99.99% of people don't understand why recessions happen. Let's start from the absolute basics. In almost all countries around the world, banks take deposits from customers.

When you make a deposit at a bank, the bank offers you interest as an incentive for keeping your money deposited.

The agreement to receive interest allows the bank to lend out a certain portion of your money to other bank customers.

Banks generate profits by lending your money to borrowers at a higher interest rate than what's being offered to you. When you deposit money in your account, the bank adds it to a pool of money from all depositors.

If you want to withdraw money, the bank takes it out of the pool and decreases their liability to you (your bank balance). To PAY interest to depositors, banks use deposits to EARN interest by lending it to customers who want to borrow money.

In other words, banks are an intermediary for people looking to lend savings and other people looking to borrow those savings. While YOU have to work to make money and earn interest on your savings, banks make profits because they can create money out of thin air.

Fractional reserve banking makes it so banks can lend more than the amount of cash they have. Lending creates new money. A mortgage is an example of a loan created through fractional reserve banking.

Let's think of it this way: A bank has $100,000 in deposits. It lends 90% of that money to someone that wants to buy a home. Now there is $190,000 in the system. The money held by depositors is still "available to be withdrawn" - depositor accounts still hold $100,000.

The newly created money expands the economy but also leads to price inflation (because more money is competing for the same amount of goods). This process of borrowing and lending money is the main reason for debt cycles.

A debt cycle begins when we start living beyond our means and spend more than we can afford. A central bank is a national bank that provides banking services to its country's government.

The goal of a central bank is to achieve price stability (low inflation). The main tool they have to achieve their goal is interest rates.

Central banks control debt cycles by increasing and decreasing interest rates for borrowers. These cycles lead to massive booms and busts, and badly impact the average citizen, who may lose their job and their ability to pay for necessities.

#Binance #bank #bankruptcy #SVB #leontech