Posted: Mar 27, 2013 4:32 pm
I know a guy who buys this nonsense. Banks engage in a process known as fractional reserve lending whereby they take in deposits and lend it out to other people. Those individuals who borrow the money typically put it in a bank while they wait to use it, and the bank they give it to then proceeds to lend that money out, and on and on it goes.
This results in there being a greater supply of money, technically, if you view the fact that people who put their money in a bank and people who borrow that money both consider themselves to have that money, thus, at least perceptively, making more people think there is more money.
In fact, there are simplified equations to show just how fast money grows when you lend it to a bank. If reserve requirements at 10%, meaning that banks have to keep at least 10% of all deposits in reserve in order to pay out anyone who wants to withdraw their money and thus prevent a run on the bank, and someone deposits $100, the bank will then lend out $90, the debtor will put the $90 in the bank, the bank will lend out $81, etc., and therefore the money supply proceeds to increase by:
$90/.1=$900
Now, it strikes me as utterly bizarre that anyone freaks out over this. No actually currency is being produced, and lending money dramatically improves economic efficiency and growth as money is diverted from savers with no use for it at the time to borrowers who may have profitable investments or need for consumption at the time. Obviously bank runs can ensue, but our federal deposit insurance system insures deposits of up to like $250k now, and few reasonable people actually fear a run.
This results in there being a greater supply of money, technically, if you view the fact that people who put their money in a bank and people who borrow that money both consider themselves to have that money, thus, at least perceptively, making more people think there is more money.
In fact, there are simplified equations to show just how fast money grows when you lend it to a bank. If reserve requirements at 10%, meaning that banks have to keep at least 10% of all deposits in reserve in order to pay out anyone who wants to withdraw their money and thus prevent a run on the bank, and someone deposits $100, the bank will then lend out $90, the debtor will put the $90 in the bank, the bank will lend out $81, etc., and therefore the money supply proceeds to increase by:
$90/.1=$900
Now, it strikes me as utterly bizarre that anyone freaks out over this. No actually currency is being produced, and lending money dramatically improves economic efficiency and growth as money is diverted from savers with no use for it at the time to borrowers who may have profitable investments or need for consumption at the time. Obviously bank runs can ensue, but our federal deposit insurance system insures deposits of up to like $250k now, and few reasonable people actually fear a run.