$15 Trillion in 5 Days

A man walks in a bank and deposits $1000, the bank can now loan $900 of that $1000 deposit. The bank can loan it to a person who then deposits it right back into the same bank. Now the bank has the original $1000 deposit in the first mans account plus the new $900 in the second persons account, so the bank now has $1900 and can now loan a third person $1710 dollors and have that money deposited right bank into a new third account, now the bank has three accounts that total $3610, the bank can now make it's forth loan of $3249 and have it deposited right back into a forth account and have a total of $6859 in the four accounts...I can keep going and going and going till a loaf of bread cost 3 million dollors.

 

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This is not correct. A 10% reserve requirement allows a bank the ability to loan out up to 90% of its deposits but must maintain a minimum 10% reserve. If banks had the authority to loan at 9x multiplier based on reserves then banks could hold 100% of deposits in reserve and then loan out an amount equal to 9x their total deposits. Thus creating an infinite money supply. In fact a bank holding only 11% in reserve could create an infinite money supply. 11% x 9 equals 99% plus the 11% held in reserve equals 110%.

 

You are asking me to explain something that would take hours for me to write when one 10 minute video and rush2112's link are already made at a higher level than either of us can write.

 

I think we need to make one change here. If the bank loans out $900 of the $1000, and the person taking that loan deposits the $900, then they can only loan out 90% of that $900 which is $810. They can't loan out $900 of the original $1000 a second time.

So the balance sheet would go $1000, $1900, $2710, $3439, etc., but the subsequent loans themselves have to get incrementally smaller ($900, $810, $729, etc.) in relation to the original loan.

The main difference being that the size of the subsequent loans plus the originating loan will eventually plateau as 90% begins getting applied to an infitesimally small number, as opposed to the size of each new loan continuing to grow beyond the original loan, but it does still have an exponential effect on the overall money supply.

 

Thanks for the correction, so we both agree for every deposit 9x can be created out of thin air. It would have been so much easier for him to just watch the 10 minute video than for me to try to write it out.

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Not quite. It's not that 9x can be created out of thin air for every deposit, but rather that every deposit can be loaned out at 90%, and 100% of every loan is created out of thin air.

 

Exactly what I said. This is what "approaches $0" means.

 

So, if someone deposits $100, and the bank loans out $90 and keeps $10 in reserve, then they loaned out 9X it's reserves. Maybe you should read my post again.

 

No you still have it wrong. It's 9X the amount of reserves. This is why I didn't bother with your video.

 

OK so it's that they have to have at least 1/10th of the total loan in reserves, but reserves are different than the overall balance sheet. Hey it's a fraction, who would've thought. Here's a brain buster, why do they need reserves at all if they can just create money out of thin air? Well I guess I just thought of the answer, because people still need to withdraw real money now and then Sorry, I meant fiat currency. Gold and silver are the real money

 

10 minutes

http://www.youtube.com/watch?v=eWl7Mb49vSk

 

The explanation is simple. They don't want every Joe Blow (ordinary people) opening a bank and creating money via FRB. Before a bank can be chartered, its owners must demonstrate they have they have, and can maintain, a minimum amount of reserves & capital before they can join this exclusive club. Else they can't join the Federal Reserve or get FDIC insurance which effectively prevents them from being a bank. As it stands now, if a chartered bank fails to maintain "standards" the FDIC gets to kick them out of the club, seize their assets and hand them over to another bank. As I said many posts back, the primary purpose of the FDIC isn't to insure depositor's money.

For fiat money to work the people have to believe it's worth something and they won't if anyone could open a bank. It's one of those contradictions that nobody will discuss and which most won't even believe.

(Of course it's obvious they broke all these rules for the TBTF banks, but remember, the rich are not like you and I. They get different rules.)

 

Add multiple banks into the equation.

 

Very interesting. So the function is to regulate membership in the good old boys club. Not quite as we are lead to believe.

I'm happy to discuss it. The function of money should be regulated by elected officials, and any proceeds should be tax surplus. It's a no brainer. Why some people get to rob the taxpayers instead by having this seat is beyond comprehension. And how about anybody can be a bank if they actually have the money to loan and a business license. If you want to be risky with your own money then go ahead and throw it away by not doing your due diligence. We did do things right in the USA for all of 15 years until Alexander Hamilton introduced the first central bank and fixed the gold/silver ratio which eventually caused the crime of 1873, the demonetization of silver. This put the gold standard into effect instead of bimetalism (Europe was all on board for this too), which allowed Bretton Woods to take place replacing gold with fiat. Without silver in the equation it was a simple bait and switch. I think people are starting to realize what real money is again though. Everybody opens their eyes to a different alarm bell.

