Want to Make Money? Then Understand How Money Works! Here’s Your Complete Guide.

by | BiggerPockets.com

A key to mastering anything is understanding the foundation or base of that concept so that you can build on it. As investors, our route goal is often to turn money into more money. If that is the case, then isn’t it important to understand what money is, where it comes from, and how it works at the base level?

In school, we are not taught about money on a macro or even micro level. Many do not understand the basic concepts of money, let alone how money works. Stepping back and looking at our monetary system as a whole gives us the ability to look at investments with a wider lens than just focusing on a small part of the grand scheme.

Many look at investments by focusing only on the specific asset. This would be like watching a football game through a drinking straw. You might be able to get a clear picture of the ball, but you don’t really know what is going on around the ball to make it go up and down the field.

Looking at the asset and the market would be like watching the same football game through a paper towel cardboard tube. You would see some of the players close to the ball and understand why the ball is moving one way or the other. But if you remove the straw or tube and look through a full, unobstructed perspective, you will see the coaches calling plays, the weather that affects the play calls, the team of coordinators up in the box relaying information down to coaches and players, and many other important factors.

A full perspective in investing would look at the whole system — how money works and why all parties are incentivized to do what they are doing. Understanding this will allow you to answer some basic questions like “Why should I invest in real estate?” or help you see opportunities where others miss.

If we want to start at the root of an investment, it is vital to understand what money is, how it works, and what incentives are behind all parties involved in a transaction. To understand this, I believe we have to understand our monetary system. Our monetary system is a complex shell game mixed with smoke and mirrors that are hardly ever discussed, let alone taught. In this article, I will do my best to describe how the United States’ and many other countries’ monetary system works. I will then share specific examples of how this information can be utilized in real world investing with a focus on real estate.


Our Monetary System

Our current monetary system in the U.S. starts at the United States Treasury. The Treasury creates a bond to place for sale at bond auction. A treasury bond essentially is an IOU that states, “If you (buyer) gives me X dollars, I (treasury) will give you Y% interest on that money over Z years, plus the full X dollars in principal.”

If the U.S. treasury says, “We would like to sell $1 trillion in bonds,” who steps up and buys them? The world’s biggest banks do. Then those banks look for buyers of the bonds at a premium. Here is where the Federal Reserve comes in. The Federal Reserve will buy the bonds from the big banks and wire them a nice payday of electronic money. You may wonder where the Fed got all that money from. They created it out of thin air not by printing, but by simply doing an electronic credit to the big banks’ account at the Fed.

Related: How Many Real Estate Deals Could You Do With an Unlimited Supply of Money?

You may be scratching your head. So, let me break this down: Big Bank X bought a $2 trillion bond and sold it to the Federal Reserve for $2 trillion, plus a premium. The Fed then says, “Instead of me sending you a check, why don’t I just credit the savings account you have here at the Fed?” Big Bank X says, “Sure, go ahead.” With a couple of keyboard strokes, the Fed just created $2 trillion of electronic currency sitting in Big Bank X’s account.

Sound like nonsense? Here is a quote from our former chairman of the Fed, Ben Bernanke, describing the real world example back in 2012 during a lecture at George Washington University:

“Now, you might ask the question, well, the Fed is going out and buying 2 trillion dollars of securities — how did we pay for that? And the answer is that we paid for those securities by crediting the bank accounts of the people who sold them to us, and those accounts, at the banks, showed up as reserves that the banks would hold with the Fed. So the Fed is a bank for the banks. Banks can hold deposit accounts with the Fed, essentially, and those are called reserve accounts. And so as the purchases of securities occurred, the way we paid for them was basically by increasing the amount of reserves that banks had in their accounts with the Fed.”

You can see the full lecture here and this exact quote at 19:08 of the video.

So now magically Big Bank X has all this money in its account at the Fed. What will Big Bank X do with all this new money in its accounts? Well, Big Bank X just did pretty well in buying treasury bonds, so why not go buy some more? They go back to the bond auction, buy more bonds, and yet again, the Fed buys the bonds by crediting their account. This leaves the Treasury with a bunch of electronic money the bankers paid them. Big Bank X is nice and rich from the premiums. And the Fed is unaffected because all they did was enter a transaction on the computer to make it happen, and now they start collecting the Y% interest on the bonds they own.

