“You have to know the past to understand the present” – Carl Sagan
We spend many years in school and for some reason this vital instrument on which our society runs is not part of school curriculums. We never really get to learn about money until either our parents proactively teach us at home or when we come of age and start working and earning money for a living. Learning about money at this stage is often too late for many.
There are many tragic examples of people who have had the fortune to earn money quickly while young through professional endeavors (high paying jobs like professional sports, high profile acting careers or even large lottery winners) who go bankrupt, simply because they never learnt about money and how money works.
What is money and how did it come about? Money by definition is a medium of exchange in the form of coins and banknotes, which is created to facilitate trade for goods and services. Money is created through three channels – by government through Central Banks who print physical notes or produce coins through a coin mint. Commercial Banks play the biggest role in the creation of money in an economy’s money supply through DEBT.
The video below illustrates how private Commercial Banks create up to 97% of all the money in circulation. The third method used to create money is through Quantitative Easing (QE). QE is monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.
The manner in which global money supply is being managed by Central Banks to deal with crisis today appears unsustainable. The unfettered printing of money in the form of quantitative easing is leading to higher and higher inflation resulting in the devaluation of currencies. In the developed markets the use of interest rates as a policy tool to manage inflation has also become ineffectual as interest rates are near or on zero percent.
There is a significant disconnect between the real economy and the current levels of stock markets which hold a large proportion of institutional and wealthy individuals wealth. The video above also illustrates how the markets are seemingly tied to this relentless printing of money by central banks. This all looks like a huge bubble that is about burst, and where does this leave the man on the street?
In the next post we will look at ‘The Future of Money’ by taking a closer look into emerging technologies like Fintech and Blockchain which could provide a solution to what appears to be an inevitable reset of the global financial system in the horizon.