This episode is a more detailed follow-up to my 2017 video, Who Controls All of Our Money? I’m going to focus on the United States in this video only because they’re the world reserve currency, but everything in this video affects all of us because the central banks around the world are all doing the same thing.
With that being said, let’s begin. Around the world today, we see central banks printing money. Around the world today, we see central banks printing money. So here’s a question. We’re told from a young age that money is hard to come by. We should study to work our whole life to earn it. How then can all this money suddenly come from nowhere? How is money created? Who’s going to pay it back? What exactly does all of this mean? And what’s going to happen next? In this episode, we’ll explore the three ways that money is being created and some of the consequences that are going to happen. I’m also going to show you the true origins of wealth inequality. If you watch
this episode the whole way through, you should have a well-rounded idea of what’s going on today. It’s important for people to know. I’m really just trying to help with that. This journey starts off simple enough, but by the end, you’ll start to see the insanity of what we’re dealing with. You are watching ColdFusion TV.
The first form of money is the one created by government. In practice, it’s outsourced to the central bank Royal Mint, but controlled by the government. Physical money comes in two forms, either paper money or coins. This physical money is a tiny fraction of the economy, and in many economies, this kind of money only makes up about three to eight percent. This physical money is created in order to meet the obligations of private banks.
When you go to an ATM and try to withdraw cash, banks need to make sure that they have enough cash in order to meet those obligations. So let’s take a $10 note for example. It costs approximately three cents in order to print this note. This means that there’s approximately $9.97 of profit for creating a $10 note. This $9.97 can now be added to tax revenue of the government.
This revenue is called seniorage. So since the government makes profit from printing and minting coins, and can reduce the amount of taxation on the public, you might be thinking, why don’t governments just always print physical money? The main reason that governments don’t create the majority of money is because of politicians.
If the politician running the office could create money at will, there would be a massive conflict of interest. There would be an urge to keep printing to fulfill campaign promises or fund wars. This would, in theory, destroy the currency by excessive printing causing massive devaluation. The more money you have in circulation, the less it’s worth. And that’s a key point.
For example, if massive inflation takes place and the average Joe has a million dollars, but that million dollars only buys an apple, how much is a million dollars actually worth? The loss in purchasing power of money over time is called inflation, and when inflation gets out of hand, money becomes worthless.
Some recent examples of runaway inflation include Argentina, Zimbabwe and Venezuela. In this animation you can graphically see just how fast inflation can run away. You don’t see it coming and as the inflation rate goes up people quickly lose faith in the currency. For example here we can see some people in Venezuela using money to make handbags and to draw pictures on because it simply isn’t worth anything anymore.
You can think of money as a measuring stick of value, a measuring stick that is highly elastic and can change depending on how much of it there is. For thousands of years, gold was the measuring stick of value. For thousands of years, gold was the measuring stick of value.
Gold was kind of like a physical anchor keeping the money supply in check and governments responsible. In 1971, President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value. Since that point, money, the measuring stick of value, has become elastic. Since the US dollar backs all other currencies as a reserve currency, Nixon’s decision changed the world.
In all of this, you might still notice that despite politicians supposedly not being able to influence money creation, it’s happening anyway. This may cause problems as we’ll see later in the episode. So to recap, the government creates physical forms of money, like notes and coins. Only about 3-8% of money is made this way. Signerage is the income from that physical money.
This income is both a benefit to the government and the taxpayer. It reduces debt for the government and reduces the burden on the individual taxpayer. The reason governments don’t create more of this money is because of the inflation risk from politicians’ decisions.
Let’s move on to number two, private banks and debt-based money. The vast amount of money created today is done by the private banking sector. In most developed economies about 97% of the entire money supply is created digitally by banks and therefore most money in the world is privatized. Banks invented digital money when they managed to persuade lawmakers after many early bank runs.
A bank run is an event where depositors try to get their money out all at once, but the banks don’t have it. From these events, banks argued that they should be legally allowed to create more deposits than actually exist based upon debt, and this is how governments outsourced the creation of digital money. The idea of using debt as money begins much earlier than this. English innovators set the stage for banks to become the creators of money across the globe.
