Nations Agenda™ - Constructive Political Thought
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Millennials, Seize the Future or Lose It All
 
Where Does Money Come From - Part 3

Where does money come from?

We hear it from the raucous voices who don't understand or want to mislead us: "The government is printing money to solve its problems. We need to tie money to the value of gold again... or silver."

Well, if the government actually puts more money into circulation, it causes inflation. The Fed is very, very aware of that, so doesn't do it. It doesn't "print money," to solve problems.

The source of government money

Taxes are the source of most government money. The Fed is another source of Treasury money.

The Federal Government uses various devices to make loans to banks, and sometimes longer loans to industries that are failing and can only be helped by the government.

Where does the government's pot of money come from for loans? One of the big places is our Social Security contributions. Social Security is paid, not as a tax, but as a contribution to a social program. It's a promise to us. The money collected, until recently, far exceeded program needs, so the government "borrowed" it for its use. That's one of the pots of gold.

The Social Security Trust Fund sells bonds. The major holder of these bonds, paying ~4% interest, is the Treasury Department (government) to cover treasury debt (National Debt).

The government also sells bonds and treasury certificates that mature with interest after a few years, to raise money. If China is said to be loaning us money to help us with our National Deficit, it's through buying these treasury certificates.

Where does money in the economy actually come from?

Our expansive economic functions. Huh? Our money doesn't exist in printed dollars, or as gold. There isn't much of printed money actually in circulation - it's largely numbers on balance sheets. Banks make loans on a percentage of their deposits, and they can borrow money from other banks, and short term from the Fed.

What happens in the economy when banks loan money, is that the borrower redeposits it in that bank or another bank. The bank with the deposit can then loan money on its deposit. The borrower then redeposits that money in another bank. This is considered to eventually have a multiplier effect of 10x in the economy.

Just like when you spend a dollar, the next person spends it, then the next, and on and on - it goes on forever... when a bank loans money, through redeposits and new loans, the effect on the economy is 10x the original amount. And the new "money" in circulation, which only exists on balance sheets, is spent over and over again - all having a very expansive effect on the economy.

So while some people think the banking industry is not such a good thing for the economy, it is actually the thing that makes it all work.

Part 4 - Derailing the Economy