Where Does Money Really Come From? Prism14 on Rethinking Money, Debt, and Growth

Where Does Money Really Come From?

Most discussions about money, taxes, and national debt start off with a fundamental misconception. Money isn’t just something governments collect to spend, nor do taxes merely cover public services. And the national debt? It’s not a burden in the way most imagine. In fact, these views miss the real story: Money is primarily created through bank lending, sparking economic growth before it even begins.

Banks extend credit based on expectations of the future, effectively “creating” purchasing power that funds investment and drives growth. Taxes and bonds, often thought of as the financial lifeblood of government, instead serve to stabilize and steer the economy, managing demand and inflation rather than simply “paying the bills.”

Redefining Debt

National debt is often seen as a weight on the shoulders of future generations, but it actually forms the backbone of private sector savings and financial security. Government bonds are some of the safest assets available, underpinning banking, investment, and pension systems. Calls to “pay off” this debt would mean pulling these stabilizing assets out of the financial system—potentially destabilizing, not protective.

Money’s Triple Helix: Creation, Growth, Change

Today’s money isn’t a static concept but a dynamic interaction between bank credit, government policy, and economic growth. This interdependence is much like a triple helix, with each strand constantly adapting and influencing the others. Bank credit creation, financial innovation, and economic growth are tightly bound, evolving together. Seeing this in action gives us insight into why conventional financial policies often miss the mark and why financial innovation always seems to slip beyond the reach of regulation.

Why Countries Borrow in Their Own Currency

Countries that control their currency have unique advantages when borrowing domestically:

• Sovereignty over monetary policy without the exchange rate risks of foreign debt.
• Safety valves like central bank intervention, which can prevent defaults if necessary.
• Financial stability, as foreign currency debt leaves economies vulnerable to global market shifts and capital flight.

But not every country can borrow freely in its own currency. Known as “original sin” in economics, this privilege depends on strong institutions, credible monetary policy, and deep domestic markets.

Taxes and Bond Sales: Two Different Roles

What might seem redundant—money printing and bond sales—actually serve separate purposes. Monetary policy (money printing) helps control inflation and economic activity broadly, while fiscal policy (bond sales) funds government spending more precisely. Just as a household separates checking and savings, this division helps governments manage distinct aspects of financial health.

Modern Monetary Theory (MMT): A Fresh Take on Government Spending

MMT shifts the narrative of public finance: Government spending, for sovereign currency issuers, isn’t limited by tax revenue but by inflation. This shift suggests:

• Spending until full employment can stimulate growth, with taxes used to prevent inflation rather than fund operations.
• Debt doesn’t limit spending but represents private sector savings.

Critics worry about inflation and international capital flows, pointing out that MMT might oversimplify the complexities of a globally interconnected economy. However, the core insight—seeing government spending and taxes as tools to manage rather than limit the economy—continues to spark fresh discussions.

Rethinking Money for Tomorrow’s Challenges

Prism14 helps you understand today’s financial complexities from new angles, providing insight into the ever-evolving financial system, its adaptations, and why traditional policies often fall short.

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