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 BullionStar.com where you can buy gold and buy silver. Torgny is also the founder of the Swedish bullion dealer LibertySilver.se as well as the Estonian bullion dealer Liberty Silver.ee.

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. 

Gold

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.

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Teaching Children to Be Financially Savvy

Teaching children about the value of money from a young age will make them responsible adults when they grow up. Read on to know how this can be made possible.

Parents are a child’s first role models for learning money management skills. Teaching them simple steps to save money and to make the best use of it, will help them in a long way. Supporting habits of saving and practicing the age old theory of reward for work will make them understand the basics in a better way. Have a look at simple tips that can make children money smart.



1. Introduce money at an early age

Once a child starts going to school, start making him aware about the concept of money. Teach them to save coins or change in their very own piggy bank and let them take ownership of it. Set up small achievable goals for them, and make sure to appreciate them when they achieve it. When in the market let them pay for small things and check if they got the right balance.


2. Encourage the habit of Saving

Talk to your children about their wants and then guide them to save and set a target for them. Smaller children can save for a toy or a game and older ones for a movie or going out. Offer to add if their balance falls short and make it an interesting task.


3. Teach how to work in a budget

Give the children a small sum of money and then ask them to keep part of it aside. Now teach them to manage the whole month in this left over amount. At the end of the month discuss about the savings how they add up to become a bigger amount. Make a daily planner for them that will guide them step by step.

Guest post contributed by:

Author Bio: Lim Chuwei is a Teacher in Singapore at ChampionTutor and highly advocates the use of cloud based application for teaching and learning.

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The benefits of investing when you're young

During secondary school days, I always remember we have to do maths question on simple interest and compound interest. As my maths was not very good during my younger days(often failing my exams), i only understood simple interest but cannot seem to understand the concept of compound interest. I remembered I spent a lot of time looking at the question, putting the numbers in my calculator just to find out how compound interest works. Through the patience of a good maths teacher in secondary school, i manage to get quite a reasonable grade during my O levels and it grew my love for numbers.

Fast forward to today, compound interest is still a concept which is important in our lives. Understanding how compound interest works may probably change your life once and for all. Compound interest works through time. The longer the time period, the faster the compounding effect.

Let's illustrate with examples of 2 scenarios:

1) Suppose you have zero savings now and you want to achieve 1 Million dollars in 20 years, how much do you need to save per month? The answer is 4166.66 per month. Saving this amount is quite hard for most people unless you have very high pay.

2) However, if similarly you have zero savings now and also want to achieve 1 Million dollars in 20 years, you can actually just save $2000 per month. If you invest $24000/year($2000x12) and let the money compound at 8% per year(with interest reinvested), you would have achieve 1.19 Million by the end of 20 years. Now saving $2000 per month may be more achievable. The key is you must invest your money and let it compound. In fact, if you think 8% return is too high, even at 7%, you would similarly have achieved 1 Million dollars(1.05 Million to be exact) in 20 years. The 8% interest can come in the form of dividends from stocks. Reinvest the dividends to let it compound.

Some people may say 20 years is too long. Yes it is if you start investing late. If you start investing at the age of 25, 20 years later you are just 45 which is still not too old for many. Achieving 1 Million dollars is possible for most average income earners.

Start investing when you are young to experience the benefits!

Watch the following video to understand how investing can compound your money in an unimaginable rate:

If you would like to learn how to start investing, read this post which i've written sometime back last year: Investing basics - How do I start investing?

*All figures above are denominated in Singapore dollars 

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