How is new money generated?


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.