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Modern Monetary Theory (MMT): How Fiat Money Works

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Villiage Idiot
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actually tons and tons is created over time to keep up with an always growing GDP!!!

It's the same money circulating over and over.

So let's say that I have a dollar, and I pay you for a product, and then you have a dollar and you pay John for a product and he now has a dollar, and then he pays me for a product and I have my dollar back. At no time was there more than one dollar in circulation, yet that one dollar satisfied several trades. For the purposes of M2 and up, when banks loan money and get deposits from the proceeds of the loans, that is the same as money circulating (people ain't getting the loans for nothing - they are spending that money), and the bank is counting the deposits over and over again, ignoring the fact that there is an offseting liability created by each loan/deposit combo.

Banks aren't really creating money, they are creating more debts and deposits.
 

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Villiage Idiot
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So this has just been a language problem all along? We all agree with the papers in all respects?

I'm not so sure about that. You seem to flip flop on the details a lot. maybe.
 

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No it wouldn't. The owners equity would be the same that it was before because making a loan isn't the same as spending money, the banks money on hand would drop by $1000, but it's assets would go up by $1000 (or more) because loans are assets to banks, the net change would be zero, or possibly even a few dollars profits if the loan was worth more than face value (which is common)
.....
Exactly! If a bank lends out a thousand dollars, and that money is deposited back into the bank, no accounts would drop because it's a net neutral transaction. That proves MY point, not yours.

No, they are separate entries on the ledger. Bank equity is realized profit - when the bank makes money, like when you pay off a loan plus the interest, and the original loan is extinguished, your interest goes into the bank's account (which is just like our accounts - credits). Promissory notes are a different type of asset, and not yet realized, because they haven't yet been paid. So a bank could "loan" you credits from their account, just like I could loan you credits from my account, in return for a promissory note - but that's not what they do. They don't subtract from their own equity account when they make a loan, they add to your account. Similar in concept, but different in the accounting.

Yes, I agree. And what is your point?

That banks actually create dollars, they don't just increase the velocity of MB.

Wait...you have been arguing that banks don't lend from deposits. No you are admitting that banks don't have enough reserves to cover the deposits. So are you waving the white flag?

Not at all. IF there were enough reserves to cover all deposits, THEN we would have 100% reserve banking.

Where are you getting this stuff from? What post of mine has given you the idea that I think banks hold all time deposits in whatever fashion you are saying?

I really do think we have a language problem. Tell me exactly what you are calling "funds for loans." You say that banks can create a loan before they get the funds, then they can get the "funds" overnight - are you talking about reserves, or something else?
 

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...Why would the bank have to borrow $20k? to cover a $20k loan. You seem to be forgetting that the $20k loan would be the liability and the promissory note (the loan) would be an asset worth $20K (plus interest). If it borrowed $20k AND held the $20k value in the promissory note the banks leger wouldn't balance.

Assuming that the bank had no excess reserves already, then the fed would have to mark down the banks settlement/reserve account by $20 LESS than the required reserve amount, the bank would then be in trouble with the Fed for not having enough required reserves and could be shut down or penalized. So the bank would need to borrow $20k overnight to cover the loan. Every non-cash transaction that a bank makes involves the fed marking up or down the banks settlement/reserve account, and since there is a minimum reserve amount (required reserves), the fed does not allow banks to have less than that amount in it's account.

Why do you think that we even have a interbank lending system or the feds discount window?

...Thus, a bank would only need to borrow 10% of $20k to meet is reserve requirement of $2,000, even if the money was deposited in another bank. The promissory note would end up on the asset side of the ledger, but since the loan is balanced against the promise, it equals zero. The interest is unrealized profits.

This is where a lot of the confusion is. Required reserves are based upon non-time deposits (checkable), not loans. the bank doesn't need to increase it's REQUIRED reserves at all to make a $20,000 loan. It just needs to either have enough excess reserves to cover that loan, or it needs to borrow the money by the next business day to cover the loan. Required reserves play no part of lending, except to the point that the banks settlement account can't go below the required reserve amount. So the bank doesn't need to increase it's required reserves to make this loan, it needs to have enough excess reserves.

