Money, money, money that’s all people care about these days. I feel like our whole society is going into a downward spiral of mental degradation because we choose to be slaves to money, people let it control them instead of controlling it. Over the years people have described money as the root of evil and still others have described it as doer of all good, what is it then? good or bad?; well I think that money is neutral and it is made bad or good based on the motives of the people who use it, so it can cause great harm if used in a bad way or great good if used in a good way, but do the people today driven by these motives truly know about this thing they want so much? I don’t know, but I could bet that most of them don’t.
Lets ask ourselves, what is even money? well money can be divided into two things one is the paper notes that everyone knows to well which is federal money, the central bank prints the notes and they then go into circulation throughout the country, a country’s basic economy and growth is based on this kind of money. The cyclic nature that drives an economy fascinates me, it all starts with a basic transaction when one person exchanges money for goods or services from another person, this money becomes the other persons income and the more he innovates and sells the more income he has this increases his purchasing power and so he buys more from another seller hence giving more money to that seller and this cycle of progress continues on and on, if i were to plot this on a graph it would be a straight line which keeps on ascending in a steep slope, it is the progress line, and I hope for our sake it keeps rising.
The human race as it is, cannot be satisfied by just this steady pace. A person needs to do more that what he is capable of hence the creation of a second form of currency which has no actual physical form it is simply termed as credit. Banks exist for this sole purpose, when a person goes to a bank and opts to take a loan, the bank pays him a certain amount of money in expectations that he repays it and voila! credit is created. It helps people get things they cannot afford, they basically make a bet on their future selves to pay of the debt that they owe the lender. Credit is truly one of the most misunderstood forms of payment in today’s world, it could be incredibly good or disastrously bad. When you consider the economy as a whole credit creation is done by banks and is regulated by the central bank of the country, people borrow money and pay something extra which is known as interest which is essentially profit for banks, the central bank regulates credit in the economy by increasing and decreasing credit rates. So here’s where the cause and effect relationship comes in again when the interest rates are reasonable people borrow more and when people borrow more they have more spending power and so they buy more the money that they spend then becomes another persons income and here’s the thing, when the other person gets this income which was at first the first persons debt, he gets this money without any debt so his income increases and so does his creditworthiness. This creates a chain reaction and many people’s purchasing power as well as income increases, the producers respond to this by increasing the prices of commodities that they sell this is called inflation; now this can’t go on. Too much inflation is always bad so the central bank increases interest rates causing people to shy away from taking more loans and again as a result incomes fall which causes a deflation and decrease in economic activity, at this point the central bank is sure that inflation is no more a threat and so it will once again reduced interest rates and so the cycle continues. Yes! it’s a cycle, a time of prosperity where people are borrowing loads and spending loads and everything seems so fine, a period of boom has set in. I don’t think I should explain what the disastrous implications of credit are in this particular post or I’ll just go on forever but lets just say it’s not all sunshine and rainbows from here on.
So, If you’re still reading and you haven’t been bored by my constantly deviating into tangents and I do so love doing; I would say that much of the money that we think that exists today actually doesn’t (the US has 2 trillion in paper money and 14 trillion in credit) and when I considered this I began to resent credit solely on a micro scale like for me as an individual. I believe that I cannot truly progress financially in life if I rely on credit too much, to hell with credit cards! who needs them, not me. People paying 12% on their credit cards will never make any real financial progress in their lives. This being said, you cannot have no credit but you should try your best to minimize it.
So for now, goodbye.
- Eleven steps to a financial crisis (cyprus-mail.com)