Most people carry a mental model of money that is about 50 years out of date. They imagine a government printing press, a high-security vault filled with gold bullion, and a dollar bill as a receipt for a piece of that gold. None of that is how the system works anymore, and the gap between the popular mental model and the actual mechanics matters – because if you misunderstand how money is created, you will almost certainly misread what moves markets.
HOW MONEY IS MADE
Here is the reality. When a bank approves a mortgage, it does not go looking for deposits to lend out. It types a number into an account. That deposit did not exist before the loan was signed. The loan creates the deposit, not the other way around. Somewhere between 90% and 97% of all money in circulation in modern economies came into existence as credit, created by commercial banks through lending.
The central bank’s role in this is indirect: it controls the price of borrowing, not the physical stock of money. When the United States (US) Federal Reserve (Fed) or South African Reserve Bank (SARB) raise rates, it makes credit more expensive. When central banks cut rates, credit becomes cheaper. What this is doing, in both cases, is managing the conditions under which private banks will or will not create new money. In addition, central banks set minimum limits on the amount of cash banks must have so that they are able to ensure they can meet unexpected withdrawals and prevent potential bank runs. Those reserves give the banks resources to lend, and “create money”.
This is why the “they’re just printing money” argument, while not entirely wrong, misses the mechanism. The more precise statement is, central banks create reserves, which are the raw material banks need to sustain their lending. If those reserves are abundant and cheap, banks lend, money expands, and liquidity flows through the system. If reserves become scarce or expensive, the opposite happens.
THE GOLD STANDARD
The case against fiat money – money that is not backed by a physical commodity like gold – is one of the more persistent intellectual inconsistencies in financial commentary. Gold’s monetary value does not come from its industrial use, which accounts for a fraction of its price. It comes from the collective belief that others will value it. That is structurally identical to what backs fiat currency.
The honest argument for gold is not that it has intrinsic value – it does not – it is that it constrains government discretion over money supply, and that constraint has appeal given how badly discretion has been abused in places like Zimbabwe, Venezuela, and Weimar Germany (1918 and 1933). That is a real concern. But a fiat currency backed by a competent central bank, a functioning legal system, and a government with the authority to collect taxes – all denominated in that same currency – arguably has a more concrete anchoring than gold does.
The gold standard also failed its most important real-world test: it prevented the monetary expansion that could have cushioned the Great Depression, and the countries that abandoned it earliest recovered the fastest. The case for gold is essentially a case for distrust of institutions, which is understandable, but it is not a case for gold being a superior backing for the value of money.
THE CASE FOR LIQUIDITY
So, if the monetary system is built on credit and the gold-standard argument has a weak foundation, what actually matters? The answer: Liquidity, not as a buzzword, but rather as a precise concept.
Liquidity is the availability of money and credit to flow through the system at a cost that keeps economic activity functioning. When liquidity is abundant, asset prices are supported, borrowing costs are manageable, banks lend, businesses invest, and shocks – even serious ones – tend to be absorbed. When liquidity dries up, everything reprices simultaneously and in the same direction, which is how you get a crisis rather than a correction.
LIQUIDITY IN THE CURRENT CRISIS
This is the framework through which events like the Iran conflict and the current tariff environment need to be assessed. Both are real. The Strait of Hormuz disruption affects roughly 20% of global seaborne oil, and an oil supply shock feeds directly into input costs, inflation prints, and central bank calculus. Tariffs restructure trade flows, compress margins, and can slow growth.
These are not trivial. But the critical question is whether either shock is materially disrupting global liquidity conditions. If the Fed continues to manage dollar liquidity, if interbank markets continue to function, if credit spreads (the difference between higher risk corporate bonds and lower risk government bonds) do not blow out – then the damage from geopolitical and trade disruptions, however real in economic terms, remains contained. Markets can and do absorb significant real-economy shocks when the supply of money is flowing.
