Why Don’t We Know Much About Finances, and What Should We Know More About It?

There’s a certain irony in how little we collectively know about the thing that dictates much of our existence: money. This isn't about being ignorant of tax codes or failing to understand the basics of budgeting—those are the surface-level conversations. Scratch a little deeper, and you’ll find that financial illiteracy extends far beyond those superficial topics. And it’s not a regional problem. It’s a global issue that cuts across demographics, education levels, and cultures.

But why? Why is it that, despite being thrust into an increasingly complex financial world, most of us flounder when faced with deeper economic questions? And more importantly, what should we be learning about finances that we’re not?

Why Don’t We Know?

The lack of financial education is deliberate in many ways. Governments, banks, and the broader financial industry have no real incentive to educate you about the complexities of finance. Most of what we learn about money is reactionary—driven by marketing, necessity, or a desperate attempt to untangle bureaucratic red tape.

How many people can clearly explain how fractional reserve banking works? Or how global monetary policies impact your local currency's value? The truth is, if we all had a clearer understanding of these systems, we might start asking more uncomfortable questions.

Power Structures in Finance

Governments and financial institutions are in no hurry to demystify these issues because an informed populace is harder to manipulate. Consider how central banks like the European Central Bank (ECB) or the U.S. Federal Reserve operate. They control monetary policy, interest rates, and inflation through mechanisms most people have little to no understanding of. Yet, these policies shape the economic environment in which we live. The less we know, the easier it is to accept financial decisions that might otherwise provoke backlash.

We could, of course, point to the education system. In most countries, financial literacy is, at best, an afterthought. Schools churn out students versed in history and geography but financially naive. The problem, though, is not that they don’t teach us how to file taxes—it’s that they don’t teach us how money works. How currency itself works.

What We Should Know More About

1. The True Nature of Debt

Debt is often framed as this monstrous thing to be avoided at all costs. And yet, some of the wealthiest corporations and governments in the world thrive on debt. The entire financial system is built on it. In fact, understanding how debt functions at a macroeconomic level can be eye-opening. Consider countries like Japan, where the debt-to-GDP ratio is well over 200%. How can a country function with such staggering debt? The answer lies in understanding how countries issue bonds, manage interest rates, and the role of central banks in propping up these systems .

Most of us understand debt on a personal level—loans, mortgages, credit cards—but we rarely discuss how debt fuels national economies. Here's something strange: the higher a government’s debt, the more people might want to invest in it through bonds. It’s counterintuitive but deeply ingrained in global finance.

• Public debt: Governments take on debt to fund everything from infrastructure projects to welfare programs. Countries issue bonds that investors buy, lending money to the government in exchange for future repayment with interest. Governments use this borrowed money to fuel economic growth, and in some cases, as long as that growth outpaces the cost of the debt, this can be sustainable.

But there are limits. If a country accumulates too much debt without a corresponding increase in economic output, it risks a debt crisis. Investors may lose confidence in the government’s ability to repay its debt, leading to skyrocketing interest rates, devaluation of the currency, and economic turmoil. A prime example is Greece during the Eurozone crisis. When Greece’s debt-to-GDP ratio spiraled out of control, the country couldn’t meet its debt obligations, leading to severe austerity measures and a deep recession.

• Private debt: This includes debt taken on by individuals (mortgages, credit cards, student loans) and corporations (corporate bonds, loans). The concept here is similar: borrowing can fuel expansion, but too much debt, especially when income isn’t growing to match it, leads to financial distress.

During the 2008 global financial crisis, U.S. households had accumulated massive amounts of debt relative to their income, often through subprime mortgages. When the housing bubble burst, many couldn’t pay their mortgages, leading to widespread defaults and a collapse of the banking system. This shows how excessive private debt, just like public debt, can become a systemic problem.

Countries trade debt like they trade goods. A key global player is the U.S. Treasury bond market. Governments and central banks around the world hold U.S. debt as a reserve currency, meaning that fluctuations in U.S. debt levels can ripple across the entire global financial system.