This gets back to what I have been saying the entire time. Banks are not allowed to directly create their own money. The process in which our banking system creates money isn't that direct, it happens because when banks make loans, the money from those loans ultimately ends up in the banking system. When a bank makes a loan, that banks reserve/settlement account at the fed is marked down by that amount period. See? The money came from some where. It came from the banks reserve/settlement account. So BANKS DO LEND FROM RESERVES. They lend from their reserve account at the fed.
 

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When you say "proceeds" I'm not sure what you mean, unless you just mean the money created by borrowing (the loan).

Don't over think this. If I go to the bank and borrow $10,000, and that bank gives me a check, the $10,000 that is represented by the check is the "proceeds" from the check. Nothing more, nothing less.

Whether or not that money was "created by borrowing" is a matter of viewpoint I assume.

Lets say that I deposit that money into my checking account at another bank. What happens? When the check clears the fed, the fed marks down the issuing banks reserve/settlement account by $10,000. So the money really did come from some where. It came from the banks account at the fed. It wasn't created from thin air.

But then the federal reserve will credit the bank that I deposited the money into with the same $10,000. So now in theory at least, there is $10,000 more money in existence, at least until I repay the loan. So I suppose it may be fair to say that the deposit itself created "new money", but maybe not the loan.

The reason that I say the loan wasn't responsible is because we have already seen that the banks account at the fed was marked down by the same amount as the loan. Again, that money came from somewhere (the account that was marked down). Even if I deposited the money back into the same bank, the banks account would still be marked down, even though it would simultainiously be marked up by the same amount resulting in a net zero transaction.

Looking at it another way, what if I demanded a cash loan? Like physical currency? What would happen? Assuming the bank would even agree with that, the bank would take the cash out of it's vault, and exchange it for the note. Nothing changes with the banks account at the fed, the bank then has $20,000 less in reserves because vault cash counts as reserves, and if this transaction left the bank with less than the required reserves, the bank would then need to acquire overnight at least enough money to cover the required reserves. Again, the bank didn't literally print up this money, the loan resulted in the banks vault cash position being reduced.

I'd agree that a loan made to a customer becomes a deposit, a loan to a bank, which in turn is held as reserves reserves within the FRS, but here you claim that a bank loans customer deposits, it doesn't simply mark up accounts, but if a bank doesn't have the reserves until the end of the day when it acquires them from somewhere else, then they are adding digits to accounts.

OK, you got me. Assuming that the bank doesn't already have enough excess reserves, for the time period between when loan is consummated and the time that the bank acquires the money a few hours later, new money has been created. But then again I did state earlier that there may be some temporary money creation due to transactional time.
Given my claim that the bank does not loan customer funds, but simply creates them (the liability) and the loan (the asset) balances out the transaction. Then all that is needed is the reserves to meet the reserve requirement.
 

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No, they are separate entries on the ledger. Bank equity is realized profit - when the bank makes money, like when you pay off a loan plus the interest, and the original loan is extinguished, your interest goes into the bank's account (which is just like our accounts - credits). Promissory notes are a different type of asset, and not yet realized, because they haven't yet been paid. So a bank could "loan" you credits from their account, just like I could loan you credits from my account, in return for a promissory note - but that's not what they do. They don't subtract from their own equity account when they make a loan, they add to your account. Similar in concept, but different in the accounting.



That banks actually create dollars, they don't just increase the velocity of MB.



Not at all. IF there were enough reserves to cover all deposits, THEN we would have 100% reserve banking.

Where are you getting this stuff from? What post of mine has given you the idea that I think banks hold all time deposits in whatever fashion you are saying?

I really do think we have a language problem. Tell me exactly what you are calling "funds for loans." You say that banks can create a loan before they get the funds, then they can get the "funds" overnight - are you talking about reserves, or something else?

Maybe different on the ledger, but the money is indistinquishable and banks can do whatever they wish to with their own money. They can certainly lend it out if they choose to.

