I read today that only something like 8% of money in the world is physical.
How and who decides that more money just exists? How do they distribute it so that it makes it into general circulation? I understand with physical money they collect it and produce new notes/coins every now and again but can’t wrap my head around how digital doesn’t cause issues when creating more
In: Economics
Most of the world’s currency exists as essentially entries in ledger books. If you buy something with a debit card no physical cash changes hands. A simplification of what happens is your bank deducts the amount of purchase from your account and sends a message to the store’s bank to credit that amount to the store’s account. The same thing happens on a larger scale with most transactions.
If the Fed wants to increase the money supply they simply change the accounting ledger for how much money is in circulation and sell the newly created money as Treasury obligations. Abracadabra, there is more money in the economy. This is a gross oversimplification of the way the monetary system works.
It works this way because nothing physically (such as gold) backs the value of the world’s major currencies such the Dollar, Euro, or Renminbi. They have value because people believe they have value.
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