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So when governments use the central banks to bail out private banks for their risky behaviour, 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. 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. 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 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 of fake money. Oh, really? I know. But it's all based on faith. How long is this sustainable, though, 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 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. 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. 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 Cantillon effect that's causing extreme fragility and ever-increasing amounts of massive wealth inequality.
