Tuesday, October 28, 2008

Wealth to Debt

Once, the more money we had, the more wealth we had.
Now, the more money we have, the more debt we have.

"Note that although the system of fractional-reserve banking creates money, it does not create wealth. When a bank loans out some of its reserves, it gives borrowers the ability to make transactions and therefore increases the supply of money. The borrowers are also undertaking a debt obligation to the bank, however, so the loan does not make them wealthier. In other words, the creation of money by the banking system increases the economy's liquidity, not its wealth."

- N. Gregory Mankiw, Ph D., Professor of Economics at Harvard University, Macroeconomics, Fifth Edition, pg 485 .