Lets say that you have a bag of blue skittles, and I have a bag of identical blue skittles. We both poor our skittles in a bowl. Then we agree that today we will only eat my skittles and that we will lend your skittles out. how do we figure out which ones were mine? We don't! We just eat about a bagful of skittles and lend out the rest.
 
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JohnfrmClevelan

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Maybe different on the ledger, but the money is indistinquishable and banks can do whatever they wish to with their own money. They can certainly lend it out if they choose to.

But a bank's equity is small in comparison to the amount of loans they write. So they couldn't loan out of equity if they wanted to.

Show me what I said that has you changing your mind again. I don't think I ever claimed that reserves cover a % of bank assets. Reserves cover a % of liabilities - our deposit accounts.
 

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When a bank makes a loan, that banks reserve/settlement account at the fed is marked down by that amount period. See? The money came from some where. It came from the banks reserve/settlement account. So BANKS DO LEND FROM RESERVES. They lend from their reserve account at the fed.

Where did you get that information?

Reserves only move out of the bank's reserve account when somebody at that bank writes a check that is deposited at another bank.

If you get a loan for $20,000 and deposit that $20,000 in your own account (same bank), your bank has to come up with another $2000 in reserves, to cover the extra $20,000 in liabilities (your deposit).

If/when you write a $20,000 check for a new car, then $20,000 in reserves will be transferred from your bank's reserve account to that of the car dealer's bank.
 

JohnfrmClevelan

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Maybe different on the ledger, but the money is indistinquishable and banks can do whatever they wish to with their own money. They can certainly lend it out if they choose to.

Lets say that you have a bag of blue skittles, and I have a bag of identical blue skittles. We both poor our skittles in a bowl. Then we agree that today we will only eat my skittles and that we will lend your skittles out. how do we figure out which ones were mine? We don't! We just eat about a bagful of skittles and lend out the rest.

The difference is that the equity account = Skittles in hand, while the promissory note = an I.O.U. for some Skittles.
 

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actually we say that that when a bank takes in a dollar the marginal reserve requirement equals 10 percent of a bank's demand and checking deposits( in this case $1.00.)....

At least you understand that. Some of these people think that required reserves are based upon loan assets.
 

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How do banks lend out deposits ...?

If i deposit some money, and the bank issues a loan to someone else with my money, would i be unable to get my money ...?

What do you think banks do with all that money people deposit?

Do you really think that the bank has a little jar of money for every individual customer in their vault?
 

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I walk in and want to borrow $20k from a bank A, but the bank A only has $1000 in reserves or the reserves to make a $10k loan.

Think about just how wrong that is, on so many levels.

• The amount of lending a bank does doesn't effect it's reserve requirment. Required reservers are a percentage of deposits, not a percentage of loan assets.

• Yes, a bank with $1,000 in deposits (reserves) can lend $20,000, but they have to cover that loan overnight. Since $100 of the deposits would be earmarked as "required reserves", the bank could use the remaining $900 for the loan, but it would have to borrow the difference ($19,100) overnight.

• Since required reserves aren't computed based upon loans, the bank doesn't have to borrow ANY required reserves. It just needs to borrow the excess reserves (aka loanable reserves) that it needs to cover the loan it made.

Banks can lend all excess reserves to either customers or other banks. The key to bank profitability is to get as much interest as possible, retail customers normally pay a higher interest rate than wholesale customers (banks or the federal reserve), so banks strive to make as many creditworthy retail loans as possible, then they lend any remaining excess reserves on the interbank lending system (as much as they can) then any remaining excess reserves are held by the fed (who used to not pay interest on reserves that but they do now).

Other than interest rate and length of term, there is little difference between lending on the FRS and lending to customers. A loan is a loan - and banks most definitely lend out the money we deposit in them.


They make the loan, by writing me a check for $20k which I deposit in my bank, bank B. At the end of the day, I'm the only one to take a loan from Bank A and no one has deposited or withdrawn anything from bank A. So the bank must borrow $1000 from another bank to cover their reserve requirement. It so happens that my bank (bank B), thanks to the money I deposited, now has increased reserves and lends $1000 of those reserves to the bank A to cover it's reserve requirement.

