How is Money Created? – Everything You Need to Know

ColdFusion

8 Jun 202029:56

EducationalLearning

32 Likes 10 Comments

TLDRThe video script delves into the complexities of modern money creation, highlighting three primary methods: government-issued physical money, private banks' debt-based money, and central bank digital money through quantitative easing. It discusses the implications of these systems, including wealth inequality, inflation, and the potential for economic crises. The script critiques the current financial practices, suggesting a shift towards wealth creation and productivity as a more sustainable solution, while also exploring alternative financial assets as potential safeguards against the system's inherent fragility.

Takeaways

💰 Central banks globally are printing money, affecting everyone as they follow similar practices.
📈 The creation of physical money by governments through central banks is minimal, constituting only 3-8% of the economy.
💸 The profit from creating money (seigniorage) reduces the need for taxation, benefiting both the government and taxpayers.
🚫 Excessive money printing by politicians can lead to conflict of interest and currency devaluation due to inflation.
🏦 The majority of money is created digitally by private banks through the issuance of loans, which is debt-based.
📊 The use of debt as money began with the Promissory Notes Act in England in 1704, allowing banks to circulate debt as money.
🏠 The real estate market is a significant tool for creating digital money, as banks create debt (money) for loans, which leads to economic growth.
📉 Fractional reserve lending allows banks to lend out more than the deposits they hold, multiplying the money supply.
💹 Central banks can bail out private banks by creating new money, but this increases the debt that future taxpayers must repay.
🌐 Central banks' quantitative easing (QE) has led to them owning a large portion of global assets, distorting markets.
🌪️ The current monetary system is fragile and may lead to stagflation, social unrest, and a loss of faith in the reserve currency status of the US dollar.

Q & A

What is the primary focus of the video?
-The primary focus of the video is to explore the ways money is created in the United States, the consequences of these methods, and the impact on wealth inequality and the economy.
How is physical money created and what percentage does it represent in the economy?
-Physical money is created by the government, outsourced to the Royal Mint, but controlled by the central bank. It comes in the form of paper money or coins and represents only about 3 to 8 percent of the economy.
What is the significance of the profit made from printing money?
-The profit made from printing money, also known as seigniorage, is a source of revenue for the government. It allows the government to reduce the amount of taxation on the public.
Why don't governments create the majority of money as physical cash?
-Governments don't create the majority of money as physical cash due to the risk of inflation from excessive printing. This could lead to a conflict of interest, as politicians may be tempted to print money to fulfill campaign promises or fund wars, ultimately devaluing the currency.
How is the majority of money created today?
-The majority of money today is created digitally by private banks through the issuance of loans, which constitutes about 97 percent of the entire money supply.
What is the role of debt in the modern economy?
-Debt plays a crucial role in the modern economy as it is equivalent to money. Banks create debt when they issue loans, which enters the economic system and can be used for transactions. The need for more growth leads to more debt.
What is fractional reserve lending and how does it amplify money creation?
-Fractional reserve lending is a banking system where banks are required to keep only a fraction of deposits as reserves and can lend out the remainder. This process, repeated across multiple banks, can lead to a multiplication of the original deposit, effectively increasing the money supply.
What is quantitative easing (QE) and how does it work?
-Quantitative easing (QE) is a method used by central banks to create money and stimulate the economy, especially during crises. Central banks buy government bonds or other financial assets, injecting new money into the financial system.
What are the potential consequences of central bank interventions in the economy?
-Central bank interventions can lead to wealth inequality, as the newly created money often ends up in assets like stocks, increasing the wealth of those who already own them. It can also cause economic distortions and disconnect the stock market from the real economy.
How does the current monetary system contribute to wealth inequality?
-The current monetary system contributes to wealth inequality by favoring those with access to credit and assets. As central banks print money and bail out financial institutions, the wealth of the upper echelons increases while the real economy and middle class struggle.
What alternatives are suggested in the video for addressing wealth inequality and economic fragility?
-The video suggests focusing on wealth creation and productivity, such as investing in small and medium businesses, education, manufacturing, innovation, research, and development, as alternatives to the current system that leads to wealth inequality and economic fragility.

Outlines

00:00

💰 The Creation and Control of Money

This paragraph discusses the control and creation of money, focusing on the United States as the world's reserve currency. It highlights the global impact of central banks printing money and questions how money can come from nowhere. The video aims to explore the three ways money is created, the consequences of these methods, and the origins of wealth inequality. It introduces the concept of physical money created by governments and controlled by central banks, which makes up a small fraction of the economy.

05:03

📈 The Role of Government and Private Banks

The second paragraph delves into the role of governments and private banks in creating money. It explains that while the government creates a small percentage of physical money, private banks are responsible for the majority of money creation through debt. The system of fractional reserve lending and the creation of digital money through loans are discussed, emphasizing the link between debt and economic growth. The paragraph also touches on the risks associated with this system, including the potential for inflation and the impact of bank lending practices on the housing market.

10:03

💸 The Impact of Central Bank Policies

This paragraph examines the impact of central bank policies on the economy, particularly focusing on the concept of quantitative easing (QE). It describes how central banks create money to issue loans directly to the banking sector, large corporations, and even the public during extreme economic events. The paragraph highlights the unprecedented expansion of central bank balance sheets and the potential risks associated with this, including the moral hazard created by the 'too big to fail' banks and the burden of debt repayment on future generations.

