This afternoon my daughter and I ventured out for a walk along the empty roads behind our house (unfortunately my son did not want to join us- teenagers).

Earlier this year we moved to a new housing development. Our house is the very last house in phase one of the development, which means behind us there is nothing but empty lots and a few paved roads that act more as walking/bike riding trails than roads. If it ever gets built, this area will eventually be phase 3. I say if because the Canadian real estate market is teetering and many developers have stalled and cancelled projects over the last few years. This developer still hasn't sold all the homes in phase 1 and 2 so I am not sure they are close to breaking ground on phase 3. Great for us, probably not great for them.

As we were walking my daughter asked why there are so many signs? I said these are lot assignments and they will have new homes on them one day. She asked why they are not building the homes yet and I told her the company that builds the houses must sell enough of them first to get enough money to start building the houses. I explained to her that typically when you buy a new house you put down what's called a down payment and have to make more payments over time as the house is being built. She understood the concept.

We continued walking along for a while and then she wondered why the person buying the house doesn't just buy it all at once like how we buy things when we go to the store? I said because houses are very expensive and most people don't have enough money to pay for them all at once, so they pay some money up front and borrow the rest from the bank. They pay the bank back money over time with some interest (I had to then further explain what interest meant).

She was quiet for a few minutes as we continued our trek and then suddenly asked "where does the bank get the money?". I didn't want to get into the details of fractional reserve banking so I just said "they create it out off thin air. Loans create new money."

"Like fake money" she exclaimed.

At first I said "yes" and felt like going into a diatribe about fiat currency, fractional reserve banking, central banks and government largesse but I collected myself and then corrected myself, "the money is not actually fake, it is real money you can spend but it creates more money in the system and reduces the value of all other money".

She definitely didn't get it so I thought for a moment and then told her this tale for the remainder of our walk home.

Let's say you live on an island.

"Can it be an island of dogs" she interrupted. To which I replied "yes, even better."

You live on dog island. The island is filled with many friendly and helpful dogs. Every day you work all day to bake one dog treat (my original story was going to involve bananas and monkeys but I quickly pivoted to dog treats and dogs as per request). You save up the treats you bake over the week and then at the end of the week get the local dogs to help you with some chores. One dog comes and chews up all the grass on your lawn to keep it short and looking good. Another dog comes and licks your windows clean. (She was laughing at my chore examples so I knew I was getting somewhere). Maybe another dog comes and chases away those naughty squirrels digging holes in your yard. After all the helpful dogs finish their chores you give them each one treat. Some weeks you might give away all your treats, other weeks you may save some to give away later when you have bigger chores for the dogs to do.

She was grasping all of this well and enjoying the story but she had no idea what a harrowing tale it was about to become.

You are enjoying your life on dog island, working to make all the treats you need to give to the dogs that help you get all your chores done but one day everything changes. Someone new moves onto the Island. Let's call him Daddy, and Daddy has a magic dog treat oven. His magic dog treat oven doesn't just make one dog treat a day it makes as many dog treats as he wants. Hundreds, Thousands, Millions, even infinite dog treats.

She is likely thinking this sounds pretty great. "Do you know what happens next?" I ask. "No" she replies.

Because Daddy can make as many dog treats as he wants he can give all the helpful dogs more treats to do the same chores they were doing for you. He can give them 2 dog treats each, or maybe 5, or even 10 it doesn't matter how many because he has a magic dog treat oven that can make infinite treats.

At this point we were just a minute or so away from home and she said "wow daddy you could have a million dogs working for you with all those treats". I said "that's right and how many dogs would be working for you". She thought for a few seconds and then frowned and said "none". I said "The End. And that is how the bank making new money out of thin air makes everyone else's money less valuable- it's like they have a magic dog treat oven except for money."

Thanks for reading.

Sats for all,
GR