[huijzer]

How money works? Well look into fractional reserve banking and do the math. If you’re a bank, you can just loan out 10-100 times what you have in assets and ask say 5% interest. Then 5*10 to 5*100 is your annual interest to the bank. That’s why the Bible and Quran are against usury.

[dghlsakjg]

That’s not how banking works. Banks cannot lend “10–100× their assets.” Loans are assets. Deposits are liabilities. What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.

The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%.

Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit).

This is a popular myth, not “doing the math”.

What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.

[eru]

> What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.

I'm with you in principle. But alas there's lots of regulation that muddies the economic waters. Eg reserves do limit lending in some places at some points in time.

> What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.

Yes, indeed. People usually get a loan to spend the money (ie invest it). Otherwise, why bother with the expensive loan?

[mothballed]

It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.

[dghlsakjg]

Extremely simplified:

When I deposit a dollar, the bank records a $1 deposit liability. If the bank makes a $1 loan, it creates a new $1 deposit for the borrower.

If that dollar is spent and redeposited, deposits increase even though the amount of base money has not. It looks like multiplication, but what’s really happening is that loans and deposits are expanding together on the balance sheet.

The bank is not creating wealth out of nothing. It now has matching assets (loans owed to it) and liabilities (deposits owed to customers), backed by capital that absorbs risk.

With reserve ratios effectively zero, lending is constrained by capital requirements and risk management, not by reserves. Banks cannot recirculate a single dollar endlessly without sufficient capital.

[LeanOnSheena]

The bank of England has some incredible articles that explain this that have been circulated on HN before. Really fantastic reading for those wanting to understand the mechanics.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

[mothballed]

They don't create wealth out of nothing. They capture, and potentially create, wealth by offering financial services including lending. The differences between the positive interest paid to depositors and the loan interest, after covering risk and other costs, is the wealth they've captured/created for themselves.

I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth.

I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this. The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.

[eru]

Mostly agreed.

> I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth.

Alas, lots of people have very weird, and very wrong ideas.

> I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this.

Yes and No. From the bank's point of view fractional reserve banking works pretty much the same way you have described it here under eg a gold standard as well.

> The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.

I rather doubt the Cantillon effect in an economy made up of smart actors who anticipate that new money entering the economy. (Though experiment to illustrate: if the Fed announced today that they are going to double the amount of money in the economy in exactly 12 months, you would see prices going up today in anticipation. The Cantillon effect would require prices to slowly go up one by one starting at the earliest in 12 months as the money makes it way through the economy like some kind of hydraulic fluid.)

Btw, there are also plenty of shadow banks that provide similar services to the economy but are not regulated as banks. They serve as a release valve for the economy.

In a very loose sense my stock broker (IBKR) is a shadow bank: lots of people have uninvested cash in their brokerage accounts and IBKR lends some of it to me as a margin loan so I can buy more stocks. Money market funds are another sort-of shadow bank.

[qsera]

>They don't create wealth out of nothing.

Banks loans may not create wealth. But they promise its creation to the society. The value of the money that they lend out comes from that promise.

And the people who borrowed from the bank create wealth when they repay their loans. The responsibility of the bank is to track it and ensure that it is created. OR that the money lended out is not spent. Either one should happen when the loan is repayed, so the bank does not care which one.

If the banks does not do it (ensure repayment or collect collateral), then all the people who worked for the money loaned by the bank, got their work stolen.

In other words, when you take a loan from a bank, you are actually borrowing from the society.

So watch your banks very closely.

[jt2190]

> But they promise [the creation of wealth] to the society.

It feels like you're trying to describe the "social contract" between private banks and the rest of society, but putting the full responsibility of "wealth creation" only on one party in the contract: The bank.

The other party, Society, is given access to capital when they borrow. The rate they're charged should be competitive since there is presumably more than one lender. By borrowing money they try to "create wealth", then to repay the loan principal along with a bit of the new wealth in the form of interest.

[yfontana]

Reserves matter even if reserve ratios are zero. If Bank A lends too much money, then when its customers spend that money, a lot of it will end up deposited at other banks. These banks will then ask Bank A for reserves (as in, central bank money) to clear the inter-bank transfers, which Bank A will need to borrow from the central bank, at a cost.

[jcranmer]

> It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero)

I know what you're thinking of here, but it doesn't mean anything like what you think it means.

So the US used to have a rule that every bank hand to have a certain percentage of its assets stored in its account at a Federal Reserve bank; it is this percentage which was gradually reduced to 0 by I think 2020. Note that only the funds in that account meet the requirement; a literal pile of cash contributes not a single cent.

The way banks are primarily limited nowadays is via capital adequacy ratio, which is essentially that you need to set aside a particular pile of capital that can be raided to guard against assets falling in value to 0. It's complicated because this pile of capital doesn't come from the money a customer deposits in their account (which needs to be held as an asset to offset the liability a depositor represents), but rather from income the bank makes in other ways. If a bank sells $1 million worth of shares, they get to issue ~$20 million more loans.

If a bank gets $1 million worth of new deposits, they get to issue... $0 more loans. Well, maybe less: if a bank gets $1 million worth of new bitcoin deposits, that probably reduces its capital ratio because bitcoin is such a risky asset.