In 1704, the English Parliament passed the Promissory Notes Act. Take a good look at your screen. What you are seeing is a promissory note. In this case, it’s a written promise to say that you’ll pay back the $20 you borrowed. Under the law, this piece of paper was as good as $20. Today, we digitize this agreement and call it debt.
If it helps, whenever I say debt in this episode, you can think of this piece of paper, remembering that it’s as good as money. Okay, so banks were authorized to be able to use these debt notes to circulate as money. From this point, banks were free to create and destroy debt and hence money from themselves rented out at interest.
In the modern world, as you’ll see, the whole world’s economy is based upon these promises. Let’s take a look at how it works today. When you go to a bank to borrow some money the banking license gives that bank the ability to create money every time they issue a loan. They do this through the double accounting system. For example if you buy a $500,000 house the bank creates $500,000 in their account and you have $500,000 in debt, that is, the promise to pay it back with interest.
This $500,000 debt can enter the wider economic system because when you purchase the house, the owner of that house can use that fresh debt that was created by the bank that they received from you to buy other things in the economy. This means in our current system if we want to have more growth we need more debt.
The key point here is that debt is actually money just from a different point of view. To the lender it’s an asset of money and to the borrower it’s a liability of debt. But they are one in the same. It sounds a bit complicated but all you need to know is that when a bank issues a loan it’s not somebody else’s savings. It’s not money that the bank had.
It’s essentially brand new money that they create. They simply type it into a computer, and it appears as a digital representation of the government’s money, which you can spend. The beneficiary of this brand new money is actually the bank, because they get to charge interest on that money, and that’s how they make a profit. Later, when you repay this loan, the debt disappears, and the money also disappears, but the bank’s profit from the interest remains.
The real estate and property markets are the largest tools for creating digital money. This is because banks have decided that it’s the safest yet most profitable form of creating debt. Because if you can’t repay the loan the banks can simply take your house.
In developed nations vast amounts of money is backed by the mortgage market. In Australia, where I live, it’s become particularly bad. For decades now, the banks have abandoned investment into the wider economy and have shifted their focus to investments in housing. This has pushed up the housing prices as people take on more debts to buy houses that they otherwise couldn’t afford, but the banks make more money.
This cycle over many decades has caused one of the biggest property bubbles on the planet. We’re addicted to debt. Yes, we’re addicted to debt as individuals, as households. You know, the ratios are way higher than almost every other country. So that’s loans, but what about deposits? When you deposit cash into a bank, you are no longer the legal owner of that money.
The banks are. They keep 10% of your deposits on reserve and can loan out 90% of that money to someone else. And that other person can deposit that money into another bank. And then that bank can loan out 90%, and so on. This is known as fractional reserve lending. If they say we’ll transfer it to your account that’s wrong because no money is transferred at all because what we call a deposit is simply the bank’s record of its debt to the public.
Now it also owes you money and its record of the money it owes you is what you think you’re getting as money and that’s all it is. When all is said and done, an initial deposit of $100 with a 10% reserve requirement can ultimately lead to $1,000 in total money circulation. Well, at least that was how it used to work.
Until March the 26th, 2020, there is now a 0% reserve requirement. According to the Federal Reserve, quote, this action eliminated reserve requirements for all depository institutions, end quote. So, banks can now create infinite amounts of money with no reserves. And it doesn’t stop there. When banks hold your deposit, they can, along with hedge funds, gamble with it through investment in financial instruments such as derivatives and securities.
They do this in order to make superior returns. Most of the time these instruments are basically just bets on if the price of an asset will rise or fall. But when taken to the extreme it can get ridiculous. Remember in my Enron video how I talked about how they use financial instruments to bet on the weather? These crazy classes of financial instruments is what brought down the housing market and the subsequent global economy in 2008.
But the problem today is that banks are playing with so many derivatives, sometimes stacked on top of each other, with leverage multiplying factors, that nobody actually knows how much money is tied up in this gambling. Some estimates put the derivative market at over one quadrillion dollars, over ten times the global economy.
