Where money comes from
Most money today is lent into existence. How credit creates money, why that makes economies move in cycles, and what it means for markets.
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In this video
- A bank loan creates new money and a new debt at the same time. Governments borrow by selling bonds.
- Since the link to gold ended in 1971, money is backed by trust and grows through credit.
- Cheap credit speeds growth up, repayments slow it down, and a deep enough slowdown becomes a recession.
- Each phase of the cycle favours different assets, and the central bank sets the price of credit.
Next videoMacro FirstThe central bank’s 2 levers1:48A central bank has a job and 2 levers: the interest rate and the balance sheet. How it uses them through the cycle, and why markets react to every inflation and jobs number.
Key terms
- Fiat money
- Money that has value because a government declares it, not because it is backed by gold. All major currencies today are fiat money.
- Money supply
- The total amount of money in an economy. More money chasing the same goods tends to push prices up.
- Economic cycle
- The repeating pattern of growth, peak, contraction and recovery that every economy goes through.
- Recession
- A period in which the economy shrinks instead of growing, usually with rising unemployment.