A strange quirk about our modern financial system is the attitude towards money deposited in and borrowed from banks. Many people think that when they borrow money from a bank, the banks lend money that someone else has deposited.
Just as strange, many people depositing money in a bank think that the bank simply holds it for them as a form of safekeeping. Since most people are both depositors in banks and borrowers from banks, it's a puzzle that both these ideas are held by the same people.
After all, how can a bank both hold a depositor's money and lend it out at the same time? The answer is that they can't. And they don't. Banks don't lend depositors money to new borrowers. They CREATE new accounts for new borrowers. And they don't hold depositors' money. They send it to the Central Bank as "reserves".
The truth is that unless your money is under your mattress or buried in the back yard, you don't have any idea where it is. It could be literally anywhere.
It's all very well to say that your money is in the bank, but what has your friendly bank manager done with it? If it's in the stock market, what has the company done with it? If it's in bonds or a money market fund, what has the government done with it?? And If you have any kind of financial "asset" (retirement fund, insurance, profit sharing plan, etc.) then someone has invested it. It could be anywhere at all!
You may not know where your money is, but you can be sure of one thing. You are not the only one who is spending it! Yes, that's right, with the miracles of modern banking and modern markets, many people can spend the same money at the same time. You may not be able to do several things at once - but your money can!
Everybody has been spending everybody else's money at the same time at ever increasing speeds. They do that by borrowing it. Long ago, they borrowed money that someone else had saved to build things. Then, the banks made money "available" to be borrowed to buy things. Now, people are borrowing money to pay the interest on the money they've already borrowed. It's a sad state of affairs!
Everybody knows how important interest rates are. If they go up, debts can't be serviced, and someone is likely to demand actual repayment. That, of course, can't be done. If you don't believe it, ask almost any banker. Better still, ask almost any Finance Minister.
So, wherever your money is tonight, you can rest assured that it is working very hard indeed servicing everyone else's loans. It has no choice. Old money had something behind it - Gold. Modern money does too - all those loans.
And if the loans go sour ...so will the money!
