r/PeterExplainsTheJoke • u/Comfortable_Cautious • 6h ago
Meme needing explanation what's going on? explain like I'm five
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u/CMDRNoahTruso 5h ago
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u/Fit-Struggle7990 5h ago
I am literally watching this episode as I came across this post. Too meta for me lmao
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u/Forsaken_Emu8112 6h ago
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
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u/Original-Leg8828 6h ago
Depending on local law they can even lend out something like 7-10 times what they actually have
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u/Teripid 5h ago edited 5h ago
Federal reserve requirements existed until 2023 *edit, as someone below pointed out 2020 was when they were set to 0. Now they're set at 0% I believe.
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u/PleaseGreaseTheL 5h ago edited 5h ago
2020*
They were reduced to 0% mandatory reserves in response to covid. EDIT: someone says it was coincidental, I am not able to check, so take this aspect with a grain of salt either way
They haven't come back yet :)
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u/TaxesAreConfusin 5h ago
ah yes so what you're saying is that money is even more imaginary than it has ever been, possibly even more imaginary than when the first stock market crash happened in 1929
looks like we're due for a centennial anniversary of that anyway, might as well celebrate by recreating it
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u/zuzg 5h ago
Gold hits record high of $5,110.50/ounce
Silver hits all-time high of $109.44/ounce
Analysts expect gold prices to climb toward $6,000 this year
Surprised Pikachu face.
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u/ISayBullish 5h ago
Meanwhile the USD saying “this is fine”
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u/soIDONTLIKEANYOFYOU 5h ago
Since the US has more gold reserves than the next 3 countries combined wouldn’t gold prices going up make the dollar stronger?
Sincerely asking cause I have no idea.
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u/Important-Agent2584 5h ago
no because the dollar isn't tied to the gold in any way
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u/GisterMizard 5h ago
That would take too many rubber bands and defeat the purpose of cash being easy to carry around.
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u/elebrin 5h ago
Not really. The dollar isn't officially backed by gold and hasn't been for some time.
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u/goatslovetofrolic 4h ago
pretty sure at this point the dollar has gone full USA and is only backed by "thoughts and prayers"
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u/AnComApeMC69 5h ago
The United States gold reserves are for international trade. The gold in Ft. Knox, for example, is used in trade not to back our currency. We’ve been off the “gold standard” since the 70’s. Some of it is gold we’re holding for other countries that’s not even ours. But, our money is a fiat currency and it’s based on faith in the economic system of America not collapsing and everyone agreeing it to use it for trade/debts. It’s backed by nothing and hasn’t been for 55 years now.
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u/sparklrebel 4h ago
Ah so that’s why pre-war money in fallout is useless, got it
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u/catsdrooltoo 4h ago
It's been backed by trust me bro. Im not a gold standard type, but the global economy isn't trusting us anymore.
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u/KeppraKid 4h ago
Every form of currency is based on faith and always has been. Coinage made from gold and silver wasn't valuable because gold and silver were magical, it was because people believed they were valuable. What can you, a random person, actually do with gold and silver? Even smiths had limited uses that weren't purely aesthetic. Modern day has more uses but still cannot be used at the volume at which it exists in an efficient way.
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u/Littledevilboi 4h ago
There is more personally owned gold in households across India, than any single other country has in it’s possession (government asset, not including individual ownership)😙 ((grain of salt, saw this the other day and there may be one or two exceptions to this, but not the US😅))
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u/OutsideCommon3679 5h ago
I don’t know about the rest of you, but I really don’t think I’m gonna pass this class.
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u/cleverkid 4h ago
It's pretty easy:
I'll help you out:
In 1910 at Jekyll Island all the Billionaire Oligarchs gathered and cooked up the "Federal Reserve" ( which is neither Federal or a Reserve ) This was done ostensibly to help stabilize the US economy in the wake of the Panic of 1907 by creating a central bank with regional branches.
What it has really done is hand over monetary policy and the ability to print "money" out of thin-air. Now this Federal Reserve prints money, lends it to the US Government ( which is now in debt to the tune of $38.5 trillion ) And the US government continues to borrow and spend like a crack whore... Spreading that money around to their friends and you and I are on the hook for the debt!
It's like your rich friend, talked you into giving him power of attorney over your affairs and is now out there running up credit card debt on your name.. and giving you a pittance of it back.
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u/OutsideCommon3679 4h ago
You had me until “ostensibly.” /s
Thanks for the explanation.
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u/Significant_Monk_251 3h ago
Technical note: they codified and fine-tuned the idea in 1910, but the Bank itself wasn't created until December 1913 after they managed to get the Federal Reserve Act through Congress two days before Christmas. Thus the the conspiracy theories that the Titanic was intentionally sunk in 1912 to kill off a few powerful men who opposed the founding of such a bank.
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u/TheGreenMan13 5h ago
Silver hit a high of $117 around 1PM EST. Dropped to $114 currently (1:25PM EST)
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u/MrWhiskers55 5h ago
Money is basically an abstract concept on assets. It was always worthless we just used it for convenience. Real value has always been in assets be that land, property, bullion, ancient family cursed artifacts. You might have heard that we are going back to feudalism and that’s why. Property is the backbone of society and we are leaning more towards that now.
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u/TaxesAreConfusin 5h ago
Thank god, I've been hoarding soup broth for all these years
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u/AwkwardFriendship317 4h ago
I was just going to say this. Everyone is always saying but gold and I'm over here like nope, can't eat or use that shit when it really REALLY hits the fan.
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u/borkthegee 4h ago
This is larper nonsense. If you're in a SHTF situation where there are no exchanges of value, not even gold, and you're down to bartering for goods then you're in total societal collapse and we're in a 95%+ of all people have died or are dying scenario.
You're going to die a bad death in that scenario, no matter how many bullets you save.
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u/Dapper_Engineer 5h ago
Username checks out?
In all seriousness though, pretty much no back, anywhere, at any point in history has kept 100% of the deposits on hand if they were paying interest on the funds deposited since they need to lend some of that money out to make interest on it, which in turn is paid back to the the dispositor as interest. This was the case even when paper currency was backed by specie. As noted elsewhere, in most countries the amount of money that the bank must keep on hand is usually based upon the total demand deposits (ex., checking accounts) along with some percentage value of the savings deposits.
If a bank is holding 100% of you assets for demand at any time it's called vault (or safety deposit box) and you are paying them for the privilege of using the space.
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u/Agitated_Yak_4924 5h ago
Money has always been imaginary? Its like Santa clause. As long as we all believe/pretend it works. If one person doesn't believe it doesnt matter. If half of us stop, yea kids will know it's fake. But it works and it's a nice thing to have, so why not continue to pretend?
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u/Nichoros_Strategy 5h ago
The money had a Gold Standard in 1929, where it could always be exchanged for a fixed amount of Gold per Dollar if preferred.
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u/exneo002 5h ago
But the fdic insures all deposits up to 250k
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u/PleaseGreaseTheL 5h ago edited 5h ago
Okay look up what happened with the contagion from regional bank failures in silicon Valley a couple years ago. It doesnt mean everyone loses all money, but it does mean people lose some and its a big deal.
Not all banks are fdic insured either, and if a bank goes under, your investment/retirement take a huge hit because the market starts freaking out.
Bank runs and bank failures are always bad for everyone.
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u/exneo002 5h ago
I mean they’re pretty sweet for the buying bank. Jokes aside this is why we passed the act that separates investment banking from retail banking.
It’s not a huge hit and it’s very localized (it would be way worse without insurance).
No one would’ve lost money except the bank shareholders if the depositors hadn’t exceeded 250k in their accounts. There are products that will combine different accounts into one virtual account so you don’t even have to manage this stuff manually.
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u/FakeTradesForDays 5h ago
The FDIC has about $150 billion dollars and can borrow another $100 billion. There's over $18 trillion in US deposits...
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u/Officer_Hops 5h ago
The FDIC is backed by the full faith and credit of the United States. They have access to much more than that. Plus, not everyone is going to pull all of their deposits at once.
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u/Pcc210 5h ago
Good thing we're not actively destroying everyone's faith and credit in the United States!
Wait.....
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u/FakeTradesForDays 5h ago
If there was a banking crisis large enough to empty the $250bn immediately accessible to the FDIC, I imagine the credit capabilities of the US would be in severe peril. It would probably lead to hyperinflation of the US dollar and an event that would make the great depression look like child's play (at least in intensity, likely not in longevity).
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u/Boulange1234 5h ago
How do I become a bank? Asking for 400 million friends.
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u/reichrunner 5h ago
Have lots of money available to loan out. Start loaning the money. Start accepting deposits. Follow all regulatory requirements.
Usually need around 10 million to start off with at a small local bank.
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u/ZHISHER 5h ago
For a little clarification, they were set to 0 because it was no longer an effective policy making tool after 2008.
The assumption used to be banks would lend every dime they had if you let them, so the Fed set reserve requirements to heat or cool lending. After 2008, banks were so very wounded they found that regardless of how much they dropped it the banks kept ample reserves on hand. As such, they switched their policy to focus more on interbank lending rates vs also regulating how much cash they can lend.
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u/OK_x86 3h ago
That works for a while but memories are short and it's easy for some MBA types to come in and raise revenues by taking on massive risk without adequate collateral. That's a recipe for another crash to trust banks to temper themselves.
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u/ArcticFlamingoDisco 5h ago
https://www.ceicdata.com/en/indicator/united-states/reserve-requirement-ratio
Yep. That's so incredibly stupid. 5-10% doesn't seem like a lot, and it's not, but it can make a big difference in a hurry.
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u/SasparillaTango 5h ago
Now they're set at 0% I believe.
zero as in there are no guardrails?
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u/Mypornnameis_ 4h ago
There are still capital rules and liquidity requirements that keep banks operating safely and with enough money to meet depositor needs for normal and stress conditions.
It's just that there is no longer a calculation saying that needs to be x% of certain classifications of deposit balances to be maintained exclusively in the vault or in a Federal Reserve account.
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u/Giogio455 4h ago edited 4h ago
There's no need to. A bank run is the nail on a coffin, not the cause.
Banks can sell loans anytime they need cash. It's very common. For an investor, a bank run is a good time to get richer as you can buy loans cheaper and manage them for a bigger profit.
Bank runs have caused depressions only because said investors DIDN'T want to buy these loans because they knew the loans were bad/the debtors were defaulting on payments
Reserve requirements are needed only if there's low investor trust.
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u/StrikingBuilder8837 4h ago
Well they are now back to having to hold around 7 to 7.5% of capital - see US capital adequacy percentage - against risk weighted assets (mortgage loans, current accounts, credit cards, corporate loans, asset finance, investments, etc. adjusted for different risk percentages gives you risk weighted assets). It’s not the Wild West regardless what people say on Reddit. Break the rules of your licence and the banking regulator will force you to sell off your loans to other banks or just shut you down.
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u/DutchTinCan 4h ago
Which is easy. Bear with me.
The bank gets a deposit of $100. They are required to keep 10% on hand.
They lend out $90 to people, they buy stuff. The seller of "stuff" deposits that $90.
The bank now has:
- $190 in deposits payable
- $100 cash (of which they need to keep $19)
They lend the remaining $81. People buy stuff, the seller of stuff puts it in savings.
