@Floyd
Refreshing to hear someone explain how money creation actually works. Loans create deposits!
@Floyd
So you create $$ out of thin air and then make $$ lending this make-believe $$ ?
Brb buying bitcoin.
caleb said:
@Floyd
So you create $$ out of thin air and then make $$ lending this make-believe $$ ?
Brb buying bitcoin.
I’m there with you lol. People seem to believe that dollars are special and backed by something tangible/physical. The reality is that dollars are database entries backed by consumer debt.
@Floyd
Do you personally own BTC?
Yeah! Roughly 5% of my portfolio. I don’t mess with other cryptocurrencies.
@Floyd
What if the credit card processor doesn’t credit a merchant account? I’m in this situation.
@Floyd
Do an AMA as a banker? Or dm me; I’d love to learn more tbh.
Wynne said:
@Floyd
Do an AMA as a banker? Or dm me; I’d love to learn more tbh.
You can glean a lot of interesting (and probably useless, too) info from reading Bits About Money, like the anatomy of CC rewards.
@Finnley
The second article was very interesting to read. Thank you for sharing.
@Floyd
If I understand this correctly, money is only permanently created if it goes to collections/bankruptcy?
kain said:
@Floyd
If I understand this correctly, money is only permanently created if it goes to collections/bankruptcy?
Money is never permanently created. There is liquid money that is in circulation, and there is illiquid money that is not in circulation. Most money (even the dollars in your savings account) were originally lent, which means that they are backed by an equal amount of consumer debt somewhere. Your $10k savings likely correlates to at least $10k in debt somewhere else, potentially much more.
Think about it this way; I get a loan for $10k to buy a used vehicle. I give this $10k to someone and they go deposit it at their institution. Then that institution uses it to buy securities or they loan it right back out. In either situation, my $10k has turned into $20k, with -$10k backing the original transaction to the car seller. In this situation, I have $0, the seller has $10k, and the institution lent it to someone else who also now has $10k. That person deposits it… It can go on for a long time. There used to be a reserve requirement that capped this to roughly 9 iterations. But now that there is no reserve requirement it could theoretically go on forever.
ITT: Money is fake.
@Vann
I’m a Business Systems Analyst primarily supporting credit & debit payments processing & credit card product design. Also heavily involved in developing/designing processes & reporting for managing a ~$1B loan syndicate.
Yes, I ignored interchange in this example but it’s so variable to the processing network and isn’t really useful in highlighting the point I was trying to make. I was really just trying to highlight where the funds come from, how they’re created, and what happens afterwards. To your point though, a lot has changed especially in the last 5 years.
$5 was just an example amount. I’m highlighting that when the original debt is paid, the only monies that remain from our perspective is the interest income (and interchange, but again it’s not specifically related to money movement between issuer and borrower). One could argue that consumers (specifically cash/debit users) do pay interchange fees of credit card users indirectly through increased costs of goods & services.
The issuing bank pays the merchant.
Transactions are just records of money movement; no physical money is exchanged. When you swipe your card, banks lend you the virtual money but they don’t have to take money out of pocket on the spot because banks don’t pay the merchant immediately as well. I think usually they do batches in processing the transactions and deposit them into your account.
Also, say if a person transfers $10k from bank A to B, another person transfers $10k from bank B to A, then at the end of the day they just cancel each other so money exchange won’t happen at the bank level.
American banks and credit unions have a ‘fractional reserve’ of US Dollars, but when you charge $100 that $100 is ‘created’ and ‘increases the money supply.’
A bank has a charter from the government to do this. In America it can be a national bank with a federal charter or a state bank with a state charter.
At least that’s what I remember from business school. I could be wrong. No promises.
@Kaius
There no longer is a reserve requirement as of March 2020 but otherwise everything is the same.
This is fractional reserve banking. The $100 is actually created out of thin air by the bank!
The United States government’s debt is about $35,810,000,000,000.
This money doesn’t actually exist anywhere and will never be fully paid off. But entities will continue to loan them money because they trust the US to cover their minimum debt payments on time, so it’s a business opportunity.
Sound familiar? Credit cards are the same thing. Your credit limit is just the $ amount they’ve decided you’re good for.
Let’s say you have a checking account at Citi. You use a Chase credit card. The processing company uses Capital One. The merchant has a business account at Wells Fargo.
The money will initially be transferred from Chase to Capital One. By the end of the day, it will go to Wells Fargo. When you pay off the purchase, Citi transfers it to Chase.