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Originally Posted by unlawflcombatnt
Much of our money supply creation comes from banks when they loan out money. Banks have an almost unlimited ability to create money through loans. They can loan out large multiples of the amount of money they have in "checkable" deposits. And when this "loaned" money is deposited in another bank as a checkable deposit, that bank can create still more money by loaning out multiples of their new checkable deposits. The only limits are how much banks are required to keep in reserve.
unlawflcombatnt
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The economy needs balance between the "means of production" & "means of consumption." |
The multiplier doesn't actually increase "real dollars" but it does add leverage and some risk. "Real dollars" are increased from real economic growth.
If you had a nation of 100 cavemen and they had $10 each iin the bank equalling $1,000 real dollars and the bank had a 25% reserv requirement, the bank could loan $750. If that $750 loan was deposited the bank could then loan $562.5, etc, etc. In this case you still only have $1,000 in circulation and the net worth of the nation of ten cavemen is still $1,000.
On the other hand if one of those cavemen invented the wheel and used a bank loan to build wheels to sell to the other cavemen allowing them to do more work, each dollar would have more and more value (able to exchange each dollar for more goods and services) if "real dollars" remained fixed. However at some point the dollars would become inefficient as an exchange medium unless more dollars were introduced into the system to met the increasing demands for dollars as a means for trade. If the value of a dollar get too high, its value as an exchange medium gets less. This happened to gold and dollars replaced gold as an exchange meduim. Now paper dollars are being replaced by electronic dollars. I think that is why people really don't pay attension to M1 any more.
Inflation as measured by dollars can be manipulated by those who control the supply of dollars, however real inflation (what one good or service is worth compared to another) has nothing to do with dollars and everything to do with relative value. I am more interested in real inflation, i.e. how many hour will I need to work to for food each week? As long as that number goes down each year, I know I am making progress.