To: grusum who wrote (3693 ) 11/22/2011 1:01:31 PM From: E. Charters Read Replies (1) | Respond to The Fed creates money by injecting credit into the economy. It is a matter of record. The more credit a bank gets from its customers, the more it must loan out, as they make no money on this stuff otherwise. The rules state that a bank must not loan out more than the fractional reserve limit, which is 20 times. IOW, if 100 dollars is deposited they may loan out almost $1,600.00. There is no limit to the number of times the money can be loaned out if the loan money is left on deposit in the same or other bank. As long as the 5% is left in as a liability the 95% can be loaned out as an asset. en.wikipedia.org What the government does is place a phony cheque for bonds in their accounts. It is written on the taxpayer almost literally. The deposited cheque increases assets or credit and MUST be loaned out. The bank has no choice as to leave it on account makes no money. It is the same as any other customer's money. liability whereas the loan it gives out and the reserves are considered assets . Deposits will always be equal to loans plus a bank's reserves, since loans and reserves are created from deposits. This is the basis for a bank's balance sheet .central bank introduces new money into the economy (termed 'expansionary monetary policy ') by purchasing financial assets or lending money to financial institutions. Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking ; this expands the amount of broad money (i.e. cash plus demand deposits ) in the economy so that it is a multiple (known as the money multiplier ) of the amount originally created by the central bank. Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2 . The effect of monetary policy on the money supply is indicated by comparing these measurements on various dates. For example, in the United States, money supply measured as M2 grew from $6407.3bn in January 2005, to $8318.9bn in January 2009.
