How is new money generated?
In: 17
Printer go brrrrr.
But in reality it’s just printed and the US gov borrows it from the federal reserve. They can create a coin worth a trillion dollars and now they have a trillion dollars
A shame that “printer go brrrrr” is the objectively correct answer, but perhaps there is hope that it is also the first one.
Such a house of cards.
The US dollar is a Fiat currency, which means it isn’t tied to any actual value but instead to debt. The fed prints the money and loans it to the government, and what makes it worth anything is that the US government(and most of the world) agrees it is worth some value. As the government prints more, it becomes worth progressively less. This is referred to as inflation, because like when you inflate a balloon you get more volume of money but the individual dollar gets stretched thinner. Inflation has historically set at about 2%, but estimates for the next few years range from 7.12%(the low-ball that the government sets) to 15%(a reasonable estimate) to 30%(based off the increased prices of gas, used cars, food, housing, and other essentials most people buy). With 15% inflation, say you have 100$, and you buy avocadoes at 1$ a pop. In 1 year, you will still have 100$, but those same avocados will be worth more, so you can only afford 85(100-15%). This is always happening, but most people don’t know about it. They think the 1% interest at the bank is great, not realizing that they are losing value even when the numbers go up.
In modernity all national currencies are fiat. The governments basically say “Let there be more money” and that money is immediately created digitally by whatever bank or financial body is responsible for creating the money.
A portion of that created digital currency will be converted into physical currency but that takes a bit more time.
Contrary to popular belief, the money supply is not usually increased simply by printing more money. New money is printed every year, but primarily only to replace old and destroyed notes that are coming out of circulation. The fact is that in the modern economy, most money is “virtual,” existing only on the account books of banks and other financial institutions. The total money supply (M2) of US dollars as of 2021 is estimated at about $22 trillion, but only about $2 trillion of that is actual notes and coins.
So in actual practice, central banks like the Federal Reserve can manage the money supply by setting banking regulations (interest rates, reserve requirements, etc.) and by trading with financial institutions (“open-market operations”). This is where it gets pretty complicated and frankly goes over my head, but the upshot is that when commercial banks loan money to people and businesses, the money supply increases.
Money is created by the federal reserve and private banks. The fed loans money to banks and buys securities. Private banks loan out money to borrowers.
There’s a lot of nonsense here. The government doesnt literally print enough money to meaningfully change the money supply. Money is primarily created through debt. It works something like this:
I have money, and you want money (say, to start a lemonade stand). Since you don’t have the money, but it’ll let you make more money in the future, you are willing to take a loan from me, and I’m willing to loan to you. You ask for $100 and i ask for $110 back in one year. So we make the deal, you get the money, and I get an IOU for $110.
This is the crucial bit, you started with $0, I started with $100. In one year, I’ll have $110. That extra $10 got created *as money* through the loan. The actual *value* got created by the labor you put into your lemonade stand.
I am a gov bank
I have 0 dollars
Person A comes to me and deposits $500
I now have $500
Person B comes and asks for $300 loan
Loan granted
——-
(Person A has $500 in bank + Person B has $300 loan = $800 in circulation)
$300 has been generated.
Money is debt. There is a documentary on yt with the same title explaining the how and why of it.
You have $100. You take it to Chase and put it in a savings account. I go to chase and take out a mortgage. They give me your $100. I now have $100, but as far as you and Chase are concerned, you still have $100. So if we each have $100, that means there’s $200.
I can take my $100, buy the house, and give that $100 to the seller, Jim. Jim now deposits the $100 I gave him at Wells Fargo. Now Bob goes to Wells Fargo and takes out a mortgage. Wells Fargo now gives Bob the $100 that Jim deposited. But Bob and Wells Fargo both still agree that he has $100 in his savings account, so now there is $300 in the economy. You, Bob, and Jim all have $100, right?
That’s how banks create money. How does it not all fall apart like a house of cards? A couple ways: Traditionally there was something called a “reserve ratio,” which meant that the bank had to keep a certain percentage of your money and couldn’t lend it out. As long as only a few people try to take money out of their savings account at any one time, this is fine.
But what happens if everyone wants to take their money out? Chase doesn’t actually have your $100 any more. First, the Federal government created an insurance system guaranteeing that your deposited money was safe. That reduced the likelihood that everyone would come running to the bank at once to take their money out, like if the bank was going out of business or something. Second, the Federal Reserve will lend money to the banks day-to-day at rock-bottom rates in order to cover situations like this.
The Federal Reserve can manipulate things like the rate they charge banks or the reserve ratio in order to make it easier or harder to lend money, and that’s how they can control the money supply.
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