Quote:
Originally Posted by JG4_Helofly
Hi,
The most important aspect of it is the money creation. So the question how money is created. Most people think, that money is created by the central bank which prints the banknotes. Well, that's no exactly true. In fact, money is created by commercial banks. They create money by lending a certain amount of money to somebody. The money they lend did not existed before. This sounds strange, but it's reallity. This way, any bank can create money from thin air and they make a profit with the interest people have to pay. If the debt is repayed after some time, the money disappears again (not the interest of course).
I know, that's not very precise and really just a summary, but generally speaking it's how it works.
Now, what consequences does this have?
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Hyperinflation is the consequence.
"Cash" used to be backed by gold... so in effect, if a country had $1b they had to have $1b worth of gold in the coffers to back it. Why did it have to be backed? because the banknote (cash) isn't worth the money it is printed on (unlike coins, which btw, have also been reduced in content as to be not worth the amount printed on them) Coins, could at one time be melted down and the gold/ silver/ etc could be reclaimed.
The US has an uneveniable position of running two economies... the offshore oil economy (in which the US prints notes) and the home economy, in which the US prints notes (Quantative Easing). If the US oil economy (Reserve Currency/ FIAT) collapsed, for example by the trade in oil being done in Euro (like it was done with the USD) all those petro $'s would go back to the home economy and that economy would crash overnight (more like crash in the time it takes to run the evening news). This is why the US debased cash from gold in the early 70's... just so they could print.
Cash is just a piece of paper now, with a value printed on it