What is money and how does the supply of money actually come about?
Let’s start by using the U.S. government as an example because they’re the largest economy and the dollar is an “international” currency, known as the “reserve 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, commonly known in highbrow economic circles as ‘dollarization.’
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, (there are approximately 8000 of them), 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……….
Step One: 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 FED at a profit. To pay for these bonds, THE FED, 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?