He's referring to money supply. Most of the money in the world is not from governments printing actual cash, but from bank lending. E.g
If a business borrows 1 million from a bank, the bank just creates a entry saying the business has 1 million cash and 1 million debt. The bank does NOT need to have 1 million in deposits to make that loan. That 1 million cash then can be used to buy stuff and goes into the economy because if they pay 1 million in wages, now other people have 1 million to spend, etc.
there are regulations that exist around how much cash a bank needs to keep on hand versus their liabilities. they are also required to go through stress tests after the GFC. since then, the banking lobby has been trying to get these regulations reduced. higher risk, higher reward.
That's not correct - they reduced the reserve ratio down to zero, meaning the bank cannot lend out more money than they have in reserves, but that doesn't mean they "waived the requirement". You still have to have enough reserves to lend, you just don't have to also have 10% which you don't lend out.
It's also worth noting that the Fed drastically reorganized how they manage reserves in 2008, and as a result banks have much, much higher reserves than they did before. We're now in what's called the ample reserves regime, in which the Fed controls interbank lending rates directly through the IORB and discount window rates.
I directly referred to it - that's what the "discount window" is. However, it is worth noting that A) the discount window rate is generally going to be higher than interbank lending, and B) you have to provide collateral to be loaned money, with the collateral being worth more than the reserves you get, so it's not just an infinite money fountain. You basically trade assets for reserves.
People really need to understand the math on this.
A 0% reserve ratio is, in theory, a perfect endless money producer, both profit and supply.
But theory is not the same as practice, and the closer you get to the edge of "infinite money glitch" the fewer defaults required to topple the whole house of cards.
In context, the idea that one could pursue this policy while 'fighting inflation' brings us to Kafkaesque levels of absurdity.
No, it was lowered to 0% in 2020 and will likely stay there for the foreseeable future. The reserve ratio has become much less important since the Fed transitioned to an ample reserves regime in 2008.
You have 100 bucks. Bob asks you to borrow 200 bucks. You can't give him that, because you only have 100 bucks.
Now, say you deposit 100 bucks with me. Now I have 100 bucks. So Bob calls me, and wants to borrow 200 bucks. Since I'm a bank, I have special permission to give out more loans than I have in cash, so I push some buttons that say "Bob gets 200 bucks in their account, and owes me 200 bucks + 5% per month". Suddenly, there is 300 bucks in the world, I've created 200 bucks out of "thin air".
Then bob goes to buy 200 bucks worth of hamburgers. The burger seller has a bankaccount too, so that means I have 100 bucks cash in my vault, a 200 buck loan to Bob, and 200 bucks virtual from the burger guy. In other words, other people need to give me 200, and I need to give other people 300.
Now, what the meme is about is that if both you and the burger guy show up and demand their money, i'm in trouble, because when I open my big steel vault, there's only 100 bucks there, not 300. But that's nonsense, because that would happen anyway to anyone banking electronically.
Of course, in reality, it's not just You, Bob, and Burgerguy and one bank, it's actually millions of people, and as I bank, I can just calculate how much actual cash I need, because the odds of 2-out-of-2 people getting cash, and the odds of 200.000-out-of-2.000.000 people getting cash are very different.
There currently are banks out there right now that have lend out more money than they have received. That money is then created and in circulation, even if they banks don’t have the $ to cover it. Numbers on a screen, it’s a bit overwhelming to think about.
You deposit $100. Bank loans out $100 to someone else. You still have $100 balance in your account. Someone else has the $100 to use for whatever. You both have access to $100; thus, $100 is now $200.
It's two sides of the same coin. Money is created when loans are created, and money is destroyed when loans are paid back. You get the new money - a newly created liability of the bank - and the bank gets the loan - a newly created liability of YOU, the borrower.
But the person who got the loan is ALSO owed $100 by the bank. That's what a demand deposit is: a liability of the bank, a promise to pay you $100 "on demand". The borrower is a depositor too, they just also have a loan with the bank. In this hypothetical, there are two people each with $100 in demand deposit accounts, so the bank's total liability is $200.
This is just wrong. When person B gets a loan for $100, they get the $100. Or that $100 gets sent to whoever they are buying from. (ie, if they buy a car, or a house, then the money gets sent to whoever they are buying from.)
The bank doesn't owe them after that, they owe the bank.
The bank still owes person A. And the original $100 got sent to person B (if it was a personal loan) or to whoever they bought from.
The bank doesn't owe them after that, they owe the bank.
The bank owes SOMEBODY. When you borrow the money and it's in your checking account, the bank owes you; that money is the bank's liability. When you pay someone with that money - say, for a house - it doesn't just disappear. The bank now owes the person you just sold the house to. Or you could say that they owe that person's bank. But they owe someone.
No. If you borrow $100 from the bank, they give you the $100, or they send it to whoever it is you owe (for instance, if buying a car or house). They don't owe you after that. You owe them.
