Many of you may be wondering what on earth has been going on with the banking system. First Silicon Valley Bank (SVB), then Credit Suisse, and then a lot of scary words about recessions and unemployment. The good news is that things seem to be contained, and global financial disaster has been averted.
The bad news is that it will undoubtedly happen again, and more banks will run into more problems.
So why should you care about a bunch of rich bankers, who most certainly don’t care about you?
It may not seem fair, but the banks essentially run the global economy.
Yup.
Why? Because banks are the only institutions that are actually allowed to make money.
Now, maybe you’re thinking that doesn’t sound right, because don’t all businesses make money?
No!
All businesses earn profit… or at least hopefully they do.
But earning profit and making money are two different things.
Earning profit and making money are two different things that have become confounded.
Earning profit is when a business spends less to provide its goods or services than it sells them for.
This a simple explanation for a very complicated process, but in essence, this is what it means to be profitable.
Making money is literally creating new money in the economy that wasn’t previously there.
Yes, banks don’t earn profit in the same way that traditional businesses do. They certainly can, in some instances, but the primary goal of a bank is to create new money that previously did not exist.
Let’s use Pizza as an example:
Pretend that you want to start a new pizza place in your town, but you cannot do it on your own, because you don’t have enough money.
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