Now it occurs to me that when we say "lend" are we saying that customer funds are lent to other customers, or to other banks?

Because if we are talking about making loans within the FRS that's different than lending to customers.[/QUOTE]
 

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Think about just how wrong that is, on so many levels.

• The amount of lending a bank does doesn't effect it's reserve requirment. Required reservers are a percentage of deposits, not a percentage of loan assets.

• Yes, a bank with $1,000 in deposits (reserves) can lend $20,000, but they have to cover that loan overnight. Since $100 of the deposits would be earmarked as "required reserves", the bank could use the remaining $900 for the loan, but it would have to borrow the difference ($19,100) overnight.

• Since required reserves aren't computed based upon loans, the bank doesn't have to borrow ANY required reserves. It just needs to borrow the excess reserves (aka loanable reserves) that it needs to cover the loan it made.

Banks can lend all excess reserves to either customers or other banks. The key to bank profitability is to get as much interest as possible, retail customers normally pay a higher interest rate than wholesale customers (banks or the federal reserve), so banks strive to make as many creditworthy retail loans as possible, then they lend any remaining excess reserves on the interbank lending system (as much as they can) then any remaining excess reserves are held by the fed (who used to not pay interest on reserves that but they do now).

Other than interest rate and length of term, there is little difference between lending on the FRS and lending to customers. A loan is a loan - and banks most definitely lend out the money we deposit in them.


They make the loan, by writing me a check for $20k which I deposit in my bank, bank B. At the end of the day, I'm the only one to take a loan from Bank A and no one has deposited or withdrawn anything from bank A. So the bank must borrow $1000 from another bank to cover their reserve requirement. It so happens that my bank (bank B), thanks to the money I deposited, now has increased reserves and lends $1000 of those reserves to the bank A to cover it's reserve requirement.

Now it occurs to me that when we say "lend" are we saying that customer funds are lent to other customers, or to other banks?

Because if we are talking about making loans within the FRS that's different than lending to customers.
Definitely some things to think about.
 

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What do you think banks do with all that money people deposit?

Do you really think that the bank has a little jar of money for every individual customer in their vault?

No, i think it's mostly accounted for, electronically.

If i deposit physical dollars, those physical dollars might make it into somebody else's hands, but the bank didn't give my dollars (electronically accounted for) to anyone else.

The bank doesn't need any deposits to create a loan. It can charge the borrower $100 to create a $1,000 loan, and use the borrowing fee to settle the reserves for the loan. Zero deposits, loan is issued. Where'd the $1,000 come from ? It didn't come from deposits. Why do banks need to hand out deposits ?
 

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Where did you get that information?

Reserves only move out of the bank's reserve account when somebody at that bank writes a check that is deposited at another bank.

If you get a loan for $20,000 and deposit that $20,000 in your own account (same bank), your bank has to come up with another $2000 in reserves, to cover the extra $20,000 in liabilities (your deposit).

If/when you write a $20,000 check for a new car, then $20,000 in reserves will be transferred from your bank's reserve account to that of the car dealer's bank.


When a bank loans money, it either makes an electronic transfer or it issues a check. Either way, the banks reserve/settlement account at the fed is marked down by that much. If the person receiving the loan then deposits the money back into the same bank, then the banks reserve account is marked up by that much. Thats what a banks reserve account is, it's really a settlement account, and it goes up when the bank takes in money, and it goes down when the bank provides money to other people. It doesn't particularly matter if the bank is providing others with money as the proceeds of a loan, or if the bank is giving them their deposits back.
 

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But a bank's equity is small in comparison to the amount of loans they write. So they couldn't loan out of equity if they wanted to.

They do it every day. Again, there is no difference between equity dollars and deposited dollars. They are all US dollars and are fungible. It's to the banks advantage to keep all of their money, regardless of source, earning as much interest as possible.

