# Someone explain this to me : I dont' understand money.

#### The Pi Pirate

##### New member
OK, so as best as I can tell, money seems to 'appear'; that is, I'm told that person x winning q dollars in the stock market doesn't nescesarrily mean person y loses q dollars. Nor is it spread out.

Also, if you have a stock, and it gets really high and probably won't get much higher, you'd sell sell sell right?

But to WHOM?

I don't understand these. Someone help me out!

Well I don't know too much about the stock market, but I know how new money is created through banking. Harry Hotshot deposits \$10,000 in a bank. Let's say the reserve requirement is 10%, which means that the bank must have 10% of all deposits in their vault at all times. This means the bank has \$1,000 in the vault and \$9,000 to use as loans. The bank loans the money away to new borrowers, who spend it at other locations. These locations then deposit the money in other banks (or the same bank), effectively adding a new \$9,000 to other banks. This process continues until the last bank can only loan 1 cent from this initial \$10,000 deposit from Harry Hotshot. You can do all the math and it will turn out that a new \$90,000 will enter the banking system.

And yes, you do sell sell sell when you're stocks are high, to people who think it will be a good investment and will continue to rise.

Hope that helps.

Maybe.

LowBrassNinja said:
Well I don't know too much about the stock market, but I know how new money is created through banking. Harry Hotshot deposits \$10,000 in a bank. Let's say the reserve requirement is 10%, which means that the bank must have 10% of all deposits in their vault at all times. This means the bank has \$1,000 in the vault and \$9,000 to use as loans. The bank loans the money away to new borrowers, who spend it at other locations. These locations then deposit the money in other banks (or the same bank), effectively adding a new \$9,000 to other banks. This process continues until the last bank can only loan 1 cent from this initial \$10,000 deposit from Harry Hotshot. You can do all the math and it will turn out that a new \$90,000 will enter the banking system.

And yes, you do sell sell sell when you're stocks are high, to people who think it will be a good investment and will continue to rise.

Hope that helps.

Maybe.

It all depends on the monetary system. Under a fiat regime, fiduciary media is created by the banking system and the money supply expands at a rapid rate. This process is well described by Ninja, and it's called fractional reserve banking. Under a commodity standard, production of the money tends to be outstripped by the demand for cash and population growth.

OK, so let me see if this is correct:
Alfred has \$100 that he got from an outside source.
He puts it in the bank, which loans out 90% to bob, keeping 10% of Alfred's account.
Alfred's account: \$100
Bank vault: \$10
Bob's cash on hand: \$90

Bob puts his in the bank, which is required to keep 10% of it - so it keeps \$9 and loans the rest to Cindy.

Alfred's account: \$100
Bob's account: \$90
Bank vault: \$19
Cindy's cash on hand: \$81

Cindy then puts HER money in the bank, which is required to keep 10% (we'll say \$8). Dorothy borrows so

Alfred's account: \$100
Bob's account: \$90
Cindy's account: \$81
Bank vault: \$27
Dorothy's cash on hand: \$73

Then

Alfred's account: \$100
Bob's account: \$90
Cindy's account: \$81
Dorothy's account: \$73
Bank vault: \$34
Edward's cash on hand: \$66.

OK, so total account money:
\$344
Bank vault
\$34

In effect, Alfred, Bob, Cindy and Dorothy all have the same money. And if any of them decide to close their accounts, or withdraw it all, not good! In fact, they don't even need to withdraw more than half.

It is true that <some person's cash on hand> + <cash in the bank vault> will never exceed \$100. However, the total value of all bank accounts can. This means that as more and more people get accounts, the amount each has to draw before breaking the bank will decrease.

I believe this is called a run on the bank.

The Pi Pirate said:
OK, so let me see if this is correct:
Alfred has \$100 that he got from an outside source.
He puts it in the bank, which loans out 90% to bob, keeping 10% of Alfred's account.
Alfred's account: \$100
Bank vault: \$10
Bob's cash on hand: \$90

Bob puts his in the bank, which is required to keep 10% of it - so it keeps \$9 and loans the rest to Cindy.

Alfred's account: \$100
Bob's account: \$90
Bank vault: \$19
Cindy's cash on hand: \$81

Cindy then puts HER money in the bank, which is required to keep 10% (we'll say \$8). Dorothy borrows so

Alfred's account: \$100
Bob's account: \$90
Cindy's account: \$81
Bank vault: \$27
Dorothy's cash on hand: \$73

Then

Alfred's account: \$100
Bob's account: \$90
Cindy's account: \$81
Dorothy's account: \$73
Bank vault: \$34
Edward's cash on hand: \$66.