The bank now has:
- $271 in deposits payable
- $100 cash (the $19 reserve and $81 fresh deposits)
This continues for a bit, until the bank has $1000 in payable deposits and the same $100 in cash.
Somebody can withdraw $50. They'll spend it, and some days later that $50 is deposited again. No biggie.
The problem is if people want to withdraw $200. The bank will have to tell people "no can do", and it'll be bankrupt. It's a bank run.
Now, in real life, this works because of the law of big numbers. A bank has millions of clients, and while some may want to withdraw everything they have, it won't make a dent. The danger is when too many people try to withdraw all their money. Even when a bank is "healthy", it'll be put into distress. That's why calling for a bank run is illegal.
Now, why do we use this "fractional reserve banking"? First off, so we don't need to keep cash equal to everyone's net worth. It's mightily inconvenient.
Second, because now you can extend credit. People can take a loan to buy something they normally cannot afford as a lump sum. Say, a house.
Third; banks need to earn money to finance their operations. So they do business with your money. If they didn't, they'd need a vault to put all your money, and then they'd charge you fees for storage.
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u/midgetyaz 5h ago
This is actually the answer. The banks use your money to loan out. They get the interest of those loans, and you get a tiny percentage of that interest.
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u/athnica 5h ago
Well that is kind of true but also a misconception at the same time. Banks can't lend out anything they don't have.
If you deposit $100, they don't lend out $1000, they lend out part of it, say $90, which may at some point be deposited back into a bank where it can be lent again and it repeats, multiplying the original amount of money.
If banks could lend out anything more than the original $100 directly, the money supply would balloon to infinity very quickly.
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u/Barry_McCockinnerz 5h ago
Correct this is called fractional lending, you deposit $1, they in turn lend out $7-$10
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u/KhabaLox 5h ago edited 2h ago
To fill in the gaps...
With a Reserve Requirement of, for example, 10%,^ the bank can loan out $90 out of 100. The person borrowing the $90 can then turn around and deposit it. The bank can then loan out 90% of the $90, or $81. The person borrowing the $81 can deposit it again, and the bank can loan out 90% of the $81. This process repeats indefinitely.
So with a Reserve Requirement (r) of 10%, in theory the bank can loan out (in essence, creating money) a total of $900. The formula is infinite sum of [(0.9X )*100] from 1 to infinity.
^ I understand that it is currently 0% in the US. Edit: formatting of exponent.
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u/Kitchen-Pass-7493 5h ago
Ehhh there are collateral requirements for loans as well though and most of the money they’re giving out isn’t going back into a bank account. Why would someone borrow money just to put it into an account with an interest rate lower than the one they’re paying to the loan? It’s usually going to buy something. Like a to buy a home or to cover the up-front costs of starting/expanding a business.
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u/mp2146 5h ago
Where do you think the money they use to purchase those things ends up?
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u/__ali1234__ 3h ago
This is reddit: they think it goes to a billionaire who puts it in a big vault like Scrooge McDuck, because that's the average redditor's understanding of economics.
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u/zdfld 5h ago
There's a slight difference. On the books, the bank still lends 1:1 (well slightly less than that). A bank needs $7 in deposits to lend out $7.
However the overall economy benefits from fractional lending which is what leverages a deposit into increased value. That's on a system wide basis though, at an individual bank level, they still need assets, liabilities and capital to balance out.
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u/Mypornnameis_ 4h ago
If by "they" you mean the bank then no, that's not how it works at all. If by "they" you mean the banking system as a whole could theoretically create as much credit as $7 to $10 from that deposit you made then yes.
An individual bank can never lend more money than it has in deposits or borrowings. But when it lends money out, in the long run that ends up as a deposit in someone else's bank account where it can be lent again.
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u/nigelinin 4h ago edited 3h ago
Alot of misinformation in the replies. As a person who used to work in a major banks treasury department (who manage the banks money). Banks do keep strict monitoring on reserves and this is federally mandated. Banks now follow a rule called LCR (Liquidity coverage ratio) which is federally mandated and covered in international guidelines.
Depending on the type of deposits you're supposed to keep between 3-100% of the deposit in reserves of high quality liquid assets (HQLA) like cash, gov't treasuries, etc. You'd keep 3% in reserves for deposits that don't see much turnover like insured retail deposits. Like 20% for commercial deposits. All the way up to 100% for deposits that can disappear in an instant like from another financial institution.
ON TOP of that, you're supposed to keep an additional like 10-30% in Extra reserves.
In general, I think most banks keep about 20% of their assets in reserves. It's not even close to 0%.
ETA: liquidity ratios are tightly monitored and calculated and forecasted daily and there's alot of oversight on this as regulators monitor this closely There are also other ratios that the banks have to follow including Net stable funding ratio (NSFR). These were introduced under Basel III which were international agreed guidelines so this applies worldwide.
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u/Iron_Chic 5h ago
Read up on Silicon Valley Bank for an example of this.
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u/Piratey_Pirate 4h ago
Oh shit I forgot about that whole deal
Edit: omg that was less than 3 years ago. Feels like ages...
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u/BigDaddySteve999 5h ago edited 1h ago
As explained in the documentary, It's a Wonderful Life.
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u/jo10001110101 3h ago
But if the bank has 2 dollar bills left, they can leave them in the safe to have sex overnight.
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u/pan_and_scan 5h ago
Unfortunately, that’s not really how it works. The reason there was a bank run during the great depression is b/c the banks had loaned out the money they didn’t have as cash. Today due to Dodd-Frank, banks have to have reserves on hand to cover this situation, Even though it’s not in hard currency, they have enough capital to cover. But please don’t trust me. This is just how I understand it.
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u/hajjidamus 5h ago
The current reserve requirement is zero. It has been at zero since March 2020. So they don't have to hold anything.