 

I don't follow. The values are based on the number of loans regardless of where the money goes or how many banks are involved. You can only take out one loan at a time, and any bank will do whether it's the same one as a previous loan or not.

 

This so called money that is created out of thin air is not created by the central bank and its creation does not change the base money supply. In The United States the central bank is The Federal Reserve and the base money supply is Federal Reserve Dollars. Keep in mind all Federal Reserve Dollars are dollars but all dollars are not Federal Reserve Dollars. Technically when you deposit dollars into your bank, no matter what form of dollar you deposit, you are exchanging those dollars for a dollar that is a derivative of your bank. It doesn’t matter if the dollars you deposited were actual Federal Reserve Dollars or a derivative of another bank; the dollars you receive will be a derivative based on your bank’s reserve of Federal Reserve Dollars and your bank’s credit worthiness. Yes the money I have held in account at my bank are dollars but they are not Federal Reserve Dollars. Yes the money I have held in account at my bank is counted as part of the money supply but it is not counted as part of the base money supply. The only way my dollars held in account at my bank can be 100% representative of Federal Reserve Dollars is if my bank maintained a 100% reserve. Even if my bank maintained a 100% reserve my dollars in that bank would still be a derivative and not actual Federal Reserve Dollars. A highly secure derivative no doubt.

In fractional reserve banking the maximum a bank can loan is set by the statutory minimum reserve requirement and a banks total deposits. The theoretical maximum the money supply can expand is set by a combination of the statutory minimum reserve requirement and the base money supply. The total base money supply (Federal Reserve Dollars in the US) is the maximum amount of money that can be held as reserve. The money supply multiplier can be determined using the following formula. (100% - the statutory minimum reserve requirement)/ the statutory minimum reserve requirement.

Examples:
10% statutory minimum reserve requirement (100%-10%)/10% = a multiplier of 9. 100% of the base money supply x 9 equals the theoretical maximum the money supply can be expanded through fractional reserve banking.
20% statutory minimum reserve requirement (100%-20%)/20% produces a multiplier of 4.
5% statutory minimum reserve requirement (100%-5%)/5% produces a multiplier of 19.

Remember it is a statutory MINIMUM reserve requirement. Banks are not allowed to hold less than this amount of customer’s deposits in reserve but it doesn’t prohibit banks from holding more than this amount of customer’s deposits in reserve. Being that banks can hold a reserve greater than the statutory minimum the maximum amount of money a bank can loan CANNOT be correctly or accurately expressed in terms using the bank’s actual reserve x the multiplier. Or as was suggested in a previous post 9x the bank’s reserve. The only time this equation would produce a correct result is when a banks actual reserve equaled the statutory minimum. You know what they say even a broken clock produces the correct time twice a day. As I wrote above the maximum amount a bank can loan is set by the statutory minimum reserve requirement in the following manner – (100% - the statutory minimum reserve requirement) x the banks total deposits.

 

^That long cut and paste can be summarized into just one sentence: Money sitting in Federal Reserve accounts vs money sitting in commercial bank accounts. Nothing more, nothing less.

For the purposes of this discussion, whether the money is sitting in a Federal Reserve account or a commercial bank account, the distinction is meaningless. All of it is USD and thus by definition since 1971 are Federal Reserve Dollars. The Federal Reserve does make the distinction between base money and commercial money because the Federal Reserve act requires the FR to carry this on its balance sheet to be balanced out by central bank assets. (namely US Gold Certificates valued at $42/ounce & US Treasury Notes).

It should be noted that the money supply reported by the Federal Reserve, M1 & M2, only includes the commercial bank account money. It never includes base money because it doesn't circulate.

 

We already know this isn't true from other posts that reference the Federal Reserve web site, and that M2 includes money market mutual funds that hold non-bank commercial paper and treasury securities. Anyone interested can look it up, I'm not going through that again. Anyone who chooses to believe otherwise is free to remain wrong.

 

Context, Son, Context. We were talking about fractional reserve banking. "My statement was "M1 & M2, only includes the commercial bank account money." "The" as in what was being referenced at the beginning of my post which you left out. You seem to have an issue with this as this is about the 3rd time you have come back into this topic and got it completely wrong.

"I'm not going to go through that again." Good. Because you were proved to be wrong.

 

Taken directly from the Federal Reserve Website.

"There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). M2 is defined as M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares."