KingofthePaupers: Stephen Colbert duped by Niall Ferguson on piggy banking

Niall Ferguson's Ascent of Money says banks lend out savers' funds like piggy banks. NOT.

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[kingofthepaupers]

"If the ratio is greater than 1 and the numerator (reserves) is greater than the denominator (total deposits), then the reserve ratio is greater than 100%."

Jct: We're still waiting to have that translated into English using poker chips as a model. Not much luck, hunh?

Jct: Now try to say that again with poker chips instead of money.

[kingofthepaupers]

@maximum411 "The arithmetic effect of gold imports is, therefore, to raise the numerator and denominator of the deposit-reserve ratio by the same absolute amount.

Jct: Sure, now include some golden poker chips too as you rephrase it to fit a simple physical model.

[kingofthepaupers]

@maximum411 If the ratio is greater than 1 and the numerator (reserves) is greater than the denominator (total deposits), then the reserve ratio is greater than 100%.

Jct: Now try to say that again with poker chips instead of money.

[maximum411]

@kingofthepaupers

If the ratio is greater than 1 and the numerator (reserves) is greater than the denominator (total deposits), then the reserve ratio is greater than 100%.

Q.E.D.

[maximum411]

@kingofthepaupers

I was just doing a paper on economic history and it reminded me of this.

See Milton Friedman: "A Monetary History of the United States, 1867-1960"

in reference to the 1930s: "The arithmetic effect of gold imports is, therefore, to raise the numerator and denominator of the deposit-reserve ratio by the same absolute amount. Since the ratio is greater than one, the numerator is raised by relatively less than the denominator and hence the ratio tends to decline." (page 535)

[kingofthepaupers]

@maximum411 a reserve ratio above 100%, although rare, is very much possible.

Jct: I'll bet you another $20 you can't have a reserve ratio higher than 100%.

[maximum411]

@kingofthepaupers

Actually, a reserve ratio above 100%, although rare, is very much possible. Less than 100% means that the amount being lent out is always greater than the amount kept in deposits. However, if the bank loans out less than the total amount it has in deposits, then the reserve ratio will be greater than 100%.

[kingofthepaupers]

DQ: The amount of money it has in deposits determines how much extra it can loan.

Jct: What's this extra it can loan over deposits on hand if not new money? So you admit they lend out new money but insist they also lend out old savings too. So you admit I'm right but I won't admit you're right to say they also lend out old deposits. That's our $20 bet. So when do the loans come from the tap pipe and when do they come from the reservoir of old savings pipe? Find bankmath for the plumbing flows.

[kingofthepaupers]

DQ: Say the ratio is 100%. Then the bank is loaning out all of its money in deposits.

Jct: No you have that backward. If they have 100 in reserve, then they can't lend any new chips out at all.

DQ: Say the ratio is 10%. Then the bank is loaning out 10 times the amount of money it has in deposits.

Jct: The Voorhis mistake. A deposit of $100 does not permit the next loan to be $1,000. It permits the next loan to be $90, and as it gets deposited back, it multiplies up to the $1,000, not 10x loan

[kingofthepaupers]

maximum411: No, you still have it wrong.

Jct: No, you have it wrong.

M: Say the reserve ratio is 300% (unrealistic in most countries).

Jct : Not just unrealistic, impossible.

M: and can loan out 1/4 of the money it has in deposits.

Jct: That's not how the reserve ratio works. 10% RR lets them create and lend out new 90%, 20% RR creates 80% new loans, 50% RR creates 50%. So a reserve ratio of 75% would allow them to create and lend out a new 25% of new money. But you can't pass 100%!