We should all agree with this!

[ShackledNation]

Money supply is the $1000 in demand deposits.
If you assume the $100 was high-powered money created by the Fed, the maximum money supply created by that high-powered money is $100/0.1 (the 10% reserve requirement) or $1000. If the reserve requirement was 20%, as shown in the wiki article, total money supply would be $100/0.2 or $500.

If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400. <------from Wiki

You got it. I'm glad we agree on the conclusion now. The increase is $400. Your statement no money was created is false.

Your spreadsheet shows $1000 in deposits and $900 in loans.
I appreciate it when you make my point for me.

Very good. But I don't think you realize what that means. There are $1000 in demand deposits...but only $100 in cash backing them. $900 worth of demand deposits were just created out of thin air when the loans were made.

You got it. I'm glad we agree on the conclusion now.

I had it from the beginning, obviously.

Your statement no money was created is false.

LOL! That's funny! Where did you misread that as my claim?

There are $1000 in demand deposits..

Yes. $1000 in deposits, $900 in loans, $100 in reserves.
Not, as you claimed, $100 in deposits and $900 in loans.


but only $100 in cash backing them.

Absolutely!

Apparently we were misreading each other lol. Well we know we agree on that point so cheers to that.

$900 worth of demand deposits were just created out of thin air when the loans were made.

Leave out the words "out of thin air".

$900 worth of demand deposits were just created when the loans were made.

Or......

$900 worth of loans were made when the demand deposits were created.

Now that is just silly. When people say "out of thin air" that is exactly what is being referred to. Its just an idiom. The production is required to make the money, the bank just writes a number on a ledger and *poof* the new money is there, appearing "out of thin air". I'm not sure why you are even arguing such a semantic point.

 

[Toddsterpatriot]

That is not exactly what fractional reserve banking is, but I will not address that for now. There is enormous literature regarding the problems caused (such as dis-aligning available credit with actual savings), but I don't want to hijack this topic and discuss it.

The alternative is separating demand deposits from time deposits. Whatever money you want to be able to spend at any given time goes in a demand deposit. Money that you wish to save and don't intend to spend will go into a time deposit, whereby you cannot withdraw the money for a set amount of time during which the bank uses that money to make loans.

Regardless, such a reform would be massive and highly unlikely, which is why I support the 2nd best option of regulating a bad banking system so it does harm at a slower rate.

That is not exactly what fractional reserve banking is, but I will not address that for now.

Please, address it now. Correct my misunderstanding.

Ok. I apologize to whoever started this thread for going on a bit of a tangent.

This is just a rough description from wikipedia:
"In most legal systems, a bank deposit is not a bailment. In other words, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank's books and on its balance sheet. Because the bank is authorized by law to create credit up to an amount equal to a multiple of the amount of its reserves, the bank's reserves on hand to satisfy payment of deposit liabilities amount to only a fraction of the total amount which the bank is obligated to pay in satisfaction of its demand deposits."

The bolded portion is what matters. Banks do not accept a $100 deposit and then loan out $90 of those dollars. They accept a $100 deposit then create a deposit account for the customer (saying he can withdraw the cash at any time, or reduce his deposit account balance through debit/credit/checking without ever touching the cash).

The bank does not then lend out $90 in cash to someone else and call it a day. The bank expands credit, and can make loans of up to $900. Again, these loans are made not through cash but by giving lenders accounts at the bank with a claim to the cash value of the loan. The bank then has $90 in cash on reserve, and $1000 in claims to that cash in the form of demand deposits and loans. That $90 in cash satisfies the 10% reserve requirement. The result is that we have $100 in a demand deposits financing $900 in loans and a $100 demand deposit. Hence, savings and credit are not aligned, which can cause serious problems.

The alternative is separating demand deposits from time deposits.

What do you feel that would accomplish?
Currently, time deposits have a 0% reserve requirement.
I guess 0% reserve is better than a 10% reserve?

Demand deposits would have a 100% reserve requirement. Banks could not lend that money, and depositors would always have access to it for spending.

Time deposits would of course have a 0% reserve requirement, but depositors would not be able to withdraw the money to spend it for a certain time period. That is the whole point of a time deposit. You are essentially lending the bank your money so they can loan it to other people. Often times you will get paid a portion of the interest the bank makes from the loans in return, which is what encourages people to use time deposits rather than purely demand deposits. This ensures available credit is always in line with savings, and would prevent banks from expanding the supply of money in order to line their coffers at our expense.

The result is that we have $100 in a demand deposits financing $900 in loans and a $100 demand deposit. Hence, savings and credit are not aligned, which can cause serious problems.

We don't agree.

$1000 in demand deposits finances $900 in loans and $100 in reserves.

 

[Toddsterpatriot]

You got it. I'm glad we agree on the conclusion now. The increase is $400. Your statement no money was created is false.


Very good. But I don't think you realize what that means. There are $1000 in demand deposits...but only $100 in cash backing them. $900 worth of demand deposits were just created out of thin air when the loans were made.

You got it. I'm glad we agree on the conclusion now.

I had it from the beginning, obviously.

Your statement no money was created is false.

LOL! That's funny! Where did you misread that as my claim?

There are $1000 in demand deposits..

Yes. $1000 in deposits, $900 in loans, $100 in reserves.
Not, as you claimed, $100 in deposits and $900 in loans.


but only $100 in cash backing them.

Absolutely!

Apparently we were misreading each other lol. Well we know we agree on that point so cheers to that.

$900 worth of demand deposits were just created out of thin air when the loans were made.

Leave out the words "out of thin air".

$900 worth of demand deposits were just created when the loans were made.

Or......

$900 worth of loans were made when the demand deposits were created.

Now that is just silly. When people say "out of thin air" that is exactly what is being referred to. Its just an idiom. The production is required to make the money, the bank just writes a number on a ledger and *poof* the new money is there, appearing "out of thin air". I'm not sure why you are even arguing such a semantic point.

When people say "out of thin air" that is exactly what is being referred to. Its just an idiom.

Out of thin air means no deposit required.

They can't make $900 in loans with only $100 in deposits, that would mean $800 out of thin air.

They can make $900 in loans with $1000 in deposits. No air needed.

 

[ShackledNation]

I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans,

I've never denied it.

Then you completely misread my post.


And in every example I gave, I was talking about the whole process. Your responses to me were based on not understanding what I was saying. Nobody when discussing the expansion of the money supply ever just stops it at that step. What matters is the total money supply expansion resulting from the initial deposit. That we agree on.


They can, but that is not what they do.

But the bank can simply make a $900 loan from the $100 cash deposit,

Nope. That would bounce the loan check. They need another $900 from somewhere.
That is not "simply mak[ing] a $900 loan".

Absolutely. The New York Fed admitted that in the link I gave you, as do countless others. The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities. All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

They would never write a check the size of their entire cash reserves. If they did, that would be the same as a run on the bank, no different than everyone trying to cash out their demand deposits all at once above what the bank can provide. That in no way disputes how the excess demand deposits are created in the first place.

And in every example I gave, I was talking about the whole process.

And when I talked about the whole process, I said deposits were always larger than loans.
That every loan was fully funded.
And you strongly disagreed.

Saying deposits are larger than loans means absolutely nothing. Each loan creates an equal deposit, and then you add the initial deposit. What matters is the amount of cash backing the loans, because the deposit accounts are basically IOUs for that cash. There are more IOUs than cash.

They can, but that is not what they do.

Baloney.

The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities.

And enough to fund the loans.
$100 in deposits does not give them the cash to fund $900 in loans and $100 in reserves.

Yes it does. They just create the deposits when they create the loans. That is the point you are missing. You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves. What it actually means, according to the Federal Reserve itself, is that banks must have enough reserves to satisfy 10% of their net transaction account liabilities. That means that if their current reserve ratio is above 10%, they can create more loans (and thus demand deposits) until the ratio is down to 10%.

All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

How many loans have you taken out where you left the proceeds in a demand account in the bank you borrowed from?

The loan is often in the form of a check, which is then deposited...into a demand account. So pretty much always. Rarely do people withdraw cash from the loan, especially for amounts of significant size.

They would never write a check the size of their entire cash reserves.

$100 deposit, $10 required reserves, $90 excess reserves.
They write the check for $90, not their entire cash reserve.

Like I said, they would never write a check the size of their entire cash reserves.

Let me set up the scenario for you again.

There is an initial deposit of $100 cash into a bank. The bank takes the cash, then creates a demand deposit account for the depositor. This is the result:

Assets
Cash.....................$100
Total Assets...........$100

Liabilities
Demand deposits....$100
Total Liabilities.......$100

Now assume the reserve ratio is 10%. What is the ratio now? Cash=100, liabilities=100. 100/100 = 1 = 100%. Under the law, the bank has every right to bring that reserve ratio down. There is absolutely no reason they cannot do the following (and in fact the following is exactly what they do):

The bank makes loans totaling $900. Nobody is given cash, they are ultimately given demand deposits, which the bank can create due to the reserve ratio not being 100%. The result?

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

What is the reserve ratio now? Cash/Demand Deposits = 100/1000 = 0.1 = 10%. And there you have it. The bank has made $900 in loans based on its initial $100 cash reserves.

But wait--it gets better. What if the bank wants to loan another $100? If it tries to do this, it will be below 10% reserves. However, the bank can easily do it anyway? How? It borrows $10 in cash from another bank. The result?

Cash=$110
Demand Deposits=$1100
Cash/Demand Deposits=110/1100 = .1 = 10%.

And look at that. More money creation. Now tell me: where did the bank break the law in doing any of this? What law was broken specifically?

I assume you have no answers to those questions. To further prove my point, here are a myriad of sources backing my claim that this is what happens:

Michael Kumhof of the IMF
"...banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be veri&#64257;ed in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries."
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Adair Turner, Chairman of the FSA in the UK:
"But in fact they don&#8217;t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit."
-http://goo.gl/8078D

Merryn Somerset Webb, editor-in-chief of Money Week, The Financial Times:
"Every time they expand their lending they increase the supply of money in the economy. And every time they contract lending they reduce it"
-http://goo.gl/zwIxq

Alan Holmes, then Senior VP of Federal Reserve Bank of NY, 1969:
&#8220;In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.&#8221;
-http://goo.gl/E43K1

 

[ShackledNation]

You got it. I'm glad we agree on the conclusion now.

