Most people think that a bank is the safest place to keep their savings. Most people don’t know what banks do with their savings when they are not looking.
How Does Our Banking System Work?
A bank can only loan a percentage (~90%) of the money it has. Consider a simple example in which the bank is free to loan 100% of the money.
Assume a bank has $1,000. Josh gets a $1,000 loan from the bank to buy a used car. He buys the car from Susie for $1,000. Susie deposits the money in the bank.
Let’s assume that Eric also wants to buy a car. Bank loans the $1,000 Susie deposited to Eric. He buys a car from Kelly. Kelly deposits $1,000 in the bank.
The $1,000 which the bank started with has fantastically transmuted to two cars and two savings accounts each with a $1,000 deposit! This is the magic of Fractional Banking upon which our banking system is based.
What do you think would happen if Susie and Kelly try to withdraw their $1,000 from the bank at the same time? Worse, what would happen if either Josh or Eric default?
Our banks rob Peter to pay Paul and hope that Peter doesn’t come looking.
How Safe Are The Banks?
Banks do not need to maintain reserves to back 100% of the deposits in the Fractional Banking system. It is based on the assumption that only a small number of depositors would withdraw their savings at the same time.
Money printed by the Federal Reserve is called Base Money. Banks can legally lend more than Base Money through Fractional Banking. The plot shows US Base Money and the total US Debt over the years. As of 2020 Q1, Base Money was close to $4 Trillion, and close to $77 Trillion had been loaned.
Difference between the Base Money and the total US Debt is larger than it has ever been, and it is increasing exponentially! How long will this dangerous game of musical chairs continue?
P.S. High-paid professionals are always wondering where to invest their savings. They don’t want to take more risks with stocks because they already have a lot of money invested in the stock market. Not knowing where to invest, they end up with lazy money sitting in a bank.
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