How is *new* money put into economy?
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I don't mean how it's printed, but rather how the money is distributed into the economy. There is a lot more money in circulation today, 2007, then in 1950 for example. There are a lot more goods out there, so there needs to be more money to exchange for those goods.
Someone told me it deals with bank loans and interest rates. When the bank loans someone money, they only lend 10% of their money in reserve (bank's money & customer savings accounts), and the other 90% of the loaned money is created out of thin air. Is this true, or partially true?
Seems like the bank makes out, since they are being paid back money that they didn't even borrow out of their own pocket.
How is *new* money put into economy?The USA has millions of people that for some reason or another have to borrow money.
When the "FED" sets the "Prime" lending rate, that means the 22 financial institutions that the FED deals with can borrow money from the FED @ that interest rate.
These 22 institutions hold the "paper" on countless American loans. These paper { I.O U.s} acts as collateral for these institutions to borrow from the FED and exchange their newly created I.O.U. to the FED for the amount they want to borrow.
The borrowed FED money is then fed into the American banking industry in the same way, but at a higher interest rate than prime.
If some of the loans in the country go into default whoever is holding the I.O.U. notes suffers because their asset base diminishes, and they cannot borrow or lend as much. Sometimes this results in another bank buying out the distressed bank.
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