How MONEY & BANKING Really works - Part 1 (3 of 5)

Simfinet

2 Jan 201009:59

Summary

TLDRThe script delves into the monetary system, revealing that over 95% of money is created through bank loans and debt. It explains how banks lend money they don't possess by creating it as debt, which is accepted as currency due to government backing. The script challenges the belief that eliminating debt would boost the economy, arguing that money and debt are inseparable. It also highlights the impossibility of repaying both principal and interest from a money supply that only includes principal, leading to an escalating cycle of debt. The script questions the sustainability of perpetual economic growth, which demands increasing real-world resources and energy, and suggests that the current monetary system may be heading towards inevitable collapse.

Takeaways

💼 The majority of money in circulation is created through bank credit, not by government minting.
🏦 Banks create money by extending credit and effectively 'lending' money they don't physically hold.
📜 When individuals or entities take out loans, they sign a pledge of indebtedness, which is treated as money by the bank.
🔄 The cycle of money creation and destruction is continuous, as new loans are made and old ones are repaid.
🤝 Governments play a crucial role in the money creation process by enforcing legal tender laws, allowing bank credit, and protecting the money system.
💡 The concept of money is largely based on trust and the belief in the value of IOUs (I Owe You), which are treated as assets by banks.
🚫 The current financial system is built on debt, implying that without debt, there would be no money.
📉 The Great Depression exemplifies what can happen when the money supply shrinks due to a decrease in loans.
🔢 Banks only create the principal amount of a loan, not the interest, leading to a perpetual shortfall in the money supply to pay back loans.
🌐 The economy's reliance on constant growth and the creation of new debt to service old debts creates an unsustainable cycle.
💸 Low interest rates and aggressive credit offerings are tactics used to stimulate borrowing and prevent economic collapse.

Q & A

What typically accounts for less than 5% of the money in circulation?
-Government-created money, such as fiat currency, typically accounts for less than 5% of the money in circulation.
How is more than 95% of money created today?
-More than 95% of all money in existence today is created by banks through the process of lending, where someone signs a pledge of indebtedness to a bank.
What role does the government play in the banking money system?
-The government supports the banking money system by passing legal tender laws, allowing private bank credit to be paid out in government currency, enforcing debts through courts, and passing regulations to protect the money system's functionality and credibility.
What is the real value involved when someone signs a loan or mortgage?
-The real value involved when someone signs a loan or mortgage is the pledge of payment backed by the assets pledged to be forfeited if the payment is not made, which is essentially an IOU.
How does a bank create a matching debt to a borrower's loan?
-A bank creates a matching debt to a borrower's loan by entering a few keystrokes on a computer, which results in a liability on the bank's balance sheet and a corresponding credit in the borrower's account.
Why is it impossible for everyone to pay back both the principal and interest on loans?
-It is impossible for everyone to pay back both the principal and interest on loans because banks create only the principal amount as credit, not the money to pay the interest. The interest must be obtained from the existing money supply, which contains only principal amounts.
What happens to the money supply during periods of decreased lending, like the Great Depression?
-During periods of decreased lending, such as the Great Depression, the money supply shrinks drastically as the supply of loans dries up, leading to a significant reduction in the overall money in circulation.
Why do interest rates remain low, and why are credit cards frequently unsolicited?
-Interest rates remain low, and credit cards are frequently unsolicited to encourage borrowing and spending, which helps to stave off the collapse of the monetary system by creating more debt money to satisfy demands for money to pay off previous debts.
What is the relationship between economic growth and the real-world resources?
-Economic growth requires the perpetual use of real-world resources and energy, with more goods and services being produced each year. This growth is exponential, not linear, and it demands an escalating consumption of resources to maintain the system.
Why are governments, corporations, and individuals heavily in debt to bankers?
-Governments, corporations, and individuals are heavily in debt to bankers because the money supply is largely created through debt. As debt is potentially unlimited, so is the supply of money, leading to a situation where those who produce real wealth are in debt to those who lend the money representing that wealth.

Outlines

00:00

🏦 The Creation and Destruction of Money Through Debt

This paragraph explains that the majority of money in circulation is not created by governments but through bank credit, which is essentially debt. Banks create money when they issue loans, and this money is destroyed when loans are repaid. The process is dependent on the cooperation of governments, which pass laws to enforce the use of fiat currency, allow bank credit to be paid in this currency, and protect the financial system's credibility. The paragraph also highlights that when individuals or entities sign a loan or mortgage, they are essentially creating money through their pledge of indebtedness. This money is accepted as currency because the government allows it to be converted into fiat currency. The paragraph concludes by pointing out the irony that while the world is rich in resources and productivity, most entities are in debt to banks, which merely lend out money that represents wealth.

