Monday, September 21, 2009

Something From Nothing

Money doesn't grow on trees, but it can spontaneously come into existence... If you're part of the Federal Reserve System.

Banks lend money not only to their customers, but to each other as well.
When money is deposited into a bank, federal regulation requires the bank to hold a certain amount of that money in reserve, the rest they can invest or loan to other banks.

For the sake of this demonstration, we will say the percentage a bank must keep is 20%. In reality, that number is actually lower.

What happens?

Bank 1 receives $100.
Twenty percent, $20, is held in reserve. The remaining 80%, $80, is loaned to Bank 2.

This continues, and is shown in my following table:

Now, most banks have much more than $100 in their possession, so imagine that number multiplied by 1000 or 10,000.

That's an extra $2,859,300 that doesn't actually exist.

And people wonder what's wrong with our economy...