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How Is Money Created? Quantitiative Easing & Debt Based Money Explained

how much is 1 trillion dollars

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How much is 1 trillion dollars? Here’s a way to help you wrap your mind around it. 1 million seconds is 12 days. 1 billion seconds is 32 years. What about 1 trillion seconds? It’s 32,000 years.

us assets 2008 2020 1
How is money created? USD$3 trillion has been added to the money system in Q1 of 2020.

The USA has added 3 trillion dollars into their money supply in the past 3 months of the COVID-19 pandemic. Is that astounding? There have been many financial crises in the past 20 years, just think of the subprime mortgage crisis (2007), Icelandic financial crisis (2010), European sovereign debt crisis (2011), Greek government debt crisis (2012), Chinese stock market crash (2015) and the Black Monday stock market crash (2020). The list goes on.

In 2020, this is probably the best time to get educated about money and how it work. The money that you save isn’t going to grow. You’ll definitely have to find better ways to manage it. Start with learning today.

How is Money Created?

In this 29-minute long video by Coldfusion, gives an objective and full view of how the world money system works. The video breaks down the subject to several chapters. Some of the interesting points of the video is that physical money only makes up about 3-8% of all the money in the world. There rest of the money is made digitally by central banks and fractional reserve banking.

Coldfusion gives a primer on the general concepts of money which we have summarised in the points below:

Physical Money by the Government

The government is the key policy maker with regards to money. They decide how much money gets in the supply, be it physical or digital. They have a diverse set of tools to manage that.

  • The government creates physical forms of money (3-8% of all money), the rest is digital.
  • Seigniorage is the income from printing money. It costs 3 cents to print a $10 note.
  • This income reduces government debt and taxpayer burden. Printing a $10 note makes a profit of $9.97.
  • Governments don’t create due to inflation risk from political promises. Wars will never end that way.

Private Banks & Debt Based Money

I’m sure most people have come across articles about fractional reserve banking and how $100 of deposit can become $1000 of loans issued.

How is money created? You can do it with 0% fractional reserve banking.
There is fractional reserve banking now, at 0% requirement.

However, I think most people don’t know that as of March 15, 2020, the reserve limit has been revised to 0% – banks can create infinite amount of money with no reserves.

  • Private banks create the vast majority of money via loans (97%).
  • The processes are as simple as typing the numbers into a computer.
  • Banks can, to an extent, gamble customer deposits as they legally own it.
  • Too big to fail banks are backed up by the central bank, creating a moral hazard.

Central Banks

Quantitative Easing (QE) is something we are all familiar with. QE is a way for central banks to create money to issue loans directly to the banking sector, large corporations and most recently, the public.

Quantitative easing has led to increased central bank assets since 2008.
Quantitative easing has led to increased central bank assets since 2008.

It’s a way of flooding money into the economy at times of extreme events. As a result of this, the central bank balance sheets have gone completely out of control to prop up the economy a little longer.

The Bank of Japan’s balance sheet is now larger than Japan’s GDP – they own 80% of their stock market. The Swiss central bank owns $90 billion worth of American stocks including Apple, Microsoft, Google & Amazon.

They can create money and buy real assets. Shouldn’t you really read more about it?

us equity is double gdp

Even in America, the ability of creating money can lead to stock markets leaving reality. The US stock market has become almost twice as big as it’s economy. How does that even make sense?

  • Central banks have no savings in their account, can’t go bankrupt but can create infinite money and buy government bonds.
  • A bond is an exchange of money for a promise that the government will pay it back with interest.
  • This money eventually must be paid back by the future citizens of a country either through taxation or inflation.

Consequences Of Such A System

Any increase of the money supply will inevitably lead to inflation. Whether it works out for you or not depends on where you are at that timeline. When central banks create new money, the first recipients of the money are the ones who will receive the most benefits – it’s the people who receive it later in the game that experiences the effects of inflation.

central banks are owning too much
Central banks do own a lot of assets, fueled by QE.

The combination of central bank interventions, bailouts, all made possible with QE, has propped up the banking sector to be able to purchase assets when wealth isn’t created at all. If you could print an infinite amount of money, wouldn’t you buy all the stocks that you can?

QE has been used as a tool to lift the economy and stimulate spending. However, it has been overused multiple times, causing the stock market to be glued to the amount of money in the market, further distorting true value.

In the end, you can print money, not wealth. As the current governments continue to create money, it is going to lead to a great scale of inflation in the future. However, what’s consistent throughout humanity’s history is that out of the worst circumstances, the best innovations arrive.

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