Comment: What is the difference between you having a bank account

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What is the difference between you having a bank account

with a commercial bank or your credit union having a bank account with a commercial bank. The answer is no difference. The commercial bank still has the same reserves and the same ability to create new money out of thin air and loan it out at interest. If you move your money from a commercial bank to a credit union all you have done is make it easier for your credit union to create new money and more difficult for your former commercial bank to create new money.

You are also incorrect in thinking that credit union don't create money out of thin air also. They operate on the fractional reserve system too. They don't loan out your money to other customers; what they loan out is new checking account balances they create out of thin air, and they use their reserves to meet demands for clearing any checks drawn against the checking account balances.

I think it is huge misunderstand that bank reserves come from customer deposits. If you look at individual banks this is true since if you move your money from bank A to bank B it has the effect of reducing reserves at bank A and increasing them at bank B, but if you look at the system as a whole, bank reserves have not changed by any check that you might write. For the system as a whole, reserve increased come from operations of the federal reserve bank when they buy government bonds (either new ones or existing ones) or when they make loans to commercial banks, both of which increase the balances in checking accounts that commercial banks have with the Federal Reserve Bank.

What exactly are bank reserves? The Federal Reserve Notes in a commercial bank's vault are part of its reserves. They hold these as a reserve to meet demands from customers when the customers "cash a check". But the biggest part of bank reserves are the checking account balances they have at the Federal Reserve Bank. They have these checking accounts as reserves to meet the demands for clearing of checks drawn on them by their customers that are deposited in other commercial banks. Essentially bank reserves in the US banking system are the liabilities on the books of the Federal Reserve Bank that are owed to commercial banks. These liabilities are "Federal Reserve Notes" and checking account balance owned by commercial banks (look at liability section of the Federal Reserve Bank's balance sheet).

So anything that increases the total of the commercial banks' balances in checking accounts at the federal reserve bank also increases bank reserves. Quit thinking that the banking system gets its reserves from customers. It gets them from expansion of the Federal Reserve Bank's balance sheet.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.