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TheDeath
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posted November 17, 2009 02:52 AM |
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There are $900 available for purchasing, but the bank is betting on that the original depositor will not seek to withdraw (more than $100) of his funds. So there is now $1900.
Unused money = no money. If it bets that the original depositor won't withdraw it, it's equivalent to saying that it's betting the original depositor won't use the money.
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Binabik
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posted November 17, 2009 03:05 AM |
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TD, if I remember right according to that video you linked to:
The depositor deposits 1k (loans it to the bank)
With a 10% reserve, the bank keeps the 1k and loans 10k
I didn't even know the banks did that until I saw that video. I knew it was done at the federal level (in a different manner), but not at the individual bank level. He started going a little fast toward the end, so maybe I misinterpreted him. I don't recall anything like that being mentioned in the banking class I took, but that class was largely on different aspects of banking.
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TheDeath
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posted November 17, 2009 03:14 AM |
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The depositor deposits 1k (loans it to the bank)
With a 10% reserve, the bank keeps the 1k and loans 10k
That part could be wrong (in the video), because in that case there cannot be a bank run -- since the reserve is the deposit.
Actually it's different -- the "deposit" in the video is "reserve" directly from the Treasury Bond. I don't think it's a normal deposit.
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Binabik
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posted November 17, 2009 03:28 AM |
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I'm not sure if it matters where the reserve comes from. They just need to maintain a certain percentage.
But yea, some of what I thought that video said conflicts with my memory of the banking class (which was 25 years ago, but I still remember some of it )
One thing I remember is that banks opperate of a very thin "spread". The spread is the difference between what they pay for the money (interest to the depositor), and what they charge a borrower. The bank spread is similar to grocery stores where there is a very small profit margin on a very high volume of money.
In other words, 1% profit on 1M is the same net profit as 10% on 100K.
If the bank has a thin spread, lending 900 and keeping 100 in reserve makes more sense. If it was 10K loaned with 1K in reserve, the spread would be much larger. Note that in either case the interest they pay the depositor is the same, but the interest recieved from the borrower(s) is much larger in the second case.
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TheDeath
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posted November 17, 2009 03:47 AM |
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The spread is just a service fee, the bank has to get some profit from it. It's no different than the lender paying the bank for its services.
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mvassilev
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posted November 17, 2009 03:56 AM |
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part could be wrong (in the video), because in that case there cannot be a bank run -- since the reserve is the deposit.
Well, yes. Of course. The bank reserve comes from the deposit. It's not like the bank lends out 100% of what is deposited - then you'd be right about bank runs. (Also, what kind of idiot would put their money in the bank, then? )
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Unused money = no money.
No, because the depositor can write cheques from that account, etc.
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TheDeath
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posted November 17, 2009 04:00 AM |
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Well, yes. Of course. The bank reserve comes from the deposit. It's not like the bank lends out 100% of what is deposited - then you'd be right about bank runs. (Also, what kind of idiot would put their money in the bank, then? )
No you don't get me. If the deposit is the entire reserve, then there should be no problem with people demanding their money back. No run on the bank.
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No, because the depositor can write cheques from that account, etc.
Hmm then why are bank runs such a negative scenario? Why use fractional reserve in the first place then? Why use deposits in the first place... why not just write a check for a lend...
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mvassilev
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posted November 17, 2009 04:07 AM |
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Hmm then why are bank runs such a negative scenario?
Because people lose their money because the bank doesn't have enough to pay them all?
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Why use deposits in the first place... why not just write a check for a lend...
Don't quite understand what you mean.
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Binabik
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posted November 17, 2009 04:10 AM |
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This is a case where simplification gets in the way. In the simple scenerio of a single depositor with a checking acount, yes the depositor can write a check for the full amount of the deposit. But in the real non-simplified bank, there are thousands of depositors and the AVERAGE withdraw will be much smaller than the total amount of deposits. In other words, it's unlikely for large numbers of depositors to withdraw large amounts AT THE SAME TIME.
The idea of reserves is based on this. As the number of depositors increases, the likelyhood of them all withdrawing at the same time decreases.
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Binabik
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posted November 17, 2009 04:17 AM |
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Edited by Binabik at 04:21, 17 Nov 2009.
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I forgot to mention the difference between demand deposits and time deposits. A checking or standard savings account is a demand deposit. That means the depositor can "demand" their money at any time by writing a check, going to the bank in person, using an ATM, etc.
A time deposit, such as a CD (Certificate of Deposit) does not give the depositor the right to withdraw their money "on demand". They must wait for it to "mature". So time deposits give the bank money that they can count on to be there for a longer period of time. This decreases their risk. I don't know how this affects the required reserve, but in theory it should decrease it.
