[bun_at_work]

The bank does hold a fraction of your deposits, as our banking in the US is fractional reserve banking. This has been the case for quite some time, and isn't really the same thing as digital currency, even if we transact digitally.

[jwolfe]

From my understanding, they hold most of that in reserve accounts with the Federal Reserve. But yeah, someone at some point holds some cash. But of the total US money supply (in 2018), physical currency makes up about 11% of the total value[0].

[0] https://www.businessinsider.com/heres-how-much-us-currency-t...

[reedjosh]

And whenever this comes up, I just like to remind people that we went to a reserve requirement of 0% nearly a year ago with the start of COVID.

https://medium.com/navigating-life/we-just-went-from-fractio...

Edit: Downvoted, and I'm guessing it's the source? This is legitimate fact though. Here's the fed's own announcement.

> In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.

https://www.federalreserve.gov/newsevents/pressreleases/mone...

[tylerhou]

Which is completely fine, because the Fed is willing to step in as the lender of last resort.

[lowkey]

Where does the Fed get the money to be a lender of last resort - by printing the money and generating inflation? If so, then how does this inflation impact the purchasing power of these last resort dollars?

I often like to take things to a logical extreme. Since the Fed can simply print all this money into existence, is there a limit to their ability to print? I mean couldn't they simply print their way out of any economic crisis or would this result in another Weimar republic situation? -- genuine question.

[tylerhou]

Printing money does not always cause inflation. The purpose of the Fed is to keep the dollar's value stable. If demand for the dollar rises, the Fed has to print money to avoid deflation.

[reedjosh]

The fed itself says we've already had 4.2% CPI the last year, and that's trusting the fed not to manipulate it's own metric.

https://www.bls.gov/cpi/latest-numbers.htm

The common mantra "When a measure becomes a target, it ceases to be a measure." applies here too, but many HN peeps seem to think it doesn't for some reason.

If you remove the constant adjustments to the CPI you get a _much_ higher rate of inflation than governments will admit.

http://www.shadowstats.com/alternate_data/inflation-charts

[reedjosh]

It may be fine for the faith in banking structures, but it's not that great it you like your dollars to hold value.

[dragonwriter]

I don’t particularly want my dollars to “hold value”.

I want currency to be useful as currency; I want my investments to hold value. The two things serve different functions, and I don't want investments compromised to be useful as currency or vice versa.

[lowkey]

> I don’t particularly want my dollars to “hold value”

Sure, but would you really rather your dollars "lose value" as in they can purchase less and less goods and services over time? How does that benefit you personally?

[bun_at_work]

This comment betrays your misunderstanding of the financial institutions and systems at play here.

The Fed's goal is to maintain inflation at 2% for reasons more complicated than I'll discuss here. If you're interested here is a source you might like: > https://www.goodreads.com/book/show/30231791-the-end-of-alch...

[reedjosh]

I understand the goal and all of the justifications of Kaynsian economics. I don't have a misunderstanding of it, but a disagreement with it.

See Bitcoin Standard podcast and or book for more on hard money and economics under it.

https://saifedean.com/thebitcoinstandard/

And or the Mises Institute for the low down on Austrian economic viewpoints that answer many of the questions that Kaynsians can't.

https://mises.org/what-austrian-economics

And on top of that the fed itself says we've already had 4.2% CPI inflation this year.

https://www.bls.gov/cpi/latest-numbers.htm

But, that's trusting the stakeholders in the inflation game to be honest.

If you remove the constant adjustments to the CPI you get a _much_ higher rate of inflation than governments will admit.

http://www.shadowstats.com/alternate_data/inflation-charts

[lowkey]

> The Fed's goal is to maintain inflation at 2% for reasons more complicated than I'll discuss here.

It would be amazing if you could make the effort to explain the complicated reasons why the Fed's inflationary policy is a good thing. I have yet to hear a sound argument why sound money is worse for the people, than an inflationary currency. I can see how it would benefit the government to hide the true cost of taxation via inflation, but why does it ever benefit the individual to have their wealth diluted by the process of inflation, even if it is "only" by about 2% per year?

[bun_at_work]

Right, because fractional reserves are set around 10% or so.

edit: fraction reserve _requirements_ are set around 10% or so.

[kqr]

Well, you make it sound like there's a limited number of dollar notes and the bank will refuse your deposit/loan if they don't have enough notes lying around to make the fractional requirements.

In reality, they will accept your deposit/loan (as long as it makes business sense) with no regard for how many notes they have lying around. If that puts them over the edge of the fractional requirements, they'll just go to the Fed/Treasury, who will swing their wand and write in additional (digital) reserves for the bank.

It is mainly all digital at this point.

[reedjosh]

> they'll just go to the Fed/Treasury, who will swing their wand and write in additional (digital) reserves for the bank.

Pretty sure that's true for larger institutions and lending between themselves, but not for your everyday accounts. They must go to fed member banks themselves to ask for the loans.

[bun_at_work]

This simply isn't how the financial system works. The bank will only loan out amounts based on what they hold in reserve. Asking the Fed/Treasury to "swing their wand around" isn't really close to what happens. Also, the Federal Reserve and the Treasury are different entities.

They don't just "print money" for banks arbitrarily.

[kqr]

Printing money for banks arbitrarily is exactly what they do -- what they have to do, if they want to have any chance at meeting their target overnight rate. (Which they are.)

Demand for money comes from the market and is not very flexible, and certainly not under anyone's control. Lenders will meet the demand for money at ever increasing prices (i.e. higher overnight rates) unless money gets printed arbitrarily.

[spiralx]

Banks literally create money by lending, here's a good overview from the Bank of England:

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[scatters]

The US does not have reserve requirements; it has capital requirements. The fractional-reserve model is not a realistic description of banking in modern developed economies.

[X6S1x6Okd1st]

That definition seems to differ from the definition I've commonly seen.

How do you define a digital currency?

[bun_at_work]

I don't have a strict definition handy, however it seems as though digital currencies would be those that are digitally based, whereas the dollar is a tangible currency first, even if it is fiat.

A digital currency would be like crypto currency, or in-game currencies or something designed to be digital. The dollar is the federal reserve currency, and not intended to be digital. It doesn't make sense to call it digital currency, when in fact it's physical currency first, and we've developed digital tools to help us use it and move it around.

[X6S1x6Okd1st]

At this point the vast majority of USD is digitally represented only.

[bun_at_work]

I don't disagree, but it doesn't change that USD is not a digital currency.