Show me what I said that has you changing your mind again. I don't think I ever claimed that reserves cover a % of bank assets. Reserves cover a % of liabilities - our deposit accounts.

In the past, you have claimed that banks don't lend from deposits. If that was true, then banks would have in their reserve account the full amount of every deposit that they have.
 

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No, i think it's mostly accounted for, electronically.

If i deposit physical dollars, those physical dollars might make it into somebody else's hands, but the bank didn't give my dollars (electronically accounted for) to anyone else.

The bank doesn't need any deposits to create a loan. It can charge the borrower $100 to create a $1,000 loan, and use the borrowing fee to settle the reserves for the loan. Zero deposits, loan is issued. Where'd the $1,000 come from ? It didn't come from deposits. Why do banks need to hand out deposits ?

All electronic dollars go into the banks reserve/settlement account at the fed. Banks use that account to lend from, and are only required to keep 10% of their non-time deposits in that account. If they kept 100% of all bank deposits and didn't lend from those deposits, then we would have a full reserve banking system, instead of a fractional reserve banking system.

If ever bank customer showed up at that bank at the same time and tried to withdraw their money, they couldn't do it. The bank would literally close (emergency banking holiday) to keep people from making withdawals, and acquire as much money as possibly overnight by borrowing it, and then reopen later hoping that the crazyness has subsided. Worst case is that the bank would have to sell assets (loans) to get the money it lent out back. Fortunately, this rarely happens and we have safeguards against it.
 
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Are you calling the reserves that are transferred between reserve accounts "deposits"?

Reserves mostly come from deposits. So when a bank makes a loan, it issues a check or electronic transfer, and the fed marks down the banks account.
 

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When a bank loans money, it either makes an electronic transfer or it issues a check. Either way, the banks reserve/settlement account at the fed is marked down by that much.

You skipped the step where the bank creates a deposit (however short-lived) for the borrower. The withdrawl from lending bank's reserve account isn't to "fund" the loan, it is to accompany the check if and when it is transferred to a different bank.

If the person receiving the loan then deposits the money back into the same bank, then the banks reserve account is marked up by that much.

If the person receiving the loan deposits the check back into the lending bank, there is no transfer of reserves at all.

Thats what a banks reserve account is, it's really a settlement account, and it goes up when the bank takes in money, and it goes down when the bank provides money to other people. It doesn't particularly matter if the bank is providing others with money as the proceeds of a loan, or if the bank is giving them their deposits back.

A settlement account changes when banks transfer money. This is the main function of reserve accounts, and this is how Old West Bank and Old Midwest Bank settled up as well. Forget the legal reserve requirement for a minute, and pretend that we are in the Old West. (Or Canada, where they don't have a reserve requirement.) OWB creates a loan for $1000 by creating a deposit account for the farmer and executing a promissory note for $1000+. That's all that happens, because there is no reserve requirement.

Farmer writes a check for $400 to the grocer that is deposited in Old Midwest Bank, which just set up shop. The two banks realize they will be transacting with each other, so they set up matching settlement accounts - each bank gives the other an account with a $10,000 balance. (That liability is offset by the asset of the account at the other bank.) So OMB takes the $400 check, creates an account with a $400 balance for the grocer, and marks down OWB's account by $400.

So just like reserve accounts, the settlement accounts went up/down in the amount of the transfer.

Now - add in a 10% reserve requirement. Now, banks have to a) use the Fed for settlement, and b) keep a reserve balance at least equal to 10% of total liabilities.

Let's assume that both banks now have some MB in their accounts. When OWB creates the $1000 loan for farmer and opens an account for him, their liabilities have gone up by $1000 - so they need to obtain another $100 in reserves.

So the two are completely different situations. You can see that in both the Old West and in Canada today, reserves do not come into play at all when a bank makes a loan. They don't fund the loan, and there is nothing transferred to or from the bank because of the loan. It is only the reserve requirement that makes a U.S. bank adjust their reserve balance (if necessary) after the loan, and then only because their total liabilities (deposits) have increased.
 