[mothballed]

>If a bank gets $1 million worth of new deposits, they get to issue... $0 more loans.

Then it doesn't make sense for a classical deposit-lending bank to pay interest on those new deposits. They can't generate revenue from the new deposits since they cannot touch them to perform lending , and they are now a liability because they must perform banking services to the depositor, regulatory compliance, and insure against the risk something accidently happens to the money. Under your scheme maybe they could go park it at the fed and get interest that way but even that is technically a loan; they are giving up the notional money in exchange for interest in hopes they can collect it at a later time.

[eru]

Lots of places, eg Canada, never had a legally mandated reserve ratio.

Fractional reserve banking has economic limits, even when there are no legal limits.

[Imustaskforhelp]

I recently discovered narrow banking (https://www.narrowbanking.org/) which basically states the idea of narrow banking which can only make it so that the bank doesn't have the issues with fractional reserve banking if you are worried about it

Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking.

Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.

There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.

[mothballed]

Narrow banking was denied a depositor account at the fed IIRC so it's basically DOA as they've envisioned it.

IIRC the fed said that narrow banking threatens the stability of the banking system since private credit expansion (and ultimately, the risks that come with that) is in their estimation desirable. Regulators want nothing but to crush the idea.

[Imustaskforhelp]

> IIRC the fed said that narrow banking threatens the stability of the banking system since private credit expansion (and ultimately, the risks that come with that) is in their estimation desirable. Regulators want nothing but to crush the idea.

But why? I don't understand, I feel like certain exceptions like (credit cards?) or house loans can be built or some personal loans but we all see a disaster which will be billed by govt. thus impacting everybody

The govt itself can then buy ETF's once again / invest money from one way or other via pension funds or other funds (sovereign funds?) to the stock markets themselves or other avenues.

banks basically arbitrage the fact that they are FDIC insured and loans. Nothing wrong with it except the fact that most banks would keep most of the money with themselves and only give chump change to average person or even 0%. If that's the case, why isn't there a bank which can just provide 3% treasury funds or similar or (gold?) and then just help the average person.

I saw a lot of points I agreed upon the narrow banking website on and I'd love to discuss more about the harms of narrow banking compared to fractional and why regulators shot it down/just comparing the two of them.

[em500]

Here's John Cochrane take on Fed vs Narrow Banks: https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

TLDR: Cochrane thinks the Fed wants keep a lid on narrow banking because it believes it can cross-subsidizing lending to households and businesses from retail deposits.

[staplers]

  There already are some gold pegged stablecoins

Which require blind faith in reserve numbers.

[Imustaskforhelp]

I wouldn't call it blind faith similar to how it isn't blind faith to get usd stable coins

I think paxos and xaut have audits etc. from what I know/ I have heard.

Although having more audits is always a neat idea but I was just proposing that there are ways to invest in things like gold and have things like liquid gold perhaps via stablecoin or some other means too basically allowing you to instantly sell gold and gold is a pretty good hedge against stablecoin imo.

I actually once wrote about this idea of narrow banking discovering it accidentally where I wanted a bank which could invest in treasury bonds for inflation protected money or gold.

https://gist.github.com/SerJaimeLannister/c3db4eb84da96decfc...

[philipwhiuk]

> I think paxos and xaut have audits etc. from what I know/ I have heard.

Ah, yes, the almighty auditors.

Auditing proves you passed the audit. Nothing more, nothing less. The audit can be at any level that suits the person paying for the audit. In this case it's the company who has the vested interest in passing the audit.

[msla]

Hey, so does gold-backed currency!

How do you know how much gold the government is holding? Ask them!

How do you know the government isn't lying? Ask this question loudly enough and meet people with guns!

[eru]

That's why you should bank with private counterparties, not the government.

If you buy eg a gold ETF, you can ask all these questions without any guns coming out. You can also go and exchange them for physical gold whenever you feel like it. Without any guns coming out.

If they break their promises, you can sue them. Without any guns coming out.

[philipwhiuk]

> If they break their promises, you can sue them. Without any guns coming out.

Providing you and they are in a country who is prepared to use 'guns coming out' to enforce the outcome of said suing.

[eru]

Private contracts are a lot more robustly enforced in most parts of the world than promises of the government.

You can also do jurisdiction shopping: many companies deliberately contract under eg London law instead of local law.

[philipwhiuk]

Welcome to "monopoly over violence" - it's only been around 12,000 years or so.

[littlestymaar]

> here already are some gold pegged stablecoins

Something backed by a volatile asset isn't, by definition, a stablecoin, though.

[dghlsakjg]

Stable coins are stable relative to their backing asset, not necessarily US dollars or any other currency.

[mothballed]

On a long timescale gold is way more stable than the dollar. Dollar is nonvolatile on a long timescale in the sense the expected returns are negative and it does it reliably at usually anywhere from a return around negative 2-10%. But in terms of price stability gold would be far far far far more stable on anything but the most short-sighted of timescales.

[Dylan16807]

I guess. But you can fix the slow drain of inflation by using long-term treasury bonds instead of actual cash. That's pretty much a dollar and doesn't do badly.