The T-Bonds, etc. that were mentioned earlier are also time deposits.
Note that a standard checking account and savings account are the most basic accounts and pay the lowest interest. So they generally have small account balances. People with larger amounts of money will naturally tend to buy CDs or other time deposits which pay a higher interest. So a larger portion of the total bank deposits will be in these instruments.
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TheDeath
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posted November 17, 2009 04:17 AM |
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Because people lose their money because the bank doesn't have enough to pay them all?
You said that the depositor can write a check. This means that reserves are worthless. If not it's the same thing: unused money.
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Don't quite understand what you mean.
When a bank "lends" money to someone, why doesn't the bank write a check to that guy with the given amount? Keeping all the deposits intact?
@Binabik: yes I know but my point is that they rely on that deposited money not being used. (rather the reserves).
To me, such money is excluded from circulation and thus from the economy, since it can only be FULLY used when lends are paid back -- which means, no money was created at all, just transferred.
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Binabik
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posted November 17, 2009 04:28 AM |
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Slow down It's too big to grasp all at once.
Lemme take a quick glance at something I wrote about a week or so ago, but didn't post. Maybe this is a good place to insert it. It's fairly lengthy, but I didn't post because I have an even lengthier post to follow it, but it didn't get finished.
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Binabik
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posted November 17, 2009 04:53 AM |
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[edit - consider this was meant for earlier in the thread when I was talking about corn, eggs, etc]
blah blah edit......I noticed something you've tended to do is take an idea from a specific model and pull it out of the model and try to apply it somewhere else. Something that works within a simplified model doesn't necessarily work outside that model, or it might work differently. The economy and economics are far too big and complex to grasp the entire thing, so it helps to use simplified models, making sure you remember where you are when applying the ideas.
I've been using a bottom up approach and Mvass has mostly been using a top down approach. Also, comparing to games, I've been using a 1st person POV, and Mvass has been using a high birds-eye POV. My models haven't been true 1st person, but I call it that because it's dealing with the economy as we see it. Trading eggs and corn and stuff like that are the kinds of things we deal with in our daily lives, so we're already familiar with them.
That video covered some things from top to bottom. He somewhat bridged the gap between 1st person and 3rd person POV, but it was extremely limited to make very specific points. Btw, I thought he did a pretty good job, at least in the first half. He started moving a little fast toward the end though. Also notice that he used almost the same words I did, that money in the bank is nothing but an accounting entry, in other words just a number.
The point is that you can't always take something from my model and use it in Mvass' model, or in the model from that video. For example one thing I noticed in that video was his remark that if all the government debt were paid off there would be no more money. That's not really true (or at least I hope it hasn't gone that far), but it's true within his model. If you noticed, he started with zero money which is great to make his point, but isn't true outside his model.
I've also been ignoring your questions about inflation and instead focused on a static, balanced micro-economy. I guess it's the way I think myself. Rather than covering too much ground, I prefer a strong understanding of the foundation. Then much of the rest just falls into place. That's why I've been stressing the ideas of a barter economy, with money just being a number to measure it. The economy is too huge and it's so easy to lose our grip on this concept when we "zoom out" from the tiny micro model. I think it's important to keep firmly in mind that "money" is not really a thing in itself, but a measure of value. <===That's one of those things that somewhat breaks down outside the model, but it's still important to think of it that way.
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Binabik
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posted November 17, 2009 04:58 AM |
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Now the reason I posted that (^^^up there^^^) now is because I think it helps to look at the balanced static model. In the case currently being discussed, that means a fixed amount of money, with that money being deposited and loaned back out. In a static economy this can be done indefinitely.
It becomes a separate issue when you ask how does the economy expand? It expands by increased production. But what about the money supply? The way being discussed is ONE way it can be handled.
If nothing is done with the money supply, then the value of money increases as production increases (the same amount of money represents more goods), in other words deflation.
If the money supply increases at a moderate rate to equally reflect the growing economy, you have neither inflation nor deflation. This was the model I used when the total value of products increased from 1000 zonks to 1500 zonks. The economy has grown, but it is still balanced and will it remain static unless something cause it to grow again.
If the money supply increases at a greater rate than production, you have a decreased value of money (the same amount of money buys less goods), in other words inflation.
Most economists have agreed that SLIGHT inflation is desirable. The new money is injected first, then the economic growth follows.
If you inject too much new money, far more than the increase in produciton, then you have hyper inflation and the money can become almost worthless.
Also note that there are other ways for inflation to occur.
