If an economy always grows and for example a company makes more money, creates new jobs, salaries go up then where is this “new” money coming from?
I’m guessing the world doesn’t have a finite amount of money and it just so happens at some points, some countries get more of it. I’m thinking more money gets created when the economy is growing but I’m guessing there are rules around this?
Because I’ve also heard that you can’t just create new money because of hyper inflation I think it happens in Zimbabwe.
So these two thoughts are conflicting and I don’t know the answer.
Can anyone help please?
In: 1
Money is anything accepted broadly as a medium for exchange. Cigarettes have functioned as money and so does bitcoin. In modern fractional reserve economies debt is bought by the central bank which creates free bank reserves, which the bank can lend. The lent portion ends up in another bank as free reserves which can now be lent, and so on. Recently the Federal Reserve bought bonds from the Treasury at an unprecedented pace, creating money faster than the economy could produce goods and services that the new money could buy, which tends to make the prices, including financial assets, increase.
There are two answers, depending on if you are asking how a) monetary value is created in comparison to cash or b) how more cash is created. It’s not entirely clear from your post. So, I’ll tackle both simply.
A) Let’s say I hire you to do some light repair work around my house and pay you $100 in cash. You take the cash and deposit it in your bank account. Now, the bank has to keep some % of this on hand to cover withdrawals. That’s called the reserve rate. To make for simple math, let’s assume the reserve rate is 10%. So, the bank keeps credits your account with $100, but only keeps $10 in reserve. They loan the other $90 to person A with a check. A takes that check to her bank and deposits it. They keep $9, and loan out the remaining $81 to B, and so on. The original $100 in cash is still sitting in your bank’s reserve, but the value has changed hands several times. This is usually called the velocity of money, and describes how the value of that $100 is changing hands and being used in the economy far more quickly than the actual cash bills are. Apply this to a national or global economy, and it becomes apparent that there is a whole lot more “money” moving around all the time than there is cash.
B) Generally, the central bank of any given nation (e.g. the Federal Reserve in the US) prints new cash. They do this under two basic conditions. The first is a sort of replacement maintenance. Bills and coins get worn, torn, dirty, etc. through use, and so they have processes by which older cash is collected, deposited with the central bank, destroyed, and replaced with new money. This has zero effect on inflation. The second is when they want to stimulate the economy. Most central banks issue bonds. You buy them for X dollars today, and in some period of time (the maturity period), you can redeem them for X+Y dollars. It’s usually a low yield but very safe investment. The central bank will take the cash the receive for bonds and either hold it or destroy it. This is useful if the economy is in a boom cycle and they want to curb spending and inflation. Then, later when the economy is in something of a recession, they print new cash and buy back the bonds for face value plus some percent of the interest with that new cash to put more cash in circulation and encourage spending.
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