Re:Facebook, Libra, and the Long Game
by godson_drafty on Tuesday June 25, 2019 @01:40PM
(#20276753)
Not sure that's correct though. For banks, deposits are liabilities, while assets are loans and cash-on-hand, which they are required to hold fractionally against the total amount of their deposits. In this example, the bank is holding $200, has assets of $800, and liabilities of $1000. Adding it up, you have ($200 + $800) - $1000 == $0.
In reality the bank can take your $1,000 and write loans for $9,000 or more. It’ll have net assets of whatever capital was paid in plus loans minus deposits.
This is why double accounting (?) was created. Too keep track of All the directions money flows. Your example is right, but only half-right (there are at the same time two debts to account for).
A bank just opened and has $0 in the vault You give the bank $1000 The bank lends me $800
Your current bank balance = $1000 My current bank balance = $800 Total money in the bank = $1800
You might say that the money wasn't created because they can't afford to pay out $1800, but if for some reason at this point they need to pay back the $1000 they can ask another bank for a loan, and point to the $800 they're owed as collateral. On top of that, both the $1000 and the $800 would be insured against the failure of the bank by the federal government. This is a simplified example of course, but when the banking system is working normally it's hard to say that they don't make their profits on the creation of money.