Money?
Have you ever wondered where money comes from? No, not the fact that you work for it and you get paid. I always wondered who goes new money to pay for stuff. There is stuff like GDP (Gross Domestic Product). But lets just think on a basic level.
If a farmer is given some wheat seeds, I chose given so there is no money involved. Then he grows his wheat, puts in the time and effort, he then harvests it and wants to sell it. Someone buys it with money.
So, they buy it with money that is already in the economy, with money they already have, or do they get a loan from a bank? It still does not answer the question. But I hope to give some insight.
Money out of Thin Air
One thing that had always bothered me, it does not now, is how crypto can make money out of thin air. Someone starts a new crypto project and poof, new form of money that never existed before. How can that be done.
We were always taught in school that if you print money, it causes inflation, you cannot just print want you want. But apparently people now can with crypto, banks and central banks can.
Not just that, it is needed, it has to be done to expand the economy. To expand the money supply. As the population of the planet increases, the amount of products and services increases you need more money in the world to trade for this.
Some people will tell you with crypto that it is back by POW (Proof of Work) like Bitcoin, POS (proof of stake) or POB (Proof of Brain) like Hive is. All good terms but in fact most of the time the coins or tokens are being made out of thin air.
Where Does Money Come From?
I found what I think is an excellent article from Brian Chang. It is Canadian, well I am Canadian. lol. Here is the Source. And you really need to take the time to read it. But I will go over some points.
"As the generally-accepted medium of exchange, money is unquestionably the most widely traded commodity on earth, comprising exactly one-half of every transaction in a modern economy."
Money as a commodity. I don't know if that is just wording or my lack of understanding or if that is were we are to in the modern world. But it is interesting. I wonder what the other half is that is used in transactions?
"the vast majority of people, when asked, claim that it is the government that creates the money we regularly hold in our wallets and see in our bank accounts on a near-daily basis."
You know, I use to believe this also. Until I started reading Taskmasters posts over the last few years. Till I joined LeoFinance and really got interested in where does money come from.
"Rather, the vast majority of deposit money is instead created by private commercial banks, who as part of their regular lending operations simply conjure this money into existence “out of thin air”."
And there it is people. The majority of money is created out of thin air by the private banks. Does this not just amaze you? But it has to be done to keep an economy expanding. Bettering peoples lives. And if we are going to build an economy around Hive, specifically Hive Back Dollar (HBD) then you will start to get an understanding why more is needed. Why the 20 percent interest works and should stay. I wont go deep into that as Task as written about it in debt. I would recommend finding his posts.
"under the monetary system of today, when a commercial bank finds a willing and credit-worthy borrower, they provide this borrower with a loan not by transferring over existing savings already held on deposit, but instead by simply conjuring new money into existence with the stroke of a key."
Hard to believe I know. But apparently this is the world we live in. Supply and demand. If the demand for money is there and there is not enough money in circulation then it makes sense to me now. It has to be created. I assume the teaching in schools would refer to creating more money than is needed.
I am about to throw a lot more quotes with great information of how this all works.
"For example, if Bank A agrees to loan Ben $10,000 for 5 years, it does so by simply creating a new $10,000 deposit in Ben’s account at Bank A. This is not existing money that was simply transferred from Bank A to Ben, but brand-new money that was merely conjured out of thin air. With the new $10,000 in his account, Ben is subsequently free to draw down this $10,000 balance as he wishes to either make investments or purchase various goods and services for consumption. Of course, Ben doesn’t just receive a $10,000 asset as a result of the loan (the money in his account at Bank A). He also takes on a $10,000 liability in the form of a $10,000 debt now owed to Bank A at the end of 5 years."
If I understand this correctly, the new money, the money out of thin air is backed by something. It becomes a liability. The liability is the backing agent for the new money. And as the five years is up and the loan is paid back the liability is gone and you have a solid new 10,000 dollars circulating in the economy.
Below is some fancy accounting. Showing although 10,000 was created out of thin air the fact is there is not change in anyone's networth. It would seem this is very important.
"Bank A
Change in Assets = +$10,000 (Ben’s debt to Bank A)
Change in Liabilities = +$10,000 (Ben’s deposit at Bank A)
Change in Net Worth = None
Ben
Change in Assets = +$10,000 (Ben’s deposit at Bank A)
Change in Liabilities = +$10,000 (Ben’s debt to Bank A)
Change in Net Worth = None"
Like I said I am only doing clips of quotes here. Do read the full article. But now I am going to go into what he talks about, about Central banks making money.
CENTRAL BANKS
Here are some examples of how a central bank can make money out of thin air.
"In Canada this is generally enacted through direct loans to the federal government. When the government issues bonds or treasury bills to borrow funds for spending purposes, the Bank of Canada simply buys these bond/bills and pays for it by conjuring new money into existence."
Is your mind blown yet? Mine is. Is this throwing everything you ever thought you knew about money out the window? It is for me. But it is making 100 percent sense to me. And is so helping me understand why Hive and HBD is working and will continue to work and expand, well, forever if we want it to.
The article is summed up with this statement.
"We can see, then, that in a modern economy money is created primarily through commercial bank lending and secondarily through Bank of Canada loans directly to the government. While money creation by the Bank of Canada tends to be deliberate and calculated, money creation by private banks is much more dependent on the current state of the economy. Since it is the establishment of new bank loans that create the majority of money, the overall money stock is predominantly determined by the willingness of both commercial banks to make loans and the private sector to take on debt. Understandably, such willingness to both borrow and lend tends to fluctuate significantly alongside the cyclical nature of a modern economic society."
Now I understand what Task has talked about, about debt, and why it is so important.
SUM UP
My take on all this. There is nothing new here really. It is just how things are done that is new. It is still supply and demand. If there is more demand that supply then something has to made to fill that gap.
That can be a countries money supply, that can be stable coins like HBD.
The issue comes in when there is more supply than there is for demand. We know how that works for goods. If a company makes to much of one product and they start sitting on it they have to try and move it. Usually put it on sale.
I would assume if a country makes more money than is needed at a given time, that is where inflation comes from. Trying to get that money to equal the demand.
And with countries creating money out of thin air during Covid19, well I can only figure out that is why we are where we are in 2023.
I hope you got some education out of this blog post. I know I got educated. And let me tell you it could have been a lot longer. Maybe I will continue digging into money. As although this is great information it is only the tip of the iceberg.
Bradley