Jed Rothwell wrote: > Stephen A. Lawrence wrote: > >> 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. > > Yes, but the total amount in different banks does not change. The first > bank now has less to lend, and the second has more. Overall > creditworthiness does not increase, so the fellow who borrowed the money > in the first place is not free to borrow more, from the second bank, let > us say. > > My point is that people cannot borrow and bank the same money over and > over again, kiting up the total. Everyone has a credit limit.
Yes, you're right, of course, on all points. The "money multiplier" as I described it is a first-year economics concept, taught in introductory macro classes, and it's based on an *extremely* simplistic view of how things work. It's useful for illustrating the point that the money supply isn't "fixed" even for a country on the gold standard, but it's not good for making quantitative predictions. In the real world there is indeed a "multiplier" effect but determining its value is a lot harder than just plugging the current reserve requirement into the formula 1/(1-a). The real world is far messier than any simple pedagogical model of it. Real macroeconomic models used by professional economists tend to be huge, fiendishly complicated, and ... nonetheless very inaccurate. > > Of course there are bubbles in which these rules no longer apply . . . > for a while. The Atlanta Journal recently reported on a couple in > Atlanta who make ~$30,000 a year who managed to purchase three or four > houses worth $800,000 in total, on paper. They called these > "investments" plus one was for the wife's mother. This is a "greater > fool" bubble. Obviously the houses are not worth $800,000 now. > > (Actually, in the old days when they did not electronically monitor > these things, con men /could/ "kite" money from one bank to another, > briefly. "Kiting" means you write checks to a series of banks from one > to the other around in a circle. This worked because there was a delay > in verification and they would credit the account with nonexistent funds > for a few days. There used to be several variations on this, such as > printing checks with the wrong bank identification number on them so the > computer would send them to the wrong bank and a clerk at the bank would > redirect them to another, and the paper would slide back and forth > through the banking system, in limbo. I have a book describing this and > other methods of computer fraud and bank fraud back in the early days of > computerization in the 1960s.) > > - Jed
