Comment by hinkley | Hacker News Reader

Comment by hinkley | Hacker News Reader

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Fractional reserve guarantees that the max multiplier between money in motion and money at rest is never more than 10x.

If I’m supreme ruler of the world and I replace all currency with Hinkley Bucks, 100 of them in total, and I put them in the bank, they loan 90 to a guy who builds a house. The builder and all their suppliers and employees put that 90 in the bank, and the bank loans 81 to a guy starting a grocery store chain. Then those guys and the farmers bank that money and the bank loans out 72 bucks. On and on until the balance in everyone’s savings accounts adds up to 1000 bucks. And yet somehow the bank has all one hundred bucks in its vault. Because the rest is loans.

If you increase the reserve to 11% then 100 bucks “disappear” from this economy. Going from 10 to 11% is a 10% increase in the reserve, and it [tanks] GDP.

If you go the other way you dangerously increase the money supply very quickly. I can’t even conceive of how much more volatile 1/1800 is compared to 1/10.

The 10x thing is a common misconception generated by the fact that 10 is a nice round number that works well for this type of just-so story.

The Wikipedia article on reserve requirements has a handy table by country, from which you can see that the required ratio is actually less than 10 in most of the developed world.

In fact, several countries have no reserve requirements at all! Following your logic, those countries should be even more volatile than whatever is going on in crypto currency land. I think we can safely conclude your logic is flawed.

Mind you, I still think the whole tether business is extremely fishy. I'm just annoyed by the spread of monetary just-so stories that pretend to apply to the real world. Reserve requirements are a red herring in modern monetary systems, because central banks will always guarantee liquidity by acting as a lender of last resort.

10% isn't a fact, it's an example that is close enough to illustrate the thought experiment but allow you to do the math in your head (I originally learned about this years ago in a personal finance podcast).

And of course the fact that I have $65 in my wallet right now instead of in the bank takes $650 out of the cycle. If you're in a country where people don't trust the banks that much, or people have almost no money, a big fraction of all the money in play may be in cash, in someone's pocket, a safe, a cash register, an ATM, a briefcase, or hiding under their mattress.

Banks usually don't lend money out to just anybody, so the worst case scenario never actually happens. Or only happens once every 70 years. If there aren't too many banks in your country then you oversee more of the money supply and the house of cards effect should be more obvious than here.

If you really meant for the 10x to only be an example, you should have clearly stated that.

You're being exceedingly rude and we're done here.

Don't try to make yourself in to a victim, no one was being rude.

Continuing on:

If you have no reserve, then the only limits are how many people want 100 bucks (so upper bound $700B) and how fast can you file the paperwork to make it happen. What’s the friction in the system.

My fear is that their 1/1800 is that friction, and not a safety feature at all.

Those $900 of extra assets are balanced by $900 of extra liabilities. 0 net money is created.

sigh maybe this just isn't the venue or even the right group to try to discuss this stuff (myself included). We like to pretend like everybody else has an 'easy' job but economics is hard stuff.

I think you're mostly right, except for a couple of problems that I know of.

One, when the system goes sideways those liabilities tend not to be paid off. Bankruptcies and such. And we assume that banks are managing these risks but that doesn't always turn out to be the case - which is how the reserve rate got instituted in the first place. The government says, we don't care how much you think you've got it sorted out, we insist that you be at least this tiny bit pessimistic. My original post was sort of pointing out that if you hear "Oh we have an 8% reserve so that means only 92% of assets are being used", the money moves around so many times that the effective rate is much lower and the risk is shared. But it still does put an upper bound on how much they can be leveraged. How much money is moving around (modulo fraud and 'monetary easing'). It's not the only one, and it might not even be the most important 'resistance' built into the financial policies, but it is part of it.

The second is that we for some reason measure the health of our economy by how much money is changing hands. We don't discount liabilities changing hands at all in that, which is a bit worrying, because in the early 2000's when they weren't lending money to anybody, everything tightened up, and when they're throwing money at anybody it looks like growth but feels like danger.

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