Then I go to the bank and request a $900 loan. It knows it has $1000 lying around doing nothing useful so it just gives a fraction of it to me as a loan. The bank does the following:
So the bank received a $1000 deposit, kept a $100 reserve and loaned out $900.
That $900 is completely made up money. They just credited my account with that amount out of nowhere. I'm supposed to go out there and earn money to pay it back. If I do, all is well. If I default? The bank has its books showing they owe you $1000 but they only have $100 in reserve. The illusion is shattered the second you attempt to withdraw that money.
In the real world, it's not just you and me. It's banks leveraging their massive reserves on risky loans and investments that fail, thousands of customers noticing and attempting to withdraw everything they have all at the same time, getting nothing, leading them to default on their debts and so on and so on until the government literally manufactures even more money to bail out the banks by "injecting liquidity" into them and restoring their reserves, putting an end to the bank run at the cost of even more inflation.
So I decide to spend that $900 on a computer for software development in order to work remotely. I go to the store and buy one.
The bank just received a $900 deposit, so its original reserves are restored. This means another loan is possible! This cycle repeats itself many times as money circulates until millions have been created out of thin air. Notice that the only way those accounts balance is if I pay back my $900 loan. If I lose my job before that happens? They won't balance and the bank will have to pick and choose who can withdraw and how much.
Not too long ago, Binance had restrictions on bitcoin withdrawals. Unverified accounts could only withdraw a small amount per day, verified accounts could withdraw a larger but still limited sum. Hmm...
I still don’t see the problem. At no point is cash conservation broken. They may say that my account has $900 in it when that cash doesn’t exist, it’s been used for some other end, but that’s not weird or unusual, or even interesting. I know that the bank has plenty of other peoples’ $900 that if I wanted that cash I could take it.
The problem is banks operate in a state of perpetual insolvency. Their ability to pay off their debts to customers depends on the state of the larger economy. Too many defaults and the whole thing comes crashing down.
> At no point is cash conservation broken.
It never existed to begin with. All that's required for the illusion to disappear is for enough people to attempt to withdraw funds at the same time.
> I know that the bank has plenty of other peoples’ $900 that if I wanted that cash I could take it.
> The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans
> Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices
> The crisis rapidly spread into a global economic shock, resulting in several bank failures
> The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis
> governments and central banks provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral, and provide banks with enough funds to allow customers to make withdrawals
People complain about Tether but the whole banking system is just Tether on steroids.
> People complain about Tether but the whole banking system is just Tether on steroids.
With regulation, and audits, and insurance, and government guarantees that if something goes really wrong you will be made whole (as long as you don't deposit more than 7 years the median US income).
I also wouldn't deposit my money in an 1890's US bank.
You’re just repeating the same thing over and over. I still don’t think at any point the bank is multiplying money in any kind of real or concerning way.
You should really read up on this. He explains it fairly well, and yes, money are multiplied with fractional reserve banking. Since the bank only needs to keep a fraction of the money they owe to account holders, they can loan the rest out. But the point is that this loaned money ends up on some other customers bank account, possibly with the same bank, and can thus be loaned out again. So in a 20% reserve requirement situation, _the same money_ can be used to finance the building of five houses, not just one which it would be if the reserve requirement was 100%.
Banks duplicate your money endlessly. After money that existed only in your possession is deposited at a bank, it will exist in many places simultaneously: in your account, in other people's accounts, as loans to third parties. If you don't see how that inflates the money supply, then I'm not sure what else I can say.
This is what fuels exponential growth of nations. Banks keep conjuring up money out of thin air and loaning out to people so they can work and extract value out of this planet at unsustainable exponential rates. Humanity is addicted to it. The second these loans become unavailable for any reason, everything comes crashing down. The economy literally grinds to a halt.
Worst of all is these banks essentially dictate the direction future society will take. They choose who receives loans and who's left out in the cold. People like Larry Fink, CEO of BlackRock and manager of 10 trillion dollars. They decide things and then say "will you lead, or will you be led?"
Perhaps you're getting hung up over physical bank notes. If most people and companies hold most of their money as numbers in bank accounts and do most of their buying and selling by moving numbers between bank accounts, why is it only cash that matters?
The money is the numbers the banks report to you. Multiplying those numbers is inflating the money supply. Yes they might be required to hold some other assets than simply numbers in their databases to start the whole process, but they can still multiply money to some degree.
> It knows it has $1000 lying around doing nothing useful so it just gives a fraction of it to me as a loan. The bank does the following:
The bank does not have to do this everytime, Most of times it just creates a loan account and adds a number in the database and creates money out of thin air.
That $900 is completely made up money. They just credited my account with that amount out of nowhere. I'm supposed to go out there and earn money to pay it back. If I do, all is well. If I default? The bank has its books showing they owe you $1000 but they only have $100 in reserve. The illusion is shattered the second you attempt to withdraw that money.
In the real world, it's not just you and me. It's banks leveraging their massive reserves on risky loans and investments that fail, thousands of customers noticing and attempting to withdraw everything they have all at the same time, getting nothing, leading them to default on their debts and so on and so on until the government literally manufactures even more money to bail out the banks by "injecting liquidity" into them and restoring their reserves, putting an end to the bank run at the cost of even more inflation.
So I decide to spend that $900 on a computer for software development in order to work remotely. I go to the store and buy one.
The bank just received a $900 deposit, so its original reserves are restored. This means another loan is possible! This cycle repeats itself many times as money circulates until millions have been created out of thin air. Notice that the only way those accounts balance is if I pay back my $900 loan. If I lose my job before that happens? They won't balance and the bank will have to pick and choose who can withdraw and how much.Not too long ago, Binance had restrictions on bitcoin withdrawals. Unverified accounts could only withdraw a small amount per day, verified accounts could withdraw a larger but still limited sum. Hmm...