Originally Posted by jragosta
You're leaving out the biggest part of the picture - which really explains things. If Apple has $80B in cash, they could leverage that by using money from the Federal reserve for the loans. So if they loan someone $100,000, to use your example, $10 K of that would come out of Apple's cash and the Fed would loan them the remaining 90%. Again, it's not that simple, but it amounts to leverage - the same kind of leverage that allows you to buy a $200,000 house with only $20,000 down.
Yup, it kinda has to do with leverage.
But as I understand it, Apple doesn't have to get that remaining 90% from the Fed... It doesn't even exist. If they loan someone $100,000, it is the borrower that owes $100,000, hence Apple "having" $100,000 even though they actually only have $10,000.
Common sense tells us that, but wait a minute, the borrower must have $90,000 from somewhere since Apple only really "gave them" $10,000. So perhaps the Fed has printed $90,000 of notes for Apple, and Apple gave $10,000 of their own notes.
This is all a fallacy. As low as 3% of all the money supply in the US exists as physical currency.
Hence, even assuming Apple has $10,000 reserve of the loan in physical notes, the $100,000 loaned to the borrower in reality doesn't even exist as physical cash.
Printed notes are no longer relevant in today's world, they are merely instruments of debt used for extremely minor transactions. Whatever cash we use for day to day use is simply a relic of the past, for the human sensation of the touch of money, and the seeming "quickness" or "security" of exchanging bills and notes instead of credit or debit cards. Think about what makes up most of commerce - credit cards, cars, houses, gadgets, phone bills, salary... Almost all of that in modern economies never even have any physical printed-note basis to them.
With Apple's $100,000 loan, it just created $90,000 out of thin air. Even the $10,000 it has as reserves is an instrument of someone else (another bank usually) that has *promised to pay* Apple $10,000. If Apple's $10,000 is US Dollar Bills then yes, the Fed owes them $10,000. If that money, as it is now, is from various sources, then the Fed may not even be involved at all. Bottom line, the $90,000 that Apple can create out of thin air from a $10,000 reserve does not involve the Fed nor anything at all... It just, creates money by nature of the $100,000 loan being made.
The Fed creates money to start with by depositing say $1 million in a bank. (see the YouTube video above). Because that's how it "seeds" a bank so that that bank can then increase the money supply to about $10 million. That's only the green and blue lines in http://en.wikipedia.org/wiki/File:Co...ney_supply.svg
because by nature of the system that red line increases at a much higher rate.
The banking system is so twisted and inbred once you realise its true nature it is both eye-opening but also truly sickening.http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Money_creation