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I have a nagging question which comes probably from a misunderstanding, and I guess that the answer will point me to what exactly I do not understand. It's about monetary theory and macro economy. Here it goes.
If I understand well, the "money base" (MB) is all issued by the FED (the Central Bank). Using the fractional reserve banking system, commercial banks can issue a larger amount of M1 money (deposits, loans...).
The FED can act upon the money base by Open Market Operations, that is, by buying up federal bonds. In doing so, it issues MB-money (it "prints" money) and takes over federal bonds. It can reduce the money base (MB) by re-selling bonds, and taking up MB-money (destroying money, "burning bills").
In principle, "after all is said and done" the FED could sell all bonds again, recuperate all money, and reduce the money base to 0. (it will never do so, but one can understand that the 'balance' is right here)
However, the FED also has a discount window, where it issues loans to banks, and it charges a discount rate.
And this is where I have difficulties. Imagine that there is no money (that the FED took back all money by selling all federal bonds back again) in the money base, EXCEPT for a single bank that has taken a loan of $ 100,- at the discount window, and let us say that the discount rate is 10%
After 1 year, the bank wants to pay back. How does this bank do so ? There IS only $ 100,- in the money base, and now this poor bank is supposed to give back $ 110, - ??
If I understand well, the "money base" (MB) is all issued by the FED (the Central Bank). Using the fractional reserve banking system, commercial banks can issue a larger amount of M1 money (deposits, loans...).
The FED can act upon the money base by Open Market Operations, that is, by buying up federal bonds. In doing so, it issues MB-money (it "prints" money) and takes over federal bonds. It can reduce the money base (MB) by re-selling bonds, and taking up MB-money (destroying money, "burning bills").
In principle, "after all is said and done" the FED could sell all bonds again, recuperate all money, and reduce the money base to 0. (it will never do so, but one can understand that the 'balance' is right here)
However, the FED also has a discount window, where it issues loans to banks, and it charges a discount rate.
And this is where I have difficulties. Imagine that there is no money (that the FED took back all money by selling all federal bonds back again) in the money base, EXCEPT for a single bank that has taken a loan of $ 100,- at the discount window, and let us say that the discount rate is 10%
After 1 year, the bank wants to pay back. How does this bank do so ? There IS only $ 100,- in the money base, and now this poor bank is supposed to give back $ 110, - ??