[maratd]

> The bank does lose out from this. Individual banks can't simply add millions of dollars to all accounts on a whim, as they won't be able to pay out when customers withdraw / transfer out the cash.

Please explain this.

Almost all significant transactions are electronic now. Nobody withdraws millions of dollars in physical currency.

You're just modifying rows in a database.

All the bank would do is tell the other bank that they have the money now and debit a database row which was fake to begin with?

[joosters]

Here's a better way of explaining this:

Let's say I frequently lend cash to a wide circle of friends, and they lend cash to me too. Because my memory is bad, I have to keep track of things by writing down the debts on a piece of paper, e.g. "Bob owes me $5, I owe Kathy $10" and so on.

In effect, what these hackers have done is to steal my piece of paper while I'm not looking and scribble "I owe Mr hax0r $10" on the bottom of it.

Now, who have they stolen from? Me, of course! I will blindly pay them out $10 should they ask for it. Has Bob lost money? No. Has Kathy lost money? No. Has money magically been created and cost everyone in the world fractions of a cent? No. I am the person who has lost out.

If they stole huge amounts of money from me such that I couldn't make good on my debts to other people, then others will be indirectly affected too. But I am the person who was robbed.

[adastra]

This is the best explanation. What I think a lot of the public doesn't realize is where the money comes from when you walk into a bank and you get a loan from that bank (instead of depositing the money from somewhere else).

They basically are just creating new rows in their databases. Just like the names-on-paper example above, someone just types "+$X,000" into the row that represents the money in your account. And then someone types the equivalent of "adastra owes us $X,000" into a row in another database for their balance sheet. It really is money created out of thin air.

But then I suppose all money is actually IOU's created out of thin air... It's just that for some reason people think it's only the federal government that can create new IOU's.

[bubbleRefuge]

You are right. A bank loan is the borrower's liability and the bank's asset but the deposit resulting from the loan is bank's liability and the owner's asset. This is how most bank deposits come into existence. If all loans were paid off and no new loans were created, there would be a tiny bit of money left.

[PeterisP]

If you transfer a million dollars from bank A to an account in bank B, then the following will happen:

1) Bank A will decrement your [fake] balance; 2) Bank B will increment that account's balance; 3) Bank A will note that they owe 1 million to bank B, and Bank B will not that they deserve 1 million from bank A. They'll settle that balance somehow (that's a bit complex and irrelevant), but the debt now exists. If they don't trust each other that much, then bank B will credit the funds only after bank A has paid them; this often causes a couple days delay in international bank transfers.

Do you now see how they can't "create money" by whatever they do in their databases? To give cash out, banks need cash; to send money somewhere else, they need to give money to that somewhere else or convince that 'somewhere else' to lend them that money.

In essence, altering an account balance is exactly equivalent to faking a document stating "Bank owes me X dollars" so well that the bank (temporarily) believes it - nothing more.

[bubbleRefuge]

Good points. You are very close. However, the federal reserve system and "reserves" are the machinery that enables interbank currency flows. The federal reserve must honor all inter-bank transactions else the system collapses. In a sense they allow overdrafts on reserve accounts forcing the member bank to pay interest in these cases. So, a interbank transaction within the federal reserve system itself will never fail. So yes if you can create a fake deposit, its is funded.

[PeterisP]

I'm not sure on the exact USA fed reserve rules, but typically when the interbank deals are cleared through a centralised system or a national bank (as opposed to mutual correspondent accounts common for international deals), then it does not honor ALL inter-bank transactions - they validate against the bank's capacity to pay (i.e., their deposits at that central bank), the overdrafts are limited and a bankrupt or malicious banking company can't do that much damage.

In any case, if you fake a dollar in Bank A systems, then no matter where and how you withdraw or transfer it, it's a dollar that Bank A loses.

[Retric]

There is a vary specific exception. When a lot of FDIC ensured bank fail at the same time the FED create money out of thin air to pay some of the depositors. However, while you may have added a new line in a database somewhere there is a large audit that takes place and you may or may not get though that audit. Though in most cases when a bank fails it's paid out of FDIC funds which are just another form of insurance.

[bubbleRefuge]

They do allow overdrafts. If a bank is deemed insolvent ( which has to do with bank capital not bank reserves) they are shuttered. So as long as the bank is open for business 'hacked' deposits, etc. , will flow.

[maratd]

> They'll settle that balance somehow (that's a bit complex and irrelevant)

Well, no, that's extremely relevant. How is that debt settled?

I'm quite certain they don't send over a truck full of cash.

If it's just a matter of Bank A telling Bank B to adjust their books and Bank B taking their word for it, then Bank A isn't losing anything. They just created that money out of thin air.

[PeterisP]

Let's suppose I tell you to pay the bartender for a beer and that I'll settle it with you afterwards; and you're taking my word for it - am I not still "losing" the beer money? Have I created the beer money out of thin air?

Is there any difference if I later settle this by giving you cash, write a check, pay with paypal or give you a gold piece? The debt is real, if I gave a binding certificate "I'll owe $100 to you" then I just lost $100.

Bank A isn't simply "telling Bank B to adjust their books", Bank A is telling "please adjust your books to give $X to Y, and for that I'll pay you that amount via method Z", where Z typically is either a clearing house (someone who aggregates the payments and settles the net differences of all the bazillion payments) or a mutual correspondent account. Until they settle, they have a valid, legally binding debt to Bank B.

Trucks full of cash may be involved in settlement, but usually are not since they are very inconvenient and expensive - but if Bank A holds their reserves at a central bank and thus has the right to request it to ship 123 truckloads of cash; then it may transfer part of these reserves to Bank B, so that Bank B will get one of them and Bank A will only be able to request 122 truckloads of cash. Of course, the truckloads of cash are used only as much as needed (say, to fill up ATM's) - but they are real, you can close up your bank, settle all debts, and take all remaining assets out in cash.

[joosters]

> Nobody withdraws millions of dollars in physical currency

I'd suggest that the hackers who manage to alter their balance are exceedingly likely to be the kind of people to try and obtain a physical withdrawal of their wealth!

But even in electronic form, there is some settlement going on behind the scenes. Let's say I hack my bank and give myself $100 billion dollars, then try and transfer this to another bank in a country with a suitable lack of extradition treaties. No receiving bank is going to blindly accept a transfer in of $100 billion. Do you think they just take the other bank's word for it, that they are good for the money?

[jckt]

As you said, inflation occurs when the money supply goes up, and dangerously so if it happens for no good reason (in your example). I suppose it is not in the interest of banks to have hyperinflation either?

[lobster45]

The US government printed hundreds of millions of dollars in physical currency and shipped it to Iraq and Afghanistan.

[lostlogin]

It's the next bit of this story that's most interesting.

[sp332]

Let's say Very Small Bank only has $100 million according to the database. If you create $14 million out of thin air and then move it somewhere else, they decrement their value in the database to $86 million.