The 2008 financial crisis is the reference point for what happens when liquidity itself breaks down. Oil was at $147/barrel in mid-2008 before the crisis hit – a genuine supply cost shock – but the system absorbed it. What the system could not absorb was the seizure of interbank lending when counterparty trust collapsed. Within weeks of the collapse of the Lehman Brothers investment bank, banks stopped lending to each other, the commercial paper market froze, and the real economy followed. The shock was not oil prices or subprime mortgages in isolation. It was the transformation of those shocks into a liquidity crisis. That is the distinction worth understanding.
Iran and tariffs are disruptions to the real economy. They affect trade flows, supply chains, inflation expectations, and fiscal positions. They warrant attention and careful positioning. But as long as the Fed maintains dollar swap lines, as long as global banks can fund their books at tolerable cost, and as long as credit markets remain functional, the fallout is a risk-management problem, not a system-level event. The moment any of those conditions change, and the shock finds a path into the funding markets, the calculus will change entirely.
Liquidity is not a factor among factors. It is the factor that determines whether every other factor is a problem you can navigate or a problem that navigates you.
A LOOK AT THE MARKETS
WEEK’S KEY THEMES:
- Bonds steady as Trump describes the seven-week conflict as close to over
- Wall Street set to end the week at fresh record highs on news from the US administration, though Iran is yet to confirm
- Brent crude steady below $100/barrel
- Dollar set for its third weekly decline
BONDS
The US 10-year Treasury yield has steadied at 4.28% as Trump described the seven-week conflict as “close to over,” with further talks expected in Pakistan and reports suggesting Tehran may allow free passage through the Omani side of Hormuz if a deal is reached. The Fed is widely expected to hold rates steady this month, and likely through to year-end. Easing energy prices through the week have, however, already cooled inflation expectations.
Germany’s 10-year bund yield is holding near 3% – close to 15-year highs – as persistent inflation concerns keep borrowing costs elevated despite diplomatic progress. The European Central Bank (ECB) rate hike expectations have moderated, with markets now pricing two 25 basis point increases this year, down from three a few weeks ago. ECB President, Christine Lagarde, acknowledged that high energy costs have knocked the eurozone off course, though she stopped short of signalling imminent action.
The 10-year gilt yield has eased to 4.749% as Governor of the Bank of England (BoE), Andrew Bailey, and BoE Monetary Policy Committee (MPC) member, Megan Greene, both pushed back against aggressive rate hike pricing, with Bailey describing the conflict as a major energy shock whose duration will be key for inflation. The war is expected to lift United Kingdom (UK) inflation well above target and weigh on growth ahead of the 30 April MPC meeting, though February’s gross domestic product (GDP) growth of 0.5% confirmed solid pre-war momentum.
South Africa’s 10-year yield has slipped below 8.50% from 8.55%, as renewed US-Iran negotiation hopes improved sentiment and eased pressure on emerging market bonds. Analysts caution that sustained oil price gains could push domestic inflation above 4% in the second quarter, testing the upper bound of the SARB’s tolerance band around its 3% target. Rate cut expectations have all but evaporated, with hikes now a live possibility.
EQUITIES
Wall Street futures are little changed this morning after Trump signalled Tehran had accepted the US’s terms of abandoning nuclear ambitions and reopening Hormuz, though Iranian officials are yet to confirm. A 10-day Israel-Lebanon ceasefire confirmed by Israeli Prime Minister, Benjamin Netanyahu, has added to the constructive tone. Thursday’s session saw the S&P 500 and Nasdaq close at fresh record highs, gaining 0.26% and 0.36% respectively, with the Dow adding 0.24%. Energy, real estate, and technology led the advance. Netflix dropped nearly 10% in after-hours trade on a soft second quarter outlook and news that co-founder, Reed Hastings, will step down from the board in June.
