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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 authorised 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 and 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 26, 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 investments 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 we print it
digitally so we you know we as a central bank we have the ability to create
money
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.
