tag:blogger.com,1999:blog-1707444165003305798.post2861896895046378015..comments2023-10-24T17:21:16.565+02:00Comments on Sounds in the Hickory Wind: In Which we (Fail to)* Explain Fractional Reserve Banking (but possibly explain something else)The Hickory Windhttp://www.blogger.com/profile/02099970252405596982noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-1707444165003305798.post-67977904999103958772010-11-07T21:17:18.914+01:002010-11-07T21:17:18.914+01:00Thanks for dropping by. And for the explanations. ...Thanks for dropping by. And for the explanations. The more I argue about politics the more I realise that I don't understand money/finance/the economy, not even at a very basic level. Neither do most of the people I argue with, fortunately.<br /><br />What I was trying to understand in this little story was the apparent creation (by banks) of phantom money. The banks are blamed for treating money they have lent out as an asset that still has value to them, but clearly it does, and can in fact be used, without any of the 'printing money' business or runaway inflation that people shout about. We all do it all the time and it's a good thing, until we stop believing in it.<br /><br />A question I keep asking people who understand economics/money etc- where do I start to make sense of it all? What should I be reading?The Hickory Windhttps://www.blogger.com/profile/02099970252405596982noreply@blogger.comtag:blogger.com,1999:blog-1707444165003305798.post-44427674590929632852010-11-07T17:23:23.535+01:002010-11-07T17:23:23.535+01:00In cash flow terms, spot on.
But this has nothin...In cash flow terms, spot on. <br /><br />But this has nothing to do with "FRB" which is a bit of a myth (a bit like explaining that you 'suck' a drink through a straw; you actually create a vacuum and atmospheric pressure pushes the drink into your mouth).<br /><br />1. There is no such thing as 'money' in itself, there is merely a vast mass of financial liabilities and financial assets, which inevitably net off to plus/minus zero.<br /><br />2. Contrary to popular myth, banks do NOT 'take deposits from savers and lend to borrowers', what they just do is just make loans willy nilly, safe in the knowledge that whoever receives that money will put it back in the bank. In other words, loans create deposits. Up until the stage when people realise that banks have been making reckless loans which won't be repaid and the whole system grinds to a halt.<br /><br />3. There is an upper limit to the amount of 'money' that people are prepared to borrow (i.e. take on a liability) and an upper limit to the amount of 'money' that people are willing or able to entrust to banks (and therefore an upper limit to the amount of money that banks can lend).<br /><br />4. Even if the Basel capital ratios or minimum cash ratios were reduced from 8% to 0.8% or even to 0%, this would not increase the amount of 'money' sloshing around by a factor of ten or even infinity, because the upper limit to this is set in step 3 above.Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.com