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USA Real Estate Blog

Tale of Money – Pradeek Mohandas – Medium

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The rich get fucking richer and the poor get poorer …but WHY?

All our life’s revolve around this thing called money, we do a 9- 6-hour job for making money. Most of our life is dedicated to money. The richest 1% holds 50% of all the money in the world.

Why don’t the Govt end poverty by just printing more money? Who creates and controls money?

The true begining

Let’s go backward in time, Priyanka want to buy apples from Pankaj.

Step 1 : Priyanka gives gold coin to Pankaj .
Step 2 : Pankaj gives apples in exchange .

But gold was not easy to carry and it could be looted easily. As time passed a smart third person ‘Peter’ came into system and agreed to save guard the gold coins and provide a receipt called ‘IOU’- I owe You. Saying “I have this much gold of yours and you can take it back if you come with this reciept”.

So now Priyanka can give this receipt to Pankaj instead of gold coin. But Pankaj didn’t go back to Peter and take gold because he could buy what he wanted using this IOU . Peter is the ancestor of Bank which inject money into the system. But can we trust Peter? What if Peter print receipt without having gold and provide loan to people? creating money out of nothing, devalues the money everyone else have, this is the biggest scam on planet.

Recent Past

Government and Reserve banks came into existence. Government could only create money equivalent to gold they had in reserve, this is commodity money. In theory, if you have 1000rs note you could go to RBI and get equivalent gold. Money was backed by a commodity mostly gold, silver, oil. After WW2 US dollar became most powerfull currency , indian ruppe was pegged with dollar at 1$ = 4.76₹ in 1947 after independence. Most countries kept US dollar as their reserve. So all world currency was backed dollar.

Move towards Fiat Currency

The commodity money system had many issues ,one of the core problem was it didnt allow easy creation of new money. For Govt to make new bridges, roads, school and development activities money was needed but they couldn’t create it without having equivalent commodity in reserve. In 1971 US president decouppled US dollar from gold standard. This new system was FIAT currency , govt created paper called money and declared it legal tender. It was backed by nothing but trust. Since every other nation was backed by US dollar and dollar became floating , thus all nation’s currency became floating currency. Now giving govt power to print as much as money as they needed thus creating Inflation as a result.

Inflation rate in India (2018) is approx 5% so if you keep a 1000rs without earning any interest on it, after one year it will be only worth 950rs.

robber

Uncontrollable rise in inflation cause HyperInflation. It have happened many times in course of history Germany (1920), China (1949) and most recently in Zimbabwe(2008).

They decided to print more money for making everyone happy and rich, end result was a loaf of bread costing 10 million Zimbabwe dollar. The more money in supply less the value.

1 Billion Zimbabwe dollar equaled to 1 USD .

Present Day

Money is required for a country to grow, it is the creation of money without economic output that leads to higher inflation. Indian ruppe was initialy devalued during INDO- pak and china war. Money was needed to pour into military funding, thus new money was created, devaluing the currency. Thus 1USD become 7.50rs .

How excatly is this money created?

Money needs to be created when a country spend more than its income(deficit spending), thus creating national debt.

Step 1 : Govt treasury creates BOND it’s just a IOU stating (eg: Govt Owes 1 Billion) , thus creating national Debt.

Step 2 : Bond get auctioned and a bank or financial institution pay and buy BOND.(Bank pay 1 billion for the bond)

Step 3 : This Bond is taken to central bank reserve and they write a cheque for the corresponding amount to bank. Bank can now legally type in digits into computer. Thus creating money.

2nd Part of Money creation : The BANKS

Banks multiply money through process of money multiplier. A banks basic income is from loan and interest but did you know when you take , a loan new money is created? And they do this by simply typing numbers into Computer.

Let’s say govt created 100rs and paid Priyanka for her service.
 She now deposit it into her Bank . Now Bank is required to deposit 10% ( % is subjected to change) in reserve . So bank can loan total 90rs to someone who need it.

Arjun need money for buying his new Iphone and he decides to take a loan.

Step 1: Bank loans 90rs to Arjun . He spend that amount paying phone dealer Vishesh 90rs to buy the product.

Step 2 : Vishesh deposit 90rs in bank.

From 90rs bank needs to keep 9rs in reserve and rest it can lend. So now bank can loan 81rs.

Step 3 : Jeril takes a loan of 81rs.
 now total money in system in 100+90+81 = 271rs

Step 4: Repeat

Total money generated from a 100rs is 100+90+81+….. = 1000rs

So typically when u take a loan bank is creating money. It’s not like bank can create as much as they want, they are subjected to rules and regulation. But basically when u take a loan, bank is creating money. Thus more money is created and inflation will keep rising.

Present Continues

This System is bizarre, for this system to keep from falling apart debt should keep increasing, if countries and people paid back loans and stopped borrowing, System will fail. We live and breathe in debt economy. A 10rs maggi will cost you 20rs in the future, that’s a reality. This was kind of okay when wage increased proportionally but from 2008 statics show increase in wages can’t keep up with increasing inflation.

https://www.nationaldebtclocks.org/debtclock/india

The Future

In short one who control money controls the world. And it is controlled by the richest and the banks. They can create burst in economy at will. Economy crisis will come (1920- Great depression, 1982 — Black Monday, 2008 — Financial crisis) People will lose job, Essential items will cost more and the Rich will get richer. But there is some light at end of the tunnel ,people are turning into crypto currency and other alternatives. New systems and frameworks are proposed, Change will come. In hope we live.

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