In booms everyone takes on debt, that is loans from a bank, and they spend it on things that they normally couldn’t afford, but this causes economic growth. Eventually, people can’t afford to take on more debt and can’t pay it back, the banks stop lending and defaults start to take place and the economy takes a downturn.
This is natural and has happened over centuries. But in 2008, everything changed. The world didn’t want to go through the pain of a downturn, and some analysts mark this as the very point that the real economy died. In 2008, banks had become so large, intertwined and integral to the supply of money, that when they were about to collapse, the governments had to use the central banks to bail them out.
Remember, banks are creating 97% of all money as debt, and if this can’t be paid back, it can cause a systemic failure, a risk of collapse of the entire global monetary system. Since 2008, the economy was dead, but has been on life support ever since. A decade of hyper-low interest rates, which basically make the cost of borrowing money free, have caused market distortions so large that it’s compounded the entire problem.
It was short-term gains for the consequence of long-term pain. When private banks make risky bets and incur losses, central banks can rescue them with their infinite wallet, as mentioned by Fed Chairman Jerome Powell in a recent interview for CNBC’s 60 Minutes. Fair to say you simply flooded the system with money. Yes, we did. That’s another way to think about it. We did.
Where does it come from? Do you just print it? Where does it come from? Do you just print it? We print it digitally. So we, you know, we as a central bank, we have the ability to create money digitally. And we do that by buying treasury bills or bonds or other government guaranteed securities. And that actually increases the money supply.
But by law, Chairman Powell’s Federal Reserve can only lend money that must be paid back. We’ll get to central banks in the next section. But as you’ll soon see, we have to pay these debts back. All of this money that’s being created is like that piece of paper we saw with the promise on it.
Except it’s signed by all of us and we signed that we’re going to pay this back through taxation. Us and our future generations. It’s important to note that governments don’t actually support the people. It’s the people that support governments through taxation. Taxation and trade are the two major ways that governments can raise money.
This raised money is used to pay back the central bank loans with interest. So when governments use the central banks to bail out private banks for their risky behavior, the governments are left with the debt which eventually has to be paid back by the taxpayers in the future. So to recap, private banks create the vast majority of money, about 97% of it, and they do so by creating loans, which is debt.
The process is as simple as typing numbers into a computer. Banks can, to an extent, spend and gamble consumer deposits as they legally own it. Two big to fail banks are backed up by the central bank, creating a moral hazard. And that brings us to the final and most insane form of money creation. Central bank digital money.
The third form of money is quantitative easing, or QE. Quantitative easing is a new form of money that was invented by the Japanese central bank in 1989. It was later popularized by the Federal Reserve in the United States during the 2008 crisis. QE is where a central bank creates money in order to issue loans directly to the banking sector, large corporations, and most recently, the public.
It’s a way of flooding money into the economy at times of extreme events like the financial crisis of 2008. As a result of this, the central bank’s balance sheets have gone completely out of control in order to prop up the economy a little bit longer. In 2008 during the crisis and the first time this was tried outside of Japan, the $700 billion bailout of QE was very controversial.
Bailing out Wall Street is the only way to save Main Street, so says the president. The House of Cards was much bigger. It started to stretch beyond just Wall Street. That’s how the president defended one of the largest proposed financial rescue plans in U.S. history.
Treasury Department and congressional staffers are working through the weekend hammering out the details. The president’s plan would allow the treasury to buy up to 700 billion dollars worth of bad loans, like many of those subprime mortgage deals. But those bad debts then go on the American public’s tab. Congress will have to raise the legal limit on the national debt from $10.6 trillion to $11.3 trillion.
It was thought to be a one-off emergency scenario, but over the next decade, the Federal Reserve was unable to reverse it. To give you an idea of how significant all of this was, it took from the foundation of America in 1776 all the way up to 2008 for the nation to attain less than a trillion dollars in debt. By 2014, that number had expanded to 4.
