Stephen A. Lawrence wrote:
Furthermore, we make an additional assumption: The loan recipients place 100% of the borrowed money back into a bank.
This assumption makes no sense. People who borrow money do not put back in the bank. The bank charges more interest than it pays, so this would be a crazy thing to do. You would lose money. People who borrow money immediately spend it. That is to say, they use it to buy a house or build a factory, or perhaps to pay off another loan, in which case the amount of money on loan from the other bank decreases.
Essentially, people who borrow money immediately give it to other people (or corporations). Those other people may put some fraction of the money back into the bank but they may put it into some other bank, or more likely they will go on spending it at the grocery store or somewhere else. The total fraction of money which happens to be in the bank at any given moment remains about the same.
There is an exception to this rule.Some people borrow money from banks in Japan which pay close to zero interest and charge very little. They put the money in US banks which pay some interest. This worked well for several years but lately the dollar has plummeted against the yen and anyone who has done this lately has lost money.
- Jed
