ewp (12/02/82)
Jack Nickles expressed concern about US banks lending money overseas in a
recent article. I don't claim to be a financial expert but I might be
able to ease some of that concern.
When a bank (I'll use the term "bank" to refer to any lending institution)
lends money to someone there is not a loss in the net supply of money. This
is how the money supply grows by a real, not inflationary, measure. The idea
is that money is lent out by all banks, which the borrower spends for some
goods or services. The ones who supply the goods or services take this income
and spend or save it (by save I mean some type of investment). If they spend
it this last step recurses, if they save it, it goes into the banks. The banks
now have more money to lend out. Eventually the borrower pays back the debt
from earnings on whatever the money was used for, and there is a net
increase in the amount of money. Where did this money actually come from?
It is merely the translation of the work of the parties involved into
currency. Obviously this is a vast oversimplification but, the point is that
you don't lose money by lending it out, you gain. When US banks lend out a
lot of money because of a high demand, they start raising the price of this
high demand quantity, hence high interest rates. Of course as interest rates
rise, people will look elsewhere for cheaper loans and somewhere in there
supply and demand should balance out.
Hope that clears up more problems than it creates,
Ed Pawlak
ihuxb!ewp