Fractional reserve banking india - Need Advice.

naveen_reloaded

>
[OP]
Regulars
Sep 2, 2007
1,767
109
I heard of FRB , from the concept i got is you can keep on multiplying the money by borrowing and depositing in another bank . I cant able to find anything about FRB in RBI site. Anyone can explain to me ?
 

kickass

Super Adm1n
Regulars
Oct 3, 2011
1,470
231
Mumbai
FRB is the way the entire banking system in the world works. a bank has to only keep a percentage of deposits with it at any given time eg say if u deposit 100rs in a bank then the bank keeps ur 100 and can now lend out 1000 rs to any1 assuming the bank has to maintain a reserve of 10%. when a borrower comes along all the bank does is create a ledger entry of 1000 shown as credit to xyz. on top of that they charge u interest on that amount that si created from thin air!. this entire scheme is based on the fact that at any given time all the people who have deposits in that bank won't come to ask for their money !!. it they do then u have a "bank run" and default by the bank. this is basically what u wud call as legal counterfeiting. if u and me did this we wud be in jail but nobody touches these bloody bankers. this is what leads to huge money supply in the system and thus inflation. that is why rbi keeps on increasing the reserve ratio to force the banks to keep more reserves and thus reduce the money supply.
 

naveen_reloaded

>
[OP]
Regulars
Sep 2, 2007
1,767
109
1.) I saw videos from khan academy , and I am little confused . It says , it causes deflation , as we usually think this icrease causes the inflation.He goes to say that the amount increase decreases the value of the currency , thus deflation , against the popular belief of , it causes inflation2.) Can we go to a bank and invest X amount and ask them take it as FRB acc , and lend us 9X the amount ? like they do ?3.) also how is it "creating money out of thin air ?" , actually i am little confused. when say 10 Rs is now equal 100 Rs , in real case , IIC , its the gold which is the base and upon which money is issued. So literally when say a 10 Rs wirth gold is base and given 1000 Rs Currency , it literally means that now the 10 rs worth gold = 0.001 RS right ?
 


manu1991

Ancient Philospher
Regulars
Dec 9, 2006
7,331
1,425
Delhi
1) When the central bank increases the reserve rate, banks have to keep a higher proportion of their deposits as reserves. So the money supply reduces, when the supply of any commodity goes down, its price increases, in this case, the interest rate increases. Vice Versa for a decrease. As the central bank prints more and more money, the "value" of that money goes down.

2) I don't think you understand. Fractional reserve banking is a system by which banks work. it is not a type of account. Banks operate on the principle of Law of large numbers - Wikipedia, the free encyclopedia ie everyone will not want to withdraw money at the same time.

Taking the example that kickass quoted, if the reserve ratio is 10% and for simplicity there is only one bank in the country, and say someone deposits 100 Rs. in a bank, the bank is OBLIGATED to have 10Rs. either as cash or government bonds etc. as reserves with the central bank(CRR and SLR; no need to get into the details). If it wants, it can keep the entire 100Rs. but there is no incentive to do so. So the bank lends the rest of the 90 Rs, this 90 Rupees is ultimately paid to someone(say you take a loan and give it to a car company) who again deposits it in that bank. The bank now has deposits worth 190Rs in total so it has to keep 19Rs. as deposits and can lend 81Rs out and this process continues. If you are familiar with infinite geometric progressions, this would be one of the form : initial money*(1-reserve ratio) + initial money*(1-reserve ratio)^2 ..... which would add up to initial money * 1/reserve ratio which is 100* 1/0.1 = 1000 in our case. So the banks were able to "create" 1000 Rupees out of 100 Rupees. By creation, it doesn't mean that they printed money, these are just ledger entries. If all depositors in the process were to demand their money back simultaneously, the bank WOULD NOT have money to pay them back, but in an economy with millions of depositors, this is statistically impossible to happen.

