Where Does Money Come From?

Money.  What a wonderful word in all its forms.  Cash, Moo-la, Income, all of these words represent the ultimate to a business.  If you have money you are successful, if you don’t you fail.  It seems so very simple, but where does that money you earn and spend actually come from?


As a business the most likely source of income is sales.  You sell something and people buy it.  Actually pretty much all money a company earns comes from this.  But where do the people who buy from you get their money?


Almost everyone works a job.  Businesses pay their employees and employees spend money.  Simple isn’t it.  That is until you add in what most people use to spend money.


This is where it gets hard to follow the trail of money.  Banks and other financial groups lend money out.  That is fairly simple, but how do they get the money to lend out?  Some don’t seem to bother getting money, as evidenced by banks failing.  Others seem to cover it by having investors or people depositing money for safekeeping.  You didn’t think the bank just left your money sitting there did you?  Now when a bank cannot cover what they are lending out they often turn to the central bank of a country.  How does that bank get money?


Countries issue something called treasury bonds.  Basically these are an investment that pays a fixed interest rate and allows the country to use your money for a fixed period of time.  These are sold in huge batches of millions or even billions of dollars at a time.  Private citizens can purchase these bonds, but often they are purchased by other countries.  Now how do other countries purchase bonds?


As talked about here the US is issuing a huge number of bonds this year.  A total of somewhere in the neighborhood of 2 trillion dollars.  Yet at the same time the US has also purchased over 100 billion dollars of bonds from other countries.  Somehow the US and other countries are issuing debt and at the same time buying the debt of other nations.  Some type of magic is happening here to allow a country to borrow money and lend at the same time.  This type of magic is called “printing money”.  The advantage of being a huge country like the US is that people aren’t looking that closely when the US makes more money available each year.  This sadly causes inflation over time but not so much when the world is burning to the ground (financially speaking).

What is the moral of this story?  Well, basically it means that you are making money because of magic.  To me this means that surviving this recession is going to have far reaching effects far beyond what we can even imagine.  Keep an eye on your money, because if the government can make it appear with magic, it can also disappear with magic.

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