News Money Per Person: How Much Would We Get?

[russ_watters]

They do it in China.

Interesting, but this ain't China. In the US, that'd get you arrested.

There may also be some technical details there that we are missing, along the same lines as writing a check before you have the money in your account to cover it. As long as the money comes in before the person you give the check to deposits it, you're ok...

So the lag in the loan process can provide the opportunity to exceed 100%, but it isn't the same thing that Burnsys is claiming.

 

[russ_watters]

No russss. please, the 90$ they lend you came from only 9 real dolars of your original 100 you deposited... so they actualy create 90$ out of 9$, so 81 where created out of thin air in their computers and in their books...

Still wrong. If you don't like the source that I gave, find your own. There really is nothing more I can do for you.

edit: I recommend finding a reputable source, not a source with an adjenda and a bias or a post in a forum, like your last one. That supposed conversation glossed over the fact that the way the money gets multiplied (heck, reading it, it may even be true, but it is misleading) is by re-depositing it. As I asked you before: if they can create money out of thin air, why even bother with the deposits before starting to send out loans?

In the hypotetical case that the bank has opened today and has only 2 clients...

You who make the deposit of 100$ real dolars,
and me who get a loan of 90$...

You put 100 dolars (reals) in the bank
the bank catch 10$ (real) and put it in the safe...
(they have 90 real dolars left)
I apply for a 90$ loan...
The bank open an acount... in their computer they type: deposit.. 90$ *
they take 9$ (real) and they put it on the safe... (they still has 81$ real)
so total of deposits in the bank is 190$ (numbers in the computer or books) total of real money in the safe 19$ (real paper money) **

So now, we, the only 2 clients of the bank decide to withdraw all our money (100 fom you and 90 for me..) the bank collapse...***

* Just to clarify, that's your account that they just opened and put $90 into.

** This is where you are wrong: since no one has yet taken any cash out of the bank, the bank still has the entire $100 cash on hand, in its vault. The $100 on my balance sheet, the $90 on yours, and the $19 in theirs are just numbers on the page, for now - they are to keep track of who owes who what.

*** You are correct about that, but that is not what you said before! The point is that the bank could not have given you the loan without first getting my deposit.

At the same time, while the situation you describe is theoretically possible, it is also theoretically possible that the bank could call your loan - then you give your money back to the bank and the bank gives my money back to me and everything is back the way it started. No money has been gained or lost.

edit: And again, with sticking the word "original" in there - that's not what you said before. Jeez, both you and Art - its like you understand it but are trying to play word-games.

 

[Burnsys]

Still wrong. If you don't like the source that I gave, find your own. There really is nothing more I can do for you.

edit: I recommend finding a reputable source, not a source with an adjenda and a bias or a post in a forum, like your last one. That supposed conversation glossed over the fact that the way the money gets multiplied (heck, reading it, it may even be true, but it is misleading) is by re-depositing it. As I asked you before: if they can create money out of thin air, why even bother with the deposits before starting to send out loans?

http://www.answers.com/topic/fed-federal-reserve-system
fractional-reserve banking
In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, lending the remainder at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners. Fractional-reserve banking allows for the possibility of a bank run in which the depositors collectively attempt to withdraw more money than is in the possession of the bank, leading to bankruptcy. This is possible because both the borrower and the depositor have a claim to withdraw money deposited at the bank. It also increases the money supply through a mechanism called the deposit creation multiplier, explained below, which leads to inflation by definition. Most governments impose strictly-enforced reserve requirements on banks, with the exact fraction of deposits that must be kept in reserve generally set by a central bank.

http://en.wikipedia.org/wiki/Money_creation
Money creation
For example, let's assume that a primary deposit of $1000 is made into bank A. If the cash reserve ratio is 12%, then $120 must be kept on hand by the bank and $880 is available to be lent to someone else (called the excess reserve). Now if bank A uses its $880 in excess reserve by lending it out, and that is deposited in bank B, it represents a primary deposit to the second bank. Bank B must keep 12% of $880 on hand but can lend out $774.40. If that $774.40 is eventually deposited in bank C, the third bank must keep $92.93 on hand but can lend out $681.47. The process continues until there is no excess reserve left (For simplicity we will ignore safety reserves.). By adding all the derivative deposits we can calculate the amount of money created. Alternatively we can use the deposit multiplier equation:

