They can only issue new debt based on new deposits. It might not work the exact same, but it's a system that can only function if people keep taking on loans and then depositing those loans within the system. If enough people walk in and demand their deposits now, in cash, that's when you just throw up your hands, as a banker, and say "sorry, we don't have it, and the FDIC only has $2,200 in the insurance pool per $1,000,000.00 of "insured" deposits". Ponzi...
AFAIK a ponzi scheme operator cannot create funds that don't exist. A fractional reserve banker can. It's a big difference.
After all if you want to play "by the rules" (nyuck nyuck) you can always create a corporation, have that corporation borrow money from you, create that money (at whatever multiple of reserve your local mob boss allows, which depends on where you live and how connected you are), then have that corporation deposit it in your bank. Now you have more reserves and can up the ante in the next round. See also "inter-bank loans". Some of these corporations (or whatever you call them) will have to go bankrupt once in a while.
Remember this is when you are playing by the rules. If you want to cheat there is nothing inherent in the system that prevents you from simply adding a bunch of zeros to an account in your bank. I bet however if you try this you have more than just the US justice system to worry about.. so this is probably more dangerous than laundering drug money. Of course if you are at the top of the chain it is 100% legal and goes by names like QE.
The only way this kind of thing ends usually is not with a rush of withdraws (like a ponzi or bank run) but with people realizing the money you create is worthless. Then you finally get bored of printing trillions of worthless zimbabwean dollars etc. etc. for yourself and move on.
Considering how easy this system is for people to take advantage of, and how most such systems have ended quickly with the hyperinflationary spiral, you have to conclude that TPTB or "the fed" have actually done a damn good job keeping a lid on it over the last 100 years.
The "funds" that are created are just promises, either to pay or to receive cash. The entire system actually functions on the promise to pay CASH. A Ponzi operator removes the deposits that he can milk, pays out the interest while hoping to get re-investments, and pays out early adopters with late adopter cash, and alleges that there are actual funds available for everyone. A bank does the same thing - they do not, and could not ever have the capacity to pay even 10% of depositors if they all came in and demanded their cash at once. They are simply generating a promise to pay, on demand, as opposed to removing the actual funds and leaving a promise to pay in its place.
Banks do not ever create cash. Their is a very limited supply of cash, and the only thing that has kept the debt ponzi going is that more people are willing to accept promises-for-cash as a substitute for actual cash. If everyone shows up to redeem at once, the game is over. Done. The FDIC is bankrupt in the first five seconds. And even then, the Fed can monetize treasuries until it's blue in the face, but that just re-stocks the banking system with collateral upon which to generate a whole new set of promises. Not actual, physical cash. You won't see that happen until the political class wrests control of the printing press, which is likely in the next leg of the debt crisis.
The fed will probably be replaced with direct control of the issue of money and credit by the political class. It is under these circumstances that you will see hyperinflation, in physical currency. This will be the death knell for the dollar. Until then, my primary long term investment is physical gold and silver, which I've accumulated for more than a decade, and physical cash. Cash will be the emperor until US.gov co-opts the ability to monetize, and then it's straight to wet ink. Bernanke's Ctrl+P-for-treasuries only shores up the tier-1 capital ratio upon which more promises are made - it does nothing to change the actual cash position.
Furthermore, once interest rates start to skyrocket, the Fed is going to have to begin to unwind its long-bond position. It is the primary dominant force in this market, by a long shot. It now IS the long term treasury market. The losses on the Fed's balance sheet will be absolutely staggering once rates rise - LT Bonds and LT Mortgage securities will plummet 50% or more. The Fed has its own can of worms, fully self-inflicted, that it has to worry about. And, yes, I do tap my fingertips together and say "excellent" when I picture this....
The faster we move along here, the faster the market finally rejects the money it was conditioned, over a century, to accept as money. Bitcoin will help the world pick up the pieces.
