I often talk about the importance of understanding banking and the relationship between inside money and outside money. And a common theme in this topic is that the money multiplier concept isn’t quite right. In fact, the textbook treatment of this direct causal relationship is completely wrong. But if the money multiplier is a myth and banks don’t multiply their reserves and deposits then why do banks even need deposits? This new video answers one of the most common questions when learning that the money multiplier is a myth. In short, banks “multiply” deposits by earning a profit from them in various ways. But yhey don’t take in reserves or deposits and lend them out $ for $ in a textbook multiplier manner.
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Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.