What is money, and where does it come from?

One thing I can tell you for sure – it doesn’t grow on trees! But that doesn’t really answer the question. An article in the New Zealand Herald today caught my eye:

Show me the money: Reserve Bank reveals the ins and outs of printing cash

There is about five and a half billion New Zealand dollars circulating at the moment – in the country and offshore – and hundreds of thousands of notes being destroyed every week.

In 2016, the Reserve Bank destroyed 43 million notes, with a value around $1 billion.

The money is “granulated” down into “very small sort of confetti-sized bits of bank notes” then sent away to a specialised company that recycles them into plastic items one might find at home.

All this money being transformed into plastic on a weekly basis must be replaced.

print money

Thank God for Canada!

New Zealand money is printed much less frequently than it is destroyed, and it’s done overseas.

The notes are printed in Canada because it is not financially viable to run a printing factory in New Zealand. With money only ordered once a year at most, such a factory would lie unused much of the time.

Despite the increased use of Eftpos cards and online banking, the amount of New Zealand cash circulating here and overseas is growing, something that “around the currency world gets discussed a fair bit”.

There are a few “industry theories” on why the around $5.5b in cash is growing. One is that low interest rates means it doesn’t “hurt as much” to hold on to cash.

“You’re not losing interest revenue by holding it to any extent.”

Other reasons could include that New Zealand money was popular overseas, people using cash to avoid taxation, and using cash in the “dark economy” for illegal dealings.

But another thought was simply that increased spending led to increased needs for cash.

One way or another, the Reserve Bank has so far always had enough to circulate, and didn’t have “masses of unused notes sitting around”.

_____________________________

Well, I don’t know about you, but for me, this article raised more questions than it answered.

moneypig

Everyone needs something to believe in

First of all, millions of dollars in “legal tender” are created and destroyed every year – so clearly those paper notes have no intrinsic value. In fact, they’re not worth the paper (or plastic) they’re printed on.

Second, NZ money is printed in Canada – and if that money factory is working all year round, I guess those Canadians must be printing money for a few other countries as well, yeah?

“New Zealand money is printed much less frequently than it is destroyed, [but despite this, and] “Despite the increased use of Eftpos cards and online banking, the amount of New Zealand cash circulating here and overseas is growing.” How so? Was there more cash in the past? And are people hoarding old banknotes? But the government keeps issuing new designs and the old ones become obsolete, so that can’t be true.

The Reserve Bank doesn’t have masses of unused notes sitting around but always has enough to circulate even at Christmas time when demand increases, and the “around $5.5b in cash is growing” all the time.

Smells fishy to me! Obviously, there’s something they’re not telling us. And it could be this:

It’s been estimated that notes and coins in all the world’s currencies represents about 8% of the total world money supply. What? Yes!

If you think you know what money is, and you’re happy now that you know it comes from Canada, I’ve got bad news for you. Even the best economist brains in the world can’t agree on what money is. But one thing I’m sure they will agree on – It doesn’t come from a printing factory in Canada.

What they’ll tell you, if you insist on a definition, is that there is a mysterious algebraic thing they call “M”. There used to be three of these things, M1, M2 and M3 – but now it seems another has been added: M0. Well, actually I think that was a con, because M0 is notes and coins, and all those other “M”s have actually been moved further up into the realms of virtual reality – bank overdrafts, credit card limits, futures, toxic mortgages, quantitative easings, and other stuff we mortals earning normal wages or salaries have no concept of.

How-to-Have-an-AWESOME-Marriage-when-drowning-in-debt

Borrow money from your friendly local banker 🙂

Let me give a simple example. Just before a big commercial shopping event like Christmas, my bank texts me to say there is $20,000 waiting for me. All I have to do is send a text reply to a four-digit number, that $20,000 will magically appear in my account, and I can get on with the business of spreading good cheer to relatives and friends.

I never ask for it – but I can’t help wondering: Is that $20,000 sitting at the bank in a bag waiting for me, or do they give it someone else? What if I change my mind later and ask for it? Do they say, “Sorry, buddy, we gave it to Joe Bloggs”?

And I also wonder, how many other people around the world got the same offer from their banks? A thousand? Ten thousand? A million? What if we all take up the offer? What if we all don’t? Will they print more? Or shred the unclaimed millions?

Then there’s the small matter of debt. The United States of America is proud possessor of the world’s largest economy. It also happens that they are the world’s largest debtor nation. According to Wikipedia, on November 7, 2016, US total gross national debt stood at $19.8 trillion (about 106% of the previous 12 months GDP). I checked the US online debt clock at 10.23 last night, and found that their figure is nearly $70 trillion. Clearly it depends who’s measuring, and how they measure it. Whichever figure you decide to run with, it’s a sizable heap of money!

Well, the next question that arises is, who do they owe it to? I asked a mate at work who seems to know a lot about politics, economics and world affairs. “China,” he asserted confidently, “and Japan.” So, I checked them out.

Turns out that China’s “national debt” as of March 2016 (the most recent figure I could find) stood at the equivalent of $4.3 trillion. The same source informed me that Japanese “public debt” in 2013 passed the quadrillion yen barrier in 2013 (about $10.5 trillion at that time).

Debt

Looks like a tricky situation – and he’s not alone.

Government debt in the UK (ie not counting private and commercial borrowings) amounted to £1.56 trillion, or 81.58% of total GDP, and the annual cost of servicing (paying the interest on) this debt amounted to around £43 billion. The Conservative government pledged in 2010 that they would eliminate the deficit by the 2015/16 financial year. However, “the target of a return to surplus at any particular time was finally abandoned by the then Chancellor of the Exchequer George Osborne in July 2016”. And sad to say, until they start running a surplus, that debt’s only going to get bigger.

Evidently none of the world’s biggest national economies is in any position to lend money to their insolvent neighbours. Fortunately, we have banks that can come to the rescue. Fractional-reserve banking is the current form of banking practised in most countries worldwide. In a nutshell, this system allows banks to lend up to 90% of the money they have in deposits.

The beauty of the system, from the banks’ point-of-view, is that they don’t have to apologise to you when you go to make a withdrawal: “Oh, sorry, we loaned your money to John Doe.” You can have yours, and he can keep his – and the bank can collect interest on the new money it created.

Rolling_Stone_Banksters

Happy bankers 🙂

But what if we all go and demand our deposits at the same time? Luckily every country has an LOLR – which apparently stands for “Lender of Last Resort”, not “Laughing Out Loud, Really”). This is normally the country’s central bank eg the US “Fed”, or the Bank of England, which guarantee to bail out the too-big-to-fail banks when they get caught out, as in 2008.

And since we are assured that those central banks don’t have large stocks of money in their cellars, and tax-payer dollars are already insufficient to balance their government’s books, I guess that means they have to borrow more money from the private banks.

Either that or go cap-in-hand to the money printing factory in Canada. Think about it.

Advertisements

4 thoughts on “What is money, and where does it come from?

    • Yeah, that’s always the problem – even if you try to keep it simple. “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” There seems to be some debate about whether Mark Twain actually said but, whoever did, hit the nail on the head.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s