I had it from the beginning, obviously.

Your statement no money was created is false.

LOL! That's funny! Where did you misread that as my claim?

There are $1000 in demand deposits..

Yes. $1000 in deposits, $900 in loans, $100 in reserves.
Not, as you claimed, $100 in deposits and $900 in loans.


but only $100 in cash backing them.

Absolutely!

Apparently we were misreading each other lol. Well we know we agree on that point so cheers to that.

$900 worth of demand deposits were just created out of thin air when the loans were made.

Leave out the words "out of thin air".

$900 worth of demand deposits were just created when the loans were made.

Or......

$900 worth of loans were made when the demand deposits were created.

Now that is just silly. When people say "out of thin air" that is exactly what is being referred to. Its just an idiom. The production is required to make the money, the bank just writes a number on a ledger and *poof* the new money is there, appearing "out of thin air". I'm not sure why you are even arguing such a semantic point.

When people say "out of thin air" that is exactly what is being referred to. Its just an idiom.

Out of thin air means no deposit required.

They can't make $900 in loans with only $100 in deposits, that would mean $800 out of thin air.

They can make $900 in loans with $1000 in deposits. No air needed.

They make $900 out of thin air. You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Let's start with 2 banks, each with $100 deposits, $100 reserves, $0 loans.
Bank A loans $90 to Bill who deposits it at bank B.
Bank A: $100 deposits, $10 reserves, $90 loans.
Bank B: $190 deposits, $190 reserves, $0 loans.

Bank B loans $172 to Emily who deposits it at bank A.
Bank A: $272 deposits, $182 reserves, $90 loans.
Bank B: $190 deposits, $18 reserves, $172 loans.

Continue this accounting until we get a total of $2000 deposits, $200 reserves, $1800 loans. Now think about the logic of what happened. How did these deposits "enable" the loans? Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

 

[Toddsterpatriot]

Then you completely misread my post.


And in every example I gave, I was talking about the whole process. Your responses to me were based on not understanding what I was saying. Nobody when discussing the expansion of the money supply ever just stops it at that step. What matters is the total money supply expansion resulting from the initial deposit. That we agree on.


They can, but that is not what they do.


Absolutely. The New York Fed admitted that in the link I gave you, as do countless others. The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities. All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

They would never write a check the size of their entire cash reserves. If they did, that would be the same as a run on the bank, no different than everyone trying to cash out their demand deposits all at once above what the bank can provide. That in no way disputes how the excess demand deposits are created in the first place.

And in every example I gave, I was talking about the whole process.

And when I talked about the whole process, I said deposits were always larger than loans.
That every loan was fully funded.
And you strongly disagreed.

Saying deposits are larger than loans means absolutely nothing. Each loan creates an equal deposit, and then you add the initial deposit. What matters is the amount of cash backing the loans, because the deposit accounts are basically IOUs for that cash. There are more IOUs than cash.


Yes it does. They just create the deposits when they create the loans. That is the point you are missing. You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves. What it actually means, according to the Federal Reserve itself, is that banks must have enough reserves to satisfy 10% of their net transaction account liabilities. That means that if their current reserve ratio is above 10%, they can create more loans (and thus demand deposits) until the ratio is down to 10%.

All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

How many loans have you taken out where you left the proceeds in a demand account in the bank you borrowed from?

The loan is often in the form of a check, which is then deposited...into a demand account. So pretty much always. Rarely do people withdraw cash from the loan, especially for amounts of significant size.

They would never write a check the size of their entire cash reserves.

$100 deposit, $10 required reserves, $90 excess reserves.
They write the check for $90, not their entire cash reserve.

Like I said, they would never write a check the size of their entire cash reserves.

Let me set up the scenario for you again.

There is an initial deposit of $100 cash into a bank. The bank takes the cash, then creates a demand deposit account for the depositor. This is the result:

Assets
Cash.....................$100
Total Assets...........$100

Liabilities
Demand deposits....$100
Total Liabilities.......$100

Now assume the reserve ratio is 10%. What is the ratio now? Cash=100, liabilities=100. 100/100 = 1 = 100%. Under the law, the bank has every right to bring that reserve ratio down. There is absolutely no reason they cannot do the following (and in fact the following is exactly what they do):

The bank makes loans totaling $900. Nobody is given cash, they are ultimately given demand deposits, which the bank can create due to the reserve ratio not being 100%. The result?

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

What is the reserve ratio now? Cash/Demand Deposits = 100/1000 = 0.1 = 10%. And there you have it. The bank has made $900 in loans based on its initial $100 cash reserves.

But wait--it gets better. What if the bank wants to loan another $100? If it tries to do this, it will be below 10% reserves. However, the bank can easily do it anyway? How? It borrows $10 in cash from another bank. The result?

Cash=$110
Demand Deposits=$1100
Cash/Demand Deposits=110/1100 = .1 = 10%.

And look at that. More money creation. Now tell me: where did the bank break the law in doing any of this? What law was broken specifically?

