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Author Topic: The best chart I have seen regarding money creation  (Read 3063 times)
johnyj (OP)
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December 06, 2012, 10:31:46 AM
 #1



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

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December 06, 2012, 01:46:32 PM
 #2

I also would expect to see the lower right corner duplicated dozens of times.
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December 06, 2012, 01:49:00 PM
 #3

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

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December 06, 2012, 04:58:49 PM
 #4

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.

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December 06, 2012, 08:53:07 PM
 #5

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.

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December 06, 2012, 08:56:22 PM
 #6

this measurement could be useless since it count the same money at different location several times

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.

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December 06, 2012, 08:58:40 PM
 #7

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

Quote
Three old ladies go to buy a radio. They go to the shop and buy a radio for £30, each contributing £10. After they have left the shop, the manager realises there has been a pricing mistake and the radio should be £26. So he gives his assistant £4 and sends them off after the old ladies. The assistant catches up with the old ladies. Not having change for £1 and being a bit sneaky, he gives each of the old ladies £1 each and pockets £1 himself.

So, if you add up the £9 each the three old ladies paid, the £1 each the assistant gave them and the £1 the assistant pocketed, you get £31. Where did the extra £1 come from?

This works best as a verbal riddle BTW Cheesy

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December 06, 2012, 09:40:57 PM
 #8

Modern Money Mechanics by the Federal reserve bank of Chicago

For those who can be interested

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December 06, 2012, 10:51:59 PM
Last edit: December 07, 2012, 03:12:53 AM by johnyj
 #9

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

Quote
Three old ladies go to buy a radio. They go to the shop and buy a radio for £30, each contributing £10. After they have left the shop, the manager realises there has been a pricing mistake and the radio should be £26. So he gives his assistant £4 and sends them off after the old ladies. The assistant catches up with the old ladies. Not having change for £1 and being a bit sneaky, he gives each of the old ladies £1 each and pockets £1 himself.

So, if you add up the £9 each the three old ladies paid, the £1 each the assistant gave them and the £1 the assistant pocketed, you get £31. Where did the extra £1 come from?

This works best as a verbal riddle BTW Cheesy

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

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

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December 07, 2012, 12:12:28 AM
 #10

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

Quote
Three old ladies go to buy a radio. They go to the shop and buy a radio for £30, each contributing £10. After they have left the shop, the manager realises there has been a pricing mistake and the radio should be £26. So he gives his assistant £4 and sends them off after the old ladies. The assistant catches up with the old ladies. Not having change for £1 and being a bit sneaky, he gives each of the old ladies £1 each and pockets £1 himself.

So, if you add up the £9 each the three old ladies paid, the £1 each the assistant gave them and the £1 the assistant pocketed, you get £31. Where did the extra £1 come from?

This works best as a verbal riddle BTW Cheesy
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).
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December 07, 2012, 02:52:45 AM
 #11


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

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 Cheesy

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December 07, 2012, 06:58:54 AM
 #12

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

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December 07, 2012, 07:18:02 AM
 #13

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.

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December 07, 2012, 09:39:02 AM
 #14



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


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 Cheesy

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December 07, 2012, 11:46:15 AM
 #15

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 Cheesy
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. Wink

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December 08, 2012, 07:37:29 AM
 #16



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


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 Cheesy

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.

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December 08, 2012, 07:47:12 AM
 #17

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

That is step 1 in the chart.

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December 08, 2012, 08:02:03 AM
 #18

It's not magic. It is called "fractional reserve banking" and it works like this:
See, this is why you're not allowed at magic shows any more. Tongue

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December 08, 2012, 04:58:58 PM
 #19


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.


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!!!  Grin

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December 10, 2012, 06:44:53 AM
 #20


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.


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!!!  Grin

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.

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