05:01

📉 The Downward Spiral of Debt and the Money Supply

The second paragraph delves into the consequences of the debt-based money system. It explains that if all debts were repaid, there would be no money, as the money supply is tied to the continuous creation of new loans. The paragraph discusses the Great Depression as an example of what happens when the money supply shrinks due to a lack of loans. It also addresses the issue of interest, pointing out that banks create only the principal amount of a loan, not the money to pay the interest, which leads to an impossible situation where borrowers must find money to pay both principal and interest from a pool that only contains the principal. The paragraph suggests that the only way to prevent a high rate of foreclosures and economic collapse is to create more debt, which in turn increases the total debt and the amount of interest that must be paid. This creates an escalating cycle of debt. The paragraph also touches on the implications of perpetual economic growth, which requires ever-increasing use of resources and energy, and questions whether this system can sustain itself indefinitely.

Mindmap

Keywords

💡Mint

In the context of the video, 'Mint' refers to the government's role in creating money. The script suggests that despite the common belief that the government is the primary creator of money, it actually accounts for a small fraction of the money in circulation. The term is used to contrast with the larger role played by banks in money creation through lending.

💡Bank Credit Money

Bank Credit Money is a key concept in the video, referring to the money created when banks extend loans. The video explains that over 95% of money is created this way, as opposed to being physically printed by a government mint. This money is created when a bank credits a borrower's account upon the signing of a loan agreement, which is a form of debt.

💡Legal Tender Laws

Legal Tender Laws are mentioned as a mechanism by which governments enforce the use of a national currency. These laws require that the government's fiat currency be accepted for the settlement of debts, thus supporting the banking system's ability to create money through loans.

💡Debt

Debt is a central theme in the video, where it is explained that money is created from debt. When a person or entity takes out a loan, they are essentially creating money by incurring a debt that must be repaid with interest. The video argues that the current financial system is built on this cycle of debt creation and repayment.

💡Fiat Currency

Fiat Currency is the government-issued money that is not backed by a physical commodity like gold. The video discusses how governments allow bank credit to be paid out in this form of currency, which is then enforced by legal tender laws and court systems, making it acceptable for all transactions.

💡IOU

An IOU, or 'I Owe You,' is a written promise to pay a debt. In the video, it is explained that when a borrower signs a loan agreement, they are creating an IOU that represents value and is treated as a form of money. This concept is used to illustrate how debt is equated with money in the financial system.

💡Principal

The term 'Principal' in the video refers to the original amount of money borrowed in a loan. It is distinguished from the interest, which is the additional amount that must be repaid. The video points out that banks create only the principal amount as credit, not the money needed to pay the interest, leading to an inherent problem in the system.

💡Interest

Interest is the cost of borrowing money and is a critical part of the video's discussion on debt and money creation. The video explains that since banks do not create the money for interest payments, it leads to a situation where borrowers must compete for a limited money supply, often resulting in debt defaults.

💡Economic Growth

Economic Growth is discussed in the video as an expectation for the real economy to grow perpetually to support the increasing money supply. The video suggests that this growth is not linear but exponential, which implies an ever-increasing demand for resources and energy, potentially leading to unsustainable practices.

💡Debt Spiral

A 'Debt Spiral' refers to the cycle of increasing debt to fuel economic activity. The video describes how new debt is continually created to pay off old debts, leading to an escalating amount of total debt and interest. This cycle is portrayed as unsustainable and a potential cause for economic collapse.

💡Resource Depletion

Resource Depletion is mentioned in the context of the perpetual growth required by the economic system. The video suggests that for the economy to grow, more and more natural resources must be converted into products and eventually waste, raising concerns about the long-term viability of this model.

Highlights

Government-created money typically accounts for less than 5% of money in circulation.

Over 95% of money is created by banks through loans and pledges of indebtedness.

Bank credit money is created and destroyed daily as loans are made and repaid.

Governments play a crucial role in allowing banks to create money through legal tender laws and regulations.

The public is generally uninformed about the origins of money.

A loan agreement or mortgage is a pledge of payment backed by assets, representing a form of money.

Banks lend money by creating a matching debt on their books through a few keystrokes.

The government allows bank debt to be converted into fiat currency, which must be accepted as money.

The borrower's signed document is the only real value involved in a loan transaction.

Banks do not lend money; they create it from debt, which is potentially unlimited.

The wealth of resources and productivity does not prevent widespread debt.

If all debts were paid off, there would be no money, as money is debt.

The Great Depression saw a drastic shrinkage in the money supply due to a lack of loans.

Banks create only the principal amount, not the money to pay the interest.

It is impossible for everyone to pay back principal plus interest because the interest money doesn't exist.

Long-term loans like mortgages and government debt have total interest exceeding the principal.

To maintain a functional society, new debt money must be created to pay off previous debts.

Low interest rates and unsolicited credit cards are tools to create more debt money.

The monetary system may be propped up by government spending to prevent collapse.

The economy's growth requires perpetual escalation of resource use and energy.

The perpetual growth of the real economy is unsustainable due to the exponential nature of resource consumption.