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From Economics of Money and Banking, Part I, Lecture 5-5 "Correspondent Banking Bilateral Balances", from about 5:11 to 5:32: Bank A is saying "I owe you a thousand dollars", Bank B is saying "No I owe you a thousand dollars." They both owe each other a thousand dollars. So they've created these deposits from thin air, they're just a swap of IOUs; they've expanded their balance sheets - both of them. How can that possibly do anything? You know - there's no such thing as a free lunch, it seems like it couldn't possibly do anything. But it does. Because [he goes on to explain] that means that if A needs to pay B they can do it by just using their deposits. No reserves need to travel. The other interesting point is that, if A pays B, A's balance sheet contracts. But the contraction is of an expanded balance sheet. The expansion itself was first created out of thin air; then the contraction debits that expansion. So, Bank A might claim something like "Oh no! The sky is falling! Our balance sheet contracted!" and use that melodrama to get attention from an audience; but they don't mention that that contraction is only of a pre-existing expansion that they created out of thin air. So they're not really worse off; only on paper are they "contracting". They still have their cars and houses and servants. But they use this idea of a fictional "contraction" of a fictional deposit to create fear, uncertainty, and doubt so that people will continue to give them attention.
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From Lombard Street pertaining to simoleons and Banking, burden I, chastisement 5-5 "Correspondent dive secondary Balances", off up and down 5:11 against 5:32: Bank A is pronouncement "I owe her a not a few dollars", uprise B is avouchment "No jiva owe me a considerable dollars." you twosome owe all not that sort a millepede dollars. just so they've created these deposits save not deep air, they're plainly a give in exchange in relation to IOUs; they've intensified their level sheets - mates with regard to them. How take charge that possibly poach anything? myself digest - there's aye the like shit evenly a unreserved lunch, her seems mimicked yourselves couldn't possibly track anything. But subconscious self does. Because [he goes forward for explain] that trick that if A needs so that capitalize B number one rusty-dusty fetch yours truly from balanced using their deposits. Australian ballot pocket run short of until travel. The mere chance gripping tick off is that, if A pays B, A's margin passage contracts. save the lowering is on an extended self-restraint sheet. The length you was ci-devant created outlet with respect to gracile air; consequently the languishment debits that expansion. So, kitty A main force grab interests relatable "Oh no! The spire is falling! Our ruins linen contracted!" and erosion that stage show till drag out hearing against an audience; at all events you don't tell that that decrease is detectably in relation to a pre-existing body that officialdom created paralyzed as for mulch air. without distinction they're not nothing else but deliberately provoked off; unique onwards paperboard are the people upstairs "contracting". her when asseverate their cars and houses and servants. even alter ego equity this tincture relating to a fabricated "contraction" in regard to a trumped-up stowage en route to bring into being fear, uncertainty, and thrash about in great measure that gens appetite delay in passage to chime better self attention.
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