I assume you have no answers to those questions. To further prove my point, here are a myriad of sources backing my claim that this is what happens:

Michael Kumhof of the IMF
"...banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be veri&#64257;ed in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries."
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Adair Turner, Chairman of the FSA in the UK:
"But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit."
-http://goo.gl/8078D

Merryn Somerset Webb, editor-in-chief of Money Week, The Financial Times:
"Every time they expand their lending they increase the supply of money in the economy. And every time they contract lending they reduce it"
-http://goo.gl/zwIxq

Alan Holmes, then Senior VP of Federal Reserve Bank of NY, 1969:
“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
-http://goo.gl/E43K1

Saying deposits are larger than loans means absolutely nothing.

It means no loan is created out of thin air.

You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves.

90% of their loans, whether they're borrowing from depositors or other banks. Absolutely.

The loan is often in the form of a check, which is then deposited...into a demand account.

You take out a car loan and deposit the check in a demand account? Sure.

Rarely do people withdraw cash from the loan, especially for amounts of significant size.

When the car dealer gets the check, their deposit of it will withdraw cash from the lender.

Assets


Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Excellent example. You have $1000 in deposits and $900 in loans.

 

[Toddsterpatriot]

Apparently we were misreading each other lol. Well we know we agree on that point so cheers to that.


Now that is just silly. When people say "out of thin air" that is exactly what is being referred to. Its just an idiom. The production is required to make the money, the bank just writes a number on a ledger and *poof* the new money is there, appearing "out of thin air". I'm not sure why you are even arguing such a semantic point.

When people say "out of thin air" that is exactly what is being referred to. Its just an idiom.

Out of thin air means no deposit required.

They can't make $900 in loans with only $100 in deposits, that would mean $800 out of thin air.

They can make $900 in loans with $1000 in deposits. No air needed.

They make $900 out of thin air. You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Let's start with 2 banks, each with $100 deposits, $100 reserves, $0 loans.
Bank A loans $90 to Bill who deposits it at bank B.
Bank A: $100 deposits, $10 reserves, $90 loans.
Bank B: $190 deposits, $190 reserves, $0 loans.

Bank B loans $172 to Emily who deposits it at bank A.
Bank A: $272 deposits, $182 reserves, $90 loans.
Bank B: $190 deposits, $18 reserves, $172 loans.

Continue this accounting until we get a total of $2000 deposits, $200 reserves, $1800 loans. Now think about the logic of what happened. How did these deposits "enable" the loans? Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

They make $900 out of thin air.

Not out of thin air, out of deposits and smaller loans.

You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Circulating? Don't you mean on the books of the bank?

Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

Yes, you can skip from deposits bigger than loans to deposits bigger than loans.
Just like it showed in my wiki link.

 

[ShackledNation]

And in every example I gave, I was talking about the whole process.

And when I talked about the whole process, I said deposits were always larger than loans.
That every loan was fully funded.
And you strongly disagreed.

Saying deposits are larger than loans means absolutely nothing. Each loan creates an equal deposit, and then you add the initial deposit. What matters is the amount of cash backing the loans, because the deposit accounts are basically IOUs for that cash. There are more IOUs than cash.


Yes it does. They just create the deposits when they create the loans. That is the point you are missing. You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves. What it actually means, according to the Federal Reserve itself, is that banks must have enough reserves to satisfy 10% of their net transaction account liabilities. That means that if their current reserve ratio is above 10%, they can create more loans (and thus demand deposits) until the ratio is down to 10%.


The loan is often in the form of a check, which is then deposited...into a demand account. So pretty much always. Rarely do people withdraw cash from the loan, especially for amounts of significant size.

They would never write a check the size of their entire cash reserves.

$100 deposit, $10 required reserves, $90 excess reserves.
They write the check for $90, not their entire cash reserve.

Like I said, they would never write a check the size of their entire cash reserves.

Let me set up the scenario for you again.

There is an initial deposit of $100 cash into a bank. The bank takes the cash, then creates a demand deposit account for the depositor. This is the result:

Assets
Cash.....................$100
Total Assets...........$100

Liabilities
Demand deposits....$100
Total Liabilities.......$100

Now assume the reserve ratio is 10%. What is the ratio now? Cash=100, liabilities=100. 100/100 = 1 = 100%. Under the law, the bank has every right to bring that reserve ratio down. There is absolutely no reason they cannot do the following (and in fact the following is exactly what they do):

The bank makes loans totaling $900. Nobody is given cash, they are ultimately given demand deposits, which the bank can create due to the reserve ratio not being 100%. The result?

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

What is the reserve ratio now? Cash/Demand Deposits = 100/1000 = 0.1 = 10%. And there you have it. The bank has made $900 in loans based on its initial $100 cash reserves.

But wait--it gets better. What if the bank wants to loan another $100? If it tries to do this, it will be below 10% reserves. However, the bank can easily do it anyway? How? It borrows $10 in cash from another bank. The result?

Cash=$110
Demand Deposits=$1100
Cash/Demand Deposits=110/1100 = .1 = 10%.

And look at that. More money creation. Now tell me: where did the bank break the law in doing any of this? What law was broken specifically?

