Do Auto Loans increase the money supply?
Do Auto Loans increase the money supply?
Do Auto Loans increase the money supply, I cant seem to find a source for it. Its not a question on a test or anything, I was just curious, I'd always figured it was only business loans and mortgages that did so.
Yes, virtually all auto loans are bank loans. When banks write loans, they create that money out of thin air. When you make a loan payment, the principal portion disappears from existence, and the bank pockets the interest portion. So that new money only exists for as long as and to the extent that the principal has not yet been paid.
Banks don't really create it out of thin air. Banks are letting you borrow money they otherwise hold, meaning they can't lend indefinitely. This is the exact same way say a library works, they can only lend you books they have, and while you are using that book they cannot lend it to others. Paying back the principal on your loan doesn't make the money disappear, it's you giving back the amount you borrowed, plus extra to compensate the bank for lending you the money. This all matters a bit more in non-fiat currencies since those are backed by something intrinsically valued (such as gold), but even in fiat currencies banks that lend more money than they have access too are over extended and generally need to borrow themselves from either other institutions or the Fed in the US. This is why the Fed interest rate impacts loan rates.
Fractional reserve banking. Look it up
They really do.
It really does. You know what else makes money disappear? Paying federal taxes.
https://www.youtube.com/watch?v=0yMMTDYFlLc
Also central bank interest rates do not have any effect on a loan you take out. Interest rates were near 0 for ages did you get any free loans? In Japan they were negative, do you think that Japanese consumers were getting paid to take loans? During the inflationary period were you suddenly getting paid to save more? Even though central bank interest rates went up?
There used to be a reserve requirement where this was partially true on a fractional basis, but they got rid of it if I'm not mistaken.