FEBRUARY 13
Deposits Follow Loans
The Credit Feeding Machine
The Signal
Credit can feed more credit.
The Reading
Imagine an $800,000 house. Anna has saved $100,000 for the deposit. The bank lends her $700,000. Anna buys the house and the seller receives $800,000. Anna now has the house and a $700,000 debt. The seller now has the money.
Now the seller wants another $800,000 house. They take $100,000 from the money they received and use it as their deposit. A bank lends them another $700,000. They buy the next house and another seller receives $800,000. That seller can take $100,000 and do it again. Welcome to the Credit Feeding Machine. One loan completes a purchase. The sale puts money into someone else’s hands. Part of that money can help start the next purchase and another loan.
Lenders have plenty of food for the machine: home loans, car finance, personal loans, credit cards, Buy Now Pay Later and payday loans. Lending is a business. Lenders make money from interest and, in some cases, fees. Banks cannot lend without limits, but successful lending gives them a reason to keep feeding the machine.
Yesterday we saw credit letting us spend tomorrow’s work today. Today we see how one credit-funded purchase can help set up the next. The money moves to the seller. The borrower keeps the debt. Then part of the seller’s money can help begin another loan.
First Principles
Bank lending can create new deposits.
Money from one sale can help start the next purchase.
Credit can feed more credit.
Today’s Challenge
You are running the Credit Feeding Machine. Every round is the same: $100,000 goes in as the house deposit and a $700,000 loan is added.
Round 1: $700,000
Round 2: + $700,000
Round 3: + $700,000
Round 4: + $700,000
Round 5: + $700,000
Stop. Do the maths before reading on.
$700,000 × 5 = ?
The answer is $3,500,000.
Five turns have created $3.5 million in loans and helped complete $4 million of house purchases.
Now imagine thousands of Credit Feeding Machines running at the same time.
How much credit could be growing where nobody can see it?
Tomorrow’s Signal
The Invisible Expansion