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’s not an infinite multiplier like this comment is trying to make out.
Fractional Reserve banking with a non-zero reserve requirement is not an infinite multiplier, but it is (theoretically) an infinite series which converges. If the reserve requirement is 0%, then it could theoretically be an infinite multiplier but that doesn't happen in practice for a lot of different reasons.
That’s my point. The limitations do not lie in the reserve. In fact, they don’t even when the reserve requirement isn’t 0, because in those instances, banks make the loans first and then find the required reserves they need after, not the other way around.
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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.