I assume you have no answers to those questions. To further prove my point, here are a myriad of sources backing my claim that this is what happens:

Michael Kumhof of the IMF
"...banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be veri&#64257;ed in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries."
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Adair Turner, Chairman of the FSA in the UK:
"But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit."
-http://goo.gl/8078D

Merryn Somerset Webb, editor-in-chief of Money Week, The Financial Times:
"Every time they expand their lending they increase the supply of money in the economy. And every time they contract lending they reduce it"
-http://goo.gl/zwIxq

Alan Holmes, then Senior VP of Federal Reserve Bank of NY, 1969:
“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
-http://goo.gl/E43K1

Saying deposits are larger than loans means absolutely nothing.

It means no loan is created out of thin air.

You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves.

90% of their loans, whether they're borrowing from depositors or other banks. Absolutely.

The loan is often in the form of a check, which is then deposited...into a demand account.

You take out a car loan and deposit the check in a demand account? Sure.

When the car dealer gets the check, their deposit of it will withdraw cash from the lender.

Not necessarily. If the bank is the same, then there will be no withdrawal of cash. You are also mistaken if you think that with each deposit of a check cash is moved from bank to bank. That would be chaos. The lender of the car loan is Bank A, and the salesman deposits the check in Bank B. But another loan will come from Bank B, and another salesman will deposit it into Bank A. Overall it balances it out, and only the difference ever moves from place to place. The same is true for your idea of money creation as well. It is really a moot point.

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Excellent example. You have $1000 in deposits and $900 in loans.

Very good. Now answer the questions I asked. You've been ignoring them. What law says banks cannot create money in the way I am stating? Also, what have you to say about all the sources I gave you?

I gave you a lengthy response, and you gave a few lines with almost no substance. That is very telling.

 

[Toddsterpatriot]

Saying deposits are larger than loans means absolutely nothing. Each loan creates an equal deposit, and then you add the initial deposit. What matters is the amount of cash backing the loans, because the deposit accounts are basically IOUs for that cash. There are more IOUs than cash.


Yes it does. They just create the deposits when they create the loans. That is the point you are missing. You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves. What it actually means, according to the Federal Reserve itself, is that banks must have enough reserves to satisfy 10% of their net transaction account liabilities. That means that if their current reserve ratio is above 10%, they can create more loans (and thus demand deposits) until the ratio is down to 10%.


The loan is often in the form of a check, which is then deposited...into a demand account. So pretty much always. Rarely do people withdraw cash from the loan, especially for amounts of significant size.


Like I said, they would never write a check the size of their entire cash reserves.

Let me set up the scenario for you again.

There is an initial deposit of $100 cash into a bank. The bank takes the cash, then creates a demand deposit account for the depositor. This is the result:

Assets
Cash.....................$100
Total Assets...........$100

Liabilities
Demand deposits....$100
Total Liabilities.......$100

Now assume the reserve ratio is 10%. What is the ratio now? Cash=100, liabilities=100. 100/100 = 1 = 100%. Under the law, the bank has every right to bring that reserve ratio down. There is absolutely no reason they cannot do the following (and in fact the following is exactly what they do):

The bank makes loans totaling $900. Nobody is given cash, they are ultimately given demand deposits, which the bank can create due to the reserve ratio not being 100%. The result?

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

What is the reserve ratio now? Cash/Demand Deposits = 100/1000 = 0.1 = 10%. And there you have it. The bank has made $900 in loans based on its initial $100 cash reserves.

But wait--it gets better. What if the bank wants to loan another $100? If it tries to do this, it will be below 10% reserves. However, the bank can easily do it anyway? How? It borrows $10 in cash from another bank. The result?

Cash=$110
Demand Deposits=$1100
Cash/Demand Deposits=110/1100 = .1 = 10%.

And look at that. More money creation. Now tell me: where did the bank break the law in doing any of this? What law was broken specifically?

I assume you have no answers to those questions. To further prove my point, here are a myriad of sources backing my claim that this is what happens:

Michael Kumhof of the IMF
"...banks do not have to wait for depositors to appear and make funds available before they can on-lend, or intermediate, those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be veri&#64257;ed in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries."
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Adair Turner, Chairman of the FSA in the UK:
"But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit."
-http://goo.gl/8078D

Merryn Somerset Webb, editor-in-chief of Money Week, The Financial Times:
"Every time they expand their lending they increase the supply of money in the economy. And every time they contract lending they reduce it"
-http://goo.gl/zwIxq

Alan Holmes, then Senior VP of Federal Reserve Bank of NY, 1969:
“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
-http://goo.gl/E43K1

Saying deposits are larger than loans means absolutely nothing.

It means no loan is created out of thin air.

You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves.

90% of their loans, whether they're borrowing from depositors or other banks. Absolutely.

The loan is often in the form of a check, which is then deposited...into a demand account.

You take out a car loan and deposit the check in a demand account? Sure.

When the car dealer gets the check, their deposit of it will withdraw cash from the lender.

Not necessarily. If the bank is the same, then there will be no withdrawal of cash. You are also mistaken if you think that with each deposit of a check cash is moved from bank to bank. That would be chaos. The lender of the car loan is Bank A, and the salesman deposits the check in Bank B. But another loan will come from Bank B, and another salesman will deposit it into Bank A. Overall it balances it out, and only the difference ever moves from place to place. The same is true for your idea of money creation as well. It is really a moot point.

