Looking at what is happening today in the world, one can conclude that the authorities have recognized that the current crisis is enough to “print”. In short: we will stimulate the economy by giving people money. They will start distributing them quickly and everything will work out? Could politicians be so naive? And will this strategy help?

How is money created?

Let’s start with some basic information. From how money is ever created. Despite the fact that this is one of the most important processes taking place in the economy, it is not widely known, let alone understanding it.

Let’s start with the fact that money is created in two main stages. Now we will describe both.

Stage I: The Central Bank is getting to work

Politicians like to spend money, we all know. Unfortunately, they have no power over money. At least not directly. The government has tax resources. This is still a fairly healthy method of obtaining cash for maintaining administration. But where does this money come from in the first place?

The government first issues bonds, or debt. This way the government borrows money at interest. These must be given back some time but this is another story.

So, to summarize, the government issued bonds. The bonds are bought from commercial banks, charging a commission. Then they quickly sell it to the central bank.

The bonds are now in the hands of the central bank. The central creates money (the currency of the country) with a value that corresponds to the value of the former. These are booked at a commercial bank and then sent to the government. Politicians are happy, they finally got the funds for their social programs. Citizens probably even more – after all, the money almost falls from the sky!

Stage II: Commercial banks create free money

Therefore, the government allocates money for payments to its officials, persons who are responsible for maintaining the infrastructure, for the said social, etc. More precisely: it deposits these funds in the accounts of those people who are in commercial banks.

The currency that we use every day comes almost directly from the government. This has been happening for centuries. Already in the Roman Empire, emperors minted coins and they went, for example, to legionnaires in exchange for their service.

Note that it does not look very good at this stage: the government acquires funds from bonds (debt) and throws them to the market. Then the matter becomes even more pathological.

The money went to commercial banks. These, as we know, live on interest paid from borrowers. To grant loans, however, they must have a partial reserve. So they can’t just borrow as much as they want, they must have a limit. The reserve is the limit. Only that, unfortunately, since the time of the Bank of Amsterdam (it’s really a very distant story) banks do not stick to a nearly 100% reserve, i.e. they lend much more than they actually have. And this is typically new money that goes to markets in the form of loans, debts, etc.

However, all of this can work. And it works. The problem is, however, when citizens massively go to ATMs. For example, anxiety erupts in the country, there is a threat of war or an epidemic. People want to have cash in their socks because for some reasons they stop trusting banks. If we all go for bills, however, it turns out that there are not enough of them so that everyone can get their savings in hand! Not only that, but the bank may also block daily withdrawals, or place limits. Yes, WE ARE NOT ALLOWED TO PULL OUT ALL YOUR MONEY! So are that money ours or the banks?

The above gives an answer to why central banks would like to eliminate cash. If such a thing happens we will completely lose power over money. This is why it is important for people to understand the bitcoin role in a cashless society. Theoretically, authorities will be able to print to power. Of course, this will not stop bankruptcies, but well, politicians probably do not care so much. If you think that this is impossible to happen let investigate the reasons why the big empires fell in the past.

Why do empires fall?

Yes, a good question that allows us to smoothly go to the right part of the article. In history textbooks, you will probably read that the French Revolution was a struggle for social freedom and solidarity. It sounds beautiful. It’s just that icing is bad. A year before its outbreak, the former power could already “boast” that the cost of servicing its debt was as much as 62% tax receipts. The king stopped paying off his debt and was sent to prison and then to a guillotine.

Great Britain did not want to go to open war with Hitler in the 1930s because its politicians were short-sighted and cowardly? It is forgotten to add that in 1939 about 44 percent tax revenues went to servicing the debt of the British Empire. Further indebtedness – which would be necessary in the event of an armed conflict – would have to lead to the collapse of this power. Anyway, this happened after 1945.

How will this crisis end?

Now let’s look at what the US is doing. They have been mass printing money recently, and have even launched something like their 1000+ and 500+ program. Not only that, interest rates are already the lowest in history, which will certainly additionally drive the national debt even higher. Americans, in fear from being unemployed, register massively as unemployed. Similar phenomena can be seen now happening in the United States where weekly jobless claims hit 6.6 million.

It is not difficult to guess how it will all end. Sooner or later inflation will hit us all. Maybe even as high as it has not been for nearly a hundred years. Politicians have probably come to the conclusion that they will print the money to deal with the crisis. And after that everything will be fine!

Unfortunately, this will not be the case. This will probably drive even greater problems, and maybe even war. Yes, we do not want to scare, but the US can afford such madness only because they have a petrodollar in their hands. Without it – e.g. in the event that countries in the Middle East, seeing the weakness of the US dollar, cling to the Chinese yuan more strongly – they may begin to feel strong economic problems, and as a result, as a result of desperation, start a war.

Misunderstanding the essence of problems

There is one more element to this. Politicians today behave as if they did not understand the essence of the problem. Today they should look a few steps forward and use the crisis to stimulate the economy, as a free market would do: deregulate various industries and try to stimulate people to work and employ others. Record money printing today resembles patching a hole in the Titanic with chewing gum.