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u/PM_Me_Your_Deviance 5h ago
FWIW, banks generally hold a reserve anyway. BofA reported a reserve of $277b at the end of last year. That's about a 8-10% reserve, as far as some quick googling tells me.
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u/DJCzerny 4h ago
The reserve requirement is zero but SIFIs (pretty much all major banks in the US) are still required to maintain liquidity ratios by Dodd Frank.
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u/DishSignal4871 5h ago
US, Botswana, and Morocco. https://www.ceicdata.com/en/indicator/united-states/reserve-requirement-ratio
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u/magos_with_a_glock 5h ago
There are regulations but the banks still don't have enough money to cover EVERY client withdrawing everything at once.
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u/zdfld 5h ago
In terms of physical cash this is true.
In terms of balance sheet, it's true only in so far that liquidating assets immediately to cover deposits would have significant losses and it can't be done instantly anyways.
But that'd be true of many companies, it's an issue of cash flow.
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u/27Rench27 4h ago
I wonder how a “bank run” would even look today with how digital everything is.
Like could they just limit how much physical cash you can pull out and tell you to use one of your cards because nobody carries enough physical cash to fully cash out everybody at once?
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u/andynator1000 4h ago
You don't have to wonder https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank
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u/window-sil 4h ago
March 2023, there was a bank run: https://en.wikipedia.org/wiki/Collapse_of_Silicon_Valley_Bank
The solution was point a money cannon at the banks and fire it as much as necessary to turn AAA debt into the theoretical long term value it was worth, thus allowing all customers to withdraw all their savings, if they wished.
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u/GravyMcBiscuits 5h ago
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u/BadPunners 4h ago
For a description in video form, from Wendover Productions: https://www.youtube.com/watch?v=8xzINLykprA
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u/joe_shmoe11111 5h ago
Dodd-Frank has been substantially weakened by multiple bills in recent years.
We’re pretty much back to where we started pre-2008 on that front.
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u/FakeTradesForDays 5h ago
Dodd-Frank was written by the banks, for the benefit of the banks. It specifically made it easier for the banks to do irresponsible things and leave the American people holding the bag.
It explicitly put "unsecured loans" at the bottom of the payout ladder in the event of insolvency. "Unsecured loans" is bank language for deposits. Your deposit is an unsecured loan to the bank. If the bank fails, it has no legal responsibility to give you your deposit according to Dodd-Frank.
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u/Character_Dirt159 4h ago
FDIC insures deposits up to $250,000. No one has lost a dollar of FDIC insured deposits since its inception and it is exceedingly rare that even uninsured deposits are not honored even when a bank “fails”. Banks don’t really fail anymore. The FDIC makes a determination that the bank is near failing and takes possession of the bank’s assets and liabilities and sells them off.
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u/someonesmobileacct 5h ago
True as far as Dodd-Frank AFAIK but at the same time FDIC is typically the guarantor of last resort for deposits anyway (at up to 250k per person per bank).
Still can be a risk for businesses however, Silicon Valley bank being a sort of example (but even that mostly got sorted out at the end)
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u/PM_Me_Your_Deviance 5h ago
>If the bank fails, it has no legal responsibility to give you your deposit according to Dodd-Frank.
... no, they absolutely do. It's just at the bottom of the "payout ladder", as you said.
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u/FakeTradesForDays 5h ago
Yeah but these banks are leveraged 20:1 or more against deposits. If they were to fail, depositors would not be getting their money.
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u/aure__entuluva 5h ago
I've heard Steve Eisman (one of the people who shorted the 2008 financial crisis, made famous by the movie the Big Short) say several times that there are still a lot more protections and that he still thinks lack of capital or over-leverage is no where near a problem like it was back then. He's got a podcast/youtube channel. He could be wrong of course, but I tend to think he knows a bit more than me.
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u/studentloandeath 5h ago
Current reserve is 0. They don't have to hold anything. It used to be 9 to 1.
Meaning for every 10 dollars they received from the fed they could loan out 9.
That's not what banks did. If they received 100 dollars they would loan out 900. They could do this purely on paper / digitally.
Now there is no holding requirement making them highly susceptible to bank runs and poor loans. The only exception is the government had proven time and time again they will bail the banks out no matter how financially irresponsible they are. The "too big to fail" financial policy.
Dodd-Frank had been dead and gone since Trumps first term.
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u/Pissbaby9669 4h ago
Incorrect. Reserve requirements are different from capital ratio requirements. Banks cannot just leverage themselves arbitrarily
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u/DustRhino 5h ago
Unless you charged depositors fees to cover all bank operations, it would be impossible to operate a bank that kept 100% of deposits on hand for withdrawal at any arbitrary time.
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u/yeagermeister34 5h ago
"Fun" fact- when I was a kid, I thought that banks had a little cubby with my name on it and every time I deposited money they added it to my cubby. When I told me brother I think he laughed for 10 minutes straight
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u/Alarming_Present_692 5h ago edited 5h ago
I mean... that inflation is largely caused by a money velocity largely dictated to people's ability to borrow money, so if cash actually sat in a vault as opposed to getting circulated back into the economy there'd be way less inflation... that's not to say that a dollar today isn't worth less than a dollar tomorrow & idle cash is an economic loss not dissimilar to the destruction of property. You just seemed to be over looking something & I wanted to help.
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u/Forsaken_Emu8112 5h ago
Yes, if we stifled investment and lending there'd be less inflation, which is why we don't do that. (Target inflation is 2-3%; if you're consistently below this, your country has a problem, and if your currency starts deflating everyone's quality of life is going to start actively decreasing pretty dramatically unless you can get inflation back to a healthy level)
When inflation gets too high, you can raise rates to help bring it back down
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u/aure__entuluva 5h ago
Agree with this, except the target inflation rate is specifically 2%, not 2-3%. 3% is potentially still a bit of a problem.