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Excellent example. You have $1000 in deposits and $900 in loans.

Very good. Now answer the questions I asked. You've been ignoring them. What law says banks cannot create money in the way I am stating? Also, what have you to say about all the sources I gave you?

I gave you a lengthy response, and you gave a few lines with almost no substance. That is very telling.

What law says banks cannot create money in the way I am stating?

Banks can create money if they make loans.
They can make loans if they have larger deposits (or loans from other banks).
There is no law broken in that scenario.

Also, what have you to say about all the sources I gave you?

What about them? Some were silly. Some didn't prove what you claimed.
If you think they did, cut and paste the relevant section.

I gave you a lengthy response

The best ones were when you proved my claims. Thanks.

 

[ShackledNation]

Saying deposits are larger than loans means absolutely nothing.

It means no loan is created out of thin air.

You wrongly think the reserve ratio means banks can only lend out 90% of their current reserves.

90% of their loans, whether they're borrowing from depositors or other banks. Absolutely.

The loan is often in the form of a check, which is then deposited...into a demand account.

You take out a car loan and deposit the check in a demand account? Sure.

When the car dealer gets the check, their deposit of it will withdraw cash from the lender.

Not necessarily. If the bank is the same, then there will be no withdrawal of cash. You are also mistaken if you think that with each deposit of a check cash is moved from bank to bank. That would be chaos. The lender of the car loan is Bank A, and the salesman deposits the check in Bank B. But another loan will come from Bank B, and another salesman will deposit it into Bank A. Overall it balances it out, and only the difference ever moves from place to place. The same is true for your idea of money creation as well. It is really a moot point.

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Excellent example. You have $1000 in deposits and $900 in loans.

Very good. Now answer the questions I asked. You've been ignoring them. What law says banks cannot create money in the way I am stating? Also, what have you to say about all the sources I gave you?

I gave you a lengthy response, and you gave a few lines with almost no substance. That is very telling.

What law says banks cannot create money in the way I am stating?

Banks can create money if they make loans.
They can make loans if they have larger deposits (or loans from other banks).
There is no law broken in that scenario.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?

Also, what have you to say about all the sources I gave you?

What about them? Some were silly. Some didn't prove what you claimed.
If you think they did, cut and paste the relevant section.

I did cut and paste the relevant section. Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.

I gave you a lengthy response

The best ones were when you proved my claims. Thanks.

The only claims of yours I proved are the ones where we share common ground. Where we disagree is how money is created in practice. So far, you have provided no evidence that what I have said is wrong, nor any evidence that what you have said is what actually happens in practice.

 

[Toddsterpatriot]

Not necessarily. If the bank is the same, then there will be no withdrawal of cash. You are also mistaken if you think that with each deposit of a check cash is moved from bank to bank. That would be chaos. The lender of the car loan is Bank A, and the salesman deposits the check in Bank B. But another loan will come from Bank B, and another salesman will deposit it into Bank A. Overall it balances it out, and only the difference ever moves from place to place. The same is true for your idea of money creation as well. It is really a moot point.


Very good. Now answer the questions I asked. You've been ignoring them. What law says banks cannot create money in the way I am stating? Also, what have you to say about all the sources I gave you?

I gave you a lengthy response, and you gave a few lines with almost no substance. That is very telling.

What law says banks cannot create money in the way I am stating?

Banks can create money if they make loans.
They can make loans if they have larger deposits (or loans from other banks).
There is no law broken in that scenario.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?

Also, what have you to say about all the sources I gave you?

What about them? Some were silly. Some didn't prove what you claimed.
If you think they did, cut and paste the relevant section.

I did cut and paste the relevant section. Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.

I gave you a lengthy response

The best ones were when you proved my claims. Thanks.

The only claims of yours I proved are the ones where we share common ground. Where we disagree is how money is created in practice. So far, you have provided no evidence that what I have said is wrong, nor any evidence that what you have said is what actually happens in practice.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?

The law of mathematics.

The only claims of yours I proved are the ones where we share common ground.

You proved that deposits are larger than loans. Was that common ground?

So far, you have provided no evidence that what I have said is wrong,

This was the first post of mine that you responded to.....

I love these silly complaints.
Yes, banking is fractional reserve. What does that mean?
A bank takes in $100 in deposits and loans out less than $100 and holds the rest in reserve.

What is the alternative? Holding the entire $100 in reserve and lending out $0?

Are you under the impression you have proven this wrong in anyway?

Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.

I did ignore the stupid ones, like this one......


Imagine this money trick over and over.

If you do this operation 50 times, that $100 turns into $995.25—$885.25 in loans, and your original $100.


Mad math: If those loans are for one year at 10% interest, the banks will make $88.53. If they’d only been able to loan your $100, they’d make $10.


Why do they ignore the additional deposits they must pay interest on?

Right, because they're idiots. The cartoons were cute.

 

[ShackledNation]

What law says banks cannot create money in the way I am stating?

