Friday, January 13, 2012

Change of Hands - Money

During dinner today, my sister posed a question to me regarding the flow of money and the change of hands between money.

Let's assuming in this world we have $X amount of money printed and available. When money changes hands (for e.g Supplier sells meat to Supermarket which in turn sells it to restaurant which in turn sells the same to consumers), does this mean that the amount of money in this world remains as $X? In this simple scenario, money changes hands and nothing is lost (i.e the amount of money in this world remains $X). The question is, if money only changes hands, why are we now facing with a lot of money uncertainty such as debt crisis for example. If Europe has no money, does this mean interchangeably that the money actually "flows" to other nations or other people?

Where do money goes in the end?

2 comments:

  1. The reason was all due to the "virtual money" created by the banking system (Fractional Banking System) :D..
    Basically, let's say when we deposit $X to the bank, the banks would lend out $X to their lender, in this case, you still have $X reflected in your bank account, while other people who borrow from banks would have $X in their hand also.. So, the $X can grow into $2X.. The system would then replicate (i.e. the person use the $X borrowed from banks and purchase something and that person put the money back into banks and banks loan it out). The only limiting factor is the capital requirement (CAR ratio). With CAR requirement as low as 20% now, theoretically, our $X can become $5X in this world :)

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    1. :) Nicely said

      And thanks for the enlightenment :)

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