4 trillion, and since the onset of the COVID pandemic, 3 trillion was added in the span of three months. Now the US central bank is creating hundreds of billions of dollars in mere hours. It’s seeming to have less of an effect as it continues. We have a lot of good faith based on the prowess of the US printing press. I mean, the United States maintains reserve currency status.
That’s fake money, though. That’s not real money. That’s fake money. That’s 200 trillion dollars of fake money. Oh, you’re, you’re, you’re, really? I know. But it’s all based on faith. How long is this, how long is this sustainable though? Wow. To go at that pace. The argument then becomes about the taxpayer who’s pissed off and saying, let me get this straight.
You can constantly bail yourself out and you can constantly go print money with this quantitative easing. Why the hell do I have to pay taxes? Why do I pay taxes? These are the seeds of social unrest in this country. You can only drive so big of a wedge between the haves and the have-nots, especially when you’re gutting out the middle class in the process.
The Federal Reserve monetising the US debt is what enables all of this. So how does this money enter the system? Central banks use their magic money to buy the equivalent amount of bonds from the government. They do this through the bond market, which exists to lend money to corporations or governments.
Although the stock market gets more press, the bond market is actually bigger. So what is a bond? For the purposes of this video, it’s basically the same as debt but is issued by a government or corporation. Central banks which have no savings can create money to buy these bonds. So here’s an important question.
Can a central bank go bankrupt? Well, according to the European Central Bank, which published a paper in 2016, central banks are protected from insolvency due to their ability to create more money. If you think this sounds a bit unfair, just wait. Governments in our current situation are stuck between a rock and a hard place. They can’t raise money except for raising taxes, but owe trillions to central banks.
The hope is that the borrowed money can kickstart the economy. But something else is happening. When central banks buy bonds given by the government or corporations, they can end up owning a lot of the world’s assets. For example, the balance sheet of the Japanese central bank is bigger than the entire GDP of Japan.
They own 80% of their stock market. That’s right, the central bank of Japan is their stock market’s largest shareholder. The Swiss central bank owns 90 billion dollars in American stocks including Apple, Microsoft, Google and Amazon.
When I first heard of this a few years ago I simply couldn’t believe it was legal. So these central banks are creating money out of nothing and they can’t go bankrupt but yet they’re buying real assets. Even a toddler can see that something is wrong here. It turns out that creating money out of nothing and buying things does have some consequences.
These sorts of central bank interventions remove stock markets from reality. Throughout the 20th century the stock market actually used to reflect the economy but recently that’s gone completely out of whack. The US stock market has become almost twice as big as the entire nation’s GDP which literally makes no sense.
Central Bank intervention is the main reason why in April 2020 30 million people became unemployed in the United States, but the stock market had its best month since 1987. The central bank printed trillions, gave it to banks and hedge funds, with almost 0% interest rates. This money made it straight into the stock market, while the real economy barely got any help.
Earlier, we discussed that money printing leads to inflation. So why haven’t we seen it yet? Well, we have. We’ve seen inflation globally in housing prices and stock markets. The printed money ends up in all of these assets pushing up the prices, so the few people who own large amounts of stocks end up ridiculously wealthy while there’s no growth in the real economy.
The rich get richer, and the poor get poorer. A lot of people can feel and see the wealth inequality, but they have no idea where it’s coming from. I’m going to show you in three charts. Since the 1980s, the wealth of the upper echelons of society has been tied to the stock market.
Since 2008, when the economy went on life support, the stock market became glued to the Federal Reserve. The more they print, the more the stock market goes up and the richer they become. Since 1980, their wealth has grown 420%. When central banks print money, the first recipients of that newly printed money enjoy higher standards of living at the expense of the later recipients of that money when inflation has already taken hold. This phenomena is known as the Cantillon effect.
Experts believe that when the rich finally start selling their stocks and real estate so as to buy other assets in times of distress, the money velocity, that is, the rate at which money changes hands in the economy, will start to pick up, and that is when we’ll start seeing real inflation in the general economy. There is so much more to this, but I’ll leave it here for today.
So to recap, central banks have no savings in their account. They can’t go bankrupt, but can create infinite amounts of money by buying government bonds. A bond is an exchange of money for a promise that the government would eventually pay it back with interest. This money eventually must be paid back by future citizens of a country either through taxation or inflation.
