Archive for September 2007

Money As Debt

This animated video is from a while ago, but it has recently been making the rounds again. It provides good background about how the modern monetary system came about, particularly the relationship between money supply and debt, and their role in the economy.

Those of you that have taken any kind of introductory macroeconomics course will probably roll your eyes for the first 10 minutes or so, dismissing the whole thing as something you already know (like the guy in this RedFlagDeals thread), but give it a chance and watch it all the way through; or at least until the 30 minute mark. At that point it switches from education to socialist propaganda, and thus rapidly becomes less useful.

I don’t claim to be any kind of expert on the subject, but here are my comments on the video:

  • Normally money gets created when a person creates a good or service. They produce something, and this productivity has value; they exchange this value for money because it’s more convenient than bartering.
  • Loans and debt come into the picture only if that same person wants to exchange some of their future productivity for money now. e.g. Say the person needs a car for a new job, so they borrow $30,000 of “future productivity” from a bank. The implication being that they will eventually generate much more than $30K in goods and services at their new job, easily paying back the loan.
  • So given that the future productivity doesn’t exist yet, it makes perfect sense that banks must “magically create money out of nothing”, as the video repeatedly points out.
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