In recent months we’ve all heard about a measure that Central Banks may use to encourage economic growth after interest rates have hit zero. For those who haven’t heard, it’s called Quantitative Easing. You’re probably wondering what it is and how it works.
I could give you the short answer here but I’m not going to do that. First I’m going to explain the basics of how money is valued, and then you’ll understand what Quantitative Easing is and how it works to improve trade. For those who want instant satisfaction, the short answer is written in bold at the bottom of this article (be warned that it isn’t the nice measure that it’s being made out to be).
We’re going to miss out the origins of money as the transition from bartering one item or more for another item of equal value. We’re going to jump in at the deep end and start from the equating of precious metals with coins, paper notes, cheques (checks for our U.S friends) and digital money. From this point onwards, when I refer to money I mean any form of cash, dosh, wanga – or whatever you want to call it – and any other form of centrally issued product that is used to facilitate the purchase and hire of tangible and non-tangible goods and products from one entity (human, group, business…) by another.
There’s a big, fundamental flaw with any banking system that allows banks to take money from savers then loan it out to borrowers. It isn’t that savers can’t always get to their money when they need it. It isn’t that borrowers don’t always pay it back. It is, however, that banks loan out more money than they have been given by savers to look after and investors to gamble.
Were it as simple as banks loaning out more money than they have in knowledge that they need only keep so much in reserve for the fraction of their savers and investors whom withdraw their money on any given day then there wouldn’t be a problem. What banks actually do is far more serious: they not only loan out more money than they physically have in reserve they also take money from people who borrow it from other banks. Why’s that an issue? Here’s how it works:
Simple World has a population of 8 and enough gold to make $300.
Our governments have poured our tax money into bailing out businesses that have almost deliberately bankrupted themselves. Like so many others, I think that bailing out banks and other badly managed businesses will make little long term difference – the recession will still happen, businesses will still go under, everyday people will still lose their jobs and continue to struggle to feed their families and hold onto their homes. I feel the bailouts will only prolong this recession.
