Looking at what is happening today in the world, one can conclude that the authorities have recognized that the current crisis is enough to “print”. In short: we will stimulate the economy by giving people money. You will start publishing them quickly and everything will work out? Would politicians be so naive? And will this strategy help?
How is money created?
Let’s start with some basic information. From how money is ever made. Despite the fact that this is one of the most important processes taking place in the economy, it is not widely known, let alone understanding it.
Let’s start with the fact that money is created in two main stages. Now we will describe both.
Stage I: the central bank is getting to work
Politicians like to spend their money, we all know. Unfortunately, they have no power over money. At least not directly. The government has tax resources. This is still a fairly healthy method of obtaining cash for maintaining administration. But where does this money come from in the markets? We already translate.
The government first issues bonds, or debt. He borrows money at interest. These must be given back sometime, which has already hit many a power, but this is a topic for the next paragraphs.
So we are at the stage: the government issued bonds. These are buying up commercial banksby taking a commission. Then quickly resell them to the central bank.
The following scheme is created for us:
Government (bonds) -> commercial banks -> central bank
The bonds are now in the hands of the central bank. This creates money (national currency) with a value that corresponds to the value of the former. These are posted at a commercial bank and then they go to the government. Politicians are happy, they finally got the funds for their social programs. Citizens probably even more – after all, the money almost falls from the sky!
Stage II: a commercial bank creates empty money
Therefore, the government allocates money for payments to its officials, people who are responsible for maintaining the infrastructure, for the said social, etc. More specifically: deposits these funds in the accounts those people who are on commercial banks.
The currency that we use every day comes almost directly from the government. This has been happening for centuries. Already in the Roman Empire, emperors minted coins and they went, for example, to legionnaires in exchange for their service.
Note that it does not look very good at this stage: the government acquires funds from bonds (debt) and throws them to the market. Then the matter becomes even more pathological.
The money went to commercial banks. These, as we know, live on their borrowing. To grant loans, however, they must have a partial reserve. So they can’t just borrow as much as they want, they must have a limit. The reserve is the limit. Only that, unfortunately, since the time of the Bank of Amsterdam (it is a really distant story) banks do not stick to a nearly 100% reserve, i.e. they borrow much more than they actually have. In practice, the partial reserve ranges from a few to several percent. loans granted. So if the bank XYZ has deposits from customers for 1 billion PLN and must keep 10 percent. reserves, it can borrow PLN 900 million. And this is typically empty money that goes to markets in the form of loans, debits, etc.
However, all this can work. And it works. The problem is, however, when citizens massively go to ATMs. For example, anxiety erupts in the country, there is a threat of war or an epidemic (how do you know that, right?). People want to have cash in their socks because for some reasons they stop trusting banks. If we all go for bills, however, it turns out that there are not enough of them so that everyone can get their savings in hand! Not only that, the bank may block daily withdrawals, e.g. up to several thousand zł. Yes, WE ARE NOT ALLOWED TO PULL ALL YOUR MONEY! So are they ours or the bank’s?
The above gives an answer why central banks would like to eliminate cash. Then we will completely lose power over money. Theoretically, authorities will be able to print to power. Of course, this will not stop their bankruptcies, but well, politicians probably do not care so much. If you think that this will be impossible (i.e. these bankruptcies), investigate with us the reasons why the powers fell …
Yes, why are empires ending?
Yes, a good question that allows us to smoothly go to the right part of the article. In history textbooks you will probably read that the French Revolution was a struggle for social freedom and solidarity. It sounds beautiful. It’s just that icing is bad. A year before her outbreak, the former power could already “boast” that the cost of servicing its debt was as much as 62 percent. tax receipts. The king stopped paying off his debt and was sent to prison and then to a guillotine.
Great Britain did not want to go to open war with Hitler in the 1930s because its politicians were short-sighted and cowardly? It is forgotten to add that in 1939 about 44 percent tax revenues went to servicing the debt of the British Empire. Further indebtedness – which would be necessary in the event of an armed conflict – would have to lead to the collapse of this power. Anyway, this happened after 1945.
How will this crisis end?
Now let’s look at what the US is doing. They have been mass printing currencies recently, and have even launched something like their 1000+ and 500+ program. Not only that, interest rates they are already the lowest in history, which will certainly additionally drive the government’s pull to indebted the country. Americans, fearing they are unemployed, register massively as unemployed. Similar phenomena can be seen now or we will only see in other parts of the world.
It is not difficult to guess how it will all end. Sooner or later it will hit us all inflation. Maybe even as high as it has not been for nearly a hundred years. Politicians have probably come to the conclusion that they will print the crisis. And after the matter!
Unfortunately, this will not be the case. This will probably drive even greater problems, and maybe even war. Yes, we do not want to scare, but the US can afford such madness only because they have a petrodollar in their hands. Without it – e.g. in the event that countries in the Middle East, seeing the weakness of Uncle Sam, cling to the Chinese dragon more strongly – they may begin to feel strong economic problems, and as a result, and as a result of desperation start a war …
Misunderstanding the essence of problems
There is one more element to this. Politicians today behave as if they did not understand the essence of the problem. Today they should look a few steps forward and use the crisis to stimulate the economy, as a free market would do: deregulate various industries and try to stimulate people to work and employ others. Record money printing today resembles patching a hole in the Titanic with chewing gum.