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Your average capitalism enjoyer (lemmy.ml)
submitted 4 months ago by to c/politicalmemes@lemmy.ca
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[–] 1 point 4 months ago (2 children)

Yeah money actually does disappear. Banks don’t need to hold all of their deposits in reserves, they can lend them out. So 1 real dollar can act as multiples of that in the economy by people depositing and loaning it out in succession. This only works if there is confidence that borrowers can pay back their loans. When that confidence breaks down, as we saw in 2009, then businesses are unable to borrow for payroll and other expenses and the whole economy contracts. You can then try to print money to stimulate the economy, but that will lead to inflation.

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  • [–] 1 point 4 months ago (1 child)

    This is sometimes called fountain pen money and it usually not disappears money but is how new money is created.

    Banks can create new money with a proverbial stroke of a pen, lend it out and when the loan is paid destroy it again.

    The bank of England has a pretty honest flyer about it.

    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

    A quote specifically about this misconception:

    When households choose to save more money in bank accounts, those deposits come simply at th expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.

    The total absurdity of this situation, is that its very common for such loan to be paid off with a new loan, which is called “refinancing”

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  • [–] 1 point 4 months ago

    Yeah but it isn’t something new. When you lend friends or family money, you still count that as your money and expect it to be paid back (whether with interest or not). But the person you loaned that money to also counts it as their money and spends it as needed. Ideally, the borrower is able to make better use of it than the lender, and the arrangement leads to a net positive for both parties.

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