[Dilbert San Diego]

I think this is something related to “fractional reserve” banking. I think some Freepers have greater knowledge than I do about that. But the idea of the fractional reserve is that money is created via bookkeeping entries, and then the money disappears as it’s paid back. However, the interest paid is money which does not disappear.

I’m sure my understanding is unclear, but, that’s what I’ve heard, that money is created out of thin air in the form of loans. And the money is there just because the banks and the federal reserve system all agree that these bookkeeping entries represent real money.

[cripplecreek]

money is created out of thin air in the form of loans. And the money is there just because the banks and the federal reserve system all agree that these bookkeeping entries represent real money.

Sounds like they're loaning out IOUs with the promise that the American people will pay it off.

[fhayek]

In a sense, fiat money (which we have) is always created out of thin air, in the manner you describe. The challenge to central bankers is to maintain a growth in the money supply that is proportional to the growth of goods and services available in the economy. It become a chicken and egg kind of problem, because the Fed usually abandons maintaining value of the currency in favor of trying to 'stimulate' the economy.