PLEASE NOTE:

MyNews24 is a user-generated section of News24.com. The stories here come from users.

 
Derrick Spies
 
Comments: 18
Article views: 1
 
 
Latest Badges:

 
View all Derrick Spies's badges.
 

What is money?

26 November 2012, 07:15

What is money? Or more specifically what is money in today's economy?

Today's money is known as Fiat currency (from the Latin meaning 'let it be done') and has no intrinsic value, as it is not backed by reserves of any kind. In other words you cannot exchange the money in your wallet for its value in gold or silver (reserves) like you were able to in the past.

Instead, a country's currency is pegged at a value determined on its overall buying power in relation to other currencies, most notably the American dollar.

Essentially it has value because our government tells us it has value by calling it legal tender, and because we believe it has value.

Money is usually defined as a medium of exchange; a unit of account and a store of value.

I would add to that and say that money is debt.

Why is money debt?

Any money produced has interest attached to it. When the South African Reserve Bank releases money into the economy, it attaches interest to it, what we call the repo rate - currently at 5%.

What this means though is that whenever new money is issued into the economy, it immediately has the expectation of having to create more money in order to pay for its creation. (The repo rate is the rate the central bank charges the commercial banks - Standard Bank, Absa, FNB etc-  who in turn charge an even higher rate, known as the prime rate, from the general markets.)

Currently, for every R100 released by the South African Reserve Bank, it expects R105 back.

So where does the other R5 come from?

That's easy.  We get it from the marketplace, you say.

When we sell something, we add value to it. So let's say we use the R100 to make a plastic Santa Claus, we sell it for R120. We are then able to pay back the bank the R5 extra and we even have R15 left over for ourselves.

But what about the person who gives you the money, or the person who had it before him?

Remember ALL money created bears interest. So irrespective of where it is in the market system, there will always be a shortfall.

But the items themselves can increase in value, you say.

This is true. Items do increase in value. This is called inflation and is not a good thing for money. Rather than lifting the system out of debt, it erodes the value of money.

Remember money is needed to purchase the item. The higher the cost of the item becomes, the less buying power - the less value - the individual unit of money has.

This is why the Reserve Bank can target inflation by easing the interest rates on money.  By reducing the cost of the original money, we do not feel as much pressure to increase the value of items to try and pay back the debt created by having money.

But there is still debt. Money cannot make more money without increasing debt.

Isn't the debt covered by the growth in the economy, you ask?

Again, economic growth is driven by the pursuit of money. Investors (people with money or who borrow money) will build factories and create products to sell to make more money. the more money they make - the more money in circulation - the more the economy grows.

But ultimately, where does the money come from? The Reserve Bank. No-one can have money that has not been issued by the bank and ALL money bears interest. In other words, the more the economy grows, the larger its debt burden.

But I'm not taking foreign currencies into consideration, you say.

Fair enough, but remember, all currencies in today's economy are Fiat, so whether it's the pound, the euro, the dollar or the yen, they have all been released into the financial system by a reserve bank or equivalent and have interest attached.

So any direct inflows of money from one country to another, while easing the receiving country's debt, results in outflows from the other country, increasing their own debt.

So what if Reserve Banks were to have a negative interest rate?

Well, the scenario has been proposed and is even being seriously considered as a way to address the current financial crisis. Japan is looking at implementing negative rates and some US government bonds are already offering negative rates.What a negative interest rate means is that you would be charged interest for keeping money in a bank and would earn money on your debt.

It would certainly drive up demand for debt. People would want to pay off their accounts first to get rid of their money and then use their credit cards as much as possible to drive up their debts in order to earn money.

Banks would be quick to give out loans and would want to reduce their cash reserves, people would keep cash on hand, rather than in a bank where they would have to pay for storing it.

It could lead to a new surge in economic growth, something that is desperately needed in today's stalling global economy.

But it may also have unforeseen consequences.

Remember money has no intrinsic value, and if having money costs you money and owing money earns you money, then the very nature that money would take on in a negative interest environment undermines its own value. Simply having it reduces its value.