Banks can create money if they make loans.
They can make loans if they have larger deposits (or loans from other banks).
There is no law broken in that scenario.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?


I did cut and paste the relevant section. Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.

I gave you a lengthy response

The best ones were when you proved my claims. Thanks.

The only claims of yours I proved are the ones where we share common ground. Where we disagree is how money is created in practice. So far, you have provided no evidence that what I have said is wrong, nor any evidence that what you have said is what actually happens in practice.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?

The law of mathematics.

So no law was broken. Got it.

The only claims of yours I proved are the ones where we share common ground.

You proved that deposits are larger than loans. Was that common ground?

Yes. And as I mentioned before, that is totally irrelevant. Try to keep up.

So far, you have provided no evidence that what I have said is wrong,

This was the first post of mine that you responded to.....

I love these silly complaints.
Yes, banking is fractional reserve. What does that mean?
A bank takes in $100 in deposits and loans out less than $100 and holds the rest in reserve.

What is the alternative? Holding the entire $100 in reserve and lending out $0?

Are you under the impression you have proven this wrong in anyway?

Yes. Clearly so, actually. A bank can create loans of up to $900 from a single $100 cash deposit with a reserve requirement set at %10.

Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.

I did ignore the stupid ones, like this one......


Imagine this money trick over and over.

If you do this operation 50 times, that $100 turns into $995.25—$885.25 in loans, and your original $100.

That describes money creation as you think it happens.

Mad math: If those loans are for one year at 10% interest, the banks will make $88.53. If they’d only been able to loan your $100, they’d make $10.

Why do they ignore the additional deposits they must pay interest on?

They don't have to pay interest on them.

Right, because they're idiots. The cartoons were cute.

Ad hominem.

The reality remains that an initial cash deposit of $100 allows a bank to make $900 in loans. If the bank does so, they will have met the 10% reserve requirement. You are flailing here--you are even starting to disagree with yourself.

 

[ShackledNation]

When people say "out of thin air" that is exactly what is being referred to. Its just an idiom.

Out of thin air means no deposit required.

They can't make $900 in loans with only $100 in deposits, that would mean $800 out of thin air.

They can make $900 in loans with $1000 in deposits. No air needed.

They make $900 out of thin air. You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Let's start with 2 banks, each with $100 deposits, $100 reserves, $0 loans.
Bank A loans $90 to Bill who deposits it at bank B.
Bank A: $100 deposits, $10 reserves, $90 loans.
Bank B: $190 deposits, $190 reserves, $0 loans.

Bank B loans $172 to Emily who deposits it at bank A.
Bank A: $272 deposits, $182 reserves, $90 loans.
Bank B: $190 deposits, $18 reserves, $172 loans.

Continue this accounting until we get a total of $2000 deposits, $200 reserves, $1800 loans. Now think about the logic of what happened. How did these deposits "enable" the loans? Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

They make $900 out of thin air.

Not out of thin air, out of deposits and smaller loans.

You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Circulating? Don't you mean on the books of the bank?

Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

Yes, you can skip from deposits bigger than loans to deposits bigger than loans.
Just like it showed in my wiki link.

Ok, then I am right. You just agreed with me. You can skip from $200 deposits, $200 in reserves, and $0 in loans to $2000 in deposits, $200 in reserves, and $1800 in loans. Thus the $200 deposit allowed the bank to make $1800 in loans, just like that.

 

[Derideo_Te]

We definitely need more intervention to try and stem of some of the disasters created by intervention.

Meanwhile, the federal reserve goes untouched, as if it isn't the real systemic problem the country has financially.

The Federal Reseve isn't the problem, in and of itself.

It can be misused, as Reagan and Greenspan proved. But overall, it's been able to keep much of our economy stable.

What a laugh. You've lost more than 96% of your purchasing power in 100 years under the feds watch. That mean inflation, a "targeted" inflation. Central planning is a terrible idea that destroys the wealth of individuals and nations alike.

And yet despite what you say about the Fed this has become the wealthiest nation in the history of the planet.

 

[ShackledNation]

The Federal Reseve isn't the problem, in and of itself.

It can be misused, as Reagan and Greenspan proved. But overall, it's been able to keep much of our economy stable.

What a laugh. You've lost more than 96% of your purchasing power in 100 years under the feds watch. That mean inflation, a "targeted" inflation. Central planning is a terrible idea that destroys the wealth of individuals and nations alike.

And yet despite what you say about the Fed this has become the wealthiest nation in the history of the planet.

Yes, despite the Fed.

 

[Toddsterpatriot]

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?


I did cut and paste the relevant section. Each link was preceded by the name and title of the person giving the quote, and the quote itself. You just ignored them.


The only claims of yours I proved are the ones where we share common ground. Where we disagree is how money is created in practice. So far, you have provided no evidence that what I have said is wrong, nor any evidence that what you have said is what actually happens in practice.

I am talking about my scenario, whereby a bank creates loans up to $900 from a single deposit of $100 cash. What law is broken?

The law of mathematics.

So no law was broken. Got it.


Yes. And as I mentioned before, that is totally irrelevant. Try to keep up.


Yes. Clearly so, actually. A bank can create loans of up to $900 from a single $100 cash deposit with a reserve requirement set at %10.


