How does the economy “grow”? Where does the new money comes from?
In: 398
As a society we are learning all the time to create value – taking a, adding b and making c which is greater than a + b in some way that you choose to measure value. We learn to do something cheaper, quicker, better, with less waste, less energy, lasts longer, with new features. All that extra value adds up to grow the economy.
It comes through learning and innovation
new jobs, new services, new owners, new companies, new expansions, ppl and business creating new stuff and ppl buying it, thats how economy grows
Economic growth means more goods and services, not more money.
Money is just a standard way to measure the amount of goods and services in an economy.
More people = more businesses = more services for sale = more goods for sale = more value being created = more exchanges of those goods / services against currency taking place = growing economy
New money comes from govt spending.
Any time a currency issuing govt spend, they do so by increasing the balance within the relevant account. At the central bank, they have the unique ability to do so without decreasing the balance of another account. Similar to going into Excel and changing the value of a field. Its just keystrokes on a computer at the central bank.
Tax removes money from the economy, but does not fund govt spending. Most people think their taxes directly fund things but they are wrong. Taxes are simply deleted. Your account is marked down but that doesnt go anywhere. Tax does have an important role to play in the economy, its just not the role most people believe it has. But thats perhaps a seperate essay. Or a visit to Richard Murphys blog.
When the govt spend more than they tax, we call this the deficit. This word has very negative connotations, but simple book keeping says that wherever there is a deficit, there must be an equal surplus (your £1 deficit at the shop = £1 surplus for the shopkeeper).
The govt deficit = the pvt sectors surplus. Thats us. Thats where new money comes from.
Source: The Deficit Myth by Stephenie Kelton
The economy does not equal money. It’s what’s produced by companies within the country. The economy grows when more products are produced and/or better products are produced.
Imagine a tree. It has value but that value is not yet unlocked. You turn the tree into lumber and it becomes valuable for many things now. Then you create money, stocks, bonds, and put a claim on that lumber so it can be traded. Our economy grows when there are more resources turned into usable things that money then makes a claim on. However, we create money out of thin air, but we cannot create trees or coal or gold out of thin air, so even though money can increase indefinitely, resources are finite. The economy grows by having more trees to produce into lumber, not by creating more money.
This is simple. New money is created from debt in the form of lending. You go to a bank for a $100,000 loan. The bank writes the loan contract, and gives you the money. That “new” money did not exist before the loan.
I read all the answers, there’s some good ones. Here’s the simplified one that answers OP’s literal question, where does the actual literal money come from?
*Banks lend money into existence. Governments spend money into existence.*
Paying back the loan and paying (national level) taxes unprints the money.
The real economy, people making and trading stuff, grows as we gain people and gain stuff. But that creates demand for more, new money. That demand is satisfied by the new loans and the government spending.
Latest Answers