Rather than inflation we could see a rapid deflation in prices as people get rid of assets in exchange for debt.

And what happens when the Reserve Banks have to return to positive interest rates? When people suddenly have to start paying for their debts they would have created?

My conclusion

The system of Fiat money cannot last. The evidence is all around us. The debt burden is everywhere and the more money that is created the greater the debt burden becomes.

The question is, what happens when the system collapses? When the value we give money no longer exists. When the money we have can no longer buy things we need and the debt that is owed cannot be repaid?

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.
 

Read News24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
18 comments
Add your comment
Comment 0 characters remaining

Read more from our Users

Submitted by
Johnny McIntyre
Sticking your head in the dagga

The war on drugs has been raging on for a few decades to no avail. Drug use, especially cannabis, is at an all time high and continuing to grow as increased enforcement efforts seem to have no effect.  Read more...

0 comments 0 views
Submitted by
Legens Monspubis
Religion should remain in all sch...

Children should be exposed to all religions , both current and past. It should be taught to them on an even basis and particular emphasis should be placed on its history.  Read more...

1 comments 0 views
Submitted by
Percy_Makholwa
Mazrui and the South African serv...

As much as Ali Mazrui saw in West Africa, the problem of western appetites without complementing and satiating western technologies, the same comparison could easily be made in urban SA. Read more...

0 comments 0 views
Submitted by
Noli Zwe Hlope
Poor Reeva, not given enough just...

I have to say that, in this country the biggest criminals always get away with the crimes that they do.  Read more...

4 comments 284 views
Submitted by
SharksterII
Correcting Theists on alternative...

After we investigated the conduct of one of the more famous individuals based on his sexual conduct in my last article, I thought we can address some of the more commonly used arguments. Read more...

8 comments 202 views
Submitted by
Avril Parker
Oscar: Justice was served

Oscar should have told the truth from the start. He has given the courts the run around. Read more...

6 comments 617 views

Jobs in Cape Town [change area]

Property [change area]

Travel - Look, Book, Go!

Magical Massinga

Spend 5 nights at the gorgeous Massinga Beach Lodge in Mozambique and only pay for 4 from R13 220 per person sharing. Includes return flights, accommodation, transfers and romantic turndown. Book now!

Kalahari.com - shop online today

Save up to R1000 on Hisense smartphones!

View the large range of Hisense smartphones. Buy today and save up to R1000!

Deal of the week!

Save R1200 on the Samsung 48” smart full HD LED television now only R8799. Buy now!

Toys 4 for the price of 3

Buy 4 toys and get the cheapest FREE! Offer valid while stocks last. Shop now!

Mind blowing prices – As seen on TV

Get mind blowing prices on 1000’s of products! Shop now.

Save 20% on Nivea beauty products!

Buy any two Nivea beauty products and save 20%. Offer valid while stocks last. Shop now!

OLX Free Classifieds [change area]

Samsung Galaxy s4

Mobile, Cell Phones in South Africa, Western Cape, Cape Town. Date October 24

Best bargain in big bay

Real Estate, Houses - Apartments for Sale in South Africa, Western Cape, Cape Town. Date October 25

VW Golf 6, 1.6 Trendline (Excellent condition)

Vehicles, Cars in South Africa, Western Cape, Cape Town. Date October 25

 

services

E-mail Alerts The latest headlines in your inbox

RSS feeds News delivered really simply.

Mobile News24 on your mobile or PDA

E-mail Newsletters You choose what you want

News24 on your iPhone Get News24 headlines on your iPhone.

SMS Alerts Get breaking news stories via SMS.

Blogs Your opinion on you, me and everyone.

Calais Website keywords automated by OpenCalais.

 
Interactive Advertising Bureau
 
© 2014 24.com. All rights reserved.
There are new stories on the homepage. Click here to see them.
 
English
Afrikaans
isiZulu

Hello 

Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.


Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.

Settings

Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.








Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.