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  • Rohit Musale, CFA

How is Money Created

Imagine you are playing a game with an opponent, who is an expert at that game.

However, you don't even know the rules of the game.

What do you think, are your chances of winning that game?

The same thing is happening with a lot of people, when it comes to the game of money.

If you do not understand the game of money, the game will be played on you.

So the question is this:

Do you understand the game of money?

Do you know where money comes from?

Do you know who creates money?

Do you know who controls the money supply?

When you start asking those kinds of questions, and you begin to seek answers, you gradually begin to understand the game of money, and you become smarter, when it comes to making financial decisions in your life.

In this post, I want to discuss how money is created.

It is important that you understand this, so that you don't end up working for money throughout your entire life.

A lot of people are busy making money.

But smart people do not work for money.

Smart people create assets that generate money for them.

Robert Kiyosaki once said, "the rich don't work for money".

The rich work to create an asset, that creates money for them.

So let's try to understand how money gets created.

Once you understand this, your life will change forever.

Here, I will take the example of the US.

But you can apply the same concept to almost every country in the world.

More specifically, I talk about the US because it is the most important economy in the world.

Whatever they do, is almost always replicated across the world.

So here is the process of how money actually gets created.

It all begins with a politician going out and making promises to people that, 'he will do this and he will do that'.

Based on those promises, the politician gets elected.

Once he gets elected, the next question is: How to fulfil these promises that were made during the election campaigns?

You need money to fulfil those promises.

So the politician looks into the government treasury account to see if there is any money in it.

And surprise! there is almost always no money there.

Almost every country in the world is running a budget deficit.

What is a budget deficit?

Basically, it is just a technical term.

It simply means that we are spending more money than we are earning.

Almost every country in the world is spending more money than it is earning from taxes or other revenue sources.

If the government is having a budget deficit, it means that it doesn't have enough money to spend.

It is probably borrowing money and spending that money.

The politician finds that there is no money in the government account.

But now, he has made promises to the people.

He will have to ensure that if he wants to maintain the position of power, he has to fulfil those promises.

So he goes out to borrow money in the name of the government.

Borrowing money is fine, but the question is: from whom do you borrow?

This is where a central bank comes into the picture.

This is where the game of money really begins.

This is where the game of money is actually played.

Every country in the world has got a government and a central bank.

The central bank has the legal right to print as much money as they want.

This was not the case before 1971.

Before 1971, almost every currency in the world was one way or the other, tied to gold.

However, the world of money changed on August 15 1971, when the US stopped giving away their gold in exchange for dollars.

In simple words, the relationship between gold and the dollar was permanently cut off.

The world realized this much later over the years.

This gave full power to the US central bank to print as much money as they wanted and every other country followed suit.

That is why you will notice that, before 1971, there was no foreign exchange market.

After 1971, the foreign exchange market began to flourish.

And today, it's worth trillions of dollars, per day.

Coming back to our politician: he wants money to spend.

He goes to the central bank and asks for money.

The central bank cannot just print money and give it to the government, because any bank does not give away money for free.

The bank is not in the business of doing charity.

The bank is in the business of giving out loans.

The central bank agrees to give money, but it agrees to give money in the form of a loan.

The question is: the loan is given to whom?

Well, the loan is given to the government.

It's the government that is borrowing the money, not the politician or the political party.

The politician has the right to approve the transaction.

The politician does not take personal liability.

The politician is simply increasing the liability of the government by going to the central bank, and borrowing the money in the name of the government.

This is exactly where the problem lies.

If I am a politician, and I can borrow trillions of dollars in the name of someone else, then there is literally no limit to the amount of money that I can borrow, right?

Because, I am not borrowing money for myself.

I am borrowing the money in the name of the government.

So, let's say, the central bank prints $1 trillion, and loans that money to the government.

So now, this $1 trillion, is borrowed by the government, not by the politician.

Who do you think is supposed to repay this money to the central bank with interest?

It's the government that has to pay this money back to the central bank with interest, not the politician.

And where do you think the government gets this money to repay to the central bank?

Well, its taxes.

And who pays the taxes?

You and me pay the taxes.

And by the way, that $1 trillion that was printed, and loaned out to the government does not have any gold backing.

To give you an example: if you have $10,000 in your bank account, and if you write a cheque for $5,000, and give the cheque to someone else, that cheque will clear, because you have money in the account.

However, if you have $10,000 in your bank account, and you write a cheque for $15,000, that cheque is going to bounce, because you don't have money in the account.

This concept does not apply to the central bank.

The central bank does not have $1 trillion in their account.

They can simply write a 'bogus cheque' of $1 trillion to the government without having any money in their account.

This is exactly how money is created.

That is a fact.

And that is exactly where the problem lies.

What is the problem?

Well, normal people like you and me, we go to work at a 9-to-5 job.

And let's say we make $7,000 salary per month.

So, we are trading an entire month of our precious time to earn that $7,000, in that particular month.

On the other hand, the central bank can print those $7,000 in milliseconds, because it is just digits on the computer for them.

These days, money is nothing but some digits on a computer.

That is a fact.

Given the system that I have explained it to you, I feel this is very unfair to hardworking people.

One group of people in our society works very hard for money.

Employees, doctors, lawyers, workers, etc.

And there is this other small group of people, who don't work for money, because they can print it.

Such a civilisation cannot persist for long. It will break sooner than later.

The central bank gets full value of every dollar that they are printing.

But the more money they print, the lesser is the value of the salary that people are earning.

Basic economics says that, anything that is more in supply has less value.

If you increase the supply of money, obviously that money is going to have less and less value.

Just look at the price of gold.

In 2000, gold was at $250 per ounce.

Today, it is $1,800 per ounce.

It's not that the price of gold has gone up.

It's the value of money that has gone down.

The value of the dollar has gone down.

It basically takes more dollars to buy the same amount of gold.

That is what I mean by a reduction in the value of the dollar.

More money printing means low value of the dollar.

More money printing means less purchasing power of the salary that you are earning.

That is the game that is being played on you.

And if you do not understand the game, you will keep working for money.

You will keep working for something that is losing value every single day.

This is why I wanted to make this post to make you aware, where exactly money is coming.

How can you apply this knowledge in your life?

What can you do about it?

Well, when I understood this game of money, the first thing that I did was, I stopped working for money.

Why should I work for something that they are printing?

I quit my job.

I started my own business.

I created an asset.

That asset generates an income for me.

I am not trading my time for money.

Time is the most scarce commodity we have.

Why would I trade my time, which is very, very valuable, with something that is losing value every single day?

If you have understood what I have explained in this post, hopefully, this will motivate you to start thinking about creating your own side hustle, or a small business, which can help you generate some extra income, so that in the future, that income would allow you to quit your job and stop trading your time for money.

I don't want you to work for money.

I don't want you to work for something that they are printing.

I don't want you to work for something that is losing value every single day.

I want you to step up in your life, create your own business, build an asset, start earning cashflow every single month, that takes care of your business expenses, personal expenses, taxes, and the bills that you have to pay, so that you have the freedom of time, freedom of money, and freedom of location.


Rohit Musale, CFA

19 December 2022


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