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u/cgranley 5h ago
I don't know why we haven't adopted this as a protest strategy rather than the boycott day where people just spend the money the day before or the day after and the ones in charge just roll their eyes and laugh a little every time we attempt it
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u/McCasky 4h ago
I had a quick scroll and couldn't see anyone mentioning it, so I'll chime in with some useful information.
There is an international banking regulation known as the "Basel Acord" which was last updated after the 2008 financial crisis (Basel iii)
Banks are meant to have more capital and assets that are able to be quickly liquidated in the event that this happens (overly simplifying it)
There are some good articles if you want to read more in depth about it 🙂
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u/GreatTea3415 3h ago
This is the correct answer, but for more context:
People are advocating for a bank run specifically to pressure the US government to stop killing us.
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u/Elvis5741 6h ago
Banks lend out more money than they have, its no joke it's how the system works
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u/Much_Section_7439 5h ago
That's how debt is generated. wealth is created when that debt is used properly. Otherwise it's just inflating the moneysupply.
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u/Excellent-Practice 5h ago edited 5h ago
Is there really a difference between the two? Wealth generation and inflation are two ways of looking at the economic pie getting bigger
Edit: thanks for the corrections. I learned something today. Diving deeper into the subject it seems the two are often linked, but not necessarily so.
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u/FakeTradesForDays 5h ago
Wealth and inflation are not the same thing at all. Wealth is the actual substance. Inflation is just changing the way you measure that substance.
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u/alannair 5h ago
No. Inflation does not make the pie bigger. Pie stays the same, and the value of cash goes down.
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u/megachonker123 5h ago
The pie turns into multiple pies that when combined have the same nutritional value as the first pie
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u/BreakfastBeneficial4 5h ago
Yeah. Pie stays the same size, but the number inside the pie keeps screaming upward.
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u/Outrageous-Pin-4664 5h ago
Wealth = goods, not money.
Inflation is an increase in the fiat currency not matched by a corresponding increase in the demand for goods.
The purpose of inflation is to enable infinitely increasing amounts of government spending. The government spends the new money at its current value. As the new money circulates, it pushes prices up, losing its value. The government simply creates more.
They don't have to print the money. A lot of it just exists as bookkeeping entries, not as actual currency. What we have isn't so much currency as it is IOUs. When the government collapses, those IOUs will be worthless.
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u/lift_1337 4h ago
Inflation is the increase in the price of goods and services relative to the fiat currency. This can be caused by over printing money, but that's far from the only cause.
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u/Temporary-Ebb3929 3h ago
Small correction: inflation is the increase in money supply/circulation not matched by an increase in the supply of goods. If there was no increase in demand, you wouldn't see an increase in prices because that money would effectively just be going under your mattress rather than circulating.
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u/From_Deep_Space 5h ago
All the above. Money is created when interest is paid back. Money being created creates (or is) inflation.
Idk if its right to say that "wealth" is created since the material good (the house, or car, w/e) isnt any more valuable, it's just that that amount of value is now represented by more dollars than it was before. Hence, inflation.
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u/InspiringMilk 5h ago
Idk what it's called in English. In my language, a central bank can produce money (you know, literally), and commercial banks can create money (by using many financial instruments, but mostly debts). Because the former controls the latter (for example, by regulating their mandatory deposit minimum, or by changing the percentage of loans), commercial banks usually cannot cause inflation unless the central bank lets them.
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u/iamnotaneggman 5h ago
Would not say it’s how wealth is created. It’s how money is created, but not necessarily wealth.
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u/Taco5106 5h ago
Correct, but the term you’re looking for is “central banking” or “modern monetary theory” not capitalism
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u/Coolers777 5h ago
Not necessarily. Capitalism can, and has in the past, functioned under different systems like the gold standard
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u/Fakjbf 4h ago
Even under the gold standard we still used fractional reserve banking, it’s been around for centuries and is part of the basis for why paper currency exists.
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u/Antique_Weekend_372 4h ago
That is not really a good way to think about it. When they make a loan, the create both an asset and a liability that balances. The liability is the money in your bank account, the asset is the money that you owe them. On balance, they have done nothing. Your bank account balance is not actual cash in a vault, it is a promise that they will give you that money if you ask for it. When you deposit money in the bank, they are not holding that money for you, either. You are lending them money. That is why banks pay interest in savings account to you
When you make payments on a loan from your account, they delete the money from both sides of the ledger, effectively “destroying” the money they ”created” when they loaned it to you. The interest is their profit and remains as an asset for them.
People focus on the money creation part and ignore the money destruction part. Eventually banks will reach close to a stable equilibrium as new loans match loans being paid off. How much money they can create total is a function of interest rates, default risk, capital requirements, etc. The higher interest rates are, the less they can lend, and the less money is created.
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u/Shiriru00 3h ago
Yeah people looooove to complain about banks creating money but strangely they never mention that they also destroy money whenever a loan is paid back (it's too bad, you could spin a good conspiracy story about how "banks are DESTROYING your money right now!").
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u/Doriantalus 4h ago
But we can still transfer our money digitally somewhere else. We could theoretically collapse a single Bank at a time if everyone just moved their balances to a competitor. As far as I know, there is nothing preventing a digital bank run.
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u/Upset-Parking-8029 5h ago
Not Scammer ATM here. The Bank doesn't have unlimited money. The way banks get money is by getting either part of money from trade or by giving out money for people to latter give back with extra money. So, quite possibly banks just don't have the needed amount to give to everyone. Some people have 100 of 100 of 100 of 100 of money put in bank. But bank doesn't have that much money on hand, so they can't give money.
