SECRET METHOD Banks Use To Control The World
Summary
TLDRThis video script delves into the intricate world of banking, revealing how banks can seemingly print money and control global assets. It outlines a three-step process: banks create money through loans, engage in a shadow banking system to transfer assets globally, and face constraints due to risk and interest rates. The script challenges viewers to consider risk analysis over central bank actions when making investment decisions, emphasizing the importance of understanding the banking system's impact on wealth-building.
Takeaways
- π‘ Banks have the ability to create money through the process of lending, which initially did not exist before the loan was created.
- π¦ The balance sheet of a bank is crucial, with assets like loans on one side and liabilities like deposits on the other.
- π When a loan is paid to another bank, the transferring bank must either offset the liability with an asset or transfer reserves to maintain balance.
- π The concept of 'shadow banking' refers to banking activities conducted outside the regulatory oversight of central banks like the Federal Reserve.
- πΏ Shadow banks can operate without the need for traditional bank reserves, potentially allowing for unlimited money creation.
- πΈ Banks can create their own reserves and money, but they are constrained by the risk associated with the assets they purchase with the created money.
- π Market risks, such as changes in interest rates, can significantly affect the value of assets, potentially leading to bank insolvency.
- π« The video emphasizes that despite the ability to create money, banks are ultimately limited by the perceived risk and creditworthiness of their assets and counterparties.
- πΌ For investors, understanding the dynamics of risk and the global monetary system is more important than just focusing on central bank actions like quantitative easing or tightening.
- π The video suggests that risk analysis should be the starting point for investors trying to navigate financial markets influenced by central banks and large financial institutions.
Q & A
What is the main claim about banks' ability to control the world as presented in the script?
-The main claim is that banks have the ability to create money and manipulate the financial system, particularly through the process of lending and the creation of deposits, which can be used to buy assets and influence the global economy.
How does the script explain the process of money creation by banks?
-The script explains that when a bank creates a loan, it effectively creates new money by adding a new deposit to its balance sheet, offset by the loan as an asset. This process is illustrated through the example of Joe borrowing money to buy a car from Moody.
What is the role of the Federal Reserve in the process described in the script?
-The Federal Reserve plays a central role by acting as the clearinghouse for interbank transactions. It facilitates the transfer of reserves between banks to balance their balance sheets when deposits are transferred between different banks.
What is the significance of the term 'shadow banking system' mentioned in the script?
-The 'shadow banking system' refers to banking activities conducted outside the traditional banking system, which are not subject to the same regulations. This system allows banks to create money and reserves without the direct oversight of central banks like the Federal Reserve.
How does the script describe the process of transferring money between banks, particularly internationally?
-The script describes the process of transferring money internationally by showing how banks credit each other's accounts and use reserves to offset liabilities. This is illustrated with the example of Exxon transferring money from Chase New York to City Bank in London.
What is the concept of 'ledger money' as mentioned in the script?
-The concept of 'ledger money' refers to the credit entries made by banks on their balance sheets to balance transactions. It's a form of money that exists as a record of debt within the banking system, rather than physical currency.
Why doesn't the script suggest that banks would actually buy everything in the world despite their ability to create money?
-The script suggests that while banks can create money and credit, they are constrained by risk, particularly the risk associated with the assets they purchase. If the value of these assets plummets, banks can become insolvent, which limits their ability to buy everything.
What is the role of risk in the banking system as discussed in the script?
-Risk plays a critical role in the banking system by constraining banks' ability to create money and buy assets. The script emphasizes that banks must manage credit risk, interest rate risk, and counterparty risk, which can affect their solvency and the stability of the financial system.
How does the script relate the concept of risk to the actions of central banks like the Federal Reserve?
-The script argues that while central banks' actions, such as quantitative easing or tightening, can influence liquidity, the perception of risk in the global monetary system is a more significant factor. It suggests that investors should focus on understanding risk levels rather than solely on central bank policies.
What is the practical implication of the script's discussion on banking and money creation for individual investors?
