How Debt Creates Money?
By: Mani Karan Singh
Tags: Wealth, Recession, Banks, Money, Debt

In this short article we will discover an interesting concept that I recently came across about how banks work and how debt creates wealth? This article will be useful for everyone except for true saints. Many of you might already know this concept better so please feel free to share your knowledge in the comment section.

Let’s begin :)

Are you seeing a lot of money floating around, and thinking how people are becoming so rich?

It is because everyone is in debt!

A country’s economy goes up when more citizens are in debt. It goes down as people start paying off their debt.

People fulfill their needs and desires with the money they make. And even when they don’t have such amount, they loan it out from bank.

Dive deep in!

Every bank has something called Cash reserved ratio. Which is nothing but the amount of money that a bank has to keep as savings so that they can not loan it out.

If a bank has 10% Cash reserved ratio. It means that they can loan out 90% of the cash you deposit in it.

Now Let’s say you deposit 1 million rupees in bank A which has a 10% cash reserved ratio. it will loan out 900,000 rs to others and keep your 100,000 in your savings.

Hope you understood the cash reserved ratio.

The bank will give you 6–7% interest on the money you deposit and it will take 10–11% interest on the money it loans out.

A lot of people think that it is the only way bank creates money. NO

Let’s see how?

Banks know of your desires and needs. So they give you special offers on loans. They encourage you to loan out money from them and fulfill your desires and needs.

From your 1 million rs, Bank A has loaned out 900,000 rs to some person. The same person will go and buy a car. He will deposit the amount in the bank which holds a bank account of the car company.

Let’s say the bank is Bank B.

Now Bank B will loan out 90% of the 900,000 rs which is 810,000 to some other person who will again deposit it in some other bank. This process will keep happening and banks will keep circulating the cash.

Now if you see carefully, the 1 million that you deposited has become a little lesser than 2 million only after two circulations.

It has been reported that if bank’s cash reserved ratio is 10% then 1 million will become 1 crore in a span of 10 years.

Now you know the reason why digital currency is being supported in countries. So that banks can have all your money and make more money out of it.

All the transactions that you make are mostly digital. The money that you receive in your bank account are now digital. So basically you don’t receive money, it is your bank who is receiving all the money.

What happens when People start paying off the debt?

Recession!

Recession is a period when the business and industry of a country is not being successful. When the economy goes down and all the small and short businesses fails.

Recession is also like a storm. It clears all the little and small businesses. they all fail and go bankrupt. Only the big and quality companies remain alive.

When recession happens in a country, The country’s central bank decreases the interest rates on loan. So they promote people to loan more money.

When people are in debt, the country’s wealth increases.

:)

END

Thanks for reading! If you know more about this concept and recession please share in the comment section.