An example of the creation of new money

5. The commercial bank now claims $1,000,000 in new liabilities (the amount on deposit in a bank is called a "liability" by the bank, because the bank has to pay interest to it, amongst other things). In the US, the law allows the bank to loan out 90% of what it has on deposit. This loaning of money that it has on deposit is the precise point new money is created, because the depositor still has his money, and the person getting the loan now has money too.
6. $900,000 is loaned out on Friday for someone to buy a house. This loan is in the form of a check. The home buyer signs the check and gives it to the seller, who deposits it right back into the bank on Monday. Note however, in real life that money would only come from the bank temporarily, who then would issue its own bonds or use a company like Fannie Mae to issue its own bonds, so that again investors can actually lend the money while the bank is simply a middleman, called a "servicer".

7. The commercial bank now claims $900,000 in new liabilities. 10 percent of that money is put into a reserves, and 90% of that, or $810,000 is loaned out. As soon as the $810,000 is deposited back into the bank, the cycle repeats and repeats until there is no more money to lend.

8. The total amount lent out to borrowers is $9,000,000. Add that to the $1,000,000 that it still has on deposit and the total is $10,000,000. Commercial banks make profit by charging fees for transactions, and by charging a higher interest rate to those they lend to, than what they pay for the funds. If the commercial bank charges 6% interest on the $9,000,000 it will earn $540,000 per year. If the bank making the loan pays 1% interest to the person who put the money on deposit in the first place it will cost them $90,000 per year. With 90% of that money lent out, if the originally depositor wants their money back, the bank has to borrow that money from another bank (or maybe from another source), at rate of interest set by the government (the overnight rate, or the federal funds rate in the US). This is called "asset-liability bouncing", and is a delicate balancing act all banks must work on every day.

 

[russ_watters]

http://www.answers.com/topic/fed-federal-reserve-system

Good, now did you read it? Compare these two statements:

For example, let's assume that a primary deposit of $1000 is made into bank A. If the cash reserve ratio is 12%, then $120 must be kept on hand by the bank and $880 is available to be lent to someone else (called the excess reserve).

the 90$ they lend you came from only 9 real dolars of your original 100 you deposited... so they actualy create 90$ out of 9$, so 81 where created out of thin air in their computers and in their books...

The first statement says:
-$1000 is deposited and divided into two piles, one of $120 which must be retained and one of $880 which is available to be lent out ($120+$880=$1000).

The second statement (contains a typo...) says:
-$100 is deposited and divided into four piles, one of $90, one of $10 (not $9), one of $81, and one of $9 (which you forgot to mention that time). ($90+10+$81+$9=$190)

Obviously, in the first scenario, only $880 can be loaned from that $1000. The part you are missing in the second statement is that the $90 has to be re-deposited before the bank can make the $81 loan.

I don't know whether you intended it or not, but the way you said it the first time implied that upon receiving an initial deposit of $100, the bank can send out nine separate checks of $90 each. That isn't true: each loan is smaller than the last (by 10%) and each loan check must be re-deposited in the same bank before the next one is sent out.

 

[Burnsys]

Good, now did you read it? Compare these two statements: The first statement says:
-$1000 is deposited and divided into two piles, one of $120 which must be retained and one of $880 which is available to be lent out ($120+$880=$1000).

The second statement (contains a typo...) says:
-$100 is deposited and divided into four piles, one of $90, one of $10 (not $9), one of $81, and one of $9 (which you forgot to mention that time). ($90+10+$81+$9=$190)

Obviously, in the first scenario, only $880 can be loaned from that $1000. The part you are missing in the second statement is that the $90 has to be re-deposited before the bank can make the $81 loan.

I don't know whether you intended it or not, but the way you said it the first time implied that upon receiving an initial deposit of $100, the bank can send out nine separate checks of $90 each. That isn't true: each loan is smaller than the last (by 10%) and each loan check must be re-deposited in the same bank before the next one is sent out.

So what is the diference? if a take the money out ($880) and then i deposit it in the same bank the same day, the bank will put only $88 and they have another 800 to lean... but i decide not to take the money out from the bank.. i left my acount open with $880 from the loan,, the bank only has to keep $88 in their reserves and can lean the rest..