-The practical implication for individual investors is to focus on understanding the risks in the financial system, which can affect asset prices and the value of investments. The script suggests that being aware of these risks can help investors make more informed decisions about where to allocate their capital.
Outlines
π¦ Understanding Bank Money Creation
This paragraph introduces a secret method banks use to control the world through money creation. It outlines three steps to explain the process. Step one focuses on the ability of banks to print money, raising the question of why they don't buy everything if they can print it. The explanation involves the balance sheet mechanics of banks, illustrating how banks create new money through loans. The example of Joe borrowing money to buy a car from Moody is used to demonstrate how banks create deposits and transfer them between banks, using reserves at the Federal Reserve as offsetting assets. The paragraph sets the stage for further exploration of how banks operate and the implications of their money creation abilities.
π Exploring Offshore Banking and the Shadow System
Paragraph two delves into offshore banking, also known as the shadow banking system, which operates outside the direct oversight of the Federal Reserve. It discusses how banks can transfer funds internationally, using Exxon's transfer of money from Chase New York to City London as an example. The process involves moving deposit liabilities and reserves between banks, highlighting how the shadow banking system can operate without the need for physical reserves. The paragraph introduces Perry Meiring, an expert on the subject, who explains the concept of euro dollars and how banks can create their own reserves, thus controlling the money supply beyond the constraints of traditional banking regulations.
π΅ The Potential of Banks to Buy Everything
Paragraph three explores the theoretical ability of banks to buy all assets in the world if they so desired. It uses a simplified scenario with two banks, Bank A (JP Morgan) and Bank B (HSBC), to illustrate how banks can create money and use it to purchase assets like treasuries. The process involves crediting accounts and transferring liabilities between banks to balance their books. The paragraph emphasizes the concept of 'ledger money,' where banks essentially create credit entries to facilitate transactions. It also introduces the idea that banks can effectively create their own reserves, which challenges the traditional understanding of money creation being solely the domain of central banks.
π Risk and the Limitations of Bank Money Creation
Paragraph four introduces the concept of risk as a critical factor in bank money creation. It explains that while banks can create money and credit, the value of the assets they purchase with this money is subject to market risks, such as interest rate fluctuations. Using the example of Bank A buying a treasury that later loses value, the paragraph demonstrates how banks can become insolvent if the assets they hold decline in value. It challenges the idea that banks can endlessly create money without consequence, emphasizing that the solvency of banks is tied to the perceived risk of their assets and the trust other banks place in them.
β οΈ The Importance of Risk in Global Monetary Systems
The final paragraph emphasizes the importance of understanding risk in the context of global monetary systems. It argues that while central bank actions, such as quantitative easing or tightening, are important, the perception of risk and counterparty risk within the banking system are even more critical. The paragraph suggests that an informed investor should focus on risk analysis rather than solely on central bank policies. It concludes by encouraging viewers to consider the broader implications of the banking system's operations on their investment decisions, hinting at the interconnectedness of risk perception and monetary policy.
Mindmap
Keywords
π‘Money Printing
π‘Balance Sheet
π‘Federal Reserve
π‘Deposit Liability
π‘Shadow Banking System
π‘Bank Reserves
π‘Asset Risk
π‘Counterparty Risk
π‘Quantitative Easing (QE)
π‘Settlement
Highlights
Banks have the ability to print money, raising the question of why they don't simply buy everything.
The process of money creation through loans is explained, showing how banks can create new money that didn't exist before.
The balance sheet dynamics of banks are detailed, with assets like loans and liabilities like deposits.
The transfer of deposits between banks and the role of the Federal Reserve in facilitating these transfers are discussed.
The concept of shadow banking is introduced, explaining how banks operate outside the direct oversight of the Federal Reserve.
The mechanics of transferring funds internationally within the shadow banking system are outlined.
The ability of banks to create their own reserves and money in the shadow system is highlighted.
The potential for banks to buy all assets in the world is explored, considering the constraints they might face.
The role of risk in banking operations is emphasized, explaining how it can limit the banks' ability to create unlimited money.