[eru]

Long-term treasury bonds are fairly volatile. That's how Silicon Valley Bank went under: their long-term bond holdings dropped in value enough to make them insolvent.

[Dylan16807]

They can swing a few percent. So can gold. Either one could make a bank insolvent. In the long term treasury bonds are not volatile, especially if you hold them to maturity.

[kaibee]

> On a long timescale gold is way more stable than the dollar.

This is a nonsense claim. How many flat screen TVs could you buy for a pound of gold over a 'long time scale'? Cancer treatments? Acres of land in midwest? Hours of a normal person's time? The fact of the matter is that you cannot actually store labor or time for later, so the amount of stuff you can get your gold is gonna vary wrt the broader economy. Economic reality on the ground is what actually determines the 'value' of your gold. And look, if you want some asset that you're pretty sure you could still trade for bread after the apocalypse or whatever, gold isn't the worst choice. And its deflationary, as the amount of gold isn't increasing at pace with the productivity of the global economy. And people like to hoard it when the future becomes less certain, because of the aforementioned 'tradeable for bread after the apocalypse', so I guess its an okay speculative hedge?

[mothballed]

Non-responsive paragraph.

You've attacked what could interchangeably be dollar or gold asking what it might buy or store, failing to recognize I was measuring relative stability rather than absolute stability.

The dollar has lost over 95% of its value since inception of the federal reserve (at which time dollars nature changed significantly) in 1913 against some imperfect measures of CPI. That gives you a 20x difference over time, downward. Gold has not perform nearly that bad at price stability.

We could go back further than that when the dollar was a lot more stable... but at that time dollar was backed by gold and there wasn't (mostly) a central bank nor gold possession bans that let them mess with the price quite in the same way they did later.

[eru]

The US always had really weird and restrictive financial regulations. Right from when the country got started.

Look to Canada for a much stabler system that didn't have banking crisis all the time. See eg https://archive.is/v13TM

[eru]

You are mixing up a lot of different ideas and concepts.

Historically, the combination of fractional reserve banking and the classic gold standard was very successful. Just because your bank uses grams of gold as the unit of accounting (or something that's effectively equivalent to grams of gold), doesn't mean they need to have that much of gold in their vaults. Similar to how today a bank will give you dollar bills when you ask for them, but that doesn't mean they need to have their vaults stuffed full of dollar bills. They just need enough solid assets to sell for dollars, so they can give you dollars when you want to withdraw. (Having some gold or dollars on hand is just a convenience, so you don't have to wait for the bank to liquidate assets.)

About narrow banking: there's at least two different definitions of the idea. What your website describes might be called 100% reserve banking. The website is a bit silly: you can already get 100% reserve banking today, if you want it.

The website is also extremely misleading and dishonest about fractional reserve banking. You can eg just follow their own link to the Bank of Amsterdam and read up on it.

The second definition of 'narrow banking' can be seen at eg https://en.wikipedia.org/wiki/Narrow_banking

> Narrow banking is a proposed banking system that would restrict commercial banks to hold only safe and liquid assets, like government bonds, against customer deposits, while prohibiting traditional lending activities. Under this model, banks would function as custodians and payment processors, separate from the lending function performed by other financial intermediaries.

This is like a normal fractional reserve bank, but the only asset they invest in is government bonds. This can still go wrong, if you are not careful: Silicon Valley Bank invested mainly in government bonds, but had a maturity mismatch. Their long term government bonds lost in value (because market interest rates went up), so they went bankrupt. Alas, they still got bailed out.

You can approximate this kind of narrow bank for yourself, by just putting your money either in government bonds directly, or into a money market fund that only invests in government bonds.

> [...] I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.

In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.

> There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.

Wise offers to keep your money in a fund and they transparently sell your fund shares, when you are buying a coffee with your card. They transparently buy fund shares, when money comes into your account.

See https://wise.com/help/articles/3luodUQFD9YWzNc8PvIfVK/holdin... and https://wise.com/sg/interest/ and https://wise.com/help/articles/74dYRhMCItIf2IBJLTpFQs/how-do...

---

Addendum narrow banking in the sense of only holding government bonds:

I think that should be legal for banks to do, and in fact it's a good argument in favour of eliminating deposit insurance. At least the (explicitly or implicitly) government backed deposit insurance that you have eg in the US. It creates a moral hazard where the incentives for monitoring risks are all but dulled.

People who still want the equivalent of deposit insurance should just put their money into a bank that only invests in short term government bonds: after all, a government backed deposit insurance can't really be safer than these short term government bonds anyway.

[Imustaskforhelp]

Thank you for your detailed response. I find the idea of wise's being able to store even liquid cash into stocks.

How does the taxation aspect of it work? Would I have to pay short term capital gains on each transaction that I then make?

They also provide daily interests which seem interesting and about on par with treasury rates so it technically sort of can act as the end result of narrow banking for what I wanted (instead of banks borrowing and spending and containing huge chunks of profit in between, it invests into a safe investment)

> In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.

Ah it seems that you are right but also that there are some inflation protected treasury but you might be right and I thought about it and doesn't it also bring a new set of problems that America faces.

Basically US can get real goods by giving debts and the real value of what US pays actually lessens over time because of inflation so in a sense, US is able to offset some costs by debt itself but it still has a vicious loop where you start borrowing money just to pay your debt and this starts cutting into your infrastructure hurting the poor the most but also reducing the ability of care etc. effectively making things private if govt cant fund it for many (healthcare) which would impact the poor the most

And this is really tricky as the current model really favours overconsumption and that makes more goods be easily sold and this is why other countries are willing to do this in the first place.

From what I could observe, the biggest winners would be corporations as US pays corporations get funding or the stock market looks more lucrative etc. Low real rates inflate asset values and this would disproportionately benefit the rich

It also starts to overconsume from other countries and just make it financially unable to operate at the same level combined with globalization to compete globally at everything but the software (doubtful, we will see what happens in the near future) and at the financial level.

So basically from my understanding, it increases inequality, increases overconsumption, benefits the rich and hurts the poor.

Also, basically US loses all major exports for this financial hack of sorts. Doesn't it fundamentally weaken the reality of US?

Another aspect is that since it favours the stock market or overvaluates them, these help vc funds and these vc funds trickle down to startups who can only compete at the software level so they end up subsidizing all costs (mostly human software engineering) plus hardware costs and make them able to offset/run at losses.

Now VC funds end up enshittening most solutions in order to extract maximum profit down the line usually basically impacting the end consumer and thus hurting the reputation of VC companies (and sometimes for good measure)

Theoretically this also subsidizes open source in a very minute way. Software engineers get rich and are able to enjoy the craft and there are subsidies of free storage and server access from basically github aka microsoft and others to basically streamline the whole process as well since these cloud/others also extract some values of open source.

But open source ends up creating better alternatives to VC funded solutions if those solutions exist in the most human-friendly way where profits arent even thought of usually and are run via donations.

Combine this with the fact that in India and China,developers are cheaper and they are having a boom in their VC industry/startup culture as well and they are willing to undercut America because they are simply leaner and usually pick less VC funding overall as well imo

So in a way US's software success can only be relied upon on full monopolies support considering open source and cheaper alternatives and also moral focuses where EU companies would prefer to support EU as US wreckballs into political disaster.

Also in my opinion, most of US software success recently aside from the monopolies or maybe even including them is so reliant on including "AI" and AI fundamentally lacks any moat most of the times and they are actively losing/making 0 profit while spending billions in hopes of beating the competition.

US's export of financial products basically loops this cycle back to probably an over-reliance on AI itself.

So US economy is so damn reliant on AI which is fundamentally unstable partially due to it "earning profit in the middle" or taking this lucrative deal.

Y'know what I feel the issue with this is? that in other countries there is a cap of the amount of destruction/reliance. Usually most countries suffer from the other side of spectrum but America has removed this cap because of it and this weird blend of hyper capitalism just converted into late stage capitalism.

So (when) the AI financial bubble explodes, How would America even rebuild itself?

I don't think there is a free lunch. Not even in this case, what ended up happening was that America took short term profits in long term structural losses and this hyper capitalism lured companies as well to outsource or build factories in china and other countries actively increasing the extent of the loss and there just wasnt any cap.

Something which is lucrative but not sustainable and now its starting to bite back.

A lot of issues I felt that were in America are now starting to feel intentional.

I mean one of my questions is that how can America even be optimistic at this state considering that everyone I talk to admits that AI is an bubble, so yea AI companies still make profits but long term everyone sees an impending doom. It's like a time bomb and I already feel at unease and I observe the same feeling of unease as well from other people.

Another point was that America helped foreigners into the American dream (by exporting a story) or perhaps the silicon valley dream (a lot of S&P companies are built by people who came to america) as it losses even that.

In a way America just incentivized a new form of grifting called financial innovation in this AI bubble era in my opinion by this decision. I am genuinely not sure what America can do at this stage.

I am sorry to say but the future seems bleak. I hope I am wrong but I wish the average american the best of luck and hope in a better future for the whole world combined but being honest, the future doesn't feel good for America.

[eru]

> How does the taxation aspect of it work? Would I have to pay short term capital gains on each transaction that I then make?

Sorry, I have no clue, you need to investigate that by yourself. My jurisdiction doesn't have capital gains taxes, so I didn't look into this. Let me know what you find.

> Also, basically US loses all major exports for this financial hack of sorts. Doesn't it fundamentally weaken the reality of US?

Your view of exports is a bit too narrow. A 'trade deficit' mostly just means that the US 'exports' financial assets. The US is really good at producing financial assets. Eg when people globally buy into a hot US IPO that officially counts as widening the trade deficit, even though you could say in a sense that effectively the US is exporting Google shares. And they are really good at making new companies.

Btw, in aggregate the US earns more from their investments abroad than they send foreigners for their investments in the US. Despite the foreigners investing more overall. That's a pretty good deal for the Americans (in aggregate).

I agree that an unsustainable government deficit is bad, but that's bad regardless of whether it's foreigners or locals who finance the government.

> So (when) the AI financial bubble explodes, How would America even rebuild itself?

You can look at what happened in the past after similar episodes.

Btw, for an interesting history lesson look at what happened after 1987's Black Monday: https://thehill.com/opinion/finance/356376-black-monday-less...

> I am sorry to say but the future seems bleak. I hope I am wrong but I wish the average american the best of luck and hope in a better future for the whole world combined but being honest, the future doesn't feel good for America.

I don't live in America, but from the outside it seems like the place still has a lot of life and dynamism left.

The main thing that would keep me from moving there is their asinine NIMBYism in the big cities and car infestation of the whole country. I'm not too worried about their economy, and I have about 50% of my investment portfolio in US stocks.

[Imustaskforhelp]

> Sorry, I have no clue, you need to investigate that by yourself. My jurisdiction doesn't have capital gains taxes, so I didn't look into this. Let me know what you find.

I will look into it later, thank you. I don't think the stocks thing is available in my country but I will check

> Your view of exports is a bit too narrow. A 'trade deficit' mostly just means that the US 'exports' financial assets. The US is really good at producing financial assets. Eg when people globally buy into a hot US IPO that officially counts as widening the trade deficit, even though you could say in a sense that effectively the US is exporting Google shares. And they are really good at making new companies.

Y'know actually this is the crux of my comment as well.

That, America is in this particular position where its only exports are usually finance. The issue is that its finances are extremely overvalued (even more so with the AI bubble), even investing in S&P 500 doesn't feel safe to me because its a matter of (when) and not if, that the bubble bursts.

This is what I am worried about, I am not American as well but when the AI bubble bursts and People panick essentially taking in a second all the "exports" that US economy made, This is the only thing stopping America from breaking all hell loose. And I don't think this is the right thing because this export of finance or just this nationalistic focus of financialization caused the AI bubble to exist in the first place.

At the end of the day, any technological innovation just gets wedded to finance and some of them are really really shady like the AI bubble and the crypto bubble.

I am not even talking about the global influence of this leads when companies will do so many immoral things that we are witnessing in the tech giants (google,facebook,twitter,amazon,microsoft)

I think that most americans who live there are actually really net negative and they are impacted the most out of this as I said, and this is part of the struggle because I feel like that the majority shouldn't be subdued by the minority's interests or have the idea of inequality persists which actively hurts the majority.

It's mostly their country and they don't even have a say in this arguably, the most important matter.

Perhaps this is capitalism and I don't have too much faults with the capitalism model Adam smith presented but I very much have a problem with this late stage capitalism.

Much of the system is inequal but the people there are taught to be on the good side of that line and let it continue. The social and moral effects of it are already visible in the country.

The baseline of a country even with finance is inherently linked to these factors as well which America's failing in. It's not visible in the graphs the things I said in the S&P because it can be at an all time high but this just goes on to show the decoupling of finance from reality and how it can come to bite again if things go bad because if things go bad, they will go really really bad and anything that can happen will happen and the current politics of US is fundamentally shaky as well and that reflects in their finance as well.

Overall, my heart just goes out to the average american suffering from all this. Whose budgets are being cut to please the large tax cuts of the rich and who suffers the most from inflation and the bubble bursting.

America's economy right now is shaky. Anything can happen, nothing bad has happened because people think that they are rich because of the S&P so consumption still happens and things are barely okay even if there are so many cracks in the system right now.

But when S&P breaks loose due to the AI bubble bursting. I genuinely worry that America can really go through a lot of internal turmoil because of it.

So at the end of the day, I feel like AI investments financially would lead to disaster and this might impact the world as well but it will really harshly impact America the most.

Also, no, if stock markets rise then the money isn't flowing in US govt bonds where the interest rates are low, this is the first time in many years perhaps I think during the tarrifs that people weren't putting money in either of these things and genuinely looked for other outcomes and the US govt had to pay higher interest rates which is very contrary to what usually happens and that was the sign of something bad and I don't know if I am able to make my stance clear but I genuinely feel like a country's major exports shouldn't really be finance.

[Aunche]

> That’s why the Bible and Quran are against usury.

That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.

[eru]

> It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.

You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.)

Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.

[jbs789]

This is not correct. For starters, loans are assets.

Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc.

The regulatory capital ratio determines how much capital they must hold to support the assets.

[eru]

> The regulatory capital ratio determines how much capital they must hold to support the assets.

That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions.

The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios.

Interestingly they barely held any reserves at all, perhaps 2% or less of assets.

These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.

[staplers]

  Loans are assets

-1 = 1

And people wonder why finite natural resources skyrocket in value.

[somewhereoutth]

The best way to understand a loan is as the right to a future income stream (principal repayments and interest). The original debtor (the person/entity taking out the loan) establishes the credibility of that future income stream (based on income, expected returns on a project, etc) and sells it to the lender (usually a bank) for cash up front. Thus the loan is an asset on the bank's balance sheet, that is generating returns (assuming all goes to plan). Banks can and usually do sell on that asset to other parties.

Conversely, when you deposit cash to a bank, you are actually creating a liability on the bank's balance sheet - as you might want your money back one day!

[staplers]

And bankruptcies never happen and no money is created to bailout the lenders

[littlestymaar]

For every debt there's a debtor and a debtee. For the first debt is a liability, while it's an asset for the second.

[staplers]

and liabilities are always paid back in full and never smoothed over with money printing bailouts.

[littlestymaar]

I don't understand the point you're making.

All kind of assets can lose value overnight, be it stocks or real estate.

[staplers]

Lending on no reserve secretly doubles the money supply, sometimes even more if repackaged multiple times. It creates a highly risky financial environment that taxpayers inevitably are forced to bailout (usually through layoffs and hyperinflation). Time and time again.

[TZubiri]

This is a common misconception, thinking that fractional reserve banking is the way in which banks lend. In actuality it's a limitation to how banks lend.

Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.

[eru]

> Without fractional reserve rules the banks could lend their money infinitely.

What's that supposed to mean?

> I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.

That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements).

The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.

[imtringued]

>The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.

No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created.

Now you might argue that this is a bit unrealistic, but at least in principle you could artificially engineer a situation like that even in the current system by having large corporations agree to use the same bank for money created by a specific loan.

But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory.

This means there is no static limit to the amount of money that can be created. The limit is dynamic and depends on the interactions between banks. Specifically, it depends on the liquidity/solvency of a given bank. This means this limit is purely practical and more akin to friction, rather than a fundamental restriction in the math of banking/accounting. It's like how computers aren't turing machines because they have finite amounts of memory. There is no limit to how much memory a computer can have as long as you can manage to build a computer with that much memory.

[eru]

Thanks for arguing in good faith.

> No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created.

Yes, monopolies are bad. I completely agree with your analysis here. That's one reason why central banks can get away with so much.

> But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory.

Here's where it gets interesting.

Assume there are n banks. Let's also assume for the sake of simplicity that transfers behave a bit like Brownian motion. That means on average we don't expect any bias in transfers between banks, but we also expect some random variance.

Say, our banks settle their net transfers at the end of the day. With a bit of math, we see that the expected variance for any bank proportional to something like gross transfers of that bank, and thus the standard deviation is proportional to the square-root of gross transfers. (It also depends on n.)

Our commercial banks settle by exchanging reserves, eg central bank base money or perhaps they ship physical gold. We can assume that they want to avoid being short of reserves when it comes to settling, but it's not infinitely, and holding reserves costs money. So in practice they'll settle on some multiple of the standard deviation as their precautionary reserves. If the amount of total reserves in the banking system is fixed, that'll place a limit on how much banks will want to expand their total balance sheets.

See https://oll-resources.s3.us-east-2.amazonaws.com/oll3/store/... for more on this topic and a better analysis.

The above was about reserves and how demand for pre-cautionary reserves limits the size of the aggregate balance sheet of all banks.

Now the other question is: why do banks bother with deposits?

So, let's assume that our bank makes a loan to a customer: they create a deposit / loan pair out of thin air that adds up to zero. Now the customer spends that deposit. On average we can assume (n-1)/n parts of the deposit go to other banks and 1/n stays with the originating bank (by the assumption that our average bank has a market 1/n market share.) Those (n-1)/n parts get transferred to other banks, and thus they drain our reserves in the settlement at the end of the day.

If we can attract enough deposits, we can make up for that outflow and have a nice 0 in the net settlement.

The above is all assuming there's no regulation that requires a specific amount of reserves or capital etc, and it's all set by each bank purely by commercial necessity. You are right that there's no one fixed limit, but the limits are also not arbitrary.

Instead of attracting deposits a bank can also sell of the loan it just made. Or it can borrow and use that loan as collateral. But economically, that's all basically equivalent to a deposit in different guises.

About liquidity: in a functioning modern economy, as long as you are solvent you can always get liquidity. (But conversely that means that your counterparties will treat any liquidity problems they see with you as signs of underlying solvency problems.)

You might also like https://www.cato.org/blog/diamond-dybvig-panic-1907 (or https://archive.is/uRtmw) on bank runs.

[TZubiri]

>What's that supposed to mean?

The misconception is that if a bank has a capital X, the law gives them power to create loans up to 10X.

What I'm saying is that without the law, the bank could create loans without a constraint, so say 20X, 100X 1000X.

The fractional reserve policy is actually a limit, not the source of lending in excess of capital.

Loans are money creation, and this creation is organic, it doesn't need a charter from the government.

Another misconception is that this money creation is monetary emission or that it somehow causes inflation. It doesn't, because it is gross money creation, not net money creation.

[eru]

> What I'm saying is that without the law, the bank could create loans without a constraint, so say 20X, 100X 1000X.

No, they couldn't, and they didn't when no such laws existed. Canada and Scotland had prominent episodes in their histories when banking was fairly lightly regulated and no such laws existed; and their banks did not create '1000X' loans from thin air.

> Another misconception is that this money creation is monetary emission or that it somehow causes inflation.

No, it would absolutely contribute to inflation. As a thought experiment: just imagine the government banned private money creation tomorrow. Inflation would totally crash and the economy would collapse from a lack of demand.

> It doesn't, because it is gross money creation, not net money creation.

What is that supposed to mean?

> Loans are money creation, and this creation is organic, it doesn't need a charter from the government.

I agree on the first and last part. I'm not what you mean by organic.

[TZubiri]

Besides the discussion of who is right, I think both theories are quite standard and we would benefit from learning the standard terms.

Regarding your theory of gold deposits being behind money creation is on Wikipedia as Metallism.