 

[gravenewworld]

Money is a rather abstract concept. You have to keep in mind the definitions of what money supply is. M0-is the money supply of all the coins and physical cash in the economy. M1 money supply is M0+the amount in checking and savings accounts, M2 money supply is M1+other types of savings accounts, Cds, and money market accounts. Keeping this definition in mind, it is easy to see how banks can "create" money. The money from a deposit is an asset for the bank, the money it owes to the depositor is a liability. Assets and liabilities must always be equal to each other.

Assume that the required reserve ratio is 10%. Let's say I deposit 100 dollars in bank 1, bank 1 lends out 90 dollars to person 2

Bank 1
Assets Liabilities
100 100
-90
----
10

90 (loan)



Person 2 deposits into bank 2. bank2 holds onto 10% and lends out to 81 to person 3

Bank2
Assets Liabilities
90 90
-81
----
9

81 (loan)


Person 3 deposits into bank 3

Bank 3
Assets Liabilities
81 81





Summing assets and liabilites you see that 81+90+100=271. There is now 271 dollars in deposits at banks from an original 100 dollar deposit. The money supply has increased because there is now more money in deposits at banks. Person 1 and Person 2 still have 100 and 90 dollars in their checking or savings account, the bank however does NOT have that much in cash--they lent it out as a loan. This doesn't matter though, the definition of M2 money supply(which most economists use) is HOW MUCH IS IN CHECKING AND SAVINGS ACCOUNTS, not how much physical paper money or coins are floating around. There is indeed a creation of money.

The money multiplier=1/required reserve ratio.Given an infinite amount of time and deposits $100 could potentially turn into $1000. This never happens in the real world though, since this is only a theoretical model. In the real world the multiplier is a lot less, but it is still there. The more complicated you make your model the more accurate it will be. This model is taught by economists to stress the concept of money multiplication, not to reflect the real world. Models to simulate the real world are extremely complex and most of the times can not be calculated in a reasonable way.

 

[hitssquad]

The difference between lending more than one has and lending less than one has

So what is the diference?

You were implying that American banks lend more than they retain on deposit. Russ was saying that American banks do not lend more than they retain on deposit. The links you have posted seem to confirm the latter -- according to your links, American law does not allow the lending out of more than 90% of the value of deposits.

 

[Burnsys]

. The total amount lent out to borrowers is $9,000,000. Add that to the $1,000,000 that it still has on deposit and the total is $10,000,000

Total amount lent to borrowers is 9.000.000 from a initial deposit of 1.000.000

So banks has lent 9 times the money that was in deposit.. that is much more than 90%... or i am missing somenthing??

 

[Art]

Russ,

Please do not misquote me. It's irritating.

My opening premise was banks create money
My closing premise is banks create money

Your opening premise is and I quote;

"Again, this may vary from country to country, but in the US, only the Federal Reserve, directed by the government, can print and distribute money."

Your closing premise is (as far as I can gather) banks create money

Glad you finally see things my way but you do yourself no favours trying to wriggle around it. Be big enough to admit your mistakes.

 

[gravenewworld]

Total amount lent to borrowers is 9.000.000 from a initial deposit of 1.000.000

You are assuming that every person who gets a loan deposits it into the same bank--and yes that is theoretically possible and allowed. Let's assume that every loan that is given out is directly deposited into the same bank. Say I make a deposit of 100 dollars and required reserve ratio is 10%, so the bank lends out 90% to person 2. Person 2 then deposits that money into the same bank. The bank takes that 90 dollars and loans out 81 more dollars to person 3. Person 3 takes the money and deposits it directly into the same bank again--and so on ad infinitum. The total amount of new money created would be $1000 from $100. It doesn't matter that the money is being deposited into the same bank--the definition of M2 money supply takes into account all the money in savings and checking accounts--it doesn't matter if the bank physically has the money or not. Yes the bank created 1000 more dollars, but there is only $100 dollars in physical paper floating around. That does not matter, the only thing that matters is how much on paper I deposited, person 2 deposited, person 3 deposited, person 4... Like i said money is an abstract concept. That is why your deposits at banks are FDIC insured for 100,000 by the government--to protect against a run on banks. A bank might say you have 5,000 dollars in your account, but that money is not actually at the bank, it is only on paper. In 2000 there was approximately 5.4 trillion dollars in M2 money supply, however, in actual physical money, i.e. coins and dollars there was only 688 billion .

