Comment by serbuvlad
1 year ago
First of all, I take offense to being thrown in as part of the crypto community, with which I have nothing to do, and for which I do not have much hope.
So now if you are unhappy with the monetary system you are automatically a crypto bro and can be dismissed?
Secondly, the problem with fractional reserve banking is as follows: Suppose Larry makes a deposit of one dollar, which the bank guarantees can be retrieved at any time. The bank loans this dollar to Catherine, which uses it to buy something from Steve. Now Steve has one dollar, which he deposits with the bank. The bank lends this dollar to Catherine2, which uses it to buy something from Steve2. And so on, up to CatherineN and SteveN
Now, in so far as transactions can take place in the economy with bank IOUs, which are considered perfect money substitutes, the amount of money in the economy has been multiplied by a factor of N. Where before only Peter had a dollar (or a dollar IOU, which are supposedly the same), now Pere AND Steve, Steve2, up to SteveN all have a dollar IOU. This leads to an inflationary pressure.
Now it is true that upon the Catherine's repaying of the debt, these extra dollars will go away. However, in reality there is no such thing as negative dollars. The supply of money has been increased by the bank.
An objection could be raised that Catherine's extra demand for money to pay off her debt will exactly offset the extra supply of money. This is nonsense! Everyone demands money all the time. If Catherine did not demand money to pay off her loan, she would demand money in order to satisfy her next most urgent want which could be satisfied by money. The increase in the demand for money is negligible.
Your explanation of fractional reserve banking is somewhat correct, but missing the big picture
Licensed banks can and do write loans at any time without having any deposits to 'lend out'. In doing so they create both the loan (an asset) and a deposit (a liability) simultaneously from thin air. The books immediately balance.
The deposit created is then paid to the borrower and the liability vanishes. The bank is left with only the asset - the one that they created from thin air.
For short term liquidity a bank can always use the overnight lending facility at the central bank. Doing so just makes all their loans far less profitable as this is at a floating daily rate.
In reality the limit to which the money supply grows is not dictated by 'fractional reserves', but solely by interest rate policy and the commercial viability of being able to make loans and demand in the economy.
Not quite. The deposit is paid to the borrower as an advance, and the deposit is transferred to the payee (or the receiving bank if the payee is at another bank)
The liability can never vanish - balance sheets have to balance. Bank liabilities are what we call 'money'. Hence how you are 'in credit' at the bank.
And when we look at the bank assets which back those liabilities, we find that (say) 10% are government-printed money, and the remaining 90% were created by banks.
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Not really:
The loan will be accounted to loan book and deposit book on the local(!) banking system level; if the money moves out of the bank, it has to go through central banking money circle - on this level, the loan amount is _NOT_ created, this account can be "filled" only with incoming transactions from other banks (customer deposits!) Thats the reason why a bank needs deposists: to make payments possible, since the number on the central banking account is always smaller than the number of all loans on the local banking system level.
You might want to read this paper from the Bank of England
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Choice quote from page 1:
"Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposit"
The part you are talking about is illustrated in Figure 2.
The transfer of central bank reserves between banks doesn't change the fact that once a loan is written new money enters circulation.
Your mistake was saying Synapse merely did what banks do. Banks don't lose track of money when they increase the money supply.
My comment was meant as a tounge-in-cheek joke, with a dig at the banking system. It was not meant as a serious equivocation between what Synapse did and what banks do.