Regarding how banks worked before such laws existed, we could look at the period immediately before the creation of fractional reserve, I would predict that immediately before the rule was put in place, the banks were creating these 1000X (maybe 100X? I don't know) which caused a bank run. Without looking, the history of fiat money is quite recent, 1 century or maybe even less? So this shouldn't be too long ago. It is possible for banking working correctly for a long time without the rule, it might have been a short period, kind of like how soccer worked without offside rule for a long time, but it was put in place to stop some specific type of play anti-sportsmanlike play, not to enable another.

>I agree on the first and last part. I'm not what you mean by organic.

I think a more standard term is endogenous, as in an emergent behaviour of private individuals, rather than exogenous, as in set by a central bank. https://en.wikipedia.org/wiki/Endogenous_money

>What is that supposed to mean?

You are right these are not standard terms, I meant gross money creation as money that is created with a corresponding liability. For example a loan, or a loan with a mortgage on land. The money base increases, but so does the size of the economy represented by that currency in equal increments. Endogenous money seems to map quite cleanly to gross money. Although not all exogenous money is "net" (as in creating currency without an underlying asset).

>No, it would absolutely contribute to inflation. As a thought experiment: just imagine the government banned private money creation tomorrow. Inflation would totally crash and the economy would collapse from a lack of demand.

One of the examples of exogenous money that does create inflation and I would say it's net money creation (for lack of a standard term I don't know about), would be seignorage, a term that comes from metal economies, where they would reduce the amount of valuable metal in coins, and the value of the coins was maintained by the trust, power and guarantee of the imperial seals imprinted on them, this gradually lead to fiat valuable metal was completely removed.

Nowadays it seems the term seignorage is still used to refer to the revenue created by the state whenever it 'prints' money without a liability. It is important to distinguish this from endogenous money creation like loans and clarify that the latter doesn't cause inflation, and if it does its effect would be minimal when compared to seignorage.

[eru]

> Regarding your theory of gold deposits being behind money creation is on Wikipedia as Metallism.

Huh, what? There's no gold deposits in a fiat system, and they still have money creation. And in eg in 19th century Scotland gold was the unit of account, but they scarcely had any gold in the country (yet alone any gold deposits), and they still had plenty of money creation.

> Regarding how banks worked before such laws existed, we could look at the period immediately before the creation of fractional reserve, I would predict that immediately before the rule was put in place, the banks were creating these 1000X (maybe 100X? I don't know) which caused a bank run.

Huh? When would that be? There was no banking system 'before' fractional reserve banking. And what bank run are you talking about? Historically, bank runs basically only happen when a bank has solvency troubles (or when a law pretty much compels bank runs).

> I think a more standard term is endogenous, as in an emergent behaviour of private individuals, rather than exogenous, as in set by a central bank. https://en.wikipedia.org/wiki/Endogenous_money

Sure, I agree that private money creation in commercial banks is endogenous in that sense.

> You are right these are not standard terms, I meant gross money creation as money that is created with a corresponding liability. For example a loan, or a loan with a mortgage on land. The money base increases, but so does the size of the economy represented by that currency in equal increments. Endogenous money seems to map quite cleanly to gross money. Although not all exogenous money is "net" (as in creating currency without an underlying asset).

OK. Technically even the central bank money is created with offsetting liabilities, at least for the mainstream economies and their central banks like the Fed, ECB, Bank of Japan, Bank of England etc.

I say 'technically', because the treasury can just create a T-bill from thin air, sell it to the market, and then the Fed will loan you newly created money against that T-bill.

There's an interesting debate to be had about seignorage and inflation, and about fiat currency vs fiduciary currency.

First, you don't need to print money without a liability to get seignorage income. When the central does a classic open market operation where they buy a bond yield eg 5% for newly created money (naturally yielding 0%, if it's cash), they earn a 5% interest rate differential for as long as that new money is in circulation. That's very similar to how any old commercial bank earns an interest rate differential.

Now this gets a bit more complicated with inflation and/or when the central bank pays interest on reserves held with them. At the moment the Fed pays 3.65% interest on reserves. (Source: https://www.federalreserve.gov/monetarypolicy/reserve-balanc...). But generally they still have a positive seignorage income.

Money created by the Fed and money created by commercial banks contributes to inflation in the same way. The Fed just measures the total inflation that's occurring (and tries to forecast future inflation), and then adapts its own policy instruments accordingly. They automatically take private money creation into account.

About inflation and seignorage: you might think that it's very straightforward and printing more money would lead to more seignorage income. However that's not true in general.

As we noted above, central banks mostly get their seignorage income from the interest rate difference between their assets and liabilities. (Cash and 'reserves' being the primary central bank liabilities.)

When inflation is high, people really cut back on how much cash they hold, at least in real terms. For an example: as the money printing in Zimbabwe really kicked off, people might have held more cash in nominal terms, but in real terms they wallets got lighter and lighter.

In contrast, Japanese people are famous for holding oodles of cash, partially because their years of mild deflation made holding cash relatively more lucrative.

(Turkey is perhaps a good example to follow along, because they want from relatively low inflation in the 2000s to much higher inflation since, but not nearly as catastrophic as Zimbabwe. Or you can look at real money balances in the US through the Great Inflation in the 1970s vs before and after.)