15:03

🌐 The Global Consequences of Money Creation

The fourth paragraph discusses the global consequences of money creation by central banks. It explores how central banks can end up owning a significant portion of the world's assets through their purchase of government and corporate bonds. The paragraph also touches on the distortion of stock markets and the widening wealth inequality as a result of central bank interventions. It raises concerns about the sustainability of the current system and the potential for social unrest due to the growing divide between the rich and the poor.

20:03

🚀 Alternative Solutions and Future Predictions

In the final paragraph, alternative solutions to the current monetary system are proposed, emphasizing the importance of wealth creation and productivity over financialization and gambling. The paragraph suggests that if banks had invested in productive areas of society, the world would be in a better position today. It also presents potential future scenarios, including stagflation, a loss of faith in the US dollar, and the rise of digital stablecoins and modern monetary theory. The paragraph concludes with advice for individuals on how to protect themselves financially in the face of an uncertain economic future.

Mindmap

Keywords

💡Central Banks

Central banks are the institutions responsible for issuing a country's currency and controlling its money supply. In the video, central banks are highlighted as key players in the creation of money, particularly through the process of quantitative easing, and their role in influencing economic policies and stability.

💡Quantitative Easing (QE)

Quantitative easing is a monetary policy in which a central bank creates new money and uses it to buy government bonds or other financial assets to stimulate the economy, typically during times of economic downturn or crisis. The video explains that QE is a method used by central banks to inject liquidity into the financial system, which can have various effects on the economy, including inflation and wealth inequality.

💡Wealth Inequality

Wealth inequality refers to the unequal distribution of assets among different sections of the population. In the context of the video, it is presented as a growing problem exacerbated by the current monetary system, where money creation and financial policies disproportionately benefit the wealthy, leading to a widening gap between the rich and the poor.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the video, inflation is discussed as a consequence of money printing and the increase in money supply, which can lead to a decrease in the value of currency and a potential loss of confidence in the monetary system.

💡Debt

Debt refers to an obligation to pay off a sum of money that is borrowed. In the video, debt is portrayed as the primary mechanism through which money is created by private banks, with loans being essentially a form of debt that enters the economy and becomes money when spent.

💡Fractional Reserve Lending

Fractional reserve lending is a banking system in which only a fraction of deposits are kept in reserve, allowing banks to lend out the majority of their deposits, thereby creating new money in the process. This practice multiplies the effect of the initial deposit, increasing the money supply but also the potential for financial instability.

💡Financialization

Financialization refers to the increasing dominance of financial institutions and the financial sector over economic policy and economic outcomes. In the video, financialization is criticized for leading to a focus on short-term profits and speculative investments at the expense of productive investments in areas like manufacturing, research, and development.

💡Moral Hazard

Moral hazard occurs when a party is protected from the consequences of their actions, leading to a situation where they take on more risk than they would if they were fully accountable. In the video, the term is used to describe the situation where banks, knowing they are backed by central banks, take excessive risks with the creation of debt and financial investments.

💡Cantillon Effect

The Cantillon Effect refers to the phenomenon where the first recipients of new money gain an advantage over later recipients due to the time it takes for the increased money supply to affect the entire economy, leading to changes in relative prices and wealth distribution. In the video, this concept is used to explain how central bank money creation benefits certain groups before the broader economy feels the effects, contributing to wealth inequality.

💡Stagflation

Stagflation is a combination of stagnation and inflation, where an economy experiences slow growth or recession alongside a rise in prices. In the video, stagflation is presented as a potential future economic scenario resulting from the current monetary policies, characterized by high inflation and slow economic growth.

💡Modern Monetary Theory (MMT)

Modern Monetary Theory is an economic theory that advocates for the use of fiscal policy and government spending to stimulate the economy, without the need to balance budgets or worry about creating excessive debt. In the video, MMT is mentioned as a potential solution to the current economic challenges, suggesting that governments can issue their own currency and manage economic activity without the constraints of debt repayment.

Highlights

The United States, as the world reserve currency, has a significant impact on global economics.

Central banks globally are engaging in similar practices, influencing the worldwide economy.

Money is often created out of nothing, challenging the traditional understanding of its value and origin.

Wealth inequality has true origins in the way money is created and distributed.

Physical money, such as paper bills and coins, represents a small fraction of the economy.

The government profits from creating physical money, which can reduce public taxation.

Inflation, the loss of purchasing power over time, can render money worthless if not controlled.

Private banks create the majority of money today through debt-based lending.

Banks can create new money through loans, which are essentially digital entries.

The property market is a significant tool for creating digital money through mortgages.

Fractional reserve lending allows banks to lend out more money than they have in deposits.

Central banks can bail out private banks with infinite money, creating a moral hazard.

Quantitative easing (QE) is a method for central banks to flood money into the economy.

Central banks can buy government bonds, leading to ownership of a significant portion of world assets.

The current monetary system has led to wealth concentration and economic fragility.

Wealth creation through productive investments is suggested as a more sustainable approach.

The future may hold significant economic reforms as a response to the current monetary system's flaws.

Individuals may consider diversifying their assets to protect against potential economic instability.

Transcripts

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Related Tags

Money Creation Central Banks Debt Based System Wealth Inequality Economic Crisis Quantitative Easing Financialization Inflation Impact Banking Sector Taxpayer Burden