Krugman: Spend Now, Save Later

[TheRealMafoo]

Final-Fan said:

TheRealMafoo said:
That's clearer, but still a question about it.

Let's say I am a bank, and I have $100.00. I loan the first guy $90.00, and he I know is 100% good for it, so I loan the next guy the $81....

When you loan money, it goes somewhere. So the first guy pays a bill, and the second guy improves his house. regardless of what the money is for, I have to pay $171 in real money to people, and I only have $100.

Where does the $71 come from, and if I can loan out that much more then I really have, what's the 10% hold back for? I would think it's so I have capital if someone wants to take money out of there account, but I am already in the hole $71 based on your system.

I don't get it.

Well, I believe the THEORY is ignoring turnaround time.  So we're assuming that the money loaned out instantly goes back into the bank, and then the bank instantly loans it out again etc. 

So basically, if I'm right, you're "not getting it" because you're getting hung up on the reality that the idea is ignoring. 

But what your talking about (and what your post above this one is talking about), is circulation. This happens regardless of if I let the bank spend my money, or I spend my money and not save it.

The only thing I can see that helps the economy by putting the money in the bank above stuffing it under my mattress, is the money get's to be utilized while I am not spending it, but that does not explain where the 10X thing comes from.

This is the problem that happened in the Great Depression. Everyone got scared of banks, so they just took there money and saved it themselves, and there was not enough money in circulation.