August 13, 2013 in 2nd Guide - Investing Basics
Invention builds banking power
Advanced civilization based on credit and invented financial wizardry!
Banking power built on great invention are the keys to the bank, credit and banking magic. These great human inventions are the very core of high living standards in advanced economies.
This financial wizardry underpins our civilization! In Canada, this magic helped finance development of many resources that were the essential drivers for stock market and economic growth. Just as resource companies were the base for beginning stock markets in Canada, banks are the financing base providing funding for those and all important economic developments.
In fact banks are essential elements in the growth and development of Canada or any other advanced nation. Banks grew along with Canada and are now major components of the important financial sector of the Canadian stock market.
Financial Wizards Live Here - The Big 5 Canadian Banks
1. Royal Bank of Canada
2. TD Canada Trust
3. Scotiabank
4. BMO Bank of Montreal
5. CIBC
These and other banks in Canada are the institutions that create and put money to work. The power to create money is tightly controlled by laws administered by bank regulators. As with any human institution checks must always be in place so power and privilege are not abused.
This wizardry and magic math of banking can only happen with our trust. Banks depend on public trust or quickly fail without it.
How banking magic works
The reserve banking system works in Canada and throughout the developed world. Banks accept deposits, make loans, charge and pay interest. The magic happens when the $100 deposited by one customer gets loaned to another customer. Except for holding back the 'reserve' amount, banks can loan the cash to a second customer. The the banking authority or regulators in each nation set that reserve amount.
Banks can hold cash, gold, foreign currency or other reserve assets of recognized value. The regulators, the Federal Reserve Bank as the US central bank, or Bank of Canada, Bank of England and so on, the specific mandate of each vary.
However, overall reserve banking serves as the base of all their mandates. That reserve structure or central bank, serves as the bank for the banks. At least in theory, the central banks hold the reserves of the banks in a nation.
Talk About Leverage!
Typical reserves are in the 3% to 10% range. That $100 deposit from the first customer, with a 10% reserve, can become a $90 loan to a second customer. That loan buys goods or services which in turn shows up as the $90 deposit of a third customer. Most often, in another bank account. That deposit, with a 10% reserve, can get used to fund a $81 loan which again goes into the economy and so on and so on.
That original $100 deposit can create almost $1,000 of economic activity! Moving the reserve requirement down to 3% dramatically accelerates the potential for economic activity. It is the same multiplication magic! That lower reserve requirement could multiply $100 into $2,000!
Nice work if you can get it! That process "creates" huge increases in the money available in an economy!
Used properly, this powerful money-making tool stimulates economic activity benefiting everyone in a society. All participants in economic activity and their dependents are better off for it. It can seem like something from nothing or sleight of hand! However, our quality of life and the economy of the world depends on this particular credit and banking magic. It works as long as we believe it!
Since the financial meltdown of 2008, Canadians have been chest beating and bragging about the stability and financial strength their banks. There is some justification. However, I doubt that Canadian banks were wiser or more astute. It was Canadian law that prohibited any real participation in the sub-prime derivative game that brought the world economy to the brink of collapse in 2008.
Takeaways from the lesson Invention builds banking power includes:
Modern banking is at the core of advanced economies
Reserve banking is the base for economic development
Banking leverage multiplies the nation's wealth
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Use White Top Investor lessons to learn investing. By doing that you can grow into a knowledgeable, comfortable and confident investor. To learn how, you can learn investing one small step at a time at your own pace. Do that and become the master of your financial security and independence. White top Investor never sells or shares our email list. Learn more.Movers & Shakers Of Stock Markets, Lesson links:
Influencers that move markets Lesson 1
Understanding banks and credit Lesson 2
People, places and parts make markets Lesson 3
Invention builds banking power Lesson 4
Mortal investors see immortal debt Lesson 5
Markets spark interest in interest Lesson 6
Financial crisis lessons learned Lesson 7
Bernanke knows booming and busting Lesson 8
Cryptocurrency considerations Lesson 9
Internet money in a digital future Lesson 10
Analyzing analysts, data and investments Lesson 11
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