Money is weird

As I was driving to medical school this morning for my two practical tests of the day (histology and anatomy), instead of rehearsing in my mind the branches of the axillary artery or the dermatomes of the lower leg I was thinking about how money and wealth is weird.  May not be the best use of my time but it was interesting.  The basic question/thought I had was “How is wealth created?”  It led to a kind of deep, abstract and a little scary thought that my wife didn’t really care to hear at 8 o’clock in the morning.

Back in the good ol’ days before current market economics and stuff existed, wealth was created when you mined some ore out of the ground and traded it for “money.”  Doing that added directly to the amount of wealth and money that existed in the system.  Governments or banks could print more money based on the gold you mined (Gold Standard).  You could also do the same with new acquired land or with crops.  This sort of wealth could be physically evaluated, moved around and converted to money.  The wealth of the system could increased as long as more goods, land, crops, etc. kept coming in.

The scary part of my thoughts was that I don’t think wealth creation works like this so much anymore.  Nowadays its more about debt and credit.  A bank has $10,000, say, in deposits from people.  It will then somehow loan out 10 times as much money ($100,000) to other people.  It basically just increased the amount of money in the system magically.  The people who get those loans go out and spend it and stuff and pay interest on the loan, somehow increasing again the amount of money that the bank had.  Where do they get that extra money to pay back the loan with interest?  Where does it come from?  The probably get paid by some employer, but I fear that if you follow the chain of money back from the employer it will come back to some bank or government magically creating money out of nothing.

I’m not an economics major, so there probably is some really good answer about how this system works fine, but since I don’t understand it it sometimes scares me.  I think that this is why recessions so easily happen.  If people think that their stocks or money is kind of imaginary or less valuable, then it would literally lose value (stock price dropping or inflation sort of thing).

My other brother (not Nick) is a CFO of a small business.  Maybe I’ll get him to explain how the market works and how it shouldn’t be scary.  If so, I’ll probably make a follow up post.