In China, we often hear that although incomes are rising, savings always seem to be unable to keep up with soaring prices, which makes many people feel that their lives are becoming more and more difficult. What is the reason behind this phenomenon?
Credit plays an extremely important role in the modern economy. Have you ever wondered how these seemingly convenient loans and credits have quietly changed the flow of money and the state of our wealth?
Let's start with a simple example. Zhang San had 300,000 cash in his hand. If he decides to use the money to buy a new car, such as BYD Tang, the 300,000 will be directly transferred to the account of the car company. The car company used the money to pay for raw materials, workers' wages, etc., and eventually the 300,000 yuan was re-entered into the market through various channels.
Change the scene. Zhang San also had 300,000 yuan, but this time he used it as a down payment to buy a house worth 1 million, and the remaining 700,000 yuan was completed through a bank loan.
The real estate developer got 1 million yuan (including 300,000 yuan from Zhang San and 700,000 yuan from the bank). This money will also be used to pay for building materials, wages, etc., and eventually flow into the market.
The seemingly identical 300,000 is used in different ways, and eventually drives different amounts of money in circulation – one is 300,000 and the other is 1 million. The intervention of credit significantly amplifies the amount of money flowing in the market.
But what's the rationale behind that? And that's how banks create credit. Let's say there is a bank with a reserve requirement ratio of 10%. This means that banks only need to keep 10% of their deposits, and the remaining 90% can be used to issue loans.
If Zhang San deposited 100 yuan in the bank, the bank kept 10 yuan, and the remaining 90 yuan issued a loan to Li Si. Li Si took the 90 yuan to build a house and paid it to the contractor Wang Wu.
Wang Wu then deposited the 90 yuan in the bank, and the bank continued to keep 10%, and the remaining 81 yuan could be lent to others. In this way, the original deposit of 100 yuan can eventually support more loans and a wider circulation of money.
This process seems to increase the wealth of society because money seems to be "growing", but in reality, this growth is virtual. It relies on continuous borrowing activity and the constant expansion of credit. Once this cycle is broken, for example, when a large number of borrowers are unable to repay their loans, the entire system is at risk of collapsing.
For the average person, although nominal income has increased, real purchasing power may not have increased or even decreased due to the increase in the money supply (i.e., inflation). That's why a lot of people feel "getting poorer".
With the infinite expansion of credit, there is more and more money in the market, and prices naturally rise. This inflation, fueled by credit, is actually an invisible plunder of wealth.
Our money still shows the same or even more in our bank accounts, but its purchasing power is waning. It's like your money is still there, but it's quietly losing its original power.
Let's look at the specific impact of this phenomenon on an individual's life. Suppose Li Si is an ordinary office worker with a monthly income of 5,000 yuan, and his living costs include basic expenses such as rent, food, and transportation.
Over time, his salary increased, for example, to 6,000 yuan, but at the same time the rent rose from 1,000 yuan to 1,500 yuan, and the price of food and other daily necessities generally increased. As a result, even though his salary increased, Li Si's actual quality of life did not improve.
This phenomenon is repeated throughout society, and large amounts of wealth are redistributed. The most immediate beneficiaries are those who have access to the newly created money in the first place
It is usually large banks and large corporations that can use the extra money to invest or expand their business as a way to increase their wealth. And ordinary people who rely on a fixed income will find their wealth gradually eroding.
This phenomenon was particularly evident during the financial crisis. For example, the global financial crisis of 2008 was triggered by a housing bubble and excessive credit activity.
Many average families find that although their income has not changed in name, their home values have plummeted and their debts remain. This "reverse wealth effect" has left countless families in financial distress.
Another effect of the credit system is its amplification of the economic cycle. Credit expansion accelerates economic activity when the economy is upright, but it also increases the risk of overheating the economy and cooling it down.
When the economy begins to decline, a credit crunch can push the economy deeper into a downturn, a phenomenon that has been seen in many economic crises.
Through the above discussion, we can see how the credit system profoundly affects the economy and our daily lives. From macroeconomics to personal finances, the power of credit is everywhere, and its benefits come with risks, affecting everyone's economic status and quality of life.
However, most people have little understanding of this mechanism and are often unknowingly affected by it. This invisible force quietly shapes our economic environment and personal destiny.