| Here is my understanding: Our money system is based on fractional reserve banking, a system where money is created primarily through loans, which means banks will loan out ~90% (or more) of their deposits (which works fine as long as there isn't a bank run), this results in a chain where a $100 deposit of money eventually will result in about $900 in money created (electronically, out of thin air) in the form of loans to other people, all thanks to that $100 deposit. So the bulk of money is created by private banks. Now the loans made out must be paid back with interest, but there is not enough money in existence today to pay back the loans with interest, which means interest can only be paid back if more money is created (more people willing to take on debt in order to create more money). If more money cannot be created fast enough for the economy, more people will default on their loan repayments and you basically have a built in guarantee of crashes every few decades due to this. The Fed can try to prevent this by lowering interest rates to encourage borrowing, but this only prolongs the inevitable and can make the crash even worse when it does eventually happen. You also have a guarantee of inflation over the long term since more money is being created almost all the time. The government borrows from the Fed, which issues out T-Bills, bonds, etc, but when they want to borrow hundreds of billions, or when the Fed issues billions to banks at discounted rates, I am not sure how the Fed gets that money or who they get that money from. The stock market continues to climb because money is automatically dumped into the market when people are paid. Part of their salary is put into the market for people's 401k's and pensions, so every day there is more money in the market, that is what keeps it going (for now). |