Does a Change in Our Spending Decisions Affect the Total Amount of Bank Deposits?
In: Flash Cards
By: Andrea Terzi
No, it never does. The total amount of deposits in the banking system cannot change as a result of spending decisions by households or firms (technically, the “non-bank private sector”). Spending decisions can only move deposits from one account to another, and cannot cause a change in overall deposits.
When a private entity spends, it instructs a bank to transfer a balance from its own account to somebody else’s account. When a private entity saves, it simply refrains from spending out of its owned deposits. An increase, or a reduction, of overall spending in the economy will increase, or reduce, the amount of payments banks must settle but will not change the total deposits amount.
Even portfolio reallocation decisions do not change the total amount of deposits. Consider, for example, a tendency to sell stocks at current market prices: Those who sell stocks will receive deposits from the buyers (you can only sell if there is a buyer!), and again the net total is being unchanged. If the selling tendency is generalized, buyers of stocks will offer declining prices for stocks, and by the end of the day stock prices are lower with an unchanged overall deposits amount.
Not even cross-border transactions can change the total amount of deposits in any national banking system: they only shift property of funds between domestic and foreign depositors. When a payment from ‘abroad’ is received, for example, a balance is transferred from the account (in the domestic banking system) in the name of a foreigner to the account (in the same domestic banking system) in the name of a resident.
Conclusion: The overall amount of deposits does not depend on spending decisions by the non-bank private sector.
- Tags: Bank Deposits, Banking, Spending
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