Note to Readers — Tarkeen-e-Watan News

Around the world, many of the challenges faced by societies — particularly in developing countries — cannot truly be understood unless we first understand the systems behind them. One of the most important of these is money and capital: how it is created, who controls it, and how it ultimately affects our lives.

To help shed light on these questions, we present an overview of some important realities of the modern financial system and the forces that shape the global economy.

How Money Is Created — And Why the Global Economy Is More Fragile Than You Think

Money shapes our lives. We spend years studying, working, and saving to earn it. We are taught that money is scarce and must be earned through effort.

Yet something strange has been happening in the modern economy.

Governments and central banks can create trillions of dollars almost instantly.

So an important question arises:

If money is so hard for ordinary people to earn, how can it be created so easily?

Understanding this question reveals how today’s financial system truly works — and why many economists believe it is becoming increasingly unstable.

The Three Ways Money Is Created

Most people assume governments print most of the money in circulation. In reality, the system is far more complex.

Modern money is created in three main ways.

1. Physical Money Created by Governments

The most familiar form of money is cash — banknotes and coins.

In many countries, this is issued under government authority through central banking systems such as the Federal Reserve.

But here’s something surprising:

Physical money makes up only about 3–8% of total money in modern economies.

The rest exists digitally.

Printing currency is extremely cheap compared to its value. For example, producing a $10 bill costs only a few cents. The difference between production cost and face value is called seigniorage, which becomes revenue for governments.

However, governments cannot simply print unlimited money.

History shows that excessive money creation leads to inflation — when too much money chases too few goods.

Extreme examples include countries such as:

• Zimbabwe
• Venezuela
• Argentina

In such situations, currency can collapse so dramatically that even millions become nearly worthless.

Until 1971, the global monetary system had a physical anchor: gold. That changed when U.S. President Richard Nixon ended the dollar’s convertibility into gold.

Since then, most currencies have become fiat money — money backed by trust in governments rather than physical assets.

2. Private Banks Create Most of the Money

Here is one of the least understood facts in economics:

Around 90–97% of all money is created by private banks.

This happens through lending.

When someone takes a mortgage or business loan, the bank does not hand out existing deposits. Instead, it creates new digital money by issuing the loan.

In simple terms:

Loans create money.

To the borrower, it is debt.
To the bank, it is an asset.
But to the economy, it becomes circulating money.

When the loan is repaid, the money disappears — but the bank keeps the interest.

The Fractional Reserve System

Historically, banks were required to keep a portion of deposits in reserve. In the United States, this was traditionally around 10%.

However, in March 2020 the Federal Reserve reduced reserve requirements to 0%.

This dramatically increased banks’ ability to create money through lending.

Banks also use deposits to invest in complex financial products such as derivatives — bets on the future prices of assets.

Some estimates suggest the global derivatives market is worth over one quadrillion dollars, vastly larger than the real economy.

2008: The Crisis That Changed Everything

In 2008, the global financial system came close to collapse.

Banks had issued massive amounts of risky mortgage loans. When the housing market crashed, governments had to intervene.

The United States approved a $700 billion bailout to rescue the financial system.

Later, the head of the Federal Reserve, Jerome Powell, explained how emergency money was created:

“We print it digitally.”

This marked the beginning of an era of massive monetary expansion.

3. Central Banks and Quantitative Easing

One of the most powerful tools used today is Quantitative Easing (QE).

QE allows central banks to create digital money and use it to purchase:

• Government bonds
• Financial assets
• Mortgage securities

This increases liquidity and lowers interest rates.

Major central banks such as the Bank of Japan and the Swiss National Bank now hold enormous portfolios of stocks and bonds.

In fact, the Bank of Japan owns a significant share of Japan’s stock market.

Because central banks can create money, they technically cannot run out of it.

But the system has consequences.

The Cantillon Effect: Why the Rich Get Richer

When new money enters the economy, it does not reach everyone at the same time.

The first recipients are usually:

• Banks
• Financial institutions
• Hedge funds
• Large corporations

They receive the money before prices rise and often invest in assets such as stocks and real estate.

This process — known as the Cantillon Effect — increases wealth inequality.

Since the 1980s:

• Asset prices have soared
• Wages have grown slowly
• Housing has become less affordable

Inflation has not disappeared — it has simply shifted into asset markets.

What Could Happen Next?

Economists debate several possible futures for the global financial system.

1. Stagflation

A combination of high inflation and slow economic growth — similar to the 1970s but potentially worse due to record global debt.

2. Weakening Trust in the Dollar

Some analysts believe confidence in the United States dollar could decline if debt continues rising.

Others argue the dollar may temporarily strengthen due to global demand.

3. Modern Monetary Theory (MMT)

This theory suggests governments can print money freely as long as inflation remains controlled and productive capacity exists.

The debate remains unresolved.

The Deeper Problem: Financialization

Over the past several decades, financial systems have increasingly favored speculation rather than productivity.

Large amounts of credit flow into:

• Housing bubbles
• Financial trading
• Asset speculation

Instead of:

• Small businesses
• Manufacturing
• Innovation
• Research
• Education

And this matters because:

Money can be printed.
Real wealth cannot.

Real prosperity comes from productivity — goods, services, technology, and human creativity.

How Individuals Are Responding

Many investors have begun diversifying into assets that cannot easily be created by governments or banks.

These include:

• Gold
• Real estate
• Productive investments
• Cryptocurrencies

For centuries, gold has been viewed as a store of value because no central bank can create it.

Final Thoughts

The modern monetary system runs largely on debt.

• Central banks create money digitally.
• Private banks create most money through lending.
• Governments borrow heavily to sustain economic growth.

This system has produced:

• Massive asset inflation
• Rising inequality
• Growing financial fragility

Yet the system continues to function because people still trust it.

History shows that when imbalances grow too large, change eventually comes — sometimes gradually, sometimes suddenly.

The real question is not whether the system will change.

The real question is when.