Invisible Money: Uncovering the truth

Ever since the introduction of the credit card and the idea of borrowing from financial institutions, people's access to money has never been so great. A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The idea of borrowing and lending money became integrated into the cash flow system of our respective economies. Economists would say that the idea of credit and debt is responsible for granting the efficiency of cash flow around the economy, ranging from cheap loans to expensive investments. If you want to open up a new business nowadays, you simply pop over to your local bank, ask for the required sum of money, sign several documents regarding the mortgage payments, and you would be on your way to set up your business. It is so easy to borrow money nowadays, almost too easy...


*"Out with the money, in with the credit cards": Credit card usage have changed the way we humans purchase goods and investments

However, I believe that credit in itself is a very faulty, and dangerous concept that has the potential to cause detrimental effects to current economies dominated by financial means. Now, before we are able to move on to the term "Invisible Money", we have to establish one concept that people often find hard to distinguish between.

Income vs Wealth

Income represents an individual's consumption and savings opportunity within a specific time frame expressed in monetary terms. In layman terms, it means the person's real assets. Wealth, on the other hand, is a measure of everything that has value owned by a country, an individual or even the individual himself is worth something. There is no universal definition of wealth, but we often find that one person's wealth is greater than that person's income. For example, how does an office worker, who earns $10,000 HKD, be able to pay for a high-quality Armani Suit and still have money to pay for rent, food, transportation, a Rolex...the list could go on and on. From this, we can see that the person's income does not reflect the value of goods he owns. However, as economists, we know that everything has a monetary value that changes through the price mechanism, so there must an invisible force of money that allows the person to expand his consumption beyond his available means, hence the term "Invisible Money". If we go back to our original concept of income vs wealth, then we can see that income represents real assets, whereas wealth includes both real and invisible assets.

Having distinguished between income and wealth, we will now move on to the problem of borrowing money from financial institutions. It is important to realize that majority of our wealth does not come from our income. Actually, much of the money we use is artificial or what I call "future finance". Future finance essentially means that an individual is using more money than his/her actual income by borrowing money. Borrowing money is already using future money, as one is using money that is not originally from his/her own source of income, and has to pay back the money little by little with interest until its returned to the creditor (bank).

The problem with future finance, in my opinion, is the quick deterioration of the bank's liquidity. The frequency of borrowing and lending will pose potential unwanted risks associated. Investment banks like JP Morgan and commercial banks like HSBC are not doing very well recently; on 13th of July, JP Morgan record losses of about $5.8 Billion USD, while HSBC is cutting thousands of jobs in the UK to cut down costs and may receive $700 million USD fine from the US government by financing terrorists and other criminal activities, and money laundering. Another, more 'cheeky' indicator for how badly banks are doing is in the amount of bonus the respective banks' CEO's are earning. If the banks are doing well, then the CEO's will receive a lot of bonus. So how much did they earn this year? No bonus. To show you what the problem is across all banks, please take a look at the diagram below:

1. The public, who want to save money to either receive interest from the bank to his/her account or has too much money to spend (Not likely, except if the individual has a high marginal propensity to save), will choose to put their money in the bank. Hence, the money supply increases in the bank.
2. Firms or individuals who want to invest, or purchase fixed assets or start up new retail outlets will need a large amount of financial backing to support the investments they are going to buy. In most cases, these small firms and individuals will not have saved enough money from their income in order for them to buy the investment, hence they need to ask the bank to lend them money. If the bank gives the firm or individual the green light, the money is transferred and the investment is made. *Note that the borrowed money that the bank gives to the investor is the money savings from our bank accounts!
3. Over time, for about 20 years (this is for my family's apartment flat) or less, the firm or individual pays the bank back in fixed amounts with interest (a percentage of the borrowed money as a "commission" to the bank), which is the bank's profit. This is called a mortgage.
4. When the people who made the bank deposits to their savings accounts decided to spend again and are short of physical money (bank notes), then they will need to withdraw their money from the bank via ATM machines. The bank has no choice but to give them their money.