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mvassilev
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posted November 17, 2009 04:58 AM |
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You said that the depositor can write a check. This means that reserves are worthless.
? I don't see how this follows.
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Keeping all the deposits intact?
Because it's writing a check out of the deposits.
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del_diablo
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posted November 17, 2009 06:00 PM |
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How a bank works:
1. Its a money storage
2. But it loans out money
3. It may not loan out more money than a certain % of the total money stored(if more, it cannot "deposit"(I think I am using the wrong word here) out to the people who hoard their money there)
4. The bank earns money on 2 things. Loans(insert rate) and fee's(using your credit card?)
5. The people who store their money in the bank get a insert rate for allowing the bank to loan out of their money
Any questions?
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ohforfsake
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posted November 17, 2009 06:06 PM |
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When you pay with checks, cards, etc. (anything not using the standard money such as Bill and Coin), is it then m0 or m1 you transfer, given it goes straight into the account of the other person?
If all transactions were m1, the bank would never get into the "we want our deposits back"-problem, would they? Cause eventhough the money isn't there, banks could write out IOU's, via checks and what not? These IOU's could then be considered as money (means of trade) and be used just like that?
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del_diablo
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posted November 17, 2009 06:29 PM |
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When you pay with checks, cards, etc. (anything not using the standard money such as Bill and Coin), is it then m0 or m1 you transfer, given it goes straight into the account of the other person?
If all transactions were m1, the bank would never get into the "we want our deposits back"-problem, would they? Cause eventhough the money isn't there, banks could write out IOU's, via checks and what not? These IOU's could then be considered as money (means of trade) and be used just like that?
And why are you attempting to make a question of out thin air?
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Empirical measures
Money is used in final settlement of a debt and as a ready store of value. Its different functions are associated with different empirical measures of the money supply. Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.[6] Each measure can be classified by placing it along a spectrum between narrow and broad monetary aggregates. The different types of money are typically classified as Ms. The number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:
M0: Notes and coins (currency) in circulation and in bank vaults.[8] In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.[9]
MB: Equals M0 + reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). MB is referred to as the monetary base or total currency.[10] This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. [11]
M1: M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. [12] Bank reserves are not included in M1.
M2: Equals M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money.[13] M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.[14]
M3: Equals M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.[15] M3 is no longer published or revealed to the public by the US central bank.[16] However, it is estimated by the web site Shadow Government Statistics. [17]
MZM: Money with zero maturity. This measure equals M2 plus all money market funds, minus time deposits. It measures the supply of financial assets redeemable at par on demand.
>Wikipedia
M0 == Coins and notes
M1 != Bank reserves
M1 == What the bank can deposit out to their costumers
There is also M2, M3 and MZM.... I can't make sense out of them. For some reason none of the mentioned is mentioned as "Bank total money hoard", which I find strange(but not unnatural.
So M0 is basically the money in circulation, M1 is how much the bank can deposit out to the withdrawer.
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TheDeath
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posted November 17, 2009 07:24 PM |
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@Binabik: Thanks for detail but it's just one thing that keeps bugging me. Here I'll put emphasis on it:
I mean, the gov can inject money into the economy, fair enough. But my question is...
WHERE does the injected money go?
I mean in who's account, who's hands?
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You said that the depositor can write a check. This means that reserves are worthless.
? I don't see how this follows.
His deposit is still the original amount, in his account, so why keep reserves at all? Just write a check!
For instance, suppose someone deposits $1000 with the bank then lending $900. He doesn't have $100, but $1000 (of course in 'normal' scenarios he can't get $1000 out so it's like the money isn't even there).
But if he can write a check for $1000, why keep the $100 at all? He can write a check for $100 even if there are no reserves, can't he?
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Because it's writing a check out of the deposits.
I thought lending goes to some account, so you can write a check on that as well.
Anyway I'm not interested in M1 at all, since it also includes the non-active money which is worthless as far as economic activity is concerned, so to me that's like no money at all. (i.e deposits)
so M1 would be equal to M0 in my scenario because all the extra money (deposits) isn't used, so it's like it isn't there. I'm talking about money that can be used to buy stuff with when you want.
So lending doesn't really create money at all.
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mvassilev
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posted November 17, 2009 07:31 PM |
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WHERE does the injected money go?
Into the bank reserves.
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if he can write a check for $1000
Ah, I see what you mean. No, he can't write a check for $1000. He can, however, write a check for $100. Considering that people very rarely exhaust their entire accounts - and that banks have many of them - banks avert such a problem.
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I thought lending goes to some account, so you can write a check on that as well.
That's presumed to be somebody else's account - that is, the accounts of people who received the money after the loan was spent.
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