The Interest Rate

[MMMark]

Thurs. 10/04/08 15:53 EDT
.post #48

@Smiling Dave

2. The problem with FRB exists even if the bank gave no interest at all to the man in the street. They take his money and lend it to Bill Gates for three years, at the same time promising to give it back to the man in the street any time he wants it. Which of course they cannot do, since they lent it all to Gates.

I think this is wrong.

When the Man On The Street demands his money, the FR Bank need only borrow money from the Fed to satisfy MOTS’s demand (or, more correctly, enough money to replenish their reserve requirement for Gates’s loan.) The Fed happily creates the new money, and it is only at this point that Fractional Reserve Banking becomes inflationary.

Edit:

Also, it is not true that “…they lent it all to Gates.”

Assuming a reserve ratio of 10%, then, at most, they lent 90% of it to Gates, and kept 10%.