The impact of interest rate changes on the value of assets like treasuries and the solvency of banks is discussed.
The importance of perceived counterparty risk in the global monetary system is explained.
The video argues that risk analysis should be the starting point for investors, rather than just focusing on the Federal Reserve's balance sheet.
The video concludes by emphasizing the importance of understanding the banking system's inner workings for informed investing.
Transcripts
this is the secret method Banks use to
control the world I'm going to explain
this to you in three simple fast step
step number one they can print money
which begs the question if they can
print their own money why don't they buy
everything the answer is they can we're
going to address that more in Step
number three but before we get there
let's go over how this process typically
works so we've got the average Joe right
here and we have everyone's favorite
Millennial Moody the millennial with
their blue hair because I do not know
their preferred pronouns so Joe Banks
with bank a moody banks with bank B
we've got the Federal Reserve here in
the middle and as always we have assets
on the left liabilities on the right we
have the balance sheet for the
individual entities so Joe needs to
borrow some money let's say to buy a car
from Moody so Bank a says yeah we can go
ahead and do that we will go ahead and
create a brand new deposit for you Joe
which is what they do when they create a
loan this creates brand new money that
didn't exist before so if the balance
sheet starts with let's say Bank
Reserves on the left those are those
assets that they hold at the fed and we
have one deposit now we've added another
deposit but the offsetting asset is the
loan to Joe so Joe needs to pay for the
car that he's buying from Moody and
Moody Banks obviously with a different
bank so Bank a has to transfer this
liability called it Commercial Bank
deposit liability but it's just a a
deposit in your checking account so this
deposit liability has to go over here to
bank B well if they do that then they're
going to have negative equity they also
have to either offset the liability by
the same amount or they have to transfer
over an
asset aha so what they do is they take
this bank reserve and they say fed go
ahead and shoot this over to bank B's
account and that will be the offsetting
asset for this liability we just
transferred so then we get to the point
where the balance sheets look more like
this so this deposit liability has gone
over here so now it's no longer on the
balance sheet of Bank a and then with
the fed has done is they have taken the
reserves the Bank Reserves from A's
account and they've moved them into B's
account so when all is said and done
with bank B they now have that bank
reserve and the deposit they started
with but then they also have the
additional Deposit they got from Bank a
as well as the bank reserve that was
from Bank a but really it was a
liability of the Fed so they just
transferred it from A's account down to
B's account but here is where the story
gets interesting you see now Bank a only
has this loan as an asset and a deposit
they don't have any more Bank Reserves
so what do they do well they have to go
out to let's say Bank B and they have to
borrow some of these Bank Reserves if
they want to transfer or if one of their
customers wants to transfer this deposit
over to bank C so just say that Joe has
this deposit as well for 100 bucks and
he owes Larry which I didn't put on the
board here but let's say Larry banks
with c and he needs to pay Larry that
$100 that's in his account so Bank a
will transfer this $100 deposit
liability over to bank C but wait a
minute they're not going to be able to
transfer that loan as the offsetting
asset so what on Earth do they do well
what they'll likely do is go in into the
open market borrow the Bank Reserves
from Bank
B and then they'll transfer those Bank
Reserves over to bank C's balance sheet
so when everything is said and done now
they still have that loan but instead of
the deposits they have an IOU
to bank B because they owe them the Bank
Reserves that bank B was nice enough to
transfer over to bank C for them so Bank
a could settle up with bank C but the
whole key to step number one
lies right
here I'm talking about this red
arrow that's highlighting the fact that
when this transaction is done
effectively Bank B has accepted
IUS from Bank a as the offsetting
asset to that deposit
liability and if you have a hard time
following this or if it doesn't quite
make sense don't worry because we're
going to dive into this in even greater
detail in Step number two which is going
to show you how Banks if they wanted to
could quite literally buy everything in
the world but there is one constraint
and again we're going to get into that
at the end of this
video step number two now let's talk
about how the banks operate
offshore outside of the purview of the
FED we call this the shadow banking
system and just like its name implies it
