> There's really no limit on how much [money] banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit.
> What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.
...
> Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
The documentary "Four Horsemen" (link below) goes into these topics at length, especially money creation. Most people's jaws drop when they learn that 97% of all money in the world isn't in paper/coin form but rather 0s and 1s in a database and that it is all willed into existence as debt by a bank.
I don't see any inherent problem in having the sum of all deposits far exceed the actual amount of cash in existence. I do find it odd that the Fed and Congress permit the banks to exert strong control over the total money supply by adjusting how much cash they hold in reserve rather than having the Fed itself control the money supply.
Of course there is an inherent problem with it: it's fraud. Just because it's fraud we are used to doesn't make it any less so.
Demand deposits should be covered via reserves. Loans by banks should be duration-matched to financial instruments offered to the public. Presto, no bank runs and the interest rate is driven by a market expression of societies time preferences.
Economic stimulus is done via government spending, rather than jamming money into an already bloated financial sector. I would favor a universal citizens dividend for this, to minimize corruption.
http://www.theguardian.com/commentisfree/2014/mar/18/truth-m...
> There's really no limit on how much [money] banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit.
> What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow.
...
> Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.