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They do it every day. Again, there is no difference between equity dollars and deposited dollars. They are all US dollars and are fungible. It's to the banks advantage to keep all of their money, regardless of source, earning as much interest as possible.

There is a huge difference - equity dollars are an asset to the bank, while deposited dollars are a liability to the bank. Equity is money the bank has in its own account; deposits are money the bank owes to depositors.

In the past, you have claimed that banks don't lend from deposits. If that was true, then banks would have in their reserve account the full amount of every deposit that they have.

No, because that doesn't include the money created by loans, which does not bring a transfer of reserves. Reserves are the matching asset of an interbank transfer, like a check; promissory notes are the matching asset of loans.

There is a promissory note in existence for every bank-created dollar in existence, right up until the loan is extinguished. But reserves are MB, and they come from government deficit spending. When the govt. writes you a tax refund check, it adds MB to your bank's reserve account, and your bank marks up your account. That's where reserves come from.
 

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You skipped the step where the bank creates a deposit (however short-lived) for the borrower. The withdrawl from lending bank's reserve account isn't to "fund" the loan, it is to accompany the check if and when it is transferred to a different bank.

I didn't skip that part at all. When a bank makes a loan, the banks account at the Fed is reduced by the amount it loans, and when the proceeds of the loan are deposited into a bank, the fed marks up that banks reserve account by that much.

If the person receiving the loan deposits the check back into the lending bank, there is no transfer of reserves at all.

If that happened, then the transactions would offset each other, I agree. But I've never heard of someone borrowing money from a bank, and then never transfering that money to someone else. So if the bank deposited the loan proceeds into my account, within a very short period of time I am going to transfer that money to someone elses account - at which time the federal reserve would mark down my banks account and mark up someone elses account.

A settlement account changes when banks transfer money. This is the main function of reserve accounts, and this is how Old West Bank and Old Midwest Bank settled up as well. Forget the legal reserve requirement for a minute, and pretend that we are in the Old West. (Or Canada, where they don't have a reserve requirement.) OWB creates a loan for $1000 by creating a deposit account for the farmer and executing a promissory note for $1000+. That's all that happens, because there is no reserve requirement.

Farmer writes a check for $400 to the grocer that is deposited in Old Midwest Bank, which just set up shop. The two banks realize they will be transacting with each other, so they set up matching settlement accounts - each bank gives the other an account with a $10,000 balance. (That liability is offset by the asset of the account at the other bank.) So OMB takes the $400 check, creates an account with a $400 balance for the grocer, and marks down OWB's account by $400.

So just like reserve accounts, the settlement accounts went up/down in the amount of the transfer.

Now - add in a 10% reserve requirement. Now, banks have to a) use the Fed for settlement, and b) keep a reserve balance at least equal to 10% of total liabilities.

Let's assume that both banks now have some MB in their accounts. When OWB creates the $1000 loan for farmer and opens an account for him, their liabilities have gone up by $1000 - so they need to obtain another $100 in reserves.

So the two are completely different situations. You can see that in both the Old West and in Canada today, reserves do not come into play at all when a bank makes a loan. They don't fund the loan, and there is nothing transferred to or from the bank because of the loan. It is only the reserve requirement that makes a U.S. bank adjust their reserve balance (if necessary) after the loan, and then only because their total liabilities (deposits) have increased.

The reserve account drops when a bank loans money to someone and that person deposits the check (or electronic deposit - it doesn't matter) into another institution. You can't ignore that. A banks check is just like anyone elses check.
 

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Villiage Idiot
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There is a huge difference - equity dollars are an asset to the bank, while deposited dollars are a liability to the bank. Equity is money the bank has in its own account; deposits are money the bank owes to depositors.

All dollars held by a bank are assets, and depositor dollars and equity dollars are identical and indistinquishable. The liablity to the bank is the fact that they now owe the depositor the amount that person deposited. The dollars themselves aren't liabilities, unless there is some sort of anti-dollar or negative dollar that I don't know about - lol.
 