European bourses ended Thursday broadly flat, with the Stoxx 50 and Stoxx 600 largely unchanged as investors awaited further clarity on Iran negotiations. Trump’s late confirmation of the Israel-Lebanon ceasefire provided a mild lift. Healthcare company, Novo Nordisk, and software giant, SAP, each rose more than 3%, luxury brand, Hermès, and industrial technology company, Siemens, added around 1.3%, and energy company, Shell, gained approximately 1%. Cosmetics and beauty company, L’Oréal, fell over 2% while technology company, ASML, financial services group, HSBC, healthcare company, Roche, and medical innovation firm, Novartis, edged marginally lower, keeping overall indices flat.
The FTSE/JSE All Share Index and Top 40 indices each slipped approximately 0.53% on 15 April, retracing a portion of the previous session’s gains. Weakness was concentrated in financial and property stocks while industrials held relatively steady, pointing to a sector-specific pullback rather than broad-based selling. The move came despite an improving global backdrop, suggesting profit-taking after recent strength.
COMMODITIES
Brent crude is drifting toward $98/barrel this morning, drifting lower as ceasefire optimism reduces some of the supply risk premium. Trump claimed Tehran agreed to abandon nuclear ambitions, supply “free oil,” and reopen Hormuz; terms Iranian officials have not confirmed. Despite the diplomatic momentum, Hormuz remains closed under a dual US-Iran blockade, and the International Monetary Fund’s energy chief warned that restoring disrupted output could take up to two years.
Gold is holding near $4,800/ounce this morning, on course for a fourth consecutive weekly gain – up roughly 1% on the week and approximately 17% above its March low. Retreating oil prices have eased inflation fears and reduced central bank tightening pressure, supporting the metal. Trump’s claimed Iranian concessions have added to the positive tone, though unverified terms and a still-closed Strait of Hormuz mean safe-haven demand has not fully unwound.
European natural gas futures are trading near €42/MMBtu (million British thermal units), close to a six-week low, as ceasefire extension talks provide some relief. Both sides are reportedly considering extending the truce beyond its 22 April expiry. Hormuz remains choked, however, and Qatar’s Ras Laffan – the world’s largest LNG facility – is not expected to be fully operational until August. Warmer weather and stronger renewable output are also suppressing near-term demand.
CURRENCIES
The US Dollar Index is holding above 98 this morning but is tracking a third consecutive weekly decline as easing conflict risk erodes safe-haven demand. Trump’s Iran optimism, the Israel-Lebanon ceasefire, and retreating oil prices have collectively softened the inflation narrative and reduced the case for Fed tightening. New York Fed President, John Williams, added to the dovish tone, flagging uncertainty as a reason for caution on forward guidance while maintaining rate cuts as his longer-term baseline.
The euro is holding near $1.18/€ – close to pre-war highs – supported by a weaker dollar and improving diplomatic prospects. Ceasefire extension talks have eased energy price pressure and prompted traders to reduce ECB tightening bets, with two 25 basis point hikes now priced in for the year, down from three just weeks ago.
Sterling has eased slightly to around $1.356/£ but remains near an eight-week high and is up approximately 2.6% in April on peace deal optimism. The modest pullback reflects recalibrated BoE rate expectations, with Bailey and Greene both signalling a measured, data-dependent policy response. February’s GDP growth of 0.5% confirmed solid pre-war momentum, though the conflict’s inflationary and growth implications remain the dominant consideration ahead of the MPC’s 30 April meeting.
The rand is trading around R16.40/$, supported by a softer greenback and the return of risk appetite. Progress on ceasefire extension talks and the prospect of a second round of US-Iran negotiations have underpinned emerging market risk appetite. The rand has been volatile since the war began in late February and while the near-term tone is constructive, elevated fuel costs continue to cloud the domestic inflation outlook.
*Please note that all information is at the time of writing.
Key indicators:
ZAR/USD: 16.43
ZAR/EUR: 19.35
ZAR/GBP: 22.21
BRENT CRUDE: $98.67
GOLD: $4,788.33
Sources: Bank of England, BIS, Bloomberg, EIA, Federal Reserve, IMF, Investing.com, Investopedia, Refinitiv, Reuters, and Trading Economics.
Written by: Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.