Jun 202014
 

All Money Comes from Debt

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

philosoraptor.money_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 It can be withdrawn as cash and spent.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.

14-06-debt-broke more debt

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.

14-06-punctuation

14-06-punctuations

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freedom 35Royal Bank of Canada | stock purchaseHannah @ Wise Dollardebt debsLiquid Independence Recent comment authors
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phil
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Money is a form of debt… it has to be as it is an IOU for something. If I do something for you, you pay me, or are in debt for the favour, of about equal value or some higher amount if it is of interest as part of the agreement to be paid at some future time for services rendered (debt + interest over time). Newton’s 3rd Law – For every action, there is an equal and opposite reaction. In reality we can expand on this law to add a time constant. If you get something now and I get something later you pay a premium for my interest in doing it now, knowing I’ll be compensated later… My brain hurts now… – Cheers

FinanceJourney.com
Guest

It is a wonderful explanation about money and debts.
Whenever I say I borrow money from credits to invest in stocks, my friends and people usually say it is the worst idea on the earth, but I couldn’t be in this level without the borrowed money. Actually, I gained a lot from debts.
Everyone borrows money at some point in their life. No one can buy a home if they don’t want to borrow from bank with form of mortgage, students cannot invest themselves without student loans, and business cannot start without loans, etc.
So,
“Don’t work for money, let the money work for us, especially let the others money work for us” 😀
Best Regards,

Asset-Grinder
Guest

All depends on the debt you incur. Debts to grow your wealth are alright. Debts to buy material deprecating assets are horrible. Too bad people more than often fall in the latter category.

Good Day and Grind On!

Pullingmyselfup
Guest

Its really nice to read some real discussion on debt. It gets thrown around like a dirty evil 4 letter word that is the destroyer of civilization!
If you like roads, bridges, dams, power plants and the like then you can thank debt for it. Yes taxes pay for it… through paying off municipal bonds. Its not like politicians are going to be good and save the money ahead of time.

Someone’s debt is someone else’s income.

debt debs
Guest

Ok well don’t blame me if the Canadian economy takes a nose dive in 2018 when the last of my debt is paid off. If I were a conspiracy theorist, then I would say that the governments are going to try to sabotage all PF bloggers, except for you of course. You’re doing your part with a little bit of debt. Carry on. You know I only come for the jokes, ay? Kidding, totally kidding… cool dinosaur… I think I saw him here before. Is he your new blog resident mascot? 😀

Hannah @ Wise Dollar
Guest

Great post! This is reality, indeed. Most people start their business initially from business loans or mortgage funds. Starting a business isn’t easy and if you don’t have enough funds and doesn’t know how to manage your debts or loans, you surely won’t survive in the business world.

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[…] can print currency. Due to fractional-reserve banking, all chartered banks can create new money through lending. This license to manipulate the money […]

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[…] previously explained the relationship between money and debt and how the two represent different sides of the same coin. There can’t be one without the […]