is very mysterious but once we start to
dive into these details you see how
these Banks can really control the world
so let's start by looking at a paper
from a professor I believe at Boston
University and they basically go over
something similar that we went over on
the whiteboard in Step number one but
they're starting with Exxon and they've
got assets on the left liabilities on
the right and Chase New York Chase City
now they get into City London so City
Bank of London but let's hold off on
that for just a moment because I want
you to see kind of the how the
transaction plays out so we've got Exon
and they want to transfer let's to say
$10 probably more like 10 billion
dollars or 10 or 10 million or something
but they want to transfer
$10 from Chase New
York to City New
York okay great very simple process we
just went over this so what happens is
they decrease the assets they have on
deposit with Chase and increase the
assets they have with City but then
Chase New York has to transfer those
deposit liabilities over to City so it's
a minus here A Plus here but then they
also have to transfer them the Bank
Reserves so it's a minus on the asset
side of their balance sheet A Plus on
the asset side of City therefore
everything balances out in the end so
now let's assume Exxon didn't really
want transfer the money to City New York
they wanted to transfer it to city in
London City Bank in London their Branch
over there okay fine well how does it
differ so what would happen in this case
is the deposit and the reserves would go
from Chase to City New York but then
what would happen is City New York would
Credit City London's
account that City London has with City
New York so what I'm saying here is this
Bank in London has an account with the
bank in New York just like you have an
account with Wells Fargo or Bank of
America these banks have accounts with
one another so what city does is they
credit London's account with the 10
bucks those reserves back up that
liability and then what they do is they
transfer this liability that originally
started on Chase New York's balance
sheet over to City London because
remember that's where Exxon actually
wants the
deposit and then the offsetting asset
for London would be the increase of $10
to their account that they have with
city in New York so why this is so
important is because now what we've done
is we've taken dollars and they're
outside of the United States but more
importantly they're in a system that
doesn't necessarily need Bank Reserves
in other words they don't need the
Federal Reserve in other
words there's nothing constraining the
amount of money they create
except one thing that we're going to go
over in Step number three now if you're
having a hard time getting your head
around this no problem let's go over to
a video from I believe the author of
this paper and this guy's absolutely
brilliant his name is Perry Merling and
he's got all the credentials you would
expect PhD from Harvard he went to the
London School of Economics so let's go
over there and hear how he describes
this because he's probably going to do a
much better job than I just
did now
these deposits that City London has in
City New York are essentially reserves
that's the city London cannot have a
deposit account at the FED it cannot
have it's not allowed but it can have a
deposit account at a bank that has a
deposit account at the fed and so it can
sort of indirectly have a deposit
account at the fed and that's what it's
operating so it has these deposits and
the way it will it it uses them as money
the way it it if Exxon wants to transfer
this deposit to somebody else okay City
London uses its deposit in in in New
York to do that so there's these like
layers of reserves that are
happening I would like to suggest
revised version of this where Exxon is
transferring its money to credit
Leon
C and credit Leon is using a deposit at
City New York as its
Reserve okay so its deposit is in
another bank a different bank not its
own bank that makes it much clearer
what's going on here that this is a
correspondent kind of relationship so
the when we talk about euro dollar we're
talking about this stuff here that's on
the balance sheet of banks that are
outside the United States now we have
this bank credit Leon C
Leon it's a bank
it can go into the dollar deposit
business it can go into the dollar
lending business it has
reserves in its correspondent
bank plus dollar
loans plus dollar deposits you know it
can make loans by creating
deposits okay and if somebody withdraws
those deposits it can use these deposits
in New York at to make to make payment
okay so it can go into the dollar
borrowing lending business even though
it's in
France so the main takeaway from Step
number two is once you get into this
rather mysterious Shadow banking system
they can create not only their own money
but they can also create their own
reserves to have the ability to transfer
that deposit liability to another bank
so if they can create their own money if
they can create basic basically their