So banks has lent 9 times the money that was in deposit.. that is much more than 90%... or i am missing somenthing??

No. The bank lends out 90% of each individuals deposit. Given an infinite amount of time and borrowers, the amount of money the bank will create is 10 million dollars. The bank has 10% of your deposit in its vault, it also has 10% of person 2's deposit of 900,000, and 10% of person 3's deposit, etc... So if you sum the required reserves the bank is supposed to hold for all people you will get your original amount of 1 million dollars back (the physical cash has gone nowhere), but you still have created 10 million dollars since the amount of deposits has increased. M2 counts those deposits into checking or savings accounts regardless if the bank only has 1 million dollars in its vault.

 

[Burnsys]

gravenewworld i understand what you are saying...

But when the bank lent money, all they do is open an account (in the same bank) with the amount of the loan.. let's say $1000.. When they do that they only must have 10% of that amount in real money...

After that i (the borrower) decide if i take the 1000$ in cash., or if i make a check or i leave the money in the same bank... but what i am saying is that the bank to lent 1000$ only need to have 100$ real dolars...

Is that right?

 

[hitssquad]

You were implying that American banks lend more than they retain on deposit.

what i am saying is that the bank to lent 1000$ only need to have 100$ real dolars.

We all seem to be in agreement that that is what you are saying.

Is that right?

The links you posted say the opposite.

 

[gravenewworld]

But when the bank lent money, all they do is open an account (in the same bank) with the amount of the loan.. let's say $1000.. When they do that they only must have 10% of that amount in real money...

After that i (the borrower) decide if i take the 1000$ in cash., or if i make a check or i leave the money in the same bank... but what i am saying is that the bank to lent 1000$ only need to have 100$ real dolars...

No, you are still confusing what is on paper with what is actually going around. The bank can not loan out $1000 dollars directly from $100 physical cash. The maximum amount of money that can be created from $1000, but this only exists as numbers on a piece of paper (or in a computer if you would prefer), however this still is money.


I deposit $100 dollars physical cash into the bank, bank holds onto 10%, and loans rest.

Amt of money deposited in bank:100
Amount loaned out:90

after the 90 is loaned out the $100 dollars i deposited only exists on paper, the bank lent out 90% of my money that i deposited.

person 2 redeposits into same bank, bank lends out

amt of money deposited in bank: 100 and 90
Amount loaned out:90, and 81

and so on ad infinitum.

Now sum the totals of the amount of money deposited into the bank and the amount loaned out. Amount of money deposited=$190 Amount of money loaned out=$171=90% of amount of money deposited. The bank never along this chain loans out $1000 from $100. The bank loans $1000 off of $1111.11111111111.... in total deposits.

$100 real dollars are floating around, but you are forgetting the fact that the amount that everyone deposits into the bank still is counted in the supply of money. This is what is meant when they say banks can "create" money--$100 in physical cash turned into $1011.11111... in new deposits which is still counted in the supply of money.

 

[Art]

Burnsys is right in principle but wrong in the details this discussion has become one of mere semantics.

 

[Informal Logic]

Burnsys is right in principle but wrong in the details this discussion has become one of mere semantics.

A discussion degenerating into mere semantics? Imagine that.

 

[russ_watters]

Russ,

Please do not misquote me. It's irritating.

Please show me precisely where I have misquoted you and I will apologize. AFAIK, all I did was cut and bold your actual words.

My opening premise was banks create money
My closing premise is banks create money

Art, as I said before, you appear to understand the issue just fine. Its just that you jumped into the middle of something and unknowingly took the wrong side. However, I'm glad you now realize and acknowledge your mistake in agreeing with Burnsys:

Burnsys is right in principle but wrong in the details this discussion has become one of mere semantics.

Thank you. So can we drop it now?

 

[Art]

Please show me precisely where I have misquoted you and I will apologize. AFAIK, all I did was cut and bold your actual words.

That line was an accompaniment to a detailed explanation I had provided and so I consider it a misquote to quote outside it's full context when that affects or obscures it's meaning. You will also note that I very deliberately said banking industry rather than a bank so as to be accurate and avoid the silly semantics you were arguing with Burnsys which began when you obviously checked and realized your original assertion that all money comes from the fed was wrong and were floundering around to save face.