So what do we do? It’s clear that people out there who have lost their jobs need help. Though just in my opinion, I think printing money is only a band-aid. The real solution was in the past. Decades ago, societies and nations should have focused on wealth creation instead of excessive housing, financialization and gambling.
That is, banks should have made loans to productive areas of society. Small and medium businesses, entrepreneurs, education, manufacturing, innovation, research and development. All of these kind of things. Just imagine how our world would be today if banks invested hundreds of billions of dollars into these kind of things instead of property or gambling on if the price of something will go up or down.
Just imagine. It’s riskier for the banks, but the benefits lead to more jobs, more innovation, better competition and better living standards in the long run. Also, governments can collect more taxes from these incomes without necessarily raising taxes. These extra taxes from generally higher living standards can then be spent on social programs to help those who are truly in need.
You can print money, but you can’t print wealth. But focusing on wealth creation and productivity takes time, effort, and hard work, and it just seems today that people don’t have the appetite for that. And frankly, it’s too late for this option. If we focused on funding wealth creation before COVID hit, all of our economies would be much less fragile.
Most individuals and businesses would have a healthy amount of savings to ride it out, like in the late 20th century. But for now, we’re just going to have to deal with the consequences of a fragile system. But for now, we’re just going to have to deal with the consequences of a fragile system.
So what’s going to happen next? In my view, I think this is all going to lead to something very big and unpleasant over the next decade. I don’t know how it’s going to look like, but it may involve massive amounts of inflation and slow economic growth. A situation known as stagflation. This happened in the 1970s, but this time it could be much worse due to excessive amounts of debt with the added effect of social instability.
The mainstream view is that eventually the world will lose faith in the US dollar, though some macroeconomists think that the American dollar may actually rise in value as other nations try to sell their goods or exchange falling currencies for the US dollar because it’s the cleanest economy out of a world of falling economies this is called the dollar milkshake theory some people think that digital stable coins will be able to solve a lot of problems there are others still who argue that nations can print infinite amounts of money just as long as they keep producing enough goods to pay
the interest on the debt that the government owes the central banks. The argument here is that the debt actually never has to be paid back, only the interest. This is called modern monetary theory. I can’t comment on if this will work or not. I don’t think anyone can, because it’s never been tried before.
But I can’t help but think that this looks like another fragile solution. Small communities in Venezuela and a small town in Italy have taken the power back themselves and just issued their own currency. All in all, who knows what’s going to work? I have no idea. On the bright side, all of the events to come might spawn massive reform.
As I did learn while writing my book, out of the worst circumstances, the best innovations arise. So what can the individual do? Obviously, I can’t give financial advice, I’m definitely not qualified for that. But it might be worth thinking about converting some of your money into other assets that aren’t debt-based, as a form of insurance.
If you’re older, you may be thinking about gold, since no central bank can print gold. Bank of America and even Goldman Sachs, the last people on earth who you would think to be positive, are seeing gold’s potential and they’re calling it the money of last resort. Even other central banks like China and Russia have been buying gold in record amounts for years.
I think they understand what’s about to happen. If you’re younger, you may be attracted to cryptocurrencies. Governments and the banking system are starting to take the technology seriously now. If you’re more daring you can play the central bank’s game against them.
Study and invest in the assets that you think they’ll cause to rise in price. Ultimately I can’t tell you what to do here. You have to think for yourself and research to find out what you believe is best. The way money is created and the overall banking system seems like madness and people have started to notice that the system is no longer working.
The monetary system is so ingrained and so pervasive it becomes invisible to see. Nobody ever questioned it. When things started going wrong, they pointed at the things that were visible, things that look like problems, surface issues which you could see and understand.
Looking at the surface, some would point the finger at capitalism, but you have to dig deeper. And when you do, you can see it’s an unfortunate and untimely mix of the debt-based system, extreme financialization, moral hazards, and a rampant cantaloupe effect that’s causing extreme fragility and ever-increasing amounts of massive wealth inequality.