The bank's return is paid over the long term, whereas the money that the bank borrows to the investors and the money that the people withdraw are immediately transferred, hence the short term. Overall, this leaves the bank with a deficit in their money supply. This lack of liquid assets poses a real danger to banks who profit from interest. It is especially to the banks to lend money to firms who do not have much security or are not as "credit worthy" compared to the large firms. Irresponsible lending leads to the huge problems of large losses; Lehman Brothers had this problem, and was bankrupt since 2007, causing many problems to the worldwide economy. The only way to fix this problem if there was an equilibrium established between the rate at which people withdraw money and the bank receiving their mortgage payments, which is extremely difficult to obtain in the free market. Imagine if all the banks were to go bankrupt, it would be a total disaster.

Of course, we don't really see it happening in everyday life; banks still remain quite positive. For example, UA finance, Promise Ltd., and other financial firms' advertisements tell us how people are happy with credit, well it is quite pathetic in my opinion.

As a Hong Kong resident, I find that there is an issue with the mortgage system, which is called, in Chinese "銀主盤". Essentially, this has got to with the ownership payments to an investment. This banking program helps to pay 70% of the money for an investment, while the owner pays 30% of it. If the owner dies, then the bank, because it owns more of the payment share, has to pay the full 100% and therefore lose money on its investment. Also, the debt will not pass on to the relatives unless stated on the official document. Now we will move on to the US. Unlike other countries, the US has a really loose banking security due to the many issues of unpaid loans over the years. HSBC found out about this and immediately closed down and left the US market in March 2009, only leaving the credit card business to continue operating. It may be to do with cultural issues from " the land of the free", too bad they actually thought it applied to banks.

The final problem is the invisible money itself. We always hear these abnormally large figures of Government debt, such as US's $1.7 trillion USD external debt, or money that the central bank borrows to countries such as the 13 billion euros the ECB austerity package to Greece. Is it possible to transfer such a large amount of money, or rather, is there even so much real money in the first place? Maybe, maybe not; we can't be so sure. The amount of money, as in physical bank notes are definitely could struggle to match the figures that are recorded to be at. Is there such a way for a country to cough up so much money with physical money alone? Even when the central banks print much money to regulate to the economy, it is nonetheless difficult. My theory is that this transfer of money is numerical, as in computers assigning a value to every bank account. For example, if we use credit cards to pay, a numerical value gets deducted from our bank account, rather than money. It would be quite a shock to most people that we don't actually have as much money that we think we do, rather our wealth is determined by a numerical value. The advantage to this is that banks can have some form of flexibility over their money supply by utilizing all of their monetary power to fund large investments while maintaining the numerical value in every individual's bank accounts. However, there are 3 main disadvantages associated with invisible money. Firstly, is that if by some chance that a computer genius is able to hack into the Bank's operating system and mess up all of the values, then it would be difficult to recover one's money. Secondly, if the bank lends money to insecure investors, and are unable to return the money, then it would lead to some people, whose money was used to finance the investment, to not be able to recover their money. Thirdly, invisible money could lead to the formation of a "bubble economy". An economic bubble can be described as the trade in products and assets at inflated prices. One of the main causes of this is liquidity; there is excessive monetary liquidity purchasing too few assets, resulting in the inflation of the good in question to an unsustainable level. Basically, there are no real assets to support borrowing and lending. The Asian financial crisis is an example of this. Printing money may have an effect, but the illusion of an increase in money and income will stimulate spending, causing immediate inflation, further causing problems.

If credit were to continue in this state, we may be seeing an increasing number of economic recessions and banking problems. When we did not have credit, using the only money to purchase goods, then we would not have had so many financial problems occurring. So to conclude, if there is more invisible money, the greater the fragility, and the danger it poses to banks and economies alike.