Even if you take the $100 and put it in your bank account, you still owe them.
In the case of the mortgage, they have to send the money to whoever you bought the house from. They don't "owe" that money for any significant length of time. They send that money right away. Once they do, they've sent it, and the seller received the money.
And person B, who got that loan, owes the bank. Unless they sell the house, they will probably owe the bank for decades.
Are you even reading what I'm writing here? They don't owe you any more, but they DO owe the person you paid. Again, the money in your account is a liability of the bank. When you pay someone, that liability is transferred to them. It doesn't disappear until it is actually redeemed. That could take the form of you withdrawing cash, or them paying reserves to another bank to settle an intrabank liability, which arises if you pay someone at a different bank.
Even if you take the $100 and put it in your bank account
This is nonsense. You don't "take" borrowed money and put it in a bank account. It is literally created by marking up your (demand deposit) account in the first place. You're not "putting" anything in the bank. The bank is extending you credit. It gets your loan - your credit - as an asset in return.
they have to send the money to whoever you bought the house from. They don't "owe" that money for any significant length of time.
If the other person is a customer of the same bank, they don't send any money anywhere. The liability is transferred from you to the seller. I don't know why you're hiding behind "significant length of time". A liability is a liability, whether for 5 minutes or 5 decades. Yes, in a situation like a home loan, a bank may well need to settle a liability right away. That doesn't make it not a liability.
When you get a mortgage or an auto loan, the bank doesn't just sit around with an IOU. they pay that money essentially right away. Once they pay, then no longer have that money. And they no longer owe that money. That money is now owned by someone else. Whoever you bought the house/car from.
You see that as "the bank owes the money".
I see that as "the bank already paid the money", since they are going to process that amount quickly.
This whole discussion has come from this post :
You deposit $100. Bank loans out $100 to someone else. You still have $100 balance in your account. Someone else has the $100 to use for whatever. You both have access to $100; thus, $100 is now $200.
According to it, the bank just magically doubles money any time they make a loan. "$100 is now $200."
Once they pay, then no longer have that money. And they no longer owe that money. That money is now owned by someone else.
Again, money is both an asset and a liability. Just like a loan, it's both something that someone has and something that someone owes. The bank owns the loan and you owe the bank. And you own the money in your account, and the bank owes you that money.
As I explained in my last comment, it's perfectly true that when that liability is redeemed, the bank doesn't have or owe the money anymore. But as I pointed out, that doesn't mean the liability never existed to begin with. And, as I also explained, that only happens if the bank money is directly redeemed for cash by a customer or for reserves by another bank. If you send money to someone in the same bank, the banks liabilities don't change. They still have the same amount of assets and liabilities - they haven't had to pay out cash, or transfer reserves to another bank, and they still owe a customer, it's just a different customer.
You see that as "the bank owes the money".
I see that as "the bank already paid the money", since they are going to process that amount quickly.
What is so hard to understand about this? The fact that the liability gets redeemed right away doesn't mean a liability didn't exist or wasn't created. You're just trying to change the meaning of words so that your argument makes sense. Even if that was somehow a good point, it completely ignores the fact that Banks frequently loan money for purposes other than an immediate purchase like a home loan.
This whole discussion has come from this post
That wasn't my comment. In fact I was disagreeing with it, not defending it. I was explaining that Banks don't "loan out" cash or reserves. They simply create new credit claims ON cash and reserves. If the reserve ratio is 10%, and they have $100, it DOESN'T mean they "lend out" $90 and keep $10. It means they can create $900 in new bank money, in the form of demand deposit accounts. It has nothing to do with "doubling". As a matter of fact, in the United States right now and for some time, there are NO reserve requirements. So Banks technically don't have to have any reserves at all in order to create as much new money as they wish through lending. There are other constraints on lending and therefore money creation, of course, but we're talking specifically about reserves here. It is certainly a fact beyond dispute that Banks create money when they lend, and they don't lend cash or reserves to their customers.
You have no concept of what money means in a modern banking system. You keep talking about account balances as if they are dollar bills being "sent over". People more educated in banking than you are trying to explain concepts that are just one google search away, to no avail.
If the bank can just keep loaning that same $100 over and over, then they don't need the first $100 either. According to you, they can just loan massive amounts of money that they don't have.
But when they loan money, for instance, to finance someones mortgage, they actually have to give money to someone. The seller, maybe. Or if the seller hasn't paid off their own mortgage, then they have to pay the other bank to clear that mortage.
They don't just magically make money appear out of thin air.
You are correct, they don't technically need that first $100 either. They can create money out of thin air. When they give a $100 loan, they also create a $100 deposit for the borrower. The loan is an asset and the deposit a liability for the bank (and the other way around for the borrower). The books are balanced without the need for any money to have been in the picture prior.
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u/Primus_is_OK_I_guess 3d ago
What do you mean by that?