Bitcoin Forum

http://upload.wikimedia.org/wikipedia/commons/f/f2/Money-creation.gif

It's clear to see: For each 16 dollar FED created, only $9 get loaned out

But still, in the lower right part of the picture, the "broad money" calculation is not understandable for me, this measurement could be useless since it count the same money at different location several times

I also would expect to see the lower right corner duplicated dozens of times.

I see the words "fractal reserve" in the image - is something to do with preserving the Mandlebrot set going on here?

Yeah. And the "Borad money (cash + deposits)", on the lower, right portion of the graph, is like "Borat money", for make benefit of glorious nation of Kazakhstan.

Too bad that the pictures included in posts can be replaced afterwards with no notification or an ability to quote for posterity.

That's what the printscreen button is for.

This is, in fact, the case. My friend, you count amongst that rare proportion of the populace who are able to "keep things straight" which, unfortunately, far too few, especially politicians, can count themselves among.

Let me find the story of the three old ladies and the radio.

If you can spot the fallacy, you may be qualified to comment properly on fractional reserve banking.


This works best as a verbal riddle BTW :D

Modern Money Mechanics (http://www.rayservers.com/images/ModernMoneyMechanics.pdf) by the Federal reserve bank of Chicago

For those who can be interested

LOL, I read this story when I was 14 and even after seeing the answer I did not really understand I was misled :D

The same goes for money multiplier, they add same money again and again each time it loaned out, and say this is how banks generate money

I think all these accounting tricks are used to cover the real criminals that is ongoing, and I'm sure the bankers know what is going on, they just generated several hundred pages of report and no one can discover the problem following their way of counting

Sweden let those banks failed after their financial crisis in 90's, and it recovered quickly from recession, maybe that tells some truth

The riddle assumes that the 9 paid by each of the ladies went into the purchase of the radio.

Note that the riddle doesn't ask you to include the 26 in the cash register for the radio when you "add up" the amounts, which would give you 57 instead of 31.

In reality, one lady paid 8.66 for the radio and the assistant stole 0.34 from her.  The other two ladies each paid 8.67 for the radio, with the assistant stealing 0.33 from each.

Now if you add it up, you get 8.66 + 8.67 + 8.67 + 0.34 + 0.33 + 0.33 + 3 = 30.  No extra dollar.

In the riddle you are counting the dollar in the thief's pocket twice.  Once in the 9 that the ladies each paid (0.34 + 0.33 + 0.33) and again as 1 in the thief's pocket.  As I said earlier, that would be like counting that money in the cash register twice, 26 in the cash register and again in the 9 that the ladies each paid (8.66 + 8.67 + 8.67).

Each lady paied £10 and get £1 exchange, so they did pay £9, not £8.667 :D

I believe this chart leaves out the primary dealer banks which purchase treasuries before turning around and selling them to the Fed...

The chart is incomplete and inaccurate because the chain of bank deposits does not stop at 3. It goes on indefinitely. Also the reserve ratio is more like 10%, not 25%.

The result is this: for every $1 the Fed creates, banks loan (up to) 0.9¹ + 0.9² + 0.9³ + ... = $9

Currently, banks are not loaning at their limit. They have a lot of money deposited at the Fed earning interest. This is what is keeping inflation low even though the Fed is printing money. When the banks decide to start lending, the money supply will balloon and inflation will rise.

Please explain how come a $1 bill becomes $9 if you just take it out from your pocket and put it back into your pocket 9 times :D

That's actually quite easy to explain. The banks have a magic pocket, from which money doesn't disappear when they take it out. Like all magicians, the banks don't want you to know how the trick is done. ;)

It's not magic. It is called "fractional reserve banking" and it works like this:

Bank A has $1.
Bank A loans $0.90 to a customer who buys from merchant B, who deposits the money in bank B. Merchant B believes he has $0.90.
Bank B loans $0.81 to a customer who buys from merchant C, who deposits the money at bank C. Merchant C believes he has $0.81.
Bank C loans $0.73 to a customer who buys from merchant D, who deposits the money at bank D. Merchant D believes he has $0.73.
Bank D loans $0.66 to a customer who buys from merchant E, who deposits the money at bank E. Merchant E believes he has $0.66.
Bank E loans $0.59 to a customer who buys from merchant F, who deposits the money at bank F. Merchant F believes he has $0.59.
Bank F loans $0.53 to a customer who buys from merchant G, who deposits the money at bank G. Merchant G believes he has $0.53.
Bank G loans $0.48 to a customer who buys from merchant H, who deposits the money at bank H. Merchant H believes he has $0.48.
Bank H loans $0.43 to a customer who buys from merchant I, who deposits the money at bank I. Merchant I believes he has $0.43.
Bank I loans $0.39 to a customer who buys from merchant J, who deposits the money at bank J. Merchant J believes he has $0.39.
...

In the end, there is actually only $1 split among a large number of banks, but each depositor believes that they have the amount that they deposited and the fact that the depositors can withdraw their deposits at any time confirms it (as long as all depositors don't withdraw at the same time). The total amount of deposits is $9, so even though there is only 1 physical dollar, there are 9 additional virtual dollars which are nearly indistinguishable from the original $1.

That is step 1 in the chart.

See, this is why you're not allowed at magic shows any more. :P

Notice there is a time delay between the deposit and loan, so you must specify how long it takes for each step to happen, and all these steps have strict dependency

You add up all the money you have made each year in a 20 years period and said that you have made 1 million dollar, and that makes you a millionare!!!  ;D

In reality the time difference between the deposit and the loan is negative.  The bank makes the loan first, and then seeks deposits to cover their reserve requirements.

Money is an idea, not a thing.  It is not subject to physical conservation laws.

Normal banks could not create money, they either borrow from FED or sell assets to FED to exchange for new money, FED is the only source of new money

FED created base money, and that money get loaned out again and again, but adding all the loan happened after that is quite meaningless, it  serves the purpose of confusing people  ;)

If people discovered that only FED can create money, they will question about who give them that power; but if people have an impression of every bank can create money, then they might accept that as a common sense