That describes money creation as you think it happens.

Mad math: If those loans are for one year at 10% interest, the banks will make $88.53. If they&#8217;d only been able to loan your $100, they&#8217;d make $10.[/B]


Why do they ignore the additional deposits they must pay interest on?

They don't have to pay interest on them.

Right, because they're idiots. The cartoons were cute.

Ad hominem.

The reality remains that an initial cash deposit of $100 allows a bank to make $900 in loans. If the bank does so, they will have met the 10% reserve requirement. You are flailing here--you are even starting to disagree with yourself.

So no law was broken. Got it.

It is impossible for a bank with a single deposit of $100 to loan $900. Law has nothing to do with it.

Clearly so, actually. A bank can create loans of up to $900 from a single $100 cash deposit with a reserve requirement set at %10.

As long as they get additional deposits of $900 or borrow $900 from another bank.
Barring additional deposits or borrowings, they can only lend $90.

That describes money creation as you think it happens.

Why are you giving links that prove I'm right then?

Why do they ignore the additional deposits they must pay interest on?

They don't have to pay interest on them.

Why don't they have to pay interest on the additional deposits?

 

[Toddsterpatriot]

They make $900 out of thin air. You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Let's start with 2 banks, each with $100 deposits, $100 reserves, $0 loans.
Bank A loans $90 to Bill who deposits it at bank B.
Bank A: $100 deposits, $10 reserves, $90 loans.
Bank B: $190 deposits, $190 reserves, $0 loans.

Bank B loans $172 to Emily who deposits it at bank A.
Bank A: $272 deposits, $182 reserves, $90 loans.
Bank B: $190 deposits, $18 reserves, $172 loans.

Continue this accounting until we get a total of $2000 deposits, $200 reserves, $1800 loans. Now think about the logic of what happened. How did these deposits "enable" the loans? Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

They make $900 out of thin air.

Not out of thin air, out of deposits and smaller loans.

You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Circulating? Don't you mean on the books of the bank?

Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

Yes, you can skip from deposits bigger than loans to deposits bigger than loans.
Just like it showed in my wiki link.

Ok, then I am right. You just agreed with me. You can skip from $200 deposits, $200 in reserves, and $0 in loans to $2000 in deposits, $200 in reserves, and $1800 in loans. Thus the $200 deposit allowed the bank to make $1800 in loans, just like that.

Thus the $200 deposit allowed the bank to make $1800 in loans, just like that

Sure, as long as you end up with $2000 in deposits.
Because $2000 in deposits, not $200, allows $1800 in loans.
Because, as I've said since the beginning, banks loan out a portion of deposits and reserve the rest.

 

[Derideo_Te]

What a laugh. You've lost more than 96% of your purchasing power in 100 years under the feds watch. That mean inflation, a "targeted" inflation. Central planning is a terrible idea that destroys the wealth of individuals and nations alike.

And yet despite what you say about the Fed this has become the wealthiest nation in the history of the planet.

Yes, despite the Fed.

I am curious as to exactly what role you believe the Fed plays in the US economy. Can you provide examples where the Fed has been responsible for "destroying" the "wealth of individuals" and the nation?

 

[ShackledNation]

They make $900 out of thin air.

Not out of thin air, out of deposits and smaller loans.

You have $1000 circulating in the economy, despite there being only $100 before the bank entered the picture.

Circulating? Don't you mean on the books of the bank?

Could we not have skipped from the beginning (totals: $200 deposits, $200 reserves, $0 loans) straight to the final result (totals: $2000 deposits, $200 reserves, $1800 loans)?

Yes, you can skip from deposits bigger than loans to deposits bigger than loans.
Just like it showed in my wiki link.

Ok, then I am right. You just agreed with me. You can skip from $200 deposits, $200 in reserves, and $0 in loans to $2000 in deposits, $200 in reserves, and $1800 in loans. Thus the $200 deposit allowed the bank to make $1800 in loans, just like that.

Thus the $200 deposit allowed the bank to make $1800 in loans, just like that

Sure, as long as you end up with $2000 in deposits.
Because $2000 in deposits, not $200, allows $1800 in loans.
Because, as I've said since the beginning, banks loan out a portion of deposits and reserve the rest.

Alright then. You have a $200 deposit, creating $200 in cash reserves. The bank then skips to creating $1800 in loans and the corresponding $1800 in demand deposits for the debtors to spend their loans. Money created.

 

[ShackledNation]

And yet despite what you say about the Fed this has become the wealthiest nation in the history of the planet.

Yes, despite the Fed.

I am curious as to exactly what role you believe the Fed plays in the US economy. Can you provide examples where the Fed has been responsible for "destroying" the "wealth of individuals" and the nation?

The Fed is mostly an enabler of fractional reserve banking practices. Prior to the Fed, fractional reserve banking led to bank runs and panics. As a result, banks tended to expand the money supply by a lesser degree because doing so carried more risk.

The Fed essentially prevents bank runs by acting as a lender of last resort. This allows fractional reserve banking to greatly expand the money supply without risk of a bank run.

It is the expansion of the money supply through fractional reserve banking that is the problem, not the Fed per se. The Fed just allows the expansion to happen with less restraint.