06 Our Current Monetary System – M2 Money
Where most money comes fromOne part of this system we live in, is that most of the money that exists in the world actually doesn’t even exist at all. Let me explain:
- We covered the previous post that M1 money is basically money printed by the central banks as they ‘buy’ government bonds. They basically have a bank account with ‘infinite’ balance. So lets say they issued £100, for example,
- When that money gets to us, it mostly goes into other bank accounts. So now that bank has £100 on their records/balance sheets,
- By law they are allowed to issue loans to people using that money, but they only need to hold a small percentage % of that in their actual storage. So that means they can lend out £90, while still holding £100. That now makes a total supply £190, with £90 created again out of thin air.
- Now the person who received that £90 loan would most likely deposit it into a bank account himself, and therefore their bank now has £90 in their accounts. But they are allowed to lend out some, or all of of that while still holding that initial amount. So they do, they lend out £81 to someone else. So now we have £271 in circulation.
- That other person who receives this £81 loan has to put it somewhere, and he leaves it in his bank, and the cycle continues of loaning and re-loaning.
- That initial £100 of money created by the central banks can eventually inflate to £900+. That means that more than 10% of the money supply is all created by your normal high street banks through loans, mortgages etc.
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