According to the latest economic data, the M1 money supply is $1.68 trillion (all currency, all demand deposits). However, the loans outstanding from all commercial banks is just over $10 Trillion. How is this possible when bank loans are made in M1 monetary components?
What am I missing?
The Rev
Lifes a piece of shit, when you look at it
Life's a laugh and death's a joke, it's true
Just remember it's all a show, keep em laughing as you go
Just remember that the last laugh is on you
Loaning from demand deposits isn't the only way to lend money. You can also lend out money you borrowed from another bank ;) (or that another bank demand-deposited in one of your accounts).
EDIT: Look here for an upper limit. Also check the example table a bit above.
Yes, but aren't new demand deposits created every time a loan is made? The bank loans you money, you put it in your bank account. Either that, or you cash the check and put the money in your pocket. Either way, it's part of the M1, isn't it? So is money created by fractional reserve practices. This is what I'm not understanding. If $10 trillion was loaned out, it should be accounted for somewhere, in a bank account or a pocket somewhere.
Or is this a case where $100 is loaned to guy one, who loans it to guy two, who loans it to guy three. You count $300 in loans, but there's only $100 dollars in actual existence? I could see how that would be possible, here, given all the overnight lending between banks, etc. Did I answer my own question?
Banknotes can be reloaned multiple times.
Article about this in mises.org I think, within the last week. Or on lewrockwell.com, check it out. Sorry too busy atm.
The Rev: Or is this a case where $100 is loaned to guy one, who loans it to guy two, who loans it to guy three. You count $300 in loans, but there's only $100 dollars in actual existence? I could see how that would be possible, here, given all the overnight lending between banks, etc. Did I answer my own question?
Yes and yes! :)
Put it another way: even though the money isn't there anymore, everybody thinks and acts like it is. That's why M3 and the sorts are so big in comparison to M1... the "miracles" of fractional-reserve banking.
The only limit to this is given by the minimal reserves rate imposed by law. In case that is zero (AFAIK it does not happen in practice), you can get infinite (as in unbounded) M3 no how big M1 is. Isn't Keynes a god? He practically gave us the means to create perpetual motion economic devices.
banks do not loan deposits. due to legal tender laws banks are allowed to treat checkbook money as currency.
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