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Re: OT : does 2 really come after 1

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"Even if I borrow money, someone has to have the money in the first place to loan it to me."

"Not necessarily. Actual cash doesn't have to change hands during a 
loan."   

Actual cash doesn't need to change hands, but they do have to have the money somewhere.  Banks must work with reserve ratios as mandated by the government bank regulators.  They can only loan out only a certain percentage of the money they have on deposit.  That is on the theory that people won't want all or even much of their money back at one.  It is a fairly high percentage that they can loan, but they can't loan money they don't have, and they can't loan out all the money they have.  If they want to loan more than they have available, they have to borrow the money from someone else to in turn lend it.  Many credit card centered banking outifts use high rate CDs as a way of attracting deposits to fuel their loan businesses.  As you say, though, cash need not change hands.  When large loans are made, say for buying a house, the buyer likely borrows from a bank and the seller likely deposits the funds the funds in their banks.  If it happens to be the same bank, it is merely a ledger transaction for the bank and no money actually moves.  Even if it isn't the same bank, odds are good that over the many tens of thousands of transactions made in a day the net shift of money between various banks will be minimal.  That is also how checks work.  Not much actual money is shifted to cover them, because the sum of all the check written between various banks is not likely to create an imbalance between them.  If it does, that can be a very serious problem.  

Paul Crocker


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