If you still are scratching your head thinking, “No they can’t do that,” here is a quote right from Federal Reserve Bank of Boston, Putting It Simply (1984): “When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”

But wait! Now the treasury has a whole bunch of money. What do they do with it? They spend it! They give it out to different parts of the government, and they spend it on roads, bridges, social programs, and the military.

The owners and employees of the construction companies, government organizations, and any other companies/individuals who makes money from these government expenditures then put their paychecks into their bank accounts for safe keeping.


The Fractional Reserve Banking System

Because we and many other countries use a fractional reserve banking system, banks can now lend a percentage of its total deposits. Although reserve ratios can change, in many cases banks are allowed to lend out 90% of all deposits and keep 10% on reserve for account holders to withdraw if they want their money. This means 90% of the money the workers in our example earned and put into their bank ends up getting lent out. But that money goes somewhere, right? Yes. I’ll give a specific example to explain where it goes.

For a specific but very basic example of fractional reserve banking and what it does to our currency supply, we’ll look at a school teacher. Let’s say a teacher makes $50,000 and has it direct deposited into her bank account. The bank then can and does lends out $45,000, or 90%, of her deposits. Let’s say that bank decides to lend $45,000 to a company to buy a work truck. The truck dealer who sold the truck then takes the $45,000 payment and deposits it into their bank account. The bank then lends out 90% of that, or $40,500, to someone who wants a boat. The buyer of the boat then hands $40,500 to the seller, and the boat seller deposits it into his/her account. And then boat sellers bank lends out 90%. This goes on and on until the $50,000 that the teacher deposited is expanded to $500,000 in bank loans.

When you hear that there isn’t any money being printed, they are not lying. The printers might not be running, but the currency is being stretched through our banking system. The reality is 92%-96% of all currency created is formed in this exact banking system.

This constant increase in currency in the economy is sure to have an effect. The more currency in the cycle, the higher prices climb to meet that supply of currency. Everyday people then work to pay for those items that now cost more. We all trade our life and our time here on Earth in exchange for money to buy those very things that keep increasing in cost.


When the Dollar is Worth Less, it Makes Paying Off Existing Debt Easier

What does this all mean? This means the U.S. Treasury is taking on trillions and trillions of debt — roughly $19.5 trillion when I wrote this article, but you can see the real time debt figure here. They are doing this by borrowing dollars into creation from the Fed, which increases the currency supply and inevitably causes inflation.

Why would the treasury want inflation? It makes the massive debt figure hurt less and easier to pay. Let me explain. Four years ago in our example, the treasury borrowed $2 trillion. That $2 trillion maybe had a purchasing power able to purchase 100 aircraft carriers for our military.

But 4 years later, since the magically created $2 trillion has worked its way through our banking system and has become $20 trillion in private debt, the currency supply has magnified, and because of that, the prices on everything have gone up to reflect the excess supply of currency. This increase in prices includes prices on aircraft carriers. So the government got to buy 100 aircraft carries for $2 trillion, but now maybe $2 trillion will only buy 90 aircraft carriers because their prices went up with everything else. This means their 100 aircraft carriers may now be worth $2.2 trillion dollars, but they still only owe the fixed $2 trillion they borrowed. When the dollar is worth less, it makes paying off existing debt easier.

Inflation eating away purchasing power is a tricky thought to grasp, so let’s look at another example. Joe buys a brand new house in 1970 for $22,000, which was the median new home price in the United States in 1970 (you can find the data in this chart). Joe finds a banker that gives him a 30-year fixed rate mortgage. Joe borrows the full $22,000. Over the next 30 years, Joe pays down his mortgage. As he pays down this mortgage, his house, like the price of everything else, slowly climbs due to inflation. But does Joe ever have to pay any more principal than the agreed upon $22,000? No. The debt is a bookmark in time, freezing the dollar’s purchasing power in 1970, even though everything else in the world continues to get more expensive.

Related: 7 Toxic Money Habits That Harm Your Financial Future

The government understands this. Their debt is easier to pay as the dollar’s purchasing power becomes diluted through inflation. On top of this, the increased inflation helps slide income levels up, pushing individuals into higher tax brackets, which makes it easier to collect more taxes to pay for all that interest on the debt.

