Even when you take out a car loan, does that mean the bank actually has that money in deposits in order to provide that loan?
Umm, yes? the bank obviously has to have the money (or borrow it from the fed) to lend it out.
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Banks do not have that money in deposits, which is what the OP is talking about. They (at least in the U.S.) have a reserve requirement of 10%. I'm not advocating for the money multiplier effect or fractional reserve banking, but it is at least similar to personal savings accounts/investments. If I had $500 in cash, I could keep it in my wallet for a month. What if, instead I decided to buy and resell products and at the end of the month I bought gas for my car, food from the store, movie tickets, etc. with the profits? I wouldn't have spent that money if I just held on to the $500 in my wallet. Those businesses (gas station, grocery store, movie theater) all had a little more income because of that. Isn't that what the money multiplier effect is talking about? It is dangerous to not have a something in savings, and too much debt can wreak havoc when the money stops coming in, but I can at least understand the concept of leveraging. Does everyone who buys a house pay cash? Does everyone pay cash for their car? Credit card bills paid off in full each month? No, we rack up debt, which is what the government wants us to do. As long as things keep growing (on the income side as well) then the system works. The problem, as you know, is that there are limits to how long that seems to work.
youre confusing deposits and loans. The 10% reserve requirement applies to deposits. So no, if I have 10K in my bank account, the bank won't have that full 10K in currency at the bank.
But if i go for a loan, and the bank gives me $10K to buy a car. then yeah, they absolutely do have that 10K on hand. Otherwise, they wouldnt be able to give it to me.
Not exactly. You are thinking that it just has to have 10% of deposits in cash on hand at the bank, but it means that they can actually loan out more money than what it has in cash on hand. It's like if you had $1000 in savings, you might be comfortable having a $10,000 car loan because it doesn't seem too risky.