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u/swimming_singularity 5h ago
Imagine 31 trillion paper bills floating around. I don't think people realize just how big that number is. You'd have to chop down every tree in the USA and Canada, as well as all the cotton in the hemisphere, to print that many bills.
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u/tubbin1 4h ago
31 trillion dollar bills isn't that much paper, it's just 31 pieces of paper
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u/Sloppy_Steak85 4h ago
I’d like 1 gallon of gas please, do y’all take big bills? I may need change back.
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u/SleetTheFox 2h ago
"Do I look like I have 30,999,999,999,996 one-dollar bills? We're just a gas station; you'll have to go to the Bank of America next door for that kind of cash."
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u/MAGAmobile 5h ago
The banks don't have my $14?
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u/Ludecil 5h ago
If you're under your minimum balance, it sounds like you won't have your $14 very soon.
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u/MC_Queen 5h ago
Ah yes, the old fee scam. Where a bank can legitimately take your money for not having enough money. The poor get poorer and the rich get richer.
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u/FroniusTT1500 6h ago
Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.
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u/ejjsjejsj 5h ago
What I can never grasp is how they actually do that. They just create new money to give someone? Like what account is that coming from?
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u/JadaLovelace 5h ago
From how i understand, the bank simply puts a negative number on their sheets to show how much they lent out.
It’s like virtual particle creation in physics. A virtual particle pair can spontaneously come into existense, one the anti-particle of the other. After a brief moment they collide again and annihilate eachother, leaving net zero particles.
But in the case of banks, one of the particles sucks up another particle (interest) so after annihilation you’re left with more particles than you start with.
Edit: i just realized hawking radiation is a fairly close analog to fractional reserve banking.
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u/deadmanslouching 5h ago
You have a great thought process there. Banking is too complicated, so you thought of something simpler, quantum physics.
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u/Salacious_Rhino 4h ago
I love people like this honestly. Makes me laugh all the time. Reminds me of that episode of silicon valley when Richard is trying to explain how their product doesn't delete their files through a rough analogy "...but what's in your Eggs in the morning?? That's right, electrons."
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u/bienbienbienbienbien 5h ago
They use Capital Adequacy Ratios to determine how much they can lend based on what assets and liabilities they have. The deposit you make to a bank is their liability to you, not really a pile of cash they can lend based on.
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u/raincole 5h ago
There are two situations:
- The central bank creates new money, mostly to buy back government bonds. In this case, they literally create new money (digital ledges, of course, not printing physical bills).
- The banks loan out more than the deposit it has. Well, technically, a bank cannot do that. But practically they can. How? It works like this:
You deposit $100 into Bank A.
Bank A lends $99 to Jim.
Jim deposits the $99 to Bank B.
Bank B lends $98 to Marry.
Marry deposits the $98 to Bank A.
Bank A lends $97 to Casey...
See, while you originally only deposited $100 to Bank A, now Bank A has created $196 (Jim's $99 + Case's $97) of loans.
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u/boofaceleemz 5h ago edited 5h ago
You put 100 in the bank. The bank loans Timmy 50 and Tammy 50, both due back to the bank next week. But you have a car accident and now you want your money back tomorrow, but Timmy and Tammy haven’t paid back their loans yet. That’s a bank run, It’s A Wonderful Life style.
They’re creating new potential money in the economy in that sense, because we started with your 100 dollars cash but now there’s 200 or more floating around. If Timmy and Tammy put their loans into their banks the cycle repeats (that’s the “more” from “200 or more”). But they’re not actually inventing new dollars and coins, it’s just debt and promises and your original cash changing hands while you’re not using it.
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u/TheSixthVisitor 5h ago
Think of it like this: when you make a monthly budget for the future, you assume that the money you're budgeting already exists, right? You fill out your budget sheets assuming that you're going to have those paycheques by a specific date even though, technically, you don't actually have that money yet. Essentially, you're betting on the fact that your job is stable and you won't lose it before that money is paid out to you; even though it's not guaranteed, it's pretty close to a sure thing.
The economy is like that but on a much, much bigger scale. Instead of betting on simply being employed, the banks are betting that companies are still selling things, industries still exist, and money is still circulating through the system and eventually coming back to them. So the money exists "somewhere," it just doesn't physically exist in the bank itself. And since bank notes and currency are regularly being destroyed, lost, forged, printed, etc. there is simply not enough physical money in existence to account for every single dollar being tracked on the planet. Imagine the amount of space, material, manpower, and resources required to track trillions upon trillions of physical dollars.
What we think of money itself isn't actually what's moving around in the economy. The global economy is way too big for that. In reality, the economy is a bunch of weighing scales trying to balance debts and repayments across the planet. The money isn't coming "out of thin air;" it's just a change in balance between multiple parties using the bank as the holding facility and tracking system for that balance. So it's not just coming out of a single account, like in the example you mentioned. It's probably coming out of multiple accounts, maybe hundreds to thousands, all linked in the bank's system.
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u/Detachabl_e 5h ago
I'd just add that deposits up to a certain amount are federally insured. That is, if you had a bank run scenario, the Fed would step in and pay out those deposits in excess of what the bank has on hand. So when you see a bank advertisement they will generally mention "member FDIC" which means your depository accounts are insured up to $250k backed by the full faith and credit of the US Government.
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u/Werewolfdad 4h ago
Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account.
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
If you deposit $100, they can only lend out $100 (unless they borrow other money), subject to risk weighted assets and capital constraints (which further restrict lending)
Fractional reserve banking is one of the most misrepresented topics on Reddit.
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u/RockAtlasCanus 3h ago
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
I’m just here to be pedantic because this is another aspect of banking that gets wildly misconstrued on Reddit: the difference between cash (balance) as an accounting concept and cash as in a physical dollar bill.
