tag:blogger.com,1999:blog-6664061.post2513680733559268423..comments2023-05-18T05:29:40.914-05:00Comments on Life's a Garden...Dig It!: A Deposit, a Bank, a System, and a DreamOtishttp://www.blogger.com/profile/13882200488365105086noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-6664061.post-39176086434103632992008-02-12T22:42:00.000-06:002008-02-12T22:42:00.000-06:00You're mistaking the 10x money multiplier in the s...You're mistaking the 10x money multiplier in the system. A bank can loan out up to 90% of the money it has on hand, or it can borrow money from the Fed at the funds rate when the Fed decides to pump money into the economy through open market transactions. Once that money winds its way through the economy (getting lent out, redeposited, lent out, etc.), there ends up being 10x the original deposit (i.e., $1000 eventually results in $10000 on the books, but if everyone runs to get their deposit at the same time, there's still only $1000 and the banks fail). Unless the economy is actually growing, which is what happens in a productive economy as wealth is created by our labor, the $9000 extra in loans default. That's generally what happens in a recession (loans default and wealth disappears...think recent housing mess in which investors lost money).<BR/><BR/>If you have 500 credit union members, each with a $1000 share deposit, then the credit union can only loan out 500 x $1000. Maybe if you join the Fed (which can be done by any entity with millions of $$$ to buy a share in the Fed) you could borrow at the funds rate, but you'll still have to charge enough interest on the loan to cover the interest on the funds rate plus enough to cover your bank's fees. That's why the prime rate depends on what the Fed funds rate is. (The money the Fed is given to the US government minus operations costs, FYI).<BR/><BR/>If you want to make a 100%-reserve bank that doesn't create money through the fractional reserve system, you can go ahead and do that and charge depositors to hold onto their money in order to cover costs, but you can't make loans (due to the 100% reserve requirement). Or, if you're worried about inflation, look into hedging with investments in various commodities or commodity-related companies.Anonymousnoreply@blogger.com