OK, so total account money:
\$344
Bank vault
\$34

In effect, Alfred, Bob, Cindy and Dorothy all have the same money. And if any of them decide to close their accounts, or withdraw it all, not good! In fact, they don't even need to withdraw more than half.

It is true that <some person's cash on hand> + <cash in the bank vault> will never exceed \$100. However, the total value of all bank accounts can. This means that as more and more people get accounts, the amount each has to draw before breaking the bank will decrease.

I believe this is called a run on the bank.

Exactly, and banks are what make fractional reserve banking so unstable. Governments have tried to correct this problem by creating deposit insurance agencies. But during a run it is impossible to keep all banks afloat when most only have 10% reserves. The FDIC is a pointless institution, as it will quickly run out of cash and Congress will have to step in anyways.

The notes that the bank's patrons hold are called money substitutes. If the substitutes are 100% backed by money proper, then we call those substitutes money certificates. If not, then we call them fiduciary media to the extent which they are uncovered. For a bank which holds 10% reserves, its dollars are 10% money certificate and 90% fiduciary media.

In the old days people would treat bankers with distrust. Any bank which was too overzealous in its lending practices would quickly go bankrupt as the demand for redemption was very high. Also, without a central bank there were many currencies circulating throughout the economy (each bank had its own set of money substitutes) and banks were required to transfer money proper in order to complete transactions.

Today's world is different. Patrons are almost certain that their deposits are secure, as the government will step in and bail out any bank which is in danger of going insolvent. This is why there are hardly any more panics.....

Anyways, my situation is ideal. It definitely never happens. People hold cash in hand without depositing (currency drain) and banks intentionally keep excess reserves. Also, banks don't have to use all their excess for loans - they can buy securities to back up their required reserves and lessen the effects of a bank run.

Eh, it's a tough subject.

Someone explain this to me : I dont' understand money.

The Pi Pirate said:
OK, so as best as I can tell, money seems to 'appear'; that is, I'm told that person x winning q dollars in the stock market doesn't nescesarrily mean person y loses q dollars. Nor is it spread out.

Also, if you have a stock, and it gets really high and probably won't get much higher, you'd sell sell sell right?

But to WHOM?

I don't understand these. Someone help me out!
Also, if you have a stock, and it gets really high and probably won't get much higher, you'd sell sell sell right?

But to WHOM?

Minor detail incorrect:

If Joe deposits \$10,000 in his account, the bank may loan out (assuming a 10% reserve requirement) \$100,000 and charge interest on it. That's how banks make most of their money.

This means that if the fed prints \$10,000,000 in paper money, they've actually put \$100,000,000 in circulation. This is called the money multiplier. In the United States, the money multiplier used to be about 7.3 or so. Now, since the Fed stopped publishing M3 data, it's a little more difficult to derive an average money multiplier.

But to WHOM?

There are actually guys who work for the markets who decide this. When you send a message to your broker to sell, if he's got a "seat" on the market, he looks at a bunch of data on a screen that represents offers to buy stock (if he doesn't have a seat, he sends the request to someone who does). He will sell your shares at the best possible price, and it's almost always possible to sell them all at the same price (hey, the plunge protection team always has large offers on the block). Sometimes, the offers are at spot price, sometimes a little lower, sometimes a little higher. It's possible to tell a broker "don't sell for less than" which is usually a little above spot. You'll never know who your shares go to, and your broker really doesn't care or recall after about 30 seconds.

Sometimes, if a stock plunges precipitously, it's possible not to be able to sell them. Companies are not obligated to purchase back their own stock except in certain instances.

Im not sure if this helps or not, but it might be useful to understand the accounting equation.

Assets = Liabilities + Owners' Equity

http://www.quickmba.com/accounting/fin/equation/

I'm not sure if that answers your question at all, sorry if it doesnt. lol

The Pi Pirate said:
OK, so as best as I can tell, money seems to 'appear'; that is, I'm told that person x winning q dollars in the stock market doesn't nescesarrily mean person y loses q dollars. Nor is it spread out.

Also, if you have a stock, and it gets really high and probably won't get much higher, you'd sell sell sell right?

But to WHOM?

I don't understand these. Someone help me out!

You sell to someone who thinks the price is not really high, and is willing to bet it will go higher.

If folks don't think the price will go higher, then no one will buy it at that really high price. People who want to sell will have to accept a lower price. The price of the stock goes down.