Great responses though I want to dig a bit on the responses of credit not being created during the housing bubble.
I'm fairly new to the concept of debt-based money (couldn't you tell?
) and I watched a video I found
Money As Debt to get a better understanding
Around the 13:50 point they mention that using the 9:1 reserve ratio the bank can "conjure" up to 9x the "money" the bank has. Is this video wrong or is my take on their explanation not right?
Oh my - this is why this thread is so long!
To start with, begin your thinking with the concept of "leverage".
If I had a gold coin, and went to you and borrowed $1000 with it as collateral, then went to Steven and did the same thing, and then to Travlyr and did the same thing - that coin has been leveraged to get $3,000 in borrowed cash... ok?
Note some things here: no one "printed" or "created" any money, or gold coins. There is not 3 "thin air" gold coins out there - there is only 1 - but it has been pledged 3 times over.
Now, you'd see that act as fraudulent - but let's not get into that right now.
This is not exactly what the bank does with your deposit - there are some other details - but just keep in mind what I said above - just because the coin has been pledged three times over, does not create gold coins out of thin air.
Everything is always real - there is no fantasy or magic in banking. (Which is why I cringe when I see the words "conjure" or "money out of thin air")
When you deposit your money in a bank, you surrender the ownership of that money to the bank - it is no longer yours.
In return you get a slip of paper that says one of two things:
1) In X number of months, we will give you money back of this amount plus this interest
or
2) On your demand, we will give your money back of what ever amount up to what is recorded on your account.
We will focus on (2).
Now, watch and follow the real money - as it is the only thing that exists
You can think of it this way: there is a page in a book that says "The bank owes Seraphson X amount of money"
Do you think that page in a book
is money? ... well, no. No more than an IOU between friends is "money".
So let's say you give your money, $100, to the bank, they write that down and give a piece of paper, and IOU (bank deposit slip).
It is now the bank's money.
The bank uses THEIR money to make loans.
The law says they need to take 10% and keep it in reserve, so they put $10 of real money into an account at the FED called "bank reserves".
Now they have $90 of real money.
The lend it out as a loan, say to me.
I borrow $90 because I want to buy something and I do not have enough money.
People borrow money to spend money, so that is what the borrower does - spend it - and it is real money - $90.
So the bank gives me MY money - and I give them a piece of paper that says "I will pay you back" - like the IOU the bank gave to the depositor, I give to the bank.
It is now my money ($90).
The guy I bought my stuff from now has $90 in his hand and I have his stuff.
It is now his money ($90)
What does he do?
He deposits it in the bank.
The bank takes his $90, and records in a book "Bank owes Jack $90 on demand" and gives Jack an IOU.
It is now the banks money ($90).
To loan it out, the bank needs to put 10% at the Federal Reserve ($9)
They have now $81 of real money that they can loan out....
...and so on.
Do this over and over.... eventually:
- all the real money sits in the reserve at the FED.
- there are a bunch of IOU's out there
- about $900 of IOU's of the bank to depositors (with interest)
- about $900 of IOU's to the bank from borrowers (with interest)
But all the money ($100) is sitting in the reserve at the FED
