Debunking Economics - the podcast More on how money is created
Feb 5, 2025
Discover how banks create money through loans and how government deficits contribute to the economy. Unravel the connection between government spending and private sector benefits, and rethink the concept of government debt as a potential asset. Delve into the impact of Donald Trump's tax cuts and explore the world of cryptocurrencies and alternative currencies. The discussion also highlights the dynamics of interbank transactions and the cyclical nature of money, revealing how these factors influence loans, interest rates, and financial equity.
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How Government Deficits Create Money
- Government deficits create new money by putting more money into private sector bank accounts than it takes out in taxes.
- Issuing bonds reshapes this money into bonds held by the private sector but does not diminish the net money created.
Government Bonds Are Not Borrowing
- Government issuing bonds is not borrowing money but converting deposits into bonds held by private investors.
- This shifts government liabilities from deposits to bonds but leaves total net financial assets of the private sector unchanged.
Banks Create Temporary Money Through Loans
- Banks create money by simultaneously increasing deposits and loans when issuing loans to customers.
- Money created by bank loans is temporary and destroyed when loans are repaid.