How does the economy “grow”? Where does the new money comes from?
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A lot of answers about how basic business and money exchange happens, but nobody here seems to understand the monatary system, and money creation.
It used to be different, back when money was actually backed by gold and silver, but I won’t go into that, and instead focus on the modern fiat money system we have.
So basically everything these other people said about economic growth being about time and effort, is true. Extracting resources and creating new things to create value. But the way new money comes into play is a complex system between commercial banks and central banks creating loans and credit.
We have what is called fractional reserve banking. Simply put, what it means is that banks can loan out more money than exists within their reserves. So. Bank hold $1000, and businesses or people trying to buy a house come and collectively borrow $2000 from the bank. The money supply grows and the loan is used to create all that value from working like others have described. As the loans are paid back, that frees up space to create new loans and further expand the money supply, and so on. This is the gradual growth of inflation that goes on, which is different than the rapid inflation we are seeing today.(I won’t go into that). All of this is overseen and squared away with the federal reserve or other central banks.
So what happens if the loans are not paid back? Well you get defaults and bankruptcies, and the money supply shrinks as the money essentially evaporates. The bank has $1,000 and loans out $2000. And maybe $1,200 of it defaults, leaving the bank now with $800 left. This is called deflation, and rarely happens. The times that this happened were in 2008 financial crisis, and other major recessions or depression.
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