Lions of Singapore

Funny Money

Larry Haverkamp

Creating Something from Nothing

DID you know that governments can create money from nothing? It is almost like creating matter from a vacuum and happens all the time.

It works like this: Suppose George finds an old brick, paints it gold and convinces his bank to accept it as a $1,000 deposit.

The bank retains 10 per cent ($100) and loans $900 to Pete who uses it to buy a flat-screen TV from Carolyn Cable.

She deposits the $900 in her bank which again holds back 10 per cent ($90) and lends out the rest ($810).

This continues until the new loans decline to $0. I added them up and it totals $10,000. (Trust me.)

Incredibly, George's gold brick was phoney but it managed to create $10,000 in real money. Economists call it 'printing money' and governments do it too. The only difference is that instead of a phoney gold brick, central banks write a $1,000 cheque backed by money it doesn't have.

Commercial banks are in on the scheme and agree not to cash the central bank's cheque, but to treat it like real money and lend it out immediately. The loans create $10,000 of new money in the process I've described above.

Central banks, especially in the US, have been doing this at a record pace recently.

In recessions - like now - it works well. It's free money, makes people feel richer and helps pull an economy out of its slump.

The only worry is inflation, but that's unlikely. If prices rise too fast, central banks can shrink the money supply by doing this same process in reverse.

Spend more to make more

An equally popular device is for countries to spend their way out of recession.

When you and I spend, we become poorer. But a country can spend, say, $1 billion for a bridge and generate new wealth that exceeds the cost of the bridge.

Does it mean the country gets a free bridge simply by spending the money to buy it? Incredibly, yes.

It is called 'stimulus spending' and is effective in boosting self-contained economies like the US, China and India.

Unfortunately, it doesn't work well for small open economies like ours. Most of our spending - about 60 per cent - flows out of the country to pay for the imports we need to survive.

An easy way to rid debts

LET'S say George visits from America and passes an art gallery in Ang Mo Kio.

He spots a lovely painting of a naked girl and asks the owner, Terrance, 'Is this pornography or art?'

Terrance says it's art so George whips out a $1,000 note as a deposit.

When George leaves the store, Terrance grabs the money and runs over to settle a $1,000 debt he owes to his daughter's tuition teacher, Ms Tay.

Ms Tay has a gambling problem and gives the $1,000 to her brother, Desmond, to repay money she had borrowed to play 4-D.

Desmond says, 'Thanks Sis' and uses the money to pay Calvin at Cool Computers where he had purchased a notebook on credit.

Calvin uses the $1,000 to pay Eric Wong for fixing his car six months ago.

Eric is a full-time mechanic and part-time art lover. He takes the $1,000 to his art dealer, Terrance, where this story began. He pays the final instalment on a picture he bought last year.

The next day, George shows up with his wife and - too bad - she won't have that naked girl in her house. Terrance has no choice but to refund George's $1,000 deposit.

Think about it. George left a $1,000 deposit and took it back the next day.

No income or profit was generated. Somehow, however, it has caused $5,000 of debts of five people to be repaid. All can now look optimistically toward a debt-free future.

Is this a solution to the world's financial crisis? Can we do the same to eliminate a few trillion dollars of worldwide debts?

It's food for thought.

09 June 2009