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Who: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
Port: Lake Pleasant, AZ
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The Demand for Bank Loans Determines the Amount of Bank Reserves in the System

24 November 2016 | Pago Pago, American Samoa
Kimball Corson
As I have shown, the Fed does not control the amount of bank reserves in the system, but only really controls the Federal Funds Rate (FFR). But think of the FFR as a spigot for reserves in the system. Reduce it and banks can profitably loan more and borrow federal funds to cover those loans, thus increasing reserves and the money supply. Raise it and banks won't and reserves and the money supply will fall as bank loans are repaid and banks need not hold so many reserves.

It is the demand for bank loans at prevailing interest rates and the FFR that determines the amount of bank reserves in the system, not the other way around. Loan demand, at prevailing rates, and the FFR determine the money supply and the reserves required for it. Of course, banks can borrow and lend reserves at the interbank rate, but that doe not materially alter the analysis.

As bank loans are repaid, part of the money supply is destroyed and banks can develop excess reserves, unless both are obviated by replacement new loan volume. The point is loan demand, other things equal, determines reserve levels and the money supply, just as real investment substantially determines savings (to pay off bank loans made to invest).

Most people are confused on these matters because they don't understand monetary theory or how businesses and the banking system operate.
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Vessel Name: Altaira
Vessel Make/Model: A Fair Weather Mariner 39 is a fast (PHRF 132), heavily ballasted (43%), high-aspect (6:1), stiff, comfortable, offshore performance cruiser by Bob Perry that goes to wind well (30 deg w/ good headway) and is also good up and down the Beaufort scale.
Hailing Port: Lake Pleasant, AZ
Crew: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
About:
Kimball Corson: I am a 75 year old solo sailor, by choice. However, I did take on a personable, but high maintenance female kitten, now a full grown cat, named KiKiPoo when she is sweet, or KatKatPo after she has just killed something like a bird or bat. [...]
Extra:
Although I was a lawyer and practiced law with good success for thirty years, creating significant new law, I never really believed in the law, the politics of law or in the over reaching self-interest of most lawyers I met. Too much exposure to Nietzsche and other good and seriously thoughtful [...]
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Profile

Who: Kimball Corson. Text and Photos not disclaimed or that are obviously not mine are copyright (c) Kimball Corson 2004-2016
Port: Lake Pleasant, AZ