If you don’t believe me take it straight from the Federal Reserve’s mouth:

“The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money” — St. Louis Federal Reserve Bank, Review, Nov. 1975, P.22

There is one piece of the puzzle that we haven’t covered. Do you remember way back in the beginning when the Fed did some computer entries to buy bonds that pay Y% interest? Well, that means the Treasury, who issued the bonds, owes the Fed Y% interest plus the principal. That has to come from somewhere. Ah, yes, the IRS will collect that money for the treasury through income taxes. Yep, our hard-earned money that is taxed goes to paying off debt rather than fixing our schools, roads, or anything else useful.


How This Relates to You

If you made it this far, you may be thinking, “How in the heck does this relate to me?” It greatly does, and understanding how our money works gives you the ability to see things differently. Not only will it show you how our monetary system is a scam, it will enlighten you to align yourself with the inevitable outcome of this madness.

Why not play the same game as our government? Remember our example of Joe buying his house back in 1970 with debt? Why couldn’t we do the same thing with all our investment properties? I have said several times in other articles, “The most powerful tools in real estate are debt and taxes.” Debt freezes the dollar’s purchasing power in time, and real estate is the most tax-friendly asset class there is.

I can only believe the amount of money falsely created and injected into our economy during the past years of quantitative easing making its way through the banking system will result in inflation. It may take a few years and a few events to happen because much of that money is roosting overseas at this point. But I believe when you increase the amount of currency in the system like our government has, we are bound to see the purchasing power of the dollar go down. This is why debt is powerful, bookmarking in time the purchasing power prior to seeing the inflationary results of our government’s actions. By doing this, you are simply aligning your interest with those in charge.

Ultimately, our monetary system has two paths: It can hyper-inflate, or America will have to make a full-blown overhaul to the monetary system. It is my personal belief that countries will lose faith in the dollar and begin trading in other currencies and dump their U.S. bonds. This will result in much of our quantitative easing money coming back from overseas, and we will go into hyperinflation.

In either scenario, I want to be holding tangible assets like real estate. If prices skyrocket from inflation, good for real estate investors. We will see massive appreciation, increases in rent, and we still only owe our original debt at the lower costs. If the dollars goes down in a blaze and we have a full-blown overhaul, I would like to own something people still need, so that way, whatever the next monetary system comes into play, my assets will be worth lots of the new currency.

Related: Want to Lose All Your Money & Cry Yourself to Sleep? Make These 4 Newbie Mistakes!

Understanding the monetary system can also affect factors in day-to-day operations rather than only macro analysis. Recently, on the purchase of a multimillion dollar apartment complex, I negotiated a 5% increase in LTV if I deposited the 5% difference in a CD at their bank. Until I made this offer, I was stuck at a 75% LTV. Once I made this offer, we bumped to an 80% LTV.

Why would they do this? Because they were able to go lend 90% of my CD out to someone else and earn more interest on it. I was happy because I go to pull the CD money out in 12 months. But in 12 months, does the bank have to call in the loan they gave out on my CD deposit? Nope. Because I understood how the monetary system worked, I was able to borrow an additional $100k. Which, of course, is a good thing, as that debt will likely be diluted through inflation.

Or how about taking the economic concepts of the monetary system and focusing them on a specific demographic or psychographic groups? For example, if minimum wage goes up to $15 an hour, what do you think will happen? Many say, “Well, all the low-income earners will be replaced with robots.” Yes, maybe some, but what is shown in countless studies is more frequently prices of items that are a primary cost to the people of that specific demographic will rise. This is because the currency was forced into one demographic, and in a free market, the prices always adjust for excess currency. The ability to rent (demand) will go up with supply staying stagnant. If the minimum wage gets bumped to $15 an hour, do you think you can expect rental rates in C and D class property to go up? Absolutely. It’s not a discussion of if that’s morally right or wrong; it’s just a matter of fact when it comes to free market economics.

It is so important to understand how our monetary system works and understand why the government does things it does. Having that understanding will allow you the ability to look at investments through a full lens perspective. If you can understand, you can position your own investments in a way that align with the interests of those who call the shots, while also protecting yourself if things crash and burn from the madness.

