That does not mean they cannot maintain the banking system.
All that is required is timing. As long as people re-deposit what they withdraw, the system works fine.
Let's not - it confuses you because you do not apply proper economic theory in your analogies.Let's use an analogy.
Use a real example - use a monopoly set with money, notepads to record your transactions, and work it out.
Exactly my point with your analogies.Say a counterfeiter exchanges
There is NO counterfeiting going on with the Fractional Reserve banking system
Read carefully, sir.
Every transaction is done using REAL, HONEST MONEY
You withdraw REAL money from your deposit account as according to your IOU agreement with the bank.
You hand over REAL money to buy your goods.
The seller deposits REAL money into his bank deposit account based on an IOU agreement with the bank.
So quit with your bizarre counterfeiting nonsense - because it makes NO sense!
Agreed.Fractional banking is fraud...and fraud is not a proper component of the free market.
It is, as Rothbard said, two simultaneous claims on the same asset. One of them cannot be right. The bank claims both are right. That is fraud.
But there is no counterfeiting, and no "thin air money"
By earning! - how do you pay off your loan? You get a job, work hard, save money and repay your loan?!?!?!?
When an economy has trillion dollars in base money and three trillion in deposits...and the deposits are backed by two trillion in loans...how does the economy repay the two trillion?
Why is this such a bloody mystery to you?
1st, that will never happen.Put another way...say the 3 trillion in deposits all wanted to be cashed out into reserves...what happens?
If you think it will, explain the circumstance that suddenly crashed Western Civilization - and I will point to that event being the cataclysmic event, and not a failure of the banking system.
2nd, it can happen to banks - happens all the time - hundreds have closed their doors.
When their depositors take their money out - and the bank no longer has capital to repay it, the bank is bankrupt and it closes it doors.
Those that did not get paid are stiffed.
This creates a massive recession/depression if many banks suffer this fate and cause massive losses to its depositors by being unable to repay their IOU.
Now, again, if you believe the IOU is money, this simply is impossible! How can you run out of the thing you have?
But IOU is not money - it is REPAID WITH MONEY, and the money ran out.
There have been 100's of banks that have been bankrupted and dissolved since 1933.
There has not been 1 ... not one .... depositor who has lost their money.
?? I don't know where you are getting this idea... What I was explaining is how the Fed has to constantly inject reserves into the banking system to keep it afloat.
It injects money into the system to keep large BANKS afloat, and to give money to government but it does NOT inject money to keep the "system" afloat - it does not have to.
The capitalist free-market system is already a infinitely, self-sustaining feedback loop - the Federal Reserve couldn't stop the economy if they tried.
True.Fractional banking is inherently unstable and will always crash because people demand liquidity that is rightfully theirs.
False (that such a thing will collapse the system) - (true, they may choose not to borrow)Or they will decide they don't want to borrow as much.
True.Or they have the inability to repay bank loans
False.(thanks in large part to how bank money plus interest squeezes the demand for reserves).
No, not quite.Let's try this...let's establish what we agree and disagree on.
MB is destroyed = deflation...MB created = inflation. Correct?
Inflation/deflation is a consequence of the law of supply and demand
Increase in demand for money raises the price of money.
Decrease in demand for money lowers the price of money.
Increase in supply of money lowers the price of money.
Decrease in supply of money raises the price of money.
If the increase in demand of money is met with an increase in the supply, the price of money does not vary.
If there is an increase in the demand for apples, but the apple growers meet that demand, the price of apples does not vary.
This is basic economics 101 - the law of supply and demand.
It applies to apples, computers, labor ... and money.
Yes demand for money (or a lessening of it) will change the price of money and create inflation/deflation
Yes the manufacturing of money (or the lessening of it) will change the price of money and create inflation/deflation.
BOTH in action, one stronger than the other, will change the price of money.
True.You believe that M1 is not money. Therefore when M1 is either created or destroyed it doesn't affect prices, right?
You obtaining a loan means there is money to lend.
You paying off a loan means there must have been money to earn.
Well, not necessarily true either -
and though not anything to do with the banking system, I can see where people losing their deposits - that is, they got stiffed, - will change their buying habits.
You take a bath in the stock market and lose your retirement fund, you may change your spending habits so to replenish those funds - thus, not buy things, thus cause a recession.
People losing their money due to unpaid deposits may cause the same thing - a reduction in spending so to rebuild excess capital.
The amount of money neither increase or decreases in either circumstance.
You believe repaying loans reduces M1, right?
You have "Steven's" disease.
You believe when a loan is repaid, the bank sits on its hands and goes "Whew! Got the money now stuff it in a pillow case and hide it!"
No, it is a business.
It is in the business of making loans.
You repay your loan to the bank.
The bank takes your repayment and loans the money out to the economy and someone else.
It does this because that is what a bank does to earn a living.
It lends money.
It pays its employees, it lightening bills, its electrical bills, its rent from the money earned in doing its business - that is, lending money. It's earnings are called "interest".
So it lends the money again.
A person who needs money that they don't have to buy something they want today. They want to defer payment for the goods they want today, and pay for that good in the future.
The bank charges a fee for giving you money today to be returned in the future.
There is a fee for using this money for your wants because the bank cannot use that money for its wants. This fee is interest.
The person who borrows money uses it to buy something.
They spend the money.
The seller gets the money, and do you know what he does with it?
He ... deposits it!
A repayment of a loan requires money. True.
Money to repay loan comes from working. True.
The service you give by working trades for money. True.
That money to pay you for your work is withdrawn from a bank account, and lowers DD. True.
The money is repaid to bank, and that lowers loan liabilities. True.
...but you want to stop there. But it does not stop there.
The bank employees need to eat again tomorrow.
They need to earn money to buy food.
They earn money to buy food by lending money at a price.
They have money to lend.
They lend so to earn money.
There is a borrower who..... (repeat forever).
Why would it?But you don't believe a reduction in M1 results in deflation, right?
IF people are pulling out their money and NOT redepositing it, there must be a reason for this
It effects individual BANKS and their capital requirements - but it does NOT affect the banking system. Money out of one bank in this banking system and into another bank in the same banking system is:You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?
-1+1=0 ... no change.
The reasons the FED may or may not buy a T-bill has nothing to do with whether a bank takes a deposit or makes a loan to you.If so, do you believe this affects the open market and the amount of t-bills bought and sold as well as the amount of Mb created and destroyed?
There are a lot of economic circumstances that change a person's demand for money relative to their demand for other goods. Maybe millions of circumstances, maybe billions.If so, do you then believe that paying off loans can result in a reduction in Mb in the economy due to the Fed Funds Rate and open Market operations, so that this would create deflation but in a round-about fashion?
Picking one that, through a chain of effect, may indeed do as you claim.
But, it might not either.
And equally, it might do the opposite next time.