Banks barely keep any physical cash on hand in comparison to their balance sheet. Your local branch including the main vault, all the teller drawers/TCRs, and the ATM vault generally has less than $1M in physical currency on hand. Smaller banks even less, closer to like $400k or less. (All depending on how much volume they see, how many tellers, etc). And while there are big centralized currency reserves a bank’s cash reserves ≠ currency reserves.
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u/ExtremlyFastLinoone 5h ago
Fractional reserves. You give the bank 10k, the bank loans out 9k which the person then deposits into the bank, the bank then loans out 8.1k which the person deposits into the bank, and so on and so on, the bank is only required to hold on to 10% of your deposit and they can loan out the rest, and just the first two examples the bank has created 16.1k out of thin air frok the initial 10k deposit. But the bank doesnt actually have that money, its just on paper
Extrapolate to the entire country. Something happens, people panic and want their life savings, enough people do this and the bank has to close, everyone who didnt make it in time freaks out and goes to other banks and they all close this is called a run on the banks. People lose acess to their money suddenly, banks shuts down and the money is gone unless its insured by the goverment. But if this happens to enough banks then the goverment just cant pay out peoples moneys, and thats a depression.
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u/The_Lost_Jedi 5h ago
Yes. And this is why Roosevelt gave us the FDIC, Federal Deposit Insurance Corporation. What that does is insure your bank deposits, up to something like $100k.
This is because a big driver of people making bank runs is when they become afraid that the bank may collapse and their money will be lost, so they go try to take it out before that happens. This becomes a self-fulfilling prophecy, where even if the bank had been perfectly fine, everyone trying to take their money out causes it to collapse.
So, with the FDIC, you and I don't have to worry that our basic bank accounts are in any danger, and thus we don't end up inadvertantly making a run on the bank causing it to collapse.
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u/This_guy_works 4h ago
So what if you have more than 100K?
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u/Bleach984 4h ago
Use multiple banks. Or more likely, you don't have that much liquid cash and instead have assets like real estate, stocks, bonds, etc.
Rich people typically only have a small subset of their money in banks to cover momentary needs (what's called liquidity) -- to cover the time it'd take to sell their assets effectively.
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u/Traditional-Heart351 4h ago
To correct the guy above, it's 250k. From my understanding if you have more they basically create more than 1 account to insure it because its 250k per bank per category. So basically a bank will make more accounts in different categories for you to put your money in, and if you run out of that you get another bank.
Tbf most rich people, even VERY rich people, dont have millions in cash at a bank. They have their millions and billions in stocks, which are not insured at a bank level as far as im aware since you technically own the stock, the brokerage is just facilitating the transaction and keeping track of your transactions for you.
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u/froebull 5h ago
I always think of this, the Bank Run scene from It's a Wonderful Life, when this comes up. I have no idea whether it is an actual good explanation or not, it is just what comes to mind.
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u/BlahBlahILoveToast 5h ago
There's a whole bunch of people in thread explaining why banks don't have enough cash on hand to pay out everyone who has an account.
There are, as far as I can tell, zero people in thread explaining why Artie Fufkin is smug and thinks he's about to trick Kyle Rodebush into teaching himself a really surprising lesson about how the world works, Socrates style. Presumably something about how our economy is all smoke and mirrors, currency and banking is an imaginary concept that only works because we agree to pretend it does, etc. Maybe something something gold standard, Fort Knox is empty, income tax is illegal?
Or maybe it's going the other way, e.g., Wall Street is just Vegas for rich kids, Capitalism is just a pyramid scheme, American Goverment is just three megacorporations in a trenchcoat, etc.
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u/balllzak 4h ago
It's all Libertarian nonsense. I half expect Artie to break into a rant about the age of consent next.
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u/GuidePersonal4501 5h ago
Banks only keep a small percentage of your cash deposits in their “vault”. The rest of your money is loaned out to the banks customers. If everyone wanted their money all at once, the bank would need to have all its loans repaid immediately or it would run out of cash.
I think everyone should be informed about reserve banking. The US federal reserve website has some very good videos about the federal reserve (and the reserve banking system in general).
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u/akatherder 4h ago
Just from a practical standpoint, you usually can't walk into a bank and withdraw $20,000 of your own money in cash without calling ahead. They can give you a cashier's check but they simply don't have access to that much cash. It's in the vault to prevent theft.
Robbing a bank isn't actually that difficult. The issue is that (1) you don't get much money, because a bank manager's job and algorithms do everything they can to limit the amount of accessible cash while still having enough to serve withdrawals. And (2) it's a federal crime with FBI investigating and stiff penalties.
So you would have a bunch of people walking out with cashier's checks. That money gets pulled from your account immediately, but it sits in the bank's central account to back the cashier's checks until you cash it. Where are you going to cash it other than another bank? It will just bounce money around between banks I guess.
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u/Natural_nonalcoholic 5h ago
OP said explain like he’s five.
Hey buddy! You know banks? They don’t really have a biiiiig safe of enough money to give everyone. Okay? So if everyone went to get their money, they don’t have it? Understand? Proud of you 👊
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u/srainey58 5h ago
Lots of great explanations about how the banking system works, but I can’t figure out what Artie’s point/joke is. Is he saying we should destroy the country’s financial system?
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u/SocranX 4h ago
Probably. There are a lot of people online who are like, "The world doesn't work in the simple terms I thought it did which means that society is actually a SCAM controlling you through LIES, but we can fix it by destroying everything which will automatically make it start working in the simple way I thought it did."
But yeah, too many people giving an actual answer and not answering the question of why OOP is saying this.
