Krugman: Spend Now, Save Later

[mrstickball]

TheRealMafoo said:

Final-Fan said:

I believe my other post makes a relevant argument about the 10X thing.  I don't know whether we're right or wrong, but I think that my post has at least identified the source of befuddlement. 

But you can't loan the same money out twice, at the same time.

When I bought my house and got a loan from the bank, it wasn't just a line in a ledger somewhere. The bank that I got my loan from had to right a real check to a real family that took real money and was gone. The only way that money will ever be see again my by lender, is if I pay it back to them.

Until I do that, they can't lend it again, because they don't have it.

That loan is 5% interest... where is the 10X?

Ah, but thats not the way it always works, Mafoo.

Here is the way I see it:

• Mafoo deposits $100 in the bank of Mrstickball
• The bank of Mrstickball loans out $90 to Final-Fan to buy a house
• Final Fan uses that $90 to buy a house from Akvod
• Akvod puts that $90 in the bank of Richardhurtnik
• The bank of Richardhurtnik then loans out $81 to Rath for a business loan

Ect, ect, ect. On down the line, it then may equal up to, but not always, 1000% of the base deposit value. That is not saying that every dollar you put in the bank will, invariably, equal 1000% every time, but that it has the potential to do that over time.

Now, in such a scenario, it would lend creedence to the inflation rate being very tied into interest rates by the federal reserve. Why? Because banks usually base their lending habits on prime interest rates set by the fed. Therefore, if interest rates are very low, there will be a greater desire by potential borrowers to get the money out of the bank via  a loan, thus increasing the supply of money, and increasing inflation (since inflation is tied to the amount of money available).