Where Does Money Come From?

we live in a world based on money but why do we need it and where does it come from in part one of this therapy session we talked about value creation and trade if you haven’t seen it watch it first the story could have ended right there with all of us creating our pots and Spears and trading them for each other such trade which doesn’t involve any money is called barter the problem with barter economy such as to one of ancient Greece is that they rely on the coincidence of once someone with a surplus of Spears and the lack of pots has to find its exact counterpart to enter a trade having to wait for such coincidences results in an illiquid market meaning not a lot of trades are happening the problem of the coincidence of ones can be solved with a universal dividable storage of value also known as opportunity no money no money however in a situation when the coincidence of once doesn’t work because no two parties can agree on a trade give everyone a coin and

they can resolve their conundrum value can be stored trade becomes flexible and everybody gets what he wants wherever trade was common there was some widely accepted form of money in 17th century Japan for example such a unit was koku in amount of rice the Empire even tried to measure its total wealth in kaku’s and arrived at around 28 million which using the current spot market price of rice would be around one and a half billion u.s. dollars in today’s money does this conversion make sense I don’t know but it’s less than 1 mm speaker so how much money does an economy need to run that depends on the amount of value creation and trade that are happening

if you live in a Bronze Age village with an economy based on bread pottery and some kettle thousands of units will do the trick scale it up to a larger city and you’ll need millions for wealthy nation billions or even trillions today the worldwide amount of money is categorized into the four MCM zeros the cash in circulation worldwide that’s currently around 6 trillion US dollars if you are saving all your money in a piggy bank then that’s the glass ceiling you’re eventually going to hit now if you save your money in a bank account you can go places because then it becomes part of em one which is the amount of money that exists in cash plus the one which exists in demand deposits the amount of M one is currently rod thirty trillion u.s. dollars worldwide now you take those thirty trillion Washington’s and add them to saving accounts and time deposits now you will have the amount of money that we refer to as m2 which is currently around seventy trillion US dollars finally add to that larger liquid assets by constitutional money market funds and a whole lot of other crap and you’ll arrive at m3 in other words m3 is the total amount of value which we are actively representing in some currency it’s currently around 80 trillion US dollars this is not coincidentally about the same as the world GDP as remember money started out as a trade enabler these numbers are just a current snapshot of where we are at where will they be in a few years well I don’t know but probably higher than they are today if the worldwide amount of money supply is steadily increasing how so there are two ways in which money is created one is through the central bank a public institution with special powers usually granted by the Parliament among other things that has the power to literally print money or created in the form of credit which then gives to commercial banks or states by buying assets or government debt from them these dollars can then be spent and or lent out which is how they end up in circulation however in most nations the central bank makes up for less than 10% of money creation most of it is created by commercial banks or as most people refer to them just banks they use a method called fractional reserve banking which brings us back to you so you said your piggy bank money of a hundred dollars in an actual bank the bank can safely assume that you won’t run into more and claim back your entire money in fact they play a statistical game they assume that of all their clients deposits they won’t have to pay out more than ten percent at any point in time so they can lend out the rest right even better they say the entire deposits are there ten percent and they can create and lend out nine times that amount of money so for $100 that they got from your piggy bank they can now lend out another $900 and money that didn’t exist before like a magician they can just make it appear now since they can’t literally print money they created in the form of credit meaning they say it’s it’s there just believe us but just don’t try ever to spend it all at once because if everyone tried to do that we have what is called the bank run and everyone would realize that in fact only ten percent of it was ever really there and because banks don’t like to be GG by their clients they will in such situations impose a daily drawdown limit praying to their God moon Eaters that the system stabilizers and the bank run stops before the bank runs out of money the extent to which the central bank can control this creation of money is only by changing those 10% the so called reserve ratio if they increase it it means the bank need to keep a higher relative reserve which means that they can lend out less thus create less new money that level of control aside money creation is largely privatized and follows the rules of supply and demand the money supply goes up the price of a currency should drop and we should expect inflation with money supply goes down we should expect the opposite money supply check what about money demand did you notice how every dollar of money is connected to a dollar of debt whichever way money is created the institution which gave it away once it or something else in return at some point well this has been the origin of many conspiracy theories it’s actually just a reflection of the fact that money has no inherent value but it’s just a representation of value if a dollar bill wouldn’t ultimately be the claim on a dollar of debt or in other words at all of value created by someone somewhere else then all it would be is just a piece of paper with a nice drawing on it so does that mean that we can never get rid of our debt as long as there are dollars in circulation and nobody can ever really get ahead no example time let’s say you go to the bank borrow money meaning you take on debt to use that money to build a house so at the end of the day you took money that didn’t exist before to create value that didn’t exist before in exchange for debt that didn’t exist before cool the money now entered the system through construction firms and whatever which means that the money supply has increased with the exception of them zero because commercial banks don’t print when you remember now you go to work every day meaning you trade skill and time for other people’s dollars some of which might as well be the dollars which you are bang created for you to build your house in the first place mind blown and eventually pay back the money meaning you cancel out your debt which means that you own zero dollars and have zero debt what do you keep at the end of all this rigmarole is the value of your house the flow of money occurs hand-in-hand with the value creation process while underlying value is being built up and the more things we create each year the more money we need to represent this value we created that year while the amount of broad money supply m3 / GDP is currently around 80 trillion dollars the total amount of build up value or global assets is currently around 260 trillion dollars so next time you’re broke and believe the Big Bang conspiracy has screwed you just remember money has no inherent value it’s basically just the trade enabler the Japanese used to have rice money lol most money creation is privatized bank runs are bad go build a house [Music]

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