What if I told you that the entire modern financial system functioned on an infinite money glitch where billions, no trillions of dollars were created out of thin air day after day, and at any point the whole system could collapse? Oh, you. You wouldn't be surprised. But what I just said was the truth, and it's something called fractional reserve banking, otherwise known as the Infinite Money glitch. Here's how it works.
When someone deposits $1000 in the bank, the bank does not hold on to all of that money. Rather, the bank will just keep 10% a $100 as reserves and then loan out the rest or $900 to other people or companies charging interest on the loan. Making additional money for the bank, the Lendy, or the person that took out the $900 loan then goes on to spend that money. To simplify the scenario, we'll say that that person with a $900 loan immediately paid someone else that $900. At this point, when looking at this small financial system, there's a total of $1900 in circulation, but the bank only has $100 in reserves. But here's where the endless money glitch occurs, the person that was paid the 900 Dollars then goes to deposit the 900 in the bank again. Starting the process all over. The bank would keep 10% or $90.00 and then loan out the remaining $810. Then the person with the $810 loan would pay someone else, who then deposits that money in the bank and the bank then keeps another 10% loans out the rest in the cycle continues. This cycle of monetary multiplication is called the monetary multiplier effect or the infinite money glitch.
In this example, $1000 in initial capital can be transformed into $10,000 in the economy, all from nothing $9000 created out of thin air. Add a few zeros to those numbers and you can start to understand how much money in an economy can simply be created through fractional reserve banking. This infinite money glitch occurs because banks only have to retain a certain percentage of deposit due to liquidity requirements. The rest of the money they can go out and make money death through lending. In practice, the system of fractional reserves can create an infinite money glitch if lending and borrowing becomes irresponsible and pervasive enough throughout the society. The infinite money glitch is also metaphorically the stacking of financial dominoes. If all of the depositors were to want their money back at one time, called a run, the bank wouldn't have the funds to pay everyone back. This is why government backed insurance like FDIC is a necessary protection on bank deposits.
In simple terms, this is how the fractional reserve banking system works, and it's the system in place by most modern economies, including the US. The exact cash on hand requirements for banks in the US is set by the Federal Reserve. The Central Bank, which will often put banks through stress tests simulating potential bank run scenarios or financial collapse scenarios to ensure that a banking crisis doesn't occur. This level of safety is usually enough to ensure the infinite money glitch in modern banking doesn't unravel the whole system.
Usually, China is currently seeing their fractional reserve banking system fall apart as real estate loans made on fraudulent real estate are crumbling. The fractional reserve banking system is susceptible to financial fraud or misrepresentation of loans, and if the bank lends out this infinite money thinking it's all going to trustworthy borrowers, then it assumes it will get most of it back. However, if all of the trustworthy buyers end up having to declare bankruptcy, then the bank is just out of luck and on the hook, this is what the stress test the Federal Reserve puts U.S. banks through tests. The Central Bank has default rate numbers that it simulates banks abilities to remain liquid through. However, when anomalous and unexpected default rates occur, usually due to fraud, the system can collapse. All of this, of course, is oversimplified, but it speaks to_the fundamental principle to modern banking, fractional reserve banking, and the infinite money glitch that it creates.
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