This was a pretty in-depth discussion. Any questions? How do YOU use the monetary system to your advantage?

Let me know your thoughts with a comment!

About Author

Jered Sturm

Jered Sturm is co-founder and director of sales and marketing at SNS Capital Group. Jered began in the real estate industry in 2006, working for a successful real estate investment company as a handyman. From 2009-2012, Jered co-founded the construction company Sturm Properties. Using his background in contracting and construction, he began investing in “Value Add” real estate. Now, after co-founding SNS Capital Group, Jered has conducted over 10 million dollars in real estate transactions. He currently co-owns and operates a portfolio worth over 3.7 million dollars in investment real estate.


  1. Jade S.

    Fantastic read, Jered. It took me many years to full understand many aspects of our monetary system and the implications of the actions of The Fed. What I found enlightening were insights by the late Nobel Laureate Milton Friedman on why The Fed and central banking are ultimately anti-freedom in their outcomes. He seemed to favor steadily increasing the money supply vs the fractional model you so eloquently expressed above. But no question that real estate has proven to be the perfect tool to buid long term wealth given the tax and inflationary advantages.

  2. Jerry W.

    Great story Jared. Many people do not understand why others are so nervous about the overspending done by our government. I have been expecting rampant inflation like we had in the 1970s to hit. I think the delay is in part because of the amount of bonds bought by China and other countries. The dropping price of oil has helped some as well. Sooner or later this has to end. If the next 4 years end up like the last 8 years I think the inflation will eventually hit. The artificial low interest rates will have to rise sometimes as well.

  3. Seth Holland

    I may be showing my ignorance on the subject but in the event of an overhaul (or crash and burn scenario) would the banks want to liquidate thier debts, or would it be beneficial to let lenders hold on to their properties while the new system is put in place?

    • Jered Sturm

      It’s hard to say. It could play out many many different ways. Obviously, I could be completely wrong as well. But we could see a freeze where banks are not allowed by law to liquidate. I remember hearing one story I think in Zimbabwe when their currency hyper inflated and collapsed where people were paying off their mortgages in 1 12 pack of coke or a gallon of milk because the currency was worthless.
      I don’t know what will happen or if anything will happen. I can only do my best to align myself with those who do call the shots, so if stuff hits the fan their reactions may just benefit me as well.

  4. John Barnette

    Great article. I also follow economic demographer, theorist, adviser Harry Dent. Similar discussions but his analysis has a different end conclusion. Namely that world economies and money go through huge cycles and we are in the beginning of a large deflationary cycle that could ultimately lead to deleveraging/write down of debt. Much based on aging demographic and low purchasing in most of the developed world. Japan, China, most of Europe, Canada, and the US. And then much discussion of the dollar relative to other major currencies. The dollar value needs to be considered relative to the purchasing power and asset protection safety feature. Not in a vacuum but in our complicated world. As much as we have challenging economic times and rapidly expanding debt and money. Japan, China, and Europe are in a much worse situation. We are the least dirty shirt in the laundry hamper if you will.

    Then there is the whole gold discussion. I am on the fence about that. Wildly differ opinions by many smart people about future value. I do agree with one analysis…we cannot carry gold around and use it to pay for gas, groceries, rent, etc. So it may be a store of value to some extent…but we need to have some currency to transact life in the 21st century.

    I think anyway you look at it though….cash flowing real estate is where you want to be.

    • Jered Sturm

      Very thought provoking. Thank you for the comment!

      I am in the same boat on precious metals. The way I see them is an insurance policy to store purchasing power.

      I don’t claim to know exactly what is or will happen but I agree no matter how you see it playing out Cash flowing RE looks like a good place to be.

  5. Cory Adams

    You seem to have issues with the Fed and the IRS. I love it!

    Serious question: if there is a hyper-inflationary scenario do you think that a new currency might be issued and pegged to a value such that it might hurt long term borrowers? We have seen this in other countries. Example: value to pay off a loan might be 40 ounces of gold in USD but after an issue of a new currency the same debt might be 50 ounces of gold in the new currency.