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All electronic dollars go into the banks reserve/settlement account at the fed. Banks use that account to lend from, and are only required to keep 10% of their non-time deposits in that account. If they kept 100% of all bank deposits and didn't lend from those deposits, then we would have a full reserve banking system, instead of a fractional reserve banking system.

If ever bank customer showed up at that bank at the same time and tried to withdraw their money, they couldn't do it. The bank would literally close (emergency banking holiday) to keep people from making withdawals, and acquire as much money as possibly overnight by borrowing it, and then reopen later hoping that the crazyness has subsided. Worst case is that the bank would have to sell assets (loans) to get the money it lent out back. Fortunately, this rarely happens and we have safeguards against it.

According to your explanation, deposits are not money in their own right, and fractional reserve banking does not allow the money supply to exceed the underlying reserves of base money issued by the central bank.

My deposits don't go anywhere, they're still there, and i can access them whenever i want.

When i deposit money, the bank might put some of that away as reserves, but it also creates money in the amount deposited that is owed to me. That money is mine, it is not given to anyone else, it is only mine. The physical currency i deposited is no longer mine, but the money that it represented is still mine in the form of the newly created commercial bank money.
 

JohnfrmClevelan

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All dollars held by a bank are assets, and depositor dollars and equity dollars are identical and indistinquishable. The liablity to the bank is the fact that they now owe the depositor the amount that person deposited. The dollars themselves aren't liabilities, unless there is some sort of anti-dollar or negative dollar that I don't know about - lol.

Well, there is. For bank-created money, the deposit is the liability part, and the promissory note is the asset (to the bank) part. And for government-created money (transfers from the government), the deposit (owed to depositor) is the liability part, and the reserve (which never leaves the Fed) is the asset part. And these parts are severable (making the dollars fungible), because the bank can (and does) transfer reserves when a check is written on bank-created money, while the promissory note stays with the bank.

That's the key - bank assets are largely unreachable by the bank. They have reserves, which stay at the Fed; they have promissory notes, which are just I.O.U.s; and they have some equity, which is reachable.

I didn't skip that part at all. When a bank makes a loan, the banks account at the Fed is reduced by the amount it loans,

Where did you hear this?
 

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According to your explanation, deposits are not money in their own right, and fractional reserve banking does not allow the money supply to exceed the underlying reserves of base money issued by the central bank.

Deposits are money in their own right, but it's money that you acquired from some source, it's not new money unless that source is actually a loan directly from the fed, a sale of assets to the fed, or gov deficit spending funded by the fed purchasing treasuries. All that is happening is that the same money is circulating faster. If I spend a dollar at Joes, and then Joe spent it at Walmart, and Walmart then used that dollar to pay an employee, is there three dollars, or was that just the same dollar circulating over and over again?

My deposits don't go anywhere, they're still there, and i can access them whenever i want.

You can, but you aren't currently accessing any of your deposits (or else they wouldn't still be in your account and thus wouldn't be deposits). Until you utilize your deposits, the bank is free to lend that money out and gain a rent (interest) for doing so. So right this second, someone else may be using your money to purchase a new car, you just don't know it. when you spend or withdraw your money, the bank then uses someone elses money to replace what they have loaned, or maybe the last loan repayment that the recieved in the mail or online is used to pay for your withdrawal or check. Money is fungible.

When i deposit money, the bank might put some of that away as reserves, but it also creates money in the amount deposited that is owed to me. That money is mine, it is not given to anyone else, it is only mine. The physical currency i deposited is no longer mine, but the money that it represented is still mine in the form of the newly created commercial bank money.

When you deposit a check or electronic deposit, the federal reserve credits your bank with that amount of money. When you withdraw money or write a check, the federal reserve debits (marks down) your banks account. If it was physical currency, then it is still a reserve, even if the bank just puts it in their vault. If banks get to where they have more cash than they need for day to day transactions, they can literally turn that cash in and have their account at the fed marked up.

yes, your money was created. but it was created by the federal reserve, not a commercial bank. All a commercial bank may have done was to loan you some of someone elses money.
 
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