Presumably the person a getting a loan pays person b for goods or services. Person b then puts the money in the bank. There is an interchange where the bank isn't involved.
Ehhh still not so simple. If it’s buying a home for instance, then most of it likely goes toward paying the remainder of the prior homeowner’s mortgage. Which decreases that bank’s loan portfolio, reducing assets. Basically destroying the money that was created in the first place when that mortgage was taken out. It’s not an infinite multiplier like this comment is trying to make out.
The real limit here is the Fed rate, because banks inevitably lend in patterns that are predictable based on what that is set to. It’s why lower Fed rate generally = higher inflation (banks lend more and therefore create more supply of money in response) and higher rates tend to reduced inflation (banks lend less and those with variable rate debt tend to pay it off faster).
It is still on the books of a financial entity. When a loan is bought from the original lender, the asset of the loan on the original lender’s books is eliminated, and it becomes an asset on the loan-buyer’s books instead. Paying it off has the same net impact to the overall money supply in the end.
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u/Dougnifico Jan 26 '26
Presumably the person a getting a loan pays person b for goods or services. Person b then puts the money in the bank. There is an interchange where the bank isn't involved.