    • Jered Sturm

      Possibly. But I’m not sure why those in charge would want that now that they approach 20 trillion in debt. Economics have become a very confusing house of cards, but the government seems to be not just stacking the cards but they also own scotch tape and are taping them together so they can not fall. I don’t claim to know where it all will end up, but if you’re in a house of cards competition wouldn’t you want to play with the only people who are allowed to have scotch tape because inevitably they will come out on top.

    • Jered Sturm

      It’s a great thing to learn. There are people far far smarter and better at teaching this stuff than myself. My goal was to just get some people aware so they could seek out more info and the very much larger full picture than I could ever fit in an article.

  6. Lowell G.

    Inflation drives prices higher which causes “bubbles” which in turn leads to crashes. Central banks lower interest rates, money supply floods the market, prices rise to compensate the increased money flow and bubbles are created.

    Ask those who purchased homes in 05 before the crash [caused by the inflating of home prices] found it any easier to pay off their mortgage when interest rates went lower?

    Study Japans economy? BOJ used QE, negative rate policy and every other trick they could muster – all to no avail. We are heading the same direction.

    The US national debt has increased by 94% in the last 7 years largely due to fiscal spending to spur the economy and GDP has barley moved. Where is the recovery? Where is the great turn around?

    The actual number of “participants” receiving federal aide in the form of housing, food, medical or cash increased at the end of QE, not decreased.

    The only reason we are not seeing soup lines filled with our older population and little children is because “the soup” is delivered via EBT cards and electronic deposits. IF the Fed’s monetary policies have been effective – i.e. “spur and maintain” inflationary rates, then why is there still over 14% of americans on the public welfare system? That 14% doesn’t even include social security or medicaid/medicare. Thats 100 million people or roughly one third of the population being sustained by government funding. The 2016 budget for welfare spending is 1.08 TRILLION. How is that for an expanding economy!

    The great debt end game is playing out – ask yourself why does the Fed keep interest rates so low when supposedly jobless number have fallen to pre 2007 lows and corporate profits have soared? The current Fed rate is .50%. What is so revealing about Fed rate at .50%? That is a crisis level rate not recovery and certainly not growing economy rate. The rate should be at least 4% if we are doing as well as they claim.

    Now there is clamor of a negative interest rate policy for the US. Japan, Sweden, Switzerland, and several European central banks have already done it. Who buys bonds from governments at negative interest rates?

    In theory lower and or negative rates should encourage consumers and borrowers to spend more freely but the reality is negative interest rates punish savers and just make everyone else miserable. And those negative yields for those who invest? The last time I checked negative yields are considered liabilities not assets.

    Understand the Fed is banker driven, not business driven, or the average consumer driven. So lower rates can have a positive effect to a certain point, but it flattens out the closer you get to zero.

    Read the footnotes from Yellens Jackson Hole speech to get up to speed on this and negative rates.

    I’m not crying “chicken little” but we are far from the pot of gold at the end of the rainbow. No disrespect to the article or the editors who choose to post it but this falls short of “understanding how money works”

    • Jered Sturm

      Thank you for the comment. Yes, there is a lot of balls to be juggled when you tamper with the free market like our monetary system has. Interest rates being one of the many. My objective of the article was to interest people who have never even thought to look at the monetary system and hope they will begin to educate themselves further. I agree with you on some of your points but, the goal was not to teach everything to everyone it was to get people thinking so they can self-educate further into the topics that you mention. Hopefully, they will read your comment and dig deeper. Thank you for taking the time to post a comment.

  7. Be careful with broad generalizations about our monetary system and its shortfalls. Since 2009 “experts” have been predicting a rise in interst rates that has obviously not materialized for many reasons. The ‘hyperinflation’ you talk about has also long been predicted, but fortunately, not come to pass. Our economy has multiple factors beyond supply & demand of our currency that affect inflation. Understanding our monetary system is important, but oversimplification of it can also hurt you as an investor.

