Does the loaning of money by banks via the fractional reserve system increase inflation?
OK, so see if I have this right. Money comes into existence by banks using the fractional reserve system and loaning out 90% of each individuals deposits. So for instance a $1000 gets deposited and then that bank can loan out $900. And then that $900 is given to someone who deposits it into his bank and his bank can loan out 90% of it and this process continues until the original $1000 deposit has resulted in $9000 in loans.
So am I right that in this example the nation's money supply was increased by $9000?
So if I'm right then this is one way the money supply gets increased or putting it another way the fractional reserve system is one cause of inflation.
Then, of course, when the Fed "prints" money out of thin air it is another cause of inflation. I don't have any doubts on this.
I just want to check if the action of making loans via the fractional reserve system causes inflation.
If I have this right I would also like to know if that means the loans that come from the bonds and other instruments of debt that are sold by the US to investors both foreign and domestic are also increasing the money supply in the US?
So, o' learned ones. Do I have this right or do I have to "hit the books" some more?
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Good FED educational links
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same communist monetary system...
Whether it's toxic ink and paper or bits in a computer, it's the same communist monetary system/ponzi scheme controlled and manipulated by a "two party" fiat dictatorship.
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The Antidote to neoCon Koolaid: www.dvds4delegates.com
"We really do have...a once in a lifetime opportunity to take the Republican Party back to where it was." -Kent Snyder, 1959-2008
----
"...a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people." -John F. Kennedy
Correct
Inflation is defined as an increase in the money supply. So yes, it is the Federal Reserve, the Treasury and the private banking system working in conjunction, in the way you described, to increase the money supply, and therefore inflation.
The reason we had the housing boom was because these banks rushed to create new money to chase the houses. Anyone could get a loan, and many did. All this excess money chasing a fixed number of houses pushed prices up. Prices went up so much that actors in the market decided to build more houses. People borrowed more money from banks to build houses.
But just as money can be printed from thin air, it can go back to thin air. People couldn't pay their mortgages, the assets became worthless to the banks, and banks (like IndyMac) collapsed.
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Actually, it's worse than you think
If the bank gets $1000 in deposits, it can loan out $10,000 at interest, and considers the $1k as the minimum fraction in deposit reserve.
If it only loaned $900 out, from the $1000 that it got in, then it would be loaning money that's on deposit, which wouldn't be fractional.
If the banks only loaned out less than they had, we wouldn't be in this mess.
Its even worse than that
If a bank has $100,000 in deposits, it can loan out $1,000,000. If those loans are secured, such as a morgage loan, then the collateral is considered an asset. In other words, they can loan out $1,000,000 for borrowers to by homes, and then those mortgages are considered an asset on the banks books. So now they have $100,000 in deposits and $1,000,000 in assets. With that $100,000 in deposits, they can lend out ANOTHER $1,000,000 on the original $100,000 deposits. And its never ending...
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