How MONEY & BANKING Really works - Part 1 (3 of 5)
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
🏦 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.
📉 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
💡Bank Credit Money
💡Legal Tender Laws
💡Debt
💡Fiat Currency
💡IOU
💡Principal
💡Interest
💡Economic Growth
💡Debt Spiral
💡Resource Depletion
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.
Transcripts
despite the endlessly presented Mint
footage government created money
typically accounts for less than five
percent the money in circulation more
than 95 percent of all money in
existence today was created by someone
signing a pledge of indebtedness to a
bank what's more this bank credit money
has been created and destroyed in huge
amounts every day as new loans are made
and old ones repaid
banks can only practice this money
system in the active cooperation of
government first governments pass legal
tender laws to make us use the national
fiat currency secondly governments allow
private bank credit to be paid out in
this government currency thirdly
government courts enforce debts and
lastly governments pass regulations to
protect the money systems functionality
and credibility with the public while
doing nothing to inform the public about
where money really comes from the simple
truth is that when we sign on the dotted
line for a so-called loan or mortgage
our signed pledge of payment back by the
assets we pledged to forfeit should we
fail to pay is the only thing of real
value involved in the transaction to
anyone who believes we will honor our
pledge that loan agreement or mortgage
there's no a portable exchangeable and
saleable piece of paper it's an IOU it
represents value and is therefore a form
of money this money the borrower
exchanges for the banks so-called loan
now alone in the real world means that
the lender must have something to lend
if you need a hammer my loaning you a
promise to provide a hammer I don't have
won't be of much help but in the
artificial world of money a banks
promise to pay money it doesn't have is
allowed to be passed off as money and we
accept it as such
once the borrower signs the pledge of
debt the bank then balances the
transaction by creating with a few
keystrokes on a computer a matching debt
of the bank to the borrower from the
borrower's point of view this becomes
loan money in his or her account and
because the government allows this death
of the bank to the borrower to be
converted to government fiat currency
everyone has to accept it as money again
the basic truth is very simple
without the document the borrower signed
the banker would have nothing to lend
have you ever wondered how everyone
governments corporations small
businesses families can all be in debt
at the same time and for such
astronomical amounts have you ever
questioned how there can be that much
money out there to lend now you know
there isn't banks do not lend money they
simply created from debt and as debt is
potentially unlimited so is the supply
of money and as it turns out the
opposite situation is also true isn't it
astounding that despite the incredible
wealth of resources innovation and
productivity that surrounds us almost
all of us from government's to companies
to individuals are heavily in debt to
bankers if only people would stop and
think how can that be how can it be that
the people who actually produce all the
real wealth in the world are in debt to
those who merely lend out the money that
represents the wealth even more amazing
is that once we realize that money
really is debt we realize that if there
was no debt there'd be no money
[Music]
if this is news to you you are not alone
most people imagine that if all debts
were paid off the state of the economy
would improve it's certainly true on an
individual level just as we have more
money to spend when our loan payments
are finished we think that if everyone
were out of debt there would be more
money to spend in general but the truth
is the exact opposite there would be no
money at all there it is we are totally
dependent on continually renewed bank
credit for there to be any money in
existence no loans no money which is
what happened during the Great
Depression the money supply shrank
drastically is the supply of loans dried
up
and that's not all
banks create only the amount of the
principal they don't create the money to
pay the interest where is that supposed
to come from the only place borrowers
can go to obtain the money to pay
interest in the general economy's
overall money supply but almost all that
overall money supply has been created
exactly the same way as bank credit that
has to be paid back with more than was
created so everywhere there are other
borrowers in the same situation
frantically trying to obtain the money
they need to pay back both principal and
interest from a total money pool which
contains only principal it is clearly
impossible for everyone to pay back the
principal plus interest because the
interest money doesn't exist this can
even be expressed by a simple
mathematical formula the big problem
here is that for long term loans such as
mortgages and government debt the total
interest far exceeds the principal so
unless a lot of extra money is created
to pay the interest it means a very high
proportion of foreclosures and a
non-functioning economy to maintain a
functional society the rate of
foreclosure needs to be low and so to
accomplish this more and more new debt
money has to be created to satisfy
today's demands for money to surface the
previous debt but of course this just
makes the total debt bigger and that
means more interest must ultimately be
paid resulting in an ever-escalating an
inescapable spiral of mounting
indebtedness
it is only the time lag between money's
creation as new loans and its repayment
that keeps the overall shortage of money
from catching up and bankrupting the
entire system however as the banks in
the satiable Credit monster gets bigger
and bigger the need to create more and
more debt money to feed it becomes
increasingly urgent why are interest
rates so low why do we get unsolicited
credit cards in the mail why is the US
government spending faster than ever
could it be to stave off collapse of the
entire monetary system a rational person
has to ask can this really go on forever
isn't a collapse inevitable
money facilitates production and trade
as the money supply increases money just
becomes increasingly worthless unless
the volume of production and trade in
the real world grows by the same amount
add to this the realization that when we
hear that the economy is growing at 3%
per year it sounds like a constant rate
but it's not
this year's 3% represents more real
goods and services than last year's 3%
because it's 3 percent of the new total
instead of a straight line is as
naturally visualized from the words it
is really an exponential curve getting
steeper and steeper the problem of
course is that perpetual growth of the
real economy requires perpetually
escalating use of real-world resources
and energy more and more stuff has to go
from natural resource to garbage every
year forever just to keep this system
from collapsing
[Music]
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