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Comment by xenophanes | Hacker News Reader

> When you deposit money in a bank, they create 9X the loans of what you've deposited.

Source? I thought what they did is loan out 90% of what you deposited.

I think the poster is talking about re-deposits and how, recycled, that can end up being a multiple of what is deposited.

Example: you deposit $1000 in a bank with 10% reserve policy ($100 set aside as capital reserve of the bank).

Bank loans out $900 to customer for new office furniture; then that money is used to pay the office store, which is another depositor at the bank - which then counts as another deposit, 10% of which is set aside as reserve ($90). Another loan of $810 is then made, etc.

If I lend 20 bucks to my friend, then he lends it to his friend, who lends it to his friend, that's the same kind of multiplier. The total outstanding loans is $60. I really don't get what people make a big deal out of this. I guess it's b/c they aren't economists.

Except that's not the same kind of multiplier at all. I don't understand why you would make a comment without doing any research. I guess you're not an economist.

The total loans in existence is a multiple of the starting money. Same thing. And also the same is refusing to subtract the total debt for some reason. Unless you have some kind of, you know, argument?

It would only be the same if you then were convinced you had assets in the form of outstanding loans, of $60. As a bank would do such accounting.

Exactly, this is why M2 & M3 are an order of magnitude greater than the monetary base. http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup...

http://en.wikipedia.org/wiki/Reserve_ratio http://en.wikipedia.org/wiki/Money_multiplier

The banks are only required to hold reserves of something like 10% of what they've lent out, depending on the country. That means, effectively, that when you deposit $1000, the bank then turns around and lends $10,000. Most of the money in the world exists only on balance sheets.

You mean, if a bank lends you money, then you deposit it in the same bank, then they loan it to you again, then you despot it again (or something equivalent) then that "creates" lots of money even though at any given time only one guy has each of the dollars...?

Not quite. The bank's total reserves must equal at least 10% of their outstanding liabilities, which includes customer savings and checking accounts, in the same way that outstanding gift cards are considered liabilities for retailers. When a bank lends you money, they're really just signing a piece of paper that says, "we've given this person X dollars", thus it counts as a liability, in that somebody could come calling for that money.

When you deposit physical cash, the bank gains an asset, ie: that cash. It gains an equal liability, ie: the amount it credits your account. Thus the sum total of the amounts deposited and the amounts loaned must not exceed 10X the amount it either has in its safes, or that it has stored with the central bank.

When a bank lends you money, they're really just signing a piece of paper that says, "we've given this person X dollars", thus it counts as a liability, in that somebody could come calling for that money.

Sorry, does not parse. When the bank lends you money, it's an asset for them. Like you mentioned elsewhere in your comment, deposit accounts are liabilities for the bank, because somebody (the depositor) could come calling for the money.

Let me rephrase that. The money they've promised you is a liability, the money you owe them is an asset. Remember, often when someone takes out a loan, they don't withdraw the money immediately. Until they do, that loan is a liability for the bank.

The Reserve Requirements (or Cash Reserve Ratio) is a Central bank regulation that sets the minimum reserves each Commercial bank must hold to customer deposits and notes i.e the amount that the bank surrenders with the central bank. ... As of 2006 the required reserve ratio in the United States was 10% on transaction deposits.

http://en.wikipedia.org/wiki/Reserve_requirement

That's exactly what I said, not what he said. You keep 10% and loan 90%. He said they deposit $100 and then the bank loans out $900 (9x the deposit).

If you read further down, it seems to show that the banking system as a whole can expand $100 into $1000 with a 10% reserve requirement:

"Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the change in excess reserves of $90 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000), e.g.$100/0.10=$1,000."

- from http://en.wikipedia.org/wiki/Reserve_requirement

it's just saying that money+loans IGNORING DEBTS instead of subtracting debts can be a multiple of money. if in addition to adding loans u also subtract debts then you'll find nothing happened.

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