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(Or does the interbank market mean they borrow it from other banks?


Does it matter?).


In the final analysis, the additional liquidity comes from the CB, since the CB is actively preventing the interbank rate from rising.

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?

From the point of view of the receiving bank, yes.

And if there is excess it can be loaned to other banks via the interbank market?

Yes. Typically to the bank the money is taken out of, because it's the one that'll need it.

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?

Either that or from Bob accumulating real capital that he can post as collateral. If you build a house yourself (and pay the appropriate tax on it), nothing in principle prevents you from taking out a mortgage on it.

But for all practical purposes, yes, government spending precedes investment, which precedes capital accumulation in a modern industrial society.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 20th, 2011 at 08:39:17 AM EST
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