own reserves just like the Federal
Reserve creates their own Bank Reserves
then why don't they go out there and buy
all the treasuries all the real estate
all the businesses all the gold all the
Bitcoin all the
stocks and completely own the entire
world it's a good question and to a
certain degree they could and we're
going to discuss that right now
step number three the banks buy
everything remember what they've been
telling
you you'll own
nothing and you'll be happy here's how
this would work out as far as the
balance sheets let's say there are only
two banks in the world to keep things
super simple we'll call it Bank a or
maybe JP
Morgan and Bank B maybe City Bank bank
or
HSBC so before we get into what this
Bank buys buying all the assets all the
Bitcoin all the gold all the real estate
all the treasuries all the stocks
Etc let's go back to what Perry Merling
was saying at least this is his View and
there are different views out there more
on that in just a moment but the Banks
can effectively create their own
reserves they can create their own money
they can create their own assets their
own
liabilities so let's just put that or
let me just give you a real world
example so before we get to this part
let's just assume that bank B has an
account with bank a that's their
liability and Bank a has an account with
bank B and this is Bank B's liability so
there's only two Banks they know each
other well they've been doing business
with each other for the last 40 years
and they say look let's go ahead and uh
start by I'll just credit your account a
100 bucks and Bank a says well that's
mighty nice of you Bank B I'll go ahead
and respond in kind by crediting your
account 100 bucks so the balance sheets
all
balance from the
standpoint of Bank a has this $100 asset
that's how much money is in their
account at Bank B and Bank B has this
$100 asset which is the amount that they
have their balance in their account at
Bank a okay now let's go ahead and
continue so Bank a says well boy I want
to go out there and buy some Treasury
IES they're looking real good so they
say I'm going to go ahead and buy
treasury from XYZ non-bank entity and
we'll go ahead and credit their account
with us let's say they just buy it from
the average Joe so we'll credit Joe's
account by
$100 we'll assume they're buying $100
worth of treasuries okay so the $100 wor
of treasuries become the asset on their
balance sheet that's what bank a is
trying to buy but the $100
deposit is now a liability that would be
Joe's asset the asset that he now has
for selling his treasuries to bank a to
begin with all right but then George
remember we've got that settlement issue
that we were talking about in steps one
and two so let's assume that Joe wants
to transfer this deposit liability over
well Commercial Bank deposit liability
over to bank B all right well what
happens because Bank a doesn't have
anything to really settle with because
they want to keep that
treasury so this deposit goes over to
their balance sheet which we can see
right here so now on the liability side
of Bank B's balance sheet they have
$200 when they only had 100 to begin
with and they only started with $100 in
their account at Bank
a but Bank a says well here's what we'll
do we'll go ahead and transfer you this
liability we want to keep our treasury
so we'll just go ahead and add another
$100 to bank B's account that they have
with
us this is why my good friend Jeff
Snider calls this simply Ledger
money that's all it is is they're just
getting their books to balance they're
just creating this
network of ledgers or balance sheets if
you will so now that the transaction is
done let's
see if these things balance
out so Bank a has now $200 worth of
assets $200 worth of
liabilities Bank
B 200 worth of
assets 200 worth of
liabilities Bank a has purchased
treasuries effectively for free with
money that they just created due to this
scheme if you want to call it that with
bank
B whoa timeout I know a lot of you are
probably watching this saying George
this is absolutely
impossible this this can't be right I
mean at the end of the day these aren't
dollars I mean they're just it's just
credit back and forth they're just
IUS and at the end of the day they're
just claims on dollars and we know that
the only entity that can create actual
dollars is the Federal Reserve this is
what we call Base money or m0 so again
these are just all claims on dollars and
there's no way these banks at the end of
the day when they settle would accept
just a claim on a dollar they would
actually want the real
thing okay but let me ask you the last
time you were paid let's say
$1,000 or maybe you received your
paycheck and that was deposited into
your account did you receive claims on
dollars or did you actually receive
dollars see unless you received Green
Piece P of paper then you did not
receive dollars you did not receive base
money you did not receive m0 you did not
receive a liability of the fed you
received claims on
dollars that for you was just as good
because you can spend those claims on
