They don't need to borrow from the Fed.

Lets say you take out a loan for a new car. It is $35,000. The bank is going to loan you $30,000. You sign the loan papers. $30,000 goes into your checking account. That $30,000 did not exist ten seconds before you signed the loan papers. It was created new upon deposit into your account. It is brand new money being spent into the economy that did not exist ten seconds before. The Fed had nothing to do with it. That local bank created the deposit money, created it brand new with a fractional reserve loan. They only need to have a small amount of capital reserve to cover their obligation. That is $30,000 of brand spanking new money going out into the economy to compete for the purchase of an existing supply of goods. It is inflation of the money supply.

And as the loan principal is paid off, the money goes back to where it came from, nothing. Make the first payment and if $100 is the principal portion, now of that original $30,000 only 29,900 is circulating in the economy. When the principal is paid off the money goes away. If loans are being taken out at the same rate as being paid off, we have no inflation of the money supply. If more loans are being made than are being paid off (or defaulted) then we have inflation of the money supply. More money trying to buy the existing supply of goods available for sale. If loans are being paid off quicker than taken out then we have deflation of the supply of money. Less money in circulation to buy the available goods.

Hard to believe? Hard for me to believe so few understand how most of their "money" is created. It is not really money, it is credit.

John