Michael Foster wrote: > > Arbitrary raising of interest rates by the Fed, for example, reduces > inflation immediately by reducing the demand for borrowing. Since > commercial banks are able to lend about ten times the amount > deposited in them,
Please provide a reference for this. I have as yet not come across any information indicating that commercial banks can lend out more than about 90% of their net asset value -- reserve requirements currently being around 10% -- and you are claiming they can actually lend out about 900% of their net asset value. I will continue looking around but it would save time if you could provide a link to the relevant information. Next step will be dig my old macro book out of the basement and see what they say about the detailed operation of the discount window, which is what this is all about, of course. Note well that the "money multiplier effect", which is about 10x, is quite different from the claim you are making. The "money multiplier" results from the assumption that the 90% which the bank lends out is redeposited in another bank, at which point 90% of the new deposit is again lent out, and so forth. You are claiming, on the other hand, that the original bank can lend out 900% of the original deposit amount, and that once that's deposited in another bank, another 900% can be lent out. The former converges to a multiplier of about 10x. The latter diverges, with the multiplier going to infinity. The consequences to the economy are likely to be very, very different.
