More Wealth, More Debt

All Money Comes from Debt

All the money in your bank account right now was created from debt in one form or another.

The government creates money by issuing debt (bonds.) It then pays this money to public service employees, and the money eventually gets spent into the economy. The money from private sector jobs comes from debt as well. Small businesses often go into debt (business loans or re-mortgaged homes) to start up a company so they can pay their workers. More established companies pay their employees with revenue from selling products or services 🙂 But in order to have sales in the first place, they need customers. And most consumers spend money by either using debt (credit cards, and other consumer debt) or by using cash from their wages, which as explained earlier, eventually leads back to a source of more debt because of those business loans. When people sell their homes, usually most of the money would be paid by using debt called a mortgage. So everything in the financial world revolves around this four letter word.

Whenever people get a loan from a bank, such as a mortgage, the overall money supply in the country grows, which translates into more economic growth. But that also means more people will be in debt. Even central banks acknowledge this to be true.

“whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.“

~Bank of England

That “deposit,” is just a digital balance that appears in one’s bank account. It can be withdrawn as cash and spent. But the debt will remain until the money is paid back. We can’t introduce new money into the economy without also creating the same amount of debt. Similarly every time someone pays back a loan, money is destroyed along with that debt.

To understand money, we need to learn about debt because they are opposite sides of the same coin. Many financial advisers encourage people to pay off their debts. And many of my friends are debt free. Hey, good for them 😀 But if everyone tried to pay off all their debts the money supply would dry up, millions of jobs will be lost, and the economy would collapse.

For better or for worse modern society can’t function without debt 🙂 If you want to learn more, the 12 year old girl in this video does a much better job than me at explaining how money works.

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Random Useless Fact: Proper use of punctuation can be very important.