  8. Kyle Hipp

    I recommend you visit pragcap.com and read the recommended reading section to learn more on how I align. If you enjoy this topic I believe the information there will be a great primer of education and interest.
    Hyperinflation is not even a remote risk as we sit currently. Hyperinflation has never been caused by “money printing” as it is merely another symptom of the true cause of hyperinflation. Namely these causes are an overthrow of government, massive loss of productive capacity, owning debts in something other than the currency in which one is the monopoly supplier of.
    We are scrapping by with extremely low inflation, in fact it would be safe to say that we have been fighting deflation much more than inflation for nearly the last decade. The federal government must actually deficit spend on an annual basis at least the amount of the trade deficit in order for the private sector to achieve sustainable growth, understanding the sectoral balance approach, mathematically there is no other way as the private sector cannot sustain the debt growth as the last balance sheet recession clearly showed. The value of the US Dollar is not based on faith but rather on the productive capacity of capacity of the US economy with inflation as a hedge. Seeing that inflation is extremely low and we need infrastructure spending ect, I say that this is where we need to spend money from the federal level to promote a strong economy…

  9. Darin Anderson

    “On top of this, the increased inflation helps slide income levels up, pushing individuals into higher tax brackets, which makes it easier to collect more taxes to pay for all that interest on the debt.”

    Income tax brackets are indexed for inflation and increased accordingly each year. Inflation will not push anyone into a higher tax bracket (except for the few things that are not indexed such as the new Obamacare tax, but most other things are indexed). Unless you are arguing that the govt is cooking the inflation books. There are plenty of people who do try to make that argument but I have yet to find a very credible one.

    “It is my personal belief that countries will lose faith in the dollar and begin trading in other currencies and dump their U.S. bonds.”

    People have been warning about this for decades. The only thing that has changed since they started warning about this is that the the U.S. used to be considered solid and the rest of the world merely OK as far as currency stability. Since then the U.S. has probably went down to merely OK but the rest of the world has mostly went to crap. China could dump our dollars any time they wanted over the past 30 years. 8 years ago would have been a good time to start. Instead they bought more, and will continue to do so. We run a trade deficit with them. What are they going to do with all those dollars? Two things. Buy American debt and buy American assets. They are still doing both and there are no reasons to believe they will do anything but continue to do so for the foreseeable future.

    “They are doing this by borrowing dollars into creation from the Fed, which increases the currency supply and inevitably causes inflation.”

    This is a belief is often recited that when the FED creates dollars it inevitably leads to inflation. How do you know this”? The FED has created many new dollars from 2008-2013. They are creating far less of it now. Inflation from 2008 until the present day has been the lowest 8 year period of inflation in modern history (Post WWII). This the monetary definition of inflation but it doesn’t play out in real life that way. It is easy to make an example where if you double the amount of money in a system and hold the goods steady that everything will double in price. Presto, more dollars = more inflation. But it doesn’t work that way for 2 reasons. 1. If the banks hold the dollars in their accounts or on reserve with the fed rather than lending them out they will cause zero inflation. A lot of that has been happening for a number of years now. The Fed could take the dollars away again before they get put out into the economy. 2. If they do get the dollars into the economy but after the first or second distribution in the fractional system they are merely used to pay down debt and put them back into the banking systems reserves then they will also not cause inflation. A lot of that happened via debt pay down and debt write downs in the last 8 years. Certainly that could all change in coming years but the existence of excess money in the system does not have to mean inflation and as of yet it has not meant inflation. It is also not clear that the Fed has necessarily created an extraordinarily larger amount of money this cycle than they have in other downturns. Other than big bank bailouts it is not clear that they have actually added significant excess liquidity into the system. Other cycles have also had bailouts like the savings and loans in the late 80s and early 90s. They have certainly increased their own balance sheet more than other times but with any increase of inflation they can just sell those assets off to remove any excess money back from the system. It is not static and there is no reason to believe the Fed is going to let inflation get to high single or low double digits without responding by removing excess liquidity in short order.

    I frankly wish they would let inflation run to 5%. It would be good and safer for our long term economy if we could get some mild inflation so that we could raise interest rates and have room to ease when the economy hits recession again. Currently we sit on the edge of deflation and a new recession now would be a considerably more difficult challenge to deal with than the last one. Unfortunately the economy doesn’t seem to want to inflate at all right now. All of the Fed’s current tools have failed to spur inflation in the slightest.

