Let’s use the U.S. government as an example because they’re the largest economy and the dollar is an “international” currency. Side note: Since the 1970’s oil embargo by the OPEC countries, the United States offered the Saudis a deal which turned their currency into the de facto global legal tender. Some aspects of the deal:
The Saudis committed to sell oil for American dollars only on the international markets. They (the United States) would act as a security guarantor to the Kingdom, purchase oil almost exclusively from them, reinvest all the Saudi profits in America, build up their economy through joint ventures/investments, guarantee no interference in their internal affairs, guarantee zero prosecution of any Saudi Prince, both from their state department and from any country or organisation in the world and help fight their enemies by supplying Saudi Arabia with the latest weaponry and training their troops. But I digress……….
Here goes, the government needs money based on promises the politicians made the electorate about all the wonderful things they’ll do once elected. To pay for the campaign promises, the Treasury (part of the Department of Finance) borrows currency by issuing billions in so-called Government Bonds which are in effect glorified IOU’s promising that the government will repay the purchasers of those bonds plus the interest at some future date. This is known as “Deficit Spending,” spending money or rather overspending money you actually don’t have, so you create debt to meet the promises you made. What you need to understand at this point is that when economists talk of our “National Debt,” they’re talking about the total number of Treasury Bonds issued and the monthly interest on them, which means that all our country owes everyone, is wrapped up in these IOU’s. Now these bonds are in turn paid back by you and me and future generations through the same government taxing Us, yip you read correctly. Therefore, when a government issues bonds its stealing prosperity from our grandkids so it can spend the money today. Roughly 40% of all global trade is in government bonds.
Step Two: the Treasury holds a bond auction, and the world’s largest banks show up and compete to purchase part of our national debt to make a profit off us by earning interest on the bonds. Now notice how only the banks are invited to make a profit? Then, through a “shell game,” euphemistically called, “Open Market Operations,” the banks then get to sell some of those bonds to the South African Reserve Bank SARB at a profit. To pay for these bonds, SARB, with ZERO money in their account, because money hasn’t been created yet, starts writing cheques to the banks to pay for the bonds, unlike you and I, who must make sure we have funds in our accounts before we can issue cheques? When SARB issues those cheques, it starts printing money to honour them and at this point currency is created for the very first time. The banks then take that currency and buy more bonds at the next Treasury Auction and repeat the same cycle indefinitely, enriching themselves and raising the National Debt, lol. So what’s really happening is that the National Treasury and SARB are really just swapping IOU’s using the banks as middle-men and ‘presto,’ the banks walk away with money, also known as ‘Fiat Currency.” A build-up of bonds occurs at SARB and a similar build-up of currency at Treasury, this process is called, “Base Money.” The Treasury then transfers the monies to different departments of the government, and the government does some “Deficit Spending” on paying its employees (all governments are the largest employers), spending on Social Programs, spending of Infrastructure, rewarding themselves (the President and Ministers) huge Salaries, and financing Wars. Now, let’s just taking a step back, there’s a big difference between money and currencies as you’ll see in the following comparison:
Money is a store of value, maintains its purchasing power over long periods of time, and is a medium of exchange (backed by either gold or silver). Remember the promise printed on the old paper money that you could redeem the note for a portion of gold at SARB. And because it’s backed by gold, gold is finite; gold cannot be printed nor magically increased
Money is a unit of account, is durable, is indivisible, is portable and fungible, meaning it has the same value for all who trade with it.
Currency isn’t a store of value, and its purchasing power fluctuates from month to month, (through the exchange rate and inflation), currency is also a medium of exchange, durable, indivisible, is portable, is fungible BUT, it isn’t backed by the limited and tangible resources of gold or silver, therefore it can be printed in unlimited quantities, (remember Zimbabwe). Essentially, currency is a claim check, (like the ones you get at a Laundromat), a token, an IOU or a promise, made by SARB. I hope you now understand the important differences between the two; the one is make belief, the other real, tangible and everlasting.
To be continued: