Why is plain vanilla Fractional Reserve Lending with low reserve requirements an unsustainable Ponzi scheme?
In “Deposits are a fiction – but base money is not part of the Ponzi”, I argued a few things: • That deposits in total are an accounting fiction, to the extent that they are a byproduct of a small amount of base money being lent and re-lent over and over again (see “cash” in above schema, compared to “deposits”). By this I mean that while everyone believes their deposits represent wealth, it is only as real as everyone’s desire to NOT monetize it in any large amount at any point in time. All that everyone, at any point of time, can monetize is the base money, which can be (and is now) a small fraction of total deposits. If even a fraction of depositors were to withdraw, the whole system would go down. • That fractional reserve lending beyond a certain point is predicated on perpetual growth, which makes it in some ways a big Ponzi scheme. Mathematically, a Fractional Reserve Lending (‘FRL’) system can create more debt than the ability of output to support that debt. Once output is no l
