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Where does money actually come from?
Where does money actually come from?

RNZ News

time20-05-2025

  • Business
  • RNZ News

Where does money actually come from?

author:susan_edmunds] RNZ's money correspondent explains where money comes from. Photo: RNZ / Diego Opatowski You earn it, spend it, invest it. Many of us spend quite a bit of time worrying about it. But do you know where money actually comes from? Here's a rough guide to how it all works. If you've ever heard people talking about home loans being "fake" money you might have wondered what was going on. And while it sounds a bit like a conspiracy theory, there is a little truth to this idea. Retail banks create money through lending. In a recent paper , the Reserve Bank explained how, with an example of someone who wanted to buy a house for $1 million and needed to borrow $800,000 to do so. The $800,000 loan becomes an asset on the bank's balance sheet, because it's counting on the money being repaid. As part of the transaction, the bank gives an $800,000 deposit to the seller of the house, which becomes a liability on its balance sheet. This money has been transferred from the bank to the buyer, then on to the seller. But with the deposit on its books, it can lend against it more than once. Banks don't have to have to hold deposits equal to all the lending they do. The $800,000 of new money created by the initial transaction then slowly disappears over time as the loan is repaid. But at the same time, other loans can be taken out. "The amount of money created through bank lending is ultimately determined by the supply of and demand for bank loans," the Reserve Bank said. As the number of deposits held on the banks' liabilities sheets increases, so too does the potential for people to want to withdraw money. That means banks have to ensure they have access to base money stores (more on that in a minute), or hold other assets that can easily be traded for cash, such as government bonds. The Reserve Bank's capital requirements detail how much capital they need to hold for any amount of lending they do. Economist Shamubeel Eaqub said a loan was basically a promise to pay. "Everything about money is about confidence, a belief system. It's a way for us to pool our confidence in each other and money is the medium of that exchange. "That's what mortgages are, too. The bank is taking a risk - 'I think you're going to be able to pay off the debt' - so it creates a deposit on the other side on the strength of that debt, and assuming the deposits are not going to be called all at one time, it can keep lending the deposit many times." Dennis Wesselbaum, associate professor at the University of Otago, said money created by banks was temporary. "It could be your credit card that you pay back next week or your mortgage you pay back in 20 years." Brad Olsen, chief executive at Infometrics, said retail banks could not go on creating money completely unchecked. "There are some speed limits that exist naturally. Capital requirements mean that banks need to hold enough money-worthy instruments to meet those capital requirements. That means that retail bank lending rises, they also need enough assets to meet the capital requirements as their loan levels rise. There's also a natural level of risk taking within banks - they don't want to lend out so much that they can't service the amount of money people demand from them. Taking out a loan is essentially paying but from the future, and that means banks have to think long term about having rising loan levels and if people will be able to repay them - giving out too many loans, to a level that people couldn't actually repay, would see the banks without the money they loaned out, so the banks want to get the balance right." When 'the government' creates money, it happens through the filter of the Reserve Bank. Money created by the Reserve Bank is known as "monetary base" or "base money". This includes physical currency (about 20 percent of the base) and the settlement cash balances that retail banks hold in their accounts with the Reserve Bank. Banks can use their settlement cash with the bank to buy physical money for their customers. Banks can move their settlement cash between each other, without changing the total level of settlement money. But transactions involving government and the Reserve Bank can change the settlement cash level - primarily through the government issuing bonds that are sold to investors. Remember the government "money printing" during the pandemic, when there were efforts made to keep the economy turning over despite lockdowns? We had the funding for lending programme (FLP), which gave the banks cheaper access to money, which they could then lend at lower interest rates, and the large-scale asset purchase programme (LSAP), when settlement cash was created to purchase government bonds from the market. "The Reserve Bank has infinite power to create money," Eaqub said. "On occasion, especially during Covid, they did try to essentially print more money ... with LSAP and those kinds of things, they were designed to increase money supply. "But it was a very unusual circumstance and a very short-term thing. And even though the Reserve Bank created the money to buy the existing bonds from investors, the government still has to pay it back, which is what we are seeing at the moment. "The way we have set up the system, we can print money if we want to do but we understand that printing an unlimited sum of money would destroy confidence in the monetary system which can then lead to the kind of Banana Republic issues we've seen in other places like Zimbabwe. That's why the link between the government and the Reserve Bank is via the commercial banking system." He said the Reserve Bank paying a dividend to the government was the extent to which printed money would turn up in government accounts. "It's not true the Reserve Bank is funding government borrowing. It could but it would lose trust in the value of the New Zealand dollar, then we would have inflation and our money would be devalued." Eaqub said the system was much more technical than political. "It's faith, an exchange of promises. None of it works when we don't agree." And what's the deal with cash anyway? Although we're increasingly moving to contactless and cashless payment methods, New Zealanders are still fond of cash. There's about $8.6 billion in notes in the hands of the public, up from less than $5b 10 years ago, and there is about $9b total currency in circulation. Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.

