If money is in a bank it is being redistributed throughout the economy at 1 / the fractional reserve ratio. So $200 billion in their bank account could end up creating $2 trillion in additional money supply in the economy, originating from loans.
And when the recipients of those $2 trillion put that money into bank accounts, we're creating another $20 trillion in additional money supply. I sure hope they end up in bank accounts as well, so we can create another $200 trillion.
Hey, see that? I created an infinite money machine! Now that's a good argument for those original $200 billion being super useful when "put to work" by storing them in bank accounts, right?
The formula to derive it is an infinite series that already takes that into account, so no, it's just $2 trillion total. This is not considered a controversial economic formula, but maybe you are on to something that could win you a Nobel Prize.
Anyway, since the parent implied that "hoarding cash" (a.k.a. saving) was somehow bad, I wanted to clear that up. They would only be reducing the money supply if they were literally hoarding physical bills in a private vault.
This is really interesting and cleared a lot of things up for me, thanks for that! I always thought that when people told me "Banks create money out of thin air in our monetary system" that would mean they get like $100 dollars from someone in a savings account, which then permits them to lend out a multiple of that, say $900, in "new money" to other people, as long as they can support the liquidity requirement of 10% in this example by having enough not-self-created cash for that at hand. I always wondered what would prevent people from taking those loans, sticking them into accounts at different banks, which then would be able to use that liquidity to again create a multiple of new money, effectively resulting in a system that constantly increases the total money supply. But then I took a look at what appears to be happening in recent history, found a constantly increasing money supply to actually exist in the real world and didn't wonder that much anymore, because of course that would happen in such a brain-dead let-banks-create-money-out-of-thin-air system, so I never happened to challenge my assumption as to how this money creation process actually works.
So the actual trick is not that banks lend out more money than they have previously gotten as deposits, but that the fraction they lend out is eventually stored at different banks, while the original deposits that allowed for these loans to be created still continue to exist at the first bank and thus the loans practically are a duplicate of these deposits, hence "money was created out of thin air". As long as the banks all manage to keep the fraction of reserves above the pre-set limit, this indeed guarantees a maximum total money supply not to be exceeded.
The link above is about economic models for analyzing economic effects. For any actual commercial bank there are very real limits to how much credit they can extend. The models discussed simplify analysis and do not really represent anything particularly meaningful about operation of any particular real world bank.
"To avoid misunderstandings, while FMC models reflect the fact that banks face no technical limits to expanding their balance sheets instantaneously and by large amounts, they also reflect the fact that banks face economic limits. However, the latter do not include physical limits such as the availability of sufficient savings. Rather, the most important limits are their own and their customers’ potentially volatile expectations regarding future profitability and solvency"
Again it's a model to evaluate economic effects and does not represent how any particular commercial bank is operating. It does not account for actual legal frameworks banks are operating under. It's useful as a tool to study the system as a whole same way as some fluid dynamics model is not concerned with each individual molecule.
I could be wrong (I'm not a finance guy) but this isn't my understanding of how fractional reserve banking works.
If Apple deposits $200 billion and the ratio is 1/10, then the bank can loan out $180 billion of that 200; it must keep $20 billion in reserve - 1/10th.
In your scenario, the bank has negative $1.8 trillion in reserve.
You are right as far as you went, but it doesn't stop there. The 180 billion all but has to end up in a bank account somewhere and that bank will then lend out a further 9/10ths of the 180 billion. The limit of that action repeating over and over implies that 1/ratio dollars are created. As a rough theory.
But exactly how it all works out depends on a countries legal and financial implementation details.
Well if they spend or invest the $200 billion, it will end up in someone else’s bank account and will be redistributed throughout the economy from there too.
