#003 Blunt Economics Part 2: Where did the money go?
4 min read

#003 Blunt Economics Part 2: Where did the money go?

Part of Blunt Economics series:

#002 Blunt Economics Part 1: Death of Growth
#003 Blunt Economics Part 2: Where did the money go?
#004 Blunt Economics Part 3: Digital Economy
#005 Blunt Economics Part 4: Change or die trying

Monetary policy, the demand side of economic policy, refers to the actions undertaken by a nation's central bank to control money supply to achieve macroeconomic goals that promote sustainable economic growth.

The bottom line, the central banks have two main tools:

Lately tho, inflation was the king of the game. Why? To motivate consumption and growth. If your money worth less tomorrow, you have to spend them or put them into work (invest or something).

DON'T SLEEP ON YOUR MONEY!
UK depositors return

As you can see, if you put your funds in the bank deposits, taking into account only official inflation, you are losing money.

We will talk about what to do with them in Part 4 of the series.

Capital Allocation

If central banks control the money supply, do they control the distribution? Both yes and no.

According to the most popular banking theory - credit creation, banks have more control over the distribution.

Credit creation theory of banking proposes that individual banks can create money, and banks do not solely lend out deposits that have been provided to the bank. Instead, the bank creates bank deposits as a consequence of bank lending. Consequently, the amount of money that a bank can create is not constrained by their deposit-taking activities, and the act of bank lending creates new purchasing power that did not previously exist. The repayment of existing debt destroys money, as a consequence of reducing bank loans (asset side of balance sheet) and customer deposits (liability side of the bank balance sheet).

www.economicsnetwork.ac.uk

Basically, central banks decide how easy it is to print money, but ultimately, banks allocate it. And there is nothing wrong with that until growth outpaces inflation.

A lot of the time, new purchasing power goes straight to speculative assets. We have seen it with the 2007 crisis. We see evidence of it with the Robinhood traders boom, gambling on their relief payments.

This capital inflow causes prices to surge, while the real economy is barely growing.

Cash piles of specific companies and individuals continuing to grow. Meaning that they are not reinvested into the real economy either, but used for shares buyback and other speculative activities. Why? Because they give better & easier returns during these crazy times.

Who and how should we get the money to?

Lending to huge international companies is easy. You have tons of assets, information, and good prospects of bailouts if things go south.

The mortgage is easy, you have. A credit card is easy.

Lending to SMEs (Small and medium-sized enterprises) that's where it gets hard. Paperwork is a mess, and data gathering standards give you 146% chance of headache. In contrast, that type of lending provides huge economic benefits.

Hidden Champions

As Richard A. Werner puts, Hidden Champions - SMEs, but market leaders, a lot of the time, global market leaders.

All of these countries are in the top 10 exporters.

Germany vs China export 2000 - 2019

But the comparison of Germany vs. China export is especially striking. Germany has only 6% of China's population.

So how to do it? How to find these hidden gems and provide them access to capital.

Decentralization of banking.

Lending to SMB needs a lot of groundwork. To do that, you have to have local or industrial banks.


Technology

Stripe is going in these directions, and I believe their Stripe Capital will play an enormous role in the field. Moreover, their infrastructure will allow more businesses to come to the market.

Cadence is another excellent example. They solve the supply and demand problem here, allowing lenders to access better yield and diversification while making borrowers more transparent and untapped source of capital.

I strongly suggest to follow them if you are interested in the lending business.

In the next part, I will talk about the Digital economy and draw the finish line in Part 4 with actionable advice on how we, mortals, can improve our financial situation.

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