Economics =)

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Economics =) - Page 2 Empty Re: Economics =)

Post by boeloe on Thu Feb 14, 2013 7:15 am

Restrider wrote:
boeloe wrote:
I'm pretty damn sure I'm not wrong on this. Cool There is no infinite money creation. People with savings deposit those at a bank. That bank loans that money out to other people or businesses. But they can loan out more money than they have in their deposits. But they are required by law to keep a fraction of those loans in their reserves, it's called the reserve requirement. So lets say there is a reserve fraction requirement of 10% and they have a $100 in their deposits. That means they can loan out a $1000. By no means is that infinite. The central bank has control of the reserve requirement (and the central bank is part of the government) and thus they have control over the money creation.

That's how it works in theory.
However, it multiplies by more than ten.

Say you have $100 on your bank account at a 10% reserve fraction.
As you pointed out, the bank can then loan $1000. However these $1000 might have been used to finance/pay real estate. These $1000 thus ended up on the bank account of the constructor/architect/craftsmen etc. Since this bank (doesn't even have to be the same bank that had your $100 in the first place) now has new $1000 with a 10% reserve fraction, they can loan $10.000, which may have been used to finance a new enterprise. This money will most likely end up on a bank account of another bank, which can loan again....

You see where I am going with this?

Yes I see where you're going with it. And you're right. But only because I made a (infinitely stupid) mistake in the example I provided Embarassed (sorry for the confusion it caused). After a deposit of $100 the bank can't loan out a $1000, but only $90 of course (it has to keep 10% in it's reserves remember). Now there will be a infinite loan cycle like you mentioned, but the reserve requirement shaves off 10% for every cycle, meaning only 90/0.1 = $900 will ultimately be created by the initial $100 deposited and not an infinite amount of dollars.

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