Krugman: Spend Now, Save Later

[TheRealMafoo]

mrstickball said:

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).

You defined circulation. The same thing can happen if I don't use a bank. I could buy a house from Final-Fan with cash, who could in turn buy a house from Akvod with cash, who could in turn invest that cash in Rath's business, all without a bank.

Now I agree that throwing a bank in the mix makes transactions so much easier, as you now have someone who can broker this transfer of money. For example Akvod might not know about Rath's business, so he just puts the money in an interest earning CD, and the bank then in turn loans the money to Rath. The cost of that service, is Akvod makes 2-3% interest on his money, while Rath pays 10% on the loan. The other advantage, is if Rath defaults, Akvod still keeps his money. So there is value in it for both end users.

I can see how banks improve circulation (so because of banks, there can be 10x amount of money being spent/earned), and I can see how there is something earned per dollar from banks, but I still don't know how you can contribute a 10X return on a dollar because you put it in a bank instead of spending it.

Maybe I misunderstood the statement. Are you saying there is a 10X improved total economic gain putting money in a bank vs storing it in your house?

That I agree with, but because banks help improve circulation. I think there is a very small total economic gain however, from putting money in a bank vs investing it yourself on something.