A country’s debt-to-GDP ratio is a critical measure here. This ratio compares a country’s public debt to its gross domestic product (GDP). For example, a country with a debt-to-GDP ratio of 100% means that it owes an amount equivalent to its total annual economic output. While high debt-to-GDP ratios are sustainable for some economies (like Japan, which has over 200%), for others, they signal danger. This is because investor confidence hinges on a government’s perceived ability to repay its debt without excessive inflation or economic collapse.

2. The Velocity of Money

Most people understand money as a static entity—something you earn, save, or spend. But what they often miss is how fast money moves through the economy, and this speed, known as the velocity of money, has many implications.

The velocity of money refers to the rate at which money changes hands. In simpler terms, it’s the frequency with which one unit of currency is used to purchase goods and services within a certain period. High velocity means money is circulating rapidly, fueling economic growth. Low velocity suggests people are holding onto their cash, which can lead to economic stagnation.

For example, when consumers spend quickly, businesses see increased sales, pay their suppliers, and invest in growth—creating a cycle of activity. When they hold back (perhaps due to economic uncertainty), the velocity decreases, businesses may suffer, and the economy slows down. Understanding this concept is crucial because it helps explain why central banks might push for policies that encourage spending in times of economic recession.

Why does this matter to you? Because the velocity of money influences inflation, employment rates, and even your salary growth. The faster money moves, the better the economy performs. But when it slows, recessions and unemployment are right around the corner. When you hear about stimulus packages or government policies aimed at "spurring growth," they’re often about increasing the velocity of money—getting people to spend, invest, and re-circulate their earnings.

3. Liquidity and Why It Matters

You’ve probably heard about companies or financial systems being “liquid” or “illiquid.” But what does this really mean, and why should you care?

Liquidity refers to how easily an asset can be converted into cash without affecting its price. Cash is the most liquid asset, followed by things like stocks or government bonds. A house, on the other hand, is considered less liquid because it can take months or even years to sell at a fair price.

Why is liquidity important for your financial health? Imagine you’ve invested all your savings into real estate, believing that your wealth is secure. But then, suddenly, you need quick cash due to an emergency. Selling that house could take time, and even if you sell it quickly, you might have to settle for a lower price than it's worth. If you had more liquid assets (like stocks or even savings in a bank), you could access your money without such losses.

Moreover, liquidity becomes a key issue during financial crises. In 2008, when the global financial system collapsed, the issue wasn’t just bad debt—it was the liquidity crunch. Banks couldn’t sell their assets fast enough to cover their liabilities, leading to a spiral of insolvency. This is why individuals and companies alike need to maintain a balance between liquid and illiquid assets to weather financial storms.

4. Hyperinflation

Inflation is the rate at which prices rise over time, eroding purchasing power. Normally, a low and stable inflation rate (around 2-3% annually in many economies) is considered healthy. But when inflation spirals out of control, it becomes hyperinflation—a nightmare scenario where prices rise so fast that the currency loses nearly all its value.

Hyperinflation typically occurs when a country experiences a perfect storm of economic problems, including:

• Excessive money printing: When governments print money to cover budget deficits without corresponding economic growth, the money supply increases rapidly, but the economy doesn't have enough goods and services to meet this excess cash. The result is skyrocketing prices.
• Loss of confidence: Hyperinflation often starts when people lose confidence in their currency and begin exchanging it as quickly as possible for tangible goods or foreign currencies. This triggers a vicious cycle—if people expect prices to rise, they rush to spend their money, causing prices to rise even faster.
• External shocks: War, collapse of production, or international sanctions can trigger hyperinflation. Zimbabwe in the late 2000s is an extreme case, where inflation reached a staggering 79.6 billion percent per month. Venezuela in the 2010s saw similar devastation due to a combination of government mismanagement, falling oil prices, and political instability.

Conclusion

Understanding debt and monetary policy isn’t just an academic exercise. These are forces that shape everything from your daily expenses to the stability of your job and the value of your investments. Debt, when used wisely, can fuel growth—but when mismanaged, it can lead to personal financial ruin or even national crises. Likewise, monetary policy, often unseen and misunderstood, influences the broader economic environment in which we all live.

In times of uncertainty, like when inflation spirals or debt overwhelms economies, those who understand the basics of these financial principles are better prepared.