If all you want to optimise for is seignorage income, the optimal rate of inflation is something low-ish and stable. But details depend on how big your economy is, and how easy it is for people to switch to other currencies. So eg the optimal value for Singapore is probably lower than for the US. (Optimal just in the seignorage income maximising sense. Monetary policy typically has other goals.)

About fiat vs fiduciary money: you know fiat money already. Fiduciary money is where you promise to redeem the tokens in some underlying asset on demand. A classic example could be paper money that can be exchanged for gold on demand.

Confusingly, both intermix freely. What I mean is that in a fiat system, the central bank issues fiat money. But the private banks create fiduciary money: your bank typically lets you withdraw your deposit (fiduciary money) as cash (central bank fiat money).

Perhaps fiduciary money is a better term for what you describe as 'net money'?

https://cdn.mises.org/rae9_2_5_4.pdf has some good points on the distinction. (Though keep in mind that the target audience is 'Internet Austrians' who see everything but gold or silver coins as suspicious, and the authors are trying to convince them not to be so dogmatic.)

You might also like 'Those Dishonest Goldsmiths' https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709 about the myth that goldsmiths invented fractional reserve banking.

[aleph_minus_one]

> That’s why the Bible and Quran are against usury.

Now let's biblical exegesis to define what is legitimate interest and usury.

The "good" (or "bad"?) thing about these holy scriptures is that they can be interpreted quite freely to fit a personal or institutional agenda.

[eru]

That's why you have the Pope or the Supreme Court to tell you what the holy scriptures mean.

[huijzer]

There are many Christians very fervent opponents of listening to such authorities and stick to the Bible itself. Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority. But someone had to pay for the Saint Peter’s Basilica so there was an incentive to adjust scripture.

[eru]

Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.)

> Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority.

I'm no expert but doesn't James 2:26 says "Faith without works is dead."?

Surely giving some money (that you had to work hard for!) to the greatest charity in the world (the Catholic church) should count as a good work?

(But I'm just playing devil's advocate here. I don't know what their official reasoning is.)

[aleph_minus_one]

> Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.)

From an "axiomatic perspective" this means accepting much more encompassing axioms than the holy scripture; such a "proof" requires much more than "the Bible/Quran says" as huijzer implicitly used in his argument "That’s why the Bible and Quran are against usury.", but more like "the Bible says and we additionally accept the following axioms that imply that the Pope's interpretation of the Bible is the correct one".

[eru]

Nah, you can start from the Pope, and you only care about the Bible insofar as the Pope says you should care about it. Very simple 'axiom'.

[antonvs]

> That’s why the Bible and Quran are against usury.

The problem with that is they deny the existence of the time value of money, which is essentially a mathematical fact.

It's why Islamic banks come up with various workarounds to be able to charge the equivalent of interest.

[01HNNWZ0MV43FF]

You can't loan more than you have, but fractional reserve means you can loan most of your assets while only keeping some liquid: https://en.wikipedia.org/wiki/Fractional-reserve_banking

[staplers]

  You can't loan more than you have

You can when you control the ledgers. Even more easily when digital. Over 90% of all currency is digital.

[CraigJPerry]

> fractional reserve banking and do the math

all models are wrong but some are still useful. This model isn’t useful at all since the fraction was legislated to be 0 years ago.

[eru]

That's in the US. Canada for example never had any legal reserve requirements.

However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around.

The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves.

If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.

[CraigJPerry]

Canada is not an exception and operates via the same mechanism https://lop.parl.ca/sites/PublicWebsite/default/en_CA/Resear...

Fractional reserve is a model only for textbooks, it is not an accurate model of how the banking system works in most western economies with a central bank and sovereign currency today.

>> The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold

Well this is usually the biggest of several limitations which impact whether a loan would be profitable to make for a bank or not so i don't entirely disagree but this is a legislative control, there's no "economic terms" here because in general no school of economics understands this or has anything to say about this control which you correctly point out exists and is central to loan decision making. People can argue about the degree of centrality because it's not the only factor so let me put it this way: it's central in a way which any notion of "fractional reserve" is simply not.

[eru]

Your link barely says anything about private sector money creation and doesn't contradict what I said. I'm confused.

Your view of fractional reserve banking is rather.. unorthodox. Pray, tell me, why do banks bother with deposits, then?

[CraigJPerry]

>> barely says anything about private sector money creation

It opens with the words "Money is created in the Canadian economy in two main ways: through private commercial bank loans..."

the introduction continues "... It also discusses how private commercial banks create money..."

And then it goes on to do exactly that in detail. I'm struggling to understand why you wrote that.

>> Your view of fractional reserve banking is rather.. unorthodox

Unorthodox is not the word to describe what has at this point been published by most of the central banks in western economies with a sovereign currency. From the Fed to the Canadian central bank, from the Bank of England to the Bundesbank and so on.

We're unfortunately living in a Copernican moment. We now better understand how money works but we're not permitted to say the earth orbits the sun just yet.

It's utterly ludicrous that the idea of Fractional Reserve banking is propagated in today's world as having any relevance to how banking works in these economies.

>> why do banks bother with deposits, then

Very simply - cost of funds