Experts weigh in on where they would be investing, amid a volatile market.
Experts weigh in on where they would be investing, amid a volatile market.

RNZ News

time30-04-2025

  • Business
  • RNZ News

Experts weigh in on where they would be investing, amid a volatile market.

Falling interest rates are reducing what people can make from money in the bank or term deposits. Photo: RNZ / Diego Opatowski Investment markets have been volatile in recent months. Share prices have swung as markets digested the impact of Trump's tariffs. But property prices are also relatively flat, and falling interest rates are reducing what people can make from money in the bank or term deposits. So where should you put your money now? RNZ asked a range of experts where they would be investing. Murray Harris said the best thing to invest in was a well-diversified active managed fund. "That is where KiwiSaver is such a good investment vehicle. The best way to build wealth is to have a long-term savings plan that you contribute to regularly and in a disciplined way. "So, contributions to your KiwiSaver account every pay day means you don't have to worry about market volatility if you're in the right fund for your age and goal. Your regular contributions will buy you more units in your fund when markets are down, which you benefit from when markets recover, and those units increase in value … Volatility is your friend when making regular KiwiSaver contributions." Mike Taylor said the best investment was in yourself. "Use market volatility, uncertainty, and dislocation of asset prices to improve your knowledge and understanding of markets. There are countless podcasts to tune into, books to read, and of course, AI to help build your knowledge." Steve Goodey said the Auckland property market could be an option. "Whenever I've looked at the property market over the last 20 or 25 years, the Auckland market has pretty much always been booming every five or six years. For the last quite a few years, it hasn't. "The property market in New Zealand always seems to be strongest when Auckland is booming. To my mind, that makes it very undervalued at the moment." He said, with 15,000 properties on the market in Auckland, there would be a few hundred where the seller was very motivated. "The market needs to clear through that stock to give those people the opportunity to move on. I believe the most opportunity is in the 09 district, with existing housing stock that is a bit beaten up or cosmetically distressed, where it can have value added to it." Greg Smith of Devon Funds Management says New Zealand equities are looking good. Photo: Devon Funds / Supplied Smith said New Zealand equities looked good. "We are coming out of the bottom of the economic cycle, immigration is strong, consumer/business confidence is starting to improve from a low base, and we have another rate cut in a month's time and more though the year to get the OCR below 3 percent. "We are reliant on China a bit but on the tariff side 10 percent to NZ isn't going to cause much of an impact … The relative appeal of high yielders will also strengthen as rates fall. So high yielding, large cap, domestically focused equities. Exporters can also benefit from a lower kiwi dollar." Rupert Carlyon said he still saw opportunities in bitcoin. "We are nervous about the USD given what is happening. We have politicians all around the world that are putting pressure on central banks to increase lending and lower interest rates. As money supply increases which it inevitably will as this cycle plays out, Bitcoin could be a big winner through it all." Sign up for Ngā Pitopito Kōrero , a daily newsletter curated by our editors and delivered straight to your inbox every weekday.

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