What is Money?

Introduction

• Objective: Explain the concept of money to clear misconceptions and misunderstandings.
• Importance: Understanding money is crucial to comprehend the cost of living crisis and the inequality increase during COVID.

Misconceptions about Money

• Money vs Real Resources: Wealthy people often have real resources, not necessarily large amounts of money.
• Different Views on Money:
  • Example: Lending £1,000 and its impact on perceived wealth and debt.
  • Economists' View: Lending creates a perception of increased money.
  • Debt Consideration: Importance of including debts when calculating money.

Understanding Money Creation

• Central Banks: Only entities that can create money out of thin air (e.g., Bank of England, Federal Reserve, ECB).
• Loan System:
  • Process: Central banks loan money to commercial banks, which then loan it to individuals, creating money.
  • Balance of Money and Debt: Total money equals total debt, always adding up to zero.

Implications of Money and Debt

• Debt and Credit Relationship: When one party goes into debt, another accumulates credit/money.
• Impact of Government Debt: Increases in government debt lead to increased money holdings elsewhere.
• COVID Example: £700 billion government debt during COVID resulted in increased individual wealth.

Money Creation and Society

• Lending and Money Creation: Lending is perceived as money creation, but it's a balance of debt and credit.
• Commercial Banks:
  • While they can create loans, they do not change the balance of total money and debt.

Economic Impact

• Quantitative Easing (QE):
  • Affects money supply by increasing loans in the system.
  • Not equivalent to government debt-induced money creation.
• Government Spending and Debt:
  • Can create cash accumulation among individuals, often leading to increased asset prices.
• Wealth Distribution: Disproportionate accumulation of wealth by the rich leads to asset inflation and inequality.

Key Insights

• Money vs Resources: Money is not a finite resource or real resources.
  • It's a distributional tool determining access to actual resources.
• Misconceptions: Society can never "run out" of money; it's a balanced system.
• Political Implications: Misunderstood concepts of money scarcity have been used in political narratives.

Conclusion

• Balanced System: Money is a perfectly balanced system of debt and credit.
• Current Economic Dynamics: Government debt has led to wealth accumulation among the rich, affecting inequality and living standards.
• Future Discussions: More on QE and other economic mechanisms will be discussed in future videos.