Episode 1 - Banking is Fucking insane

Bryan and Miko talk about how banking makes no sense and how Bitcoin might impact the global financial system.

Banking myths

Myth number one: Banks lend out depositors' money as loans. False. Banks lend against depositors money. Each new loan actually creates the money that is loaned with an entry in an electronic ledger.

Myth number two: Banks have to keep 10% of each one dollar (Reserve Ratio) of deposits and this constrains how many loans the bank can make. Due to the reserve ratio, the amount of new money created by bank deposits can be calculated with the Money Multiplier.

No longer true. See the New York Fed's article on why reserve requirements are no longer binding

Myth number 3: national savings == national investment

Not really. In part because the Leverage Ratio is so large and because market forces actually decide where money is invested

Myth number 4: The U.S. dollar is backed by the gold in Fort Knox.

Not since 1971 when Nixon closed the Gold Window

Given that we have debunked these myths, we need to answer some glaring questions

  1. Why do banks take deposits?
  2. Why do banks pay interest our deposit accounts when they don't actually lend out our money? 3.. What constrains how much money banks can create?
  3. Do new loans increase a bank's capital and thus its ability to yet make even more loans?
  4. How does the Fed keep interest rates low and are there risks to keeping interests rates low? (hint: quantitative easing)
  5. What happens when I transfer money in my account to another bank? What happens when I transfer money from a U.S. bank to one not in the United States?

If/when will the U.S. devalue its currency and how?

Miko thinks not but this entirely depends on the trade relationship between the U.S. and China.

Where do cryptocurrencies fit into this?

Many people in the Bitcoin community believe that Bitcoin will eventually supplant the U.S. dollar as the world's reserve currency. They think of Bitcoin as a better Gold Standard

Summing up

How the banking system actually works defies our intuitions about it. Banking in our modern world really is fucking insane.

Picks

Bryan