How Money Moves
The way money is created and moves through the economy can be confusing. Most people think that money is created when they deposit it into a bank or receive their salary. However, these actions are just transfers of money from one person or entity to another.
Transfers, Not Creation
When you receive your salary, your bank balance increases, but the balance of the company that paid you decreases. This is a transfer of money, not the creation of new money. Similarly, when you buy something, like a new t-shirt, your balance goes down, and the seller’s balance goes up. No new money has entered the system; it’s just been moved from one account to another.
The Stock Market and Banks
There’s a common misconception that investing in the stock market affects the amount of money in banks. Some people believe that when money is invested in stocks or mutual funds, it’s taken out of the banking system, reducing the amount of deposits. However, this isn’t the case. When you buy a share, the money moves from your account to the seller’s account, but it stays within the banking system.
How Investments Work
When you invest in shares or mutual funds, your money is transferred to a broker’s client escrow account, which is maintained with a bank. This means that the money is still within the banking system, and the total amount of deposits doesn’t change. The money is simply being used for a different purpose.
Credit Creation and Deposit Growth
The growth of deposits in banks is actually linked to credit creation, not investments. When banks create credit, they essentially create new money by making loans. This increases the amount of deposits in the system. On the other hand, when credit creation slows down, deposit growth also slows down. This is because fewer new loans are being made, and therefore, less new money is being created.
Conclusion
In conclusion, money is not created when we deposit it in the bank or receive our salary. These are just transfers of existing money. The stock market and investments do not reduce the amount of money in banks, as the money remains within the banking system. The growth of deposits is actually linked to credit creation, and when credit creation slows down, deposit growth also slows down. Understanding how money moves and is created can help us better navigate the economy and make informed financial decisions.