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u/goat_penis_souffle 4h ago
Like a club DJ teasing a song, homeboy is itching to drop some anti semitic shit
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u/uwexistentialist 3h ago
I'm like 90% sure the next reply would have been about how the banking system is broken and you need to invest your money in Artie's favorite cryptocoin.
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u/Character_Menu6282 4h ago
Artie is discovering the basics of how banks operate and thinks he's stumbled upon a conspiracy and is being smug about it
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u/goat_penis_souffle 4h ago
It’s why I found the GameStop debacle so fascinating. Arcane underpinnings of the US securities market that have been around since the 70s make for great YouTube clickbait. Never in my wildest dreams did I think I’d see direct registration and the inner workings of DTCC become conspiracy fodder
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u/Electronic-Fuel5788 5h ago
This is about fractional reserve banking.
Im short banks will loan out much more money than they actiually have in anticipation that not everybody will ask for it back at the same time.
So if that were to hapown it would colapse the global economy.
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u/LaunchTransient 5h ago edited 4h ago
I used to be against fractional reserve banking, but with time I've come to see that full-reserve banking, while nominally more "secure", is actually much less efficient and may be more of a pain in the ass than fraction reserve banking.
Fractional reserve means you can keep your money with a bank for free, because they can loan out money and make a profit on those loans - full reserve doesn't have the financial headroom to allow that, so charges more fees.
And with Fractional-reserve, so long as at any one time the bank can supply your money, provided its not a bank run, there's no problem and it is functionally identical to Full-res banking from the customer's perspective. And in return it means that getting a loan is substantially easier, which is good for the economy overall.→ More replies (4)4
u/wesdlu 5h ago
this exactly. anyone against fractional reserve banking has not thought through the full implications of full reserve banking. imagine significantly higher fees and no interest on your bank accounts. additionally, there would be significantly less investment in projects that keep the economy growing. and, fractional reserve banks do not rely on deceiving anyone. the way they work is fully available information. i guarantee even if everyone was aware of how checking accounts work at fractional reserve banks everyone would still use them over a checking account at a full reserve bank because the full reserve bank would need to charge insane fees and wouldn’t be able to offer any interest for money deposited in their account.
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u/PlayfulPhotograph335 5h ago
You put 1000 in bank account. Bank put aside 200 and lend 800 to someone to pay a contractor to do some work (the money that must be put aside depend on legislation for each country). After the contractor takes the money you both have 1800. Now contractor deposit 800 in his account. Bank will lend 640 to someone else. In this moment there are three people that own together 2240... and the cycle continues.
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u/CosmicEggEarth 5h ago
Financial illiteracy is going on.
Banks convert financial obligations, they simply register who owes to who. They don't need gold to back it, they don't need to balance obligations, and sometimes banks (or guys in the government) just type in a couple forms and you see numbers go up in your account.
The system is based not on tangible assets you can touch, but it doesn't have to.
This freaks people out.
Because it means the only thing preventing banks from... printing money, essentially is a) the regulations and b) willingness of people to accept the numbers on your screen. When either breaks, you get problems.
The illusion of just world is just that - a delusion.
Our systems, including financial, are not based on karma or merit, they're based on networks of synchronized agreements between men and women.
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The post jokes about that gap - most think banks exist within a framework of physical stock, like grocery stores. If it were so, then fractional banking would mean the bank won't have the stock - having given out more credit than it's ever had debits. But the joke's on the jokers, they'll get their money printed. A banknote is just a token, a database value in-transit. There will be a delay to print that many banknote, it's a logistical problem of paper and ink.
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u/MeringueCorrect4090 5h ago
Bank take money from you, bank invest that money to make more money. You want your money? Don't have it, it's tied up in investments. Here, you can have this guy's money instead. Oh no, everyone wants their money now. We don't have it.
There, I explained like you're 5.
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u/FitPair953 5h ago
The joke is that we have the power to bring down the banking industry whenever we decide to. Unlike banks who charge us for being in debt, they get more money the more debt they have.
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u/Live-Teach7955 4h ago
We could also bring down the real estate industry by setting our own homes on fire and destroy the health care industry by committing suicide
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u/brontosaurusguy 4h ago
We would just be bringing down our own economic system .. why...? Suicide?
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u/insanitybit2 4h ago
> they get more money the more debt they have.
Only if they invest it properly. You're welcome to play the same game - go take out a loan and invest it.
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u/AutomaticDragonfly27 4h ago
Suuuuure....that happened in Argentina 2001 and all the banks bankrupted and disappeared....except it didn't, just people losing their life savings...
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u/TalkersCZ 5h ago
Cash is not something really done anymore.
The salaries, retirement payments etc take together around 300billions in Czech Republic. Per month.
There is 730billions of Czech Koruna cash in circulation. Thats enough to cover something over 2 months of these salaries/retirees/B2B for payment. Yes, they would spend money in companies, but still.
In digital currency (on bank accounts) there is around 8triions.
So there is barely enough cash to cover few months of salaries, let alone all the digital Korunas.
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u/Glittering-Age-9549 5h ago
To put it simple:
Most transactions aren't real money. They are credit, and credit is's debt.
When you put your money in the bank, it lends it to others immediately. It doesn't hold your money, it owes it to you, and the borrower owes it to the bank.
The borrower invests it in turn, or lends it to somebody else. Maybe they buy bonds, and the government owes them money now, or maybe they invest it in stock shares, and the company owes them revenue.
When you buy sonething with your credit card, that's credit too. You can pay with money you still don't have. The bank owes money to the shop, and you owe money to the bank.
It's a long, circular chain of entities passing debt to each other.
Also, when the central banks create new money, only a small amount is paper, most is just data in the form of bonds.
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u/CapinWinky 5h ago
Watch It's a Wonderful Life so you aren't ignorant of the basics of how a bank works like Artie Fufkin
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