Do you know what money really is?

February 7th, 2013 - Posted by in Blog, Saving Money


We all use money everyday, you probably got some in your pocket right now, but do you really understand what it is? “It’s paper or coins that we buy stuff with” correct but do you really understand what it is? For example, can you explain this simple question, “Where does money come from?”. I assumed that governments created it, but only 3% of money is created by governements, the rest is created by private banks, crazy and a bit scary. I didn’t know that until I watched the video below. In otherwords banks create virtual money out of thin air, then charge interest on top. This is partly why the world is more than $49 trillion dollars in debt, how can the whole world be in debt? Who is the $49 trillion owed to? There is a good discussion about who the money is owed to at TED.

TED Talk by Jem Bendell – “The Money Myth”

Someone on Reddit asked a intriguing question, “Where has all the money in the world gone?” Before you answer that question it is important to understand what money is and how it’s created. There is a detailed but easy to understand explaination in the comments of the reddit post (this will take you some time to read). If you are a bit short of time you can read a summary of the info in this post “explaining how money works as if I was five years old“.

Or if you prefer you can work a video documentary explain what money is, it’s long 45 minutes but the information is shocking and well worth investing the 45 minutes.

“Money as Debt” by Paul Grignon

  • John@MoneyPrinciple

    Money is certainly created by the banks as demand-driven lending but once the loan is written, which becomes an asset to the bank, if the lending bank is not able to absorb this new asset within their capitalisation then it is effectively sold on.via the banking (and shadow banking) system. Eventually some part of the loan may end up being absorbed by the central bank. The individual parts of the banking system that absorb the new asset (ie your loan) therefore expand their balance sheet and they will pay a small percentage of this expansion as the bank levy.

    This makes it very complex to identify exactly where money comes from but it is essential that money is generated in some way because money is always being destroyed – throwing away unused food, repairing your car after an accident, filling in the hole that has appeared in your roof. The question is whether it should be generated only by the central bank, which would be very bureaucratic and lead to continuous credit squeezes let alone corruption of bankers, or by the retail banks where in theory the bank should know its customers.

    The problem has been that this lending has been overshadowed by retail banks acting to buy up assets (ie loans) which were not properly evaluated and then finding that they were worthless.

  • Julian Hearn

    @John, thank you for your comment. Its very interesting stuff.

    The more I think about it, the more my head spins.

  • John@TheMoneyPrinciple

    @Julian – yes it is quite simple in some ways but knowing where the new money is created is like a minefield. The problem visited on us by Goodwin and his chums is that RBS Greenwich Capital bought assets within this chain without proper due diligence. In their ‘defence’ it was virtually impossible with the slicing and dicing although new data reporting standards have I hope changed that.

    There is an enormous incentive for the banks not to sell the asset on because the effective interest they earn on the actual money they have to have is massive – see our post on why banks love to lend although that is a bit simplistic. But even when they sell the asset on, the borrower is still paying the original bank, who will pay the new owner a little less so whichever way the bank wins….

  • Jim Spencer

    Nobody can answer on “what is money”. Money is nothing, but it is everything. To stay in the game it is necessary to saving money & taxes. Recently I have gone through the Manchester accountants, As I discussed my financials with them on the tax saving, I got good advice and I feel that we can save tax and money easily.

    To get in touch with them you can visit here: Free Expert

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