Friday, March 7, 2014

Where does the free money come from?

About the Guest Author​
The guest author of this blog post is Mr. Torgny Persson. Torgny is the founder and CEO of the Singaporean company where you can buy gold and buy silver. Torgny is also the founder of the Swedish bullion dealer as well as the Estonian bullion dealer Liberty
Torgny has a Master´s degree in Economics and has 10 years experience as a gold market expert and bullion dealer.

Where does the free money come from?

As a kid I was always fascinated by the interest appearing in the savings book at the end of the year. Yes, I am actually old enough to remember the physical savings book. I was eagerly going to the bank with my piggy bank the 2nd of January each year to find out how much free money I was going to get.
Where is the free money coming from? 

Want to study Economics?

I have a Master's degree in Economics. I'm sometimes asked to share my best advice to prospective students considering Economics as their major. Don´t do it. Yes,don't do it is my advice. 

Even so, I'm proud of my background as an economist. It has taught me a lot about how the world isn't working. I have to tell you that advanced economics was the starting point for a turnaround in my economical thinking. 

My first years studying micro- and macroeconomics was a lot of fun. Demand and supply. Carbon paper logics of the world. I was thrilled. A lot of logical reasoning theorized. I enjoyed it. It opened a new window of reasoning for me.

The latter years were also amusing but not because of the logics of economics. It was amusing because the economic models got more and more far-fetched. 

What started out as modelling the behaviour of people ended in obscurity. 

Take a professor in economics. A man with a lot of respect and authority. Seldom much real life experience. After reviewing too many increasingly unrealistic and illogical studies by his colleagues, he (because it is often a male) feels that he can come up with something equally abstract. A couple of peer reviews, a sweaty seminar and a journal publication later, and he can collect the membership card to the economics admiration club. 

To learn economics, self-studies are much superior to institutionalist studies. Mises is an excellent organisation teaching real life economics. For news coverage, there´s Zerohedge. By keeping to these sources you can learn much more about economics in a month than in four years at university. 

Where is the money?

Back to my original question. Where does the interest come from? It´s as simple as it is enthralling. The money for the interest didn´t exist before it was credited to the account. The interest is a mere book-keeping entry creating money.  

Interest, like money, is not a tangible. Most of it doesn´t exist in physical form. In Singapore, only 5.5 % of the money supply exists in physical form. In the US, the equivalent number is about 7 %. In Sweden, where I originate from, the banks are pushing strong for a cashless society, with the result that only 4 % of the money existing as notes and coins.  

When a bank is extending a loan to a borrower, where does the money come from? Depositors you may say. Wrong. Only a fraction originates from the depositors. All banks have much less deposits than money loaned out. The money is simply created out of thin air. It is lent into existence. Our current monetary system making this possible is called fractional reserve banking. With fractional reserve banking, a bank only needs to have a small fraction in reserves and can loan out create money out of thin air. 

How much is USD 17.4 trillion? 

With the stock markets like the S&P 500 index setting new records by the day, many financial journalists have a positive outlook on the economy. And sure, compared to many other economies, the Singaporean economy is strong. 

But what if we look at the major underlying economies of the world? What has changed since the financial crises in 2008? Sure, the consumption rate is higher but what does that tell us? If you look at the figures, there´s some scary information embedded. Western economies like the US is deeper in debt than ever before. 

USD 17.4 trillion. How much is that? Well, it's SGD 22 trillion. Hey wait, there's no such thing as SGD 22 trillion. The total money supply in Singapore, even calculated broadly, is only SGD 0.5 trillion. The US national debt is thus 44 times all Singapore dollar currency in existence!

I don't know how much a billion is as I can't really comprehend numbers like that. We as people are not equipped to understand trillion, quadrillion or billion figures. Money is supposed to be a unit of account, a frame of reference. USD 17.4 trillion is so out of touch from reality that not many even seem to notice how underwater the developed economies are. 


How does gold come into the equation?

History shows that gold is keeping its value and purchasing power over time.

Gold cannot be created out of thin air. 

Gold is no one's liability.

What if you put away SGD 1800 in a safe deposit box and left it there for 20 years? What would happen to your purchasing power in those 20 years? Judging from the history of unbacked fiat-money, there would be a loss in the value of the money. 

What if you instead deposited 1 oz of gold in the safe deposit box. 1 oz of gold today cost about SGD 1800. What would happen in 20 years? The gold would likely increasing in purchasing power being worth much more in 20 years. Why? Because it has kept value for 6000 years. Gold can´t be created out of thin air. Gold is a tangible asset in high demand but in limited supply. Gold is the superior metal because of its metallic characteristics such as being dense, soft and malleable.  

Gold is wisdom. Gold is a return to the safety of the past. 

Gold is a way to sleep tight at night - Gold is money! 

How to buy precious metals in Singapore

There are several different dealers offering physical precious metals in Singapore. The most important things to consider when buying physical precious metals are:

- Making sure that the dealer is presenting prices transparently online
- Ensuring that prices and storage fees, if you choose to store your bullion with the bullion company, are competitive
- Checking the track history and reputation of the bullion dealer

At BullionStar, we are proud of our price competitiveness, integrity and service. We treat our customers with utmost respect and confidentiality. We aim to offer the lowest prices for bullion in Singapore. If you choose to store your precious in our storage solution called My Vault Storage, storage is free until 2016!

If you are looking for further information about precious metals, please browse BullionStars articles section which cover topics such as precious metals, monetary economics and general economics.

Investment in Precious Metals in Singapore

Investment Precious Metals (IPM) has been exempted from GST in Singapore since 1 October 2012 as the Singaporean government is actively trying to create a regional hub for gold trading in Singapore. Singapore is one of the best places in the world to own and store precious metals since:

- There is no taxes for precious metals in Singapore (No GST or no capital gains tax)
- There is no reporting requirements for precious metals in Singapore
- Singapore is very safe with very low crime rates
- Singapore has very strong property ownership rights
- The Singaporean government is aiming to create a regional trading hub for precious metals in Singapore.

Enjoyed the article?


  1. Hi SGYI,

    How about silver? Do you think Silver has much more growth potential than Gold, whose price i think is already sky high?

    1. Hi aceirus,

      Gold price is definitely higher than silver. If comparing the value, I would think silver has more upside than gold.

      But, gold is still the inflation hedging asset for many people. During war times, people hold gold and not currency. Silver I'm not too sure though. If the demand for silver increases in the future, then silver would really go up alot.

    2. Hi SGYI,

      For me I have been buying silver bullion and didnt want to touch gold. We shall see in 10 years time how it turns out :)

  2. Hi SGYI,

    Gold and silver are both important commodities that we all should have in our asset portfolio. But I only believe in physical precious metal - bullion as the true real asset to hold during times of inflation and uncertainty.

    SG Wealth Builder

  3. The market doesn't behave like it's supposed to be as of late. With the Greece and china situation, gold should be above $1300, but it doesn't.

    I'm eying on copper and metal companies waiting for the panic trigger.

    1. Hi Vivianne,

      It looks like the panic and fear is not at the peak yet. I think there is more to come. Its only the beginning now. Strangely, silver actually dropped quite a lot last week. Indeed its behaving weirdly.