Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
This diray strating as an answer to a question of mine, I have a follow-up.

My question was:

But how is this related to the story of the wheel of loans and deposits that Migeru quoted?

So if we view this in the same terms as the wheel of loans and deposits I think it looks something like this:

Bob needs 10 units of currency to invest.

His plan is sound and he has 2 units of his own (thus reaching the margin of 20%) so the bank creates another 8 units for him.

Now the bank needs to cover this with central bank money to meet the reserve requirement (say 10%) so they borrow 0.8 from the central bank (Or does the interbank market mean they borrow it from other banks? Does it matter?).

Now if Bob pays his money to someone who deposits them somewhere else then the bank in question (another bank, or a keeps it in a moneybin), then the bank needs to borrow another 7.2 units. This can be achieved from the interbank market or from deposits.

So the point of deposits is to offset further loans from the interbank market? And if there is excess it can be loaned to other banks via the interbank market?

That covers most of the money, except the 2 units Bob had to have in order to enable the creation of the rest. That had to come from government deficit spending right?

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by A swedish kind of death on Fri May 20th, 2011 at 07:20:04 AM EST

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