So, fractional reserve banking.

[CT4Liberty]

But if I take out my deposit, the bank has to try to recall the loan made based on my deposit or attract a new deposit.

Let's do a short run sample.

I have $100. I deposit it in a bank with a 10% reserve requirement. That means they can lent out $90. I have zero dollars, the bank has $10 and the customer has $90.

That person does not spend the money but deposits it back into the bank. The bank now has $100. From that second deposit, they can lend out $81. The bank now has $19 and I have zero, the first borrower has zero and the second borrower has $81.

He doesn't spend it and puts it back into the bank. An $81 deposit so they can loan out $72.90. The bank has $27.10 in cash I and the first borrower have zero. The total money is still $100. What is growing is the amount owed to people.

Let's make it personal. I have $20. Bill wants to borrow $20 so I give it to him. Now he owes me $20. Charles needs money and runs into Bill. Bill lends him $10. I have zero, Bill has $10 (but owes me $20) and Charles has $10 and owes Bill $10. How much money was actually created? Is there more than the $20 out there circulating? Is it $20 or is it $50?

The bank is creating the "appearance" of wealth and people believe they have a claim (which they do) to their money. So in the example you gave, if the same day the 3 people come calling for their money (me for my $100, the next person for their $90 and the next person for their $81) the bank would have to hand out $271 even though they only have reserves totaling $100.

Sure, if the ponzi scheme keeps going and you can find infinite victims to loan money you dont really have out to, then we keep chugging along, the point is, because of the debt based scheme you have created - at some point there is not enough money to pay the debt and then the bank forecloses on individuals, taking from them the property they put up as collateral for money the bank never had in the first place.

[Bohner]

The bank is creating the "appearance" of wealth and people believe they have a claim (which they do) to their money. So in the example you gave, if the same day the 3 people come calling for their money (me for my $100, the next person for their $90 and the next person for their $71) the bank would have to hand out $261 even though they only have reserves totaling $100.

Sure, if the ponzi scheme keeps going and you can find infinite victims to loan money you dont really have out to, then we keep chugging along, the point is, because of the debt based scheme you have created - at some point there is not enough money to pay the debt and then the bank forecloses on individuals, taking from them the property they put up as collateral for money the bank never had in the first place.

Ummm.... They DID have that money.

[CT4Liberty]

Ummm.... They DID have that money.

They only have the amount that the original depositor put in... again, 1 person puts money in ($100), 2 people take loans ($90 and $81). If those 2 put that money back in the bank, they now have 3 accounts totaling $271... yet I am the only person who put money in and it was only $100...

The point is, that when a bank takes my deposit in a checking account, I have a claim to that money whenever I want it...therefore, lending it out creates more money into the supply.

[Zippyjuan]

They only have the amount that the original depositor put in... again, 1 person puts money in ($100), 2 people take loans ($90 and $81). If those 2 put that money back in the bank, they now have 3 accounts totaling $271... yet I am the only person who put money in and it was only $100...

The point is, that when a bank takes my deposit in a checking account, I have a claim to that money whenever I want it...therefore, lending it out creates more money into the supply.

Lets look back at my example. After all the loans and deposits how much is out being spent? $72.90 of the original $100 I gave them (the bank is holding the rest). If I want to get my money back, they have to borrow that $100 from somebody else to get their deposits back to matching their outstanding loans. Paying me my $100 back puts money into circulation but them borrowing another $100 from somebody else to replace my deposit reduces money circulating by the exact same amount so the net effect is zero. The account is really an IOU- not actual money.

[Bern]

Bank credit is money only until it isn't. /learn history

[cubical]

Lets look back at my example. After all the loans and deposits how much is out being spent? $72.90 of the original $100 I gave them (the bank is holding the rest). If I want to get my money back, they have to borrow that $100 from somebody else to get their deposits back to matching their outstanding loans. Paying me my $100 back puts money into circulation but them borrowing another $100 from somebody else to replace my deposit reduces money circulating by the exact same amount so the net effect is zero. The account is really an IOU- not actual money.

I am not expert on the banking system, but I believe the bank simply gets a loan from the fed with the loan as collateral, so all parties in fact do have accessible cash. How else can you explain the ever expanding credit over the last 4 decades?

I know there are certain deposits that require no reserves, which is one reason credit continues to grow, but I do not believe it is the sole or even main reason.

[Zippyjuan]

Fed loans are typically over-night and that is not used very often. A bank can try to attract new deposits (which takes time) or they can also try to borrow from another bank which has excess reserves to support their outstanding loans.

[cubical]

Fed loans are typically over-night and that is not used very often. A bank can try to attract new deposits (which takes time) or they can also try to borrow from another bank which has excess reserves to support their outstanding loans.

How do you explain such growth in credit then as monetary base remained relatively flat(pre 2008)?

[Bohner]

Fed loans are typically over-night and that is not used very often. A bank can try to attract new deposits (which takes time) or they can also try to borrow from another bank which has excess reserves to support their outstanding loans.

Not true... No way could the banks have kept interest rates so low for so long (since the early 90's, through 2 recessions, and while household debt was rising to an all time high) without borrowing a significant amount of funds from the fed.

[Zippyjuan]

Not true... No way could the banks have kept interest rates so low for so long (since the early 90's, through 2 recessions, and while household debt was rising to an all time high) without borrowing a significant amount of funds from the fed.

Low inflation. There are basically three things which go into determining an interest rate. First is the desired rate of return the lender wants. They add on to that the expected rate of inflation during the time of the loan (so that the return is real- after inflation) and a premium based on the riskyness of the borrower (more likely to pay back the loan- lower premium). If the future inflation rate is uncertain, that adds the same as a higher rate of inflation would. Demand for money is factored in as well- if people aren't borrowing you may have to lower your rates to attract more customers. Inflation has been low so that has allowed interest rates to stay low.

We can kinda thank China for that- in two ways. First, all the cheap junk they sell us kept the price inflation rate low. Second, their demand for US Treasuries kept the prices for them higher and longer term interest rates (like those for mortgages) lower (Treasury note prices move inversely to the interest rates- higher prices due to higher demand means lower rates- and long term loans like mortgages tend to track longer term Treasury notes- mostly the fifteen year ones).