Where does money come from? How is money made? These are two very interesting and mysterious questions most people never think of or know much about. It’s very sad to live an entire lifetime not knowing what money is or how it’s created. Money is important because our whole lives as humans on earth must rely upon this intriguing piece of paper. In simple terms money is the standard object used in exchanging goods and services. Essentially, money is the medium of exchange. Before our time the barter exchange system was the medium of exchange. For example, a farmer could sell three chickens for a cow. Now although this is an example we can all understand that the barter system was ineffective because one good could be valued more than it should be. People had to rely on word being the source valuing their goods.
Today the barter system is abolished and the fiat system is used. In a fiat system, money is printed and assigned a value of dollars. This seems to be a good system, but upon realization it is terrible with only one outcome; more and more debt. Not too long ago countries would use the fiat system and have a precious like gold backed behind every dollar printed. This in effect would stabilize the value of money but creating a set supply and demand. President Nixon in 1971 took away the backing of gold for printed money in the US economy. At that moment the Federal Reserve, the central bank used by the US government, would be allowed to print up as much money as humanly possible regardless of the country’s gold supply. To give you a better understanding that would be like giving an alcoholic a free pass to go to as many bars as possible. Money is simply created out of thin air by printing machines. The difference between an American citizen printing up money in there basement and the Federal Reserve printing up money is the American is counterfeiting and the Fed is producing “monetary policy.”
It must be understood the Federal Reserve is not affiliated what so over with the US government other than acting as a single agency loaning money. I really wouldn’t call it in agency rather a sole conductor of printed money loaned out in the world. Now when this money is printed up and loaned to the US government a puzzling accounting equation emerges. The Federal Reserve buys government bonds, or pieces of paper with a dollar value attached, while the government receives paper money that’s pumped into society. A couple of weird things appear. First, it is well known that the US money supply only has 3% of paper money circulating in the country. That’s right you guessed it right, the other 97% of the money is electronic. I didn’t know what to think of when I heard that at first. That is an insane amount of debt owed back the Federal Reserve, that unfortunately never can possibly be paid back. The second weird thing that appears from this whole exchange of bonds for money between the Fed and US government is the deadly weapon the Fed uses called interest. Of course the Fed has to profit somehow between this exchange and they do so by means of interest. Interest in the simplest terms is the cost of money. When the Fed charges interest for the money they print they do so by controlling the contraction and expansion of money by means of raising and lowering interest rates. The funniest thing about this whole process is how can one pay back the principal and interest without more money being printed to pay the interest? The answer is no one is able to because it’s simply impossible.
Let’s say for example you want to open your own pool service company in Walnut Creek, CA, where I’m originally from. You simply don’t have the money today to run the business. So as all good business people are taught, you use leverage and obtain a loan from the bank. In a very scary way you’re essentially gambling with the bank. You basically tell the bank, “I’m so confident in my business’s ability to perform I will be able to pay back the principal amount and interest loaned.” That’s a risk all business people have to make and deal with on a constant basis. But of course whenever money is involved profit is always glorified. The biggest trick of the whole business risk is that if people don’t have money to spend on your business because they got laid off at work, how can you as a business owner pay for the interest? It’s very scary and often times hidden very well from the country. There many things to consider when you open a business or credit card. The first is to ask yourself is what I’m obtaining a loan for going to produce cash on a monthly basis for me if the answer is no it’s probably not a smart idea to purchase it. The second question to ask yourself is do I have the funds or means of obtaining funds in case I’m not able to pay for the loan. Money is something not to play with by any means. Being smart, informed, and educated about the principles of money and where it comes from is crucial for any business or citizen that expects to thrive in an economy. Watch your dollars and stay tuned!