(school) Economics - Money Multiplier
Am I the only one that thinks the money multiplier effect is incredibly stupid and leaves far too many doors open for potential failure?
For those who are unfamiliar with this concept, here it is in lamen's terms:
The government introduces $1M of additional currency into circulation.
This money goes to banks, who then loan it out to other banks, who then loan it out to additional banks.
Now, every bank has to retain a minimum amount due to reserve requirements, but the effect is that this $1M can become $5-10M of claimed currency. That is, to keep it simple, 5-10 different people all claim this $1M as theirs.
Seriously... what the fuck? I learn about more and more counter intuitive concepts studying business and economics, and wonder why the hell nobody can figure out why we managed to get blindsided by the current financial crisis.
For those who are unfamiliar with this concept, here it is in lamen's terms:
The government introduces $1M of additional currency into circulation.
This money goes to banks, who then loan it out to other banks, who then loan it out to additional banks.
Now, every bank has to retain a minimum amount due to reserve requirements, but the effect is that this $1M can become $5-10M of claimed currency. That is, to keep it simple, 5-10 different people all claim this $1M as theirs.
Seriously... what the fuck? I learn about more and more counter intuitive concepts studying business and economics, and wonder why the hell nobody can figure out why we managed to get blindsided by the current financial crisis.