    The only way to get inflation to actually go is to get excess money in to the hands of people who are intent on spending it or to have a drastic reduction in available goods with the same dollars chasing them. We certainly don’t want the latter and have yet to get enough wage increases to spur the former. Large, repeated and steady tax rebates would do it. But no one wants to create the fiscal debt mess that would cause. Barring some means of putting large amounts of excess dollars into the hands of 200 million consumers, inflation remains at bay and looks likely to do so for too long. We appear to be currently stuck in the same kind of deflationary environment that Japan has been in for 25 years.

    Even the minimum wage example above would be a drop in the bucket because there are very few people who actually make minimum wage. Only if it spurred wage increases all the way up the wage scale would it lead to any noticeable broad based inflation. To be fair you did limit that effect to the small number of things those minimum wage buyers might be likely to buy. That would have no noticeable effect on our economy as it is far to vast to even notice such a small event.

    I really wish the Fed was more capable or perhaps willing if they used other means of causing inflation. I agree with all the reasons why real estate is a great place to be in such an environment. For those investing in real estate using debt they are well protected from any of the significant inflation that we are unfortunately unlikely to see anytime soon.

  10. John Barnette

    Love the discussion. Talking with a financial advisor with economics backgrond the other day. Also very telling that the velocity of money (an economic measurement that is measured and tracked) has dropped to extremely low levels. Depressionary / deflationary levels. So the fed is trying to stimulate yet businesses are not investing, expanding, hiring at a fast rate, consumers are not spending either. Thusly low inflation.

    • Darin Anderson

      That is exactly right. If velocity is low, then banks aren’t lending, businesses aren’t investing, consumers aren’t spending at any increased rates from previously. As such you can have 10 times the amount of money in the system via electronic money printing and it won’t matter. Money sitting somewhere on a balance sheet, in a vault, in a spreadsheet column, in a electronic bank account, doesn’t do a darn thing. It just sits there. It does not cause inflation by its mere existence. This is what is known as pushing on a string. All the supposed excess fed money is simply pilling up on the “pushing end” of the string. The other end isn’t moving, so all that money siting there has no effect. In fact the Fed has been quite impotent at using the printing press to drive any kind of inflation in the economy.

  11. Ryan Werner

    That is a very informative article. I have heard all of the information on the generation of money but I have never looked at it though the benefits to me. This is a great article to reference whenever the debate of leveraging or buying properties with cash.


  12. Albert Zheng

    Wow. Great Article. I never understood the monetary system well before this article laid it out very clearly. It really helped me better understand the rationale of why the Treasury continues to incur debt. I would love to see a follow on article that discusses more examples like your LTV example where you can leverage the knowledge of the banks’ interests in your favor for REI.

  13. Clayton Swansen

    Excellent article, Jered! I am not well-versed in the macro view of money in the least, but you have done an excellent job of showing how much it really matters to understand the larger principals at work in our monetary system. Might you, or any other readers here have any suggested further reading on this topic?

  14. David White

    Thanks for writing this article Jered. Also thanks to those of you who left information in the comment section. I learned a lot just from reading this article. And I intend to learn more about the subject in the near future.

  15. Carl Mcknight

    Great article Jared! For those wishing an even deeper understanding of the banking and Fractional Reserve system, there is a great book and fascinating book called; The Creature from Jekyl Island by G. Edward Griffin. It’s an eye opener on how banks and the govt work hand in hand to confiscate your wealth. Regarding your discussion on long term debt destruction by inflation; you hit the nail on the head. I found banks in 2009 to write me mortgages on 35k for 30 years, I took out as many as I could and laugh every month when I look at the fixed in time value of those loans 🙂
    Thank you

  16. Kevin Olson

    Great article Jared, I love taking the big picture approach and implementing that to your investment approach. In particular your simple but very true point in regards to a 30 yr fixed mortgage being a permanent fixed place holder to hedge against future inflation and uncertainty. As banks typically expect a loan to avg. 5-7 years, I wonder the true return against inflation etc. if you held for that full 30yrs. Thanks again!

  17. Michael Purcell

    Jered –
    Excellent explanation. I’ve studied our monetary system and you are spot on and you have presented this material in a way most people, y reading two or three times for all the nuance, can understand.
    Thank you,
    Michael Purcell
    BP PRO

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