dollars or those IUS from the bank just
like you can the green pieces of paper
it's the exact same thing here oh but
wait there is more if you've really been
paying attention you know that
throughout this entire video I've been
hinting at the fact there is a
constraint So in theory this all works
but in practice it's quite a bit
different and there's one word that
tells us everything we need to
know
risk and I'm not necessarily talking
about the risk initially from from One
bank to the other but what I'm more so
talking about is the risk with the
assets they actually purchase with all
this money they create out of thin air
let me show you what I'm referring to so
remember Bank a bought a treasury from
the average Joe that at the time let's
say was yielding 5% and therefore it was
worth
$100 but but let's assume for a moment
that interest rates go up very quickly
and very dramatically where have we seen
this happen
before so you guys know by watching my
videos that there's an inverse
relationship between the interest rate
and the value of the actual treasury so
if these interest rates go up and go
Skyhigh the value of this treasury
plummets now for the sake this example
to keep things super simple let's say
the value of the treasury goes down to
zero now the value of the treasury
wouldn't go down to zero in real life
but again just for the sake of this
example so now all of a
sudden this
asset basically goes away because it has
no value again it's gone down to zero so
now all of a sudden Bank a is is
insolvent they have negative equity
because they have $200 worth of
liabilities but they now only have $100
worth of
assets and you say oh George well that
isn't a problem because remember what
you're telling us right up here in this
phase of the game that they could just
go to bank B and say Bank B hey credit
my account for another
$100 and then everything will go back to
balancing out out and Bank B says yeah
you're my good buddy but that ain't
going to happen because let's think
about it if Bank B added another
$100 to bank A's
account they would be putting themselves
in the exact same position as Bank a and
that is up a certain creek without a
paddle as we used to
say when I was a kid because if they
added another $100 now they would have
$300 in
liabilities and only 200 in assets so
the constraint on the banks is the risk
it's the interest rate risk it's the
credit risk meaning what if they don't
even get paid
back then they can create as much money
as they want or lend each other as much
money or reserves as they want and it
doesn't bail them out
and this is why I always say what really
drives liquidity in global markets is
perceived counterparty risk it isn't
necessarily the fed's balance sheet
whether they're expanding it or
Contracting it so Bank B looks at A's
balance sheet and says yeah that ain't
looking too good then they're going to
hesitate or they're not going to create
credit for them and vice versa so it's
all about the
Asset Risk and then the perceived
counterparty risk within the network of
the banking system itself or the global
monetary system if you will in other
words these banks that operate in the
shadows I know right about now many of
you are asking the most important
question of this entire
video George why on Earth does this
matter I understand and this network
that you're talking about and all the
balance sheets and the money Printing
and the banks and oh all this is just
mumbo jumbo at the end of the day I'm
just an average investor trying to
figure out whether I should buy some
real estate maybe some stocks bonds
maybe some gold or Bitcoin none of this
matters to me at
all and this is where I would disagree
with you let me explain so if you're
there watching CNBC or Bloomberg If the
Fed is doing quantitative tightening as
an example they are going to tell you
that oh my gosh this means that
liquidity in the global monetary system
is going to shrink is going to decrease
and therefore X Y and Z will be the
likely outcome but you as an informed
investor will know that while it's
important to pay attention to the fed's
balance sheet sheet what's even more
important is to try to determine what is
happening with the amount of perceived
counterparty risk or risk in general in
the global monetary system because if
risk is going up and the fed's doing QE
it's not going to have that much of an
impact and if risk is going down then
conversely if they're doing quantitative
tightening then that also isn't going to
have much impact it's all about your
starting point are you starting by
trying to analyze risk or are you
starting by trying to analyze the fed's
balance sheet and the whole point of
this video is to try to impress upon you
my view and it's just my opinion that
the starting point should be risk
for more content that'll help you build
wealth and thrive in a world of out of
control central banks and big
governments check out this playlist
right here and I will see you on the
next video
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