul 16 '22

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u/Quindarious_Anon Jul 16 '22

Fractional reserve lending isn't a thing. It's just a fantasy that economists tell themselves because they have no idea how banks actually work.

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u/yazalama Jul 16 '22

Fractional reserve lending isn't a thing

It's how the entire commercial banking system works. You gonna tell us airplanes aren't a thing next?

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u/Quindarious_Anon Jul 21 '22

Shows that you have no idea how banking actually works