I think this should answer 3 as well. Gold is no longer used a base for currency. Its all fiat money now: Fiat money - Wikipedia, the free encyclopedia

Earlier, the gold standard was used as currency but after the Bretton Woods conference, the US dollar was pegged against gold and all other countries were asked to peg their currencies against the dollar with the promise that they could redeem that for gold any time. However, in 1971 this gold convertibility was dropped (Nixon Shock).
 

kickass

Super Adm1n
Regulars
Oct 3, 2011
1,470
231
Mumbai
1) deflation is a part of the cycle that causes inflation. when inflation shoots high the central banks take steps to control it via reigning the extra liquidity in the system. the removal of the extra money creates scarcity, slows the economy, etc etc. when it goes beyond a certain point the economy starts contracting , defaults happen, the excess supply gets destroyed/ reigned in. in a contraction ppl & business start cutting down on spending/production creating a cycle which feeds itself. the entire process is like a sine wave. the zero line represents balance(which is rarely achieved). abv zero assume it as inflationary. once an inflationary cycle is done we tend to go to the other side(deflation) only if it is controlled. uncontrolled inflation causes hyper inflation. uncontrolled deflation cud lead to depression.2)u don't have to tell them to use frb to lend u money. if u apply for a loan they will give u one(based on ur creditworthiness of course)3) the gold standard was used way back in early 1900's. when entire money supply was backed by gold. back then the money was actually worth it . now its just expensive toilet paper. it has no worth. the usa went off the gold standard in early part of this century. since then dollar has lost 98% of the value with gold. only stupid ppl believe in the value of the paper money. it has value now only till ppl have confidence in it. this is why a point will come in the near future when paper will lose all the confidence , then u shall see where gold stands coz unlike paper money gold retains value. u cannot create it from thin air. this is the reason why the swiss franc is so strong. it is backed by gold(partially)- which is better than nothing.it is excatly why they moved from gold standard. so they cud implement frb in full force. previously u needed that much gold backing which was proving difficult. now u don't have to bother. just print n print till the entire pyramid collapses one day.moral of the story- ur wallet and net worth is mere wads of toilet paper. :pwant real wealth?? redeem ur toilet paper for gold !
 

naveen_reloaded

>
[OP]
Regulars
Sep 2, 2007
1,767
109
But how can such a pyramid scheme like system be allowed ? I mean the expotential ratio of this will only lead to cycle of inflation and deflation and all th extra money pumpeed out into the system will result in more debt as people during deflation cant pay them back , which will lead to seizure of said persons property .. etc. How is it controlled ? isnt there a better system ?
 


S

sTrOnTiaBOnd

Watch these 3 documentaries to know about CRR and other things[video=youtube;Dc3sKwwAaCU]https://www.youtube.com/watch?v=Dc3sKwwAaCU[/video][video=youtube;JXt1cayx0hs]https://www.youtube.com/watch?v=JXt1cayx0hs[/video][video=youtube;7qIhDdST27g]https://www.youtube.com/watch?v=7qIhDdST27g[/video]
 

kickass

Super Adm1n
Regulars
Oct 3, 2011
1,470
231
Mumbai
But how can such a pyramid scheme like system be allowed ? I mean the exponential ratio of this will only lead to cycle of inflation and deflation and all the extra money pumped out into the system will result in more debt as people during deflation cant pay them back , which will lead to seizure of said persons property .. etc.

How is it controlled ? isnt there a better system ?
there is no control and that is what has lead to the current situation where entire countries are going under ! this fraud system gained speed in the last couple of decades. the end game is pretty much near now. its quite obvious it cannot continue forever.
its called keynesian economics. the economists think they can control this monster by tweaking n messing with the money supply. since 2008 they have realized how wrong they and their keynesian crap is.
 

naveen_reloaded

>
[OP]
Regulars
Sep 2, 2007
1,767
109
there is no control and that is what has lead to the current situation where entire countries are going under ! this fraud system gained speed in the last couple of decades. the end game is pretty much near now. its quite obvious it cannot continue forever.
its called keynesian economics. the economists think they can control this monster by tweaking n messing with the money supply. since 2008 they have realized how wrong they and their keynesian crap is.

So we will go back to gold standard ?

Actually looking the way how U.S cunningly moved from gold standard to dollar , is amazing . Thus they have high power to manipulate the economy and making everyone depend on dollar. I hope i am stating it correct