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A 100% reserve requirement would seem to be likely to collapse the money supply.

The idea is that these reserves are funded by repoing enough good assets at the discount window.

Suppose, for the sake of argument, that the repo haircut is 5%.

Then, in order to cover 100 worth of deposits you have to repo 105 worth of eligible assets.

The bank balance sheet could well consist of an additional 100 worth of debt on the liability side, 20 worth of equity, and 115 worth of other assets, which may or may not be eligible collateral for repos. To wit:

Assets			| Liabilities
======================================
eligible assets 105 + x | debt	   100
other assets	115 - x | deposits 100
			| equity    20
I fail to see why requiring that 105 worth of eligible assets be pledged at the discount window in exchange for 100 in cash would collapse the money supply.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 12:53:58 PM EST
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