Jed Rothwell wrote: > 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.
Spending it doesn't destroy it. Rather, it puts it in someone else's hands, and that organization, having nothing better to do with it, puts it in a bank. Or, they buy a bond -- i.e., lend it to another company -- and that company puts it in a bank. Or, they pay it out as salary to a worker, and that worker puts it in a bank (until the next shopping day). The point is that the assumption, though it sounds stupid, is actually a lot more realistic than one might expect, because we're not *really* assuming the person who borrows the money banks it. Rather, we're assuming the money circulates, possibly through several hands, but *eventually* is placed back in a bank account. How fast it gets back to the bank (*some* bank) has to do with the "velocity of money". > 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 >
