💲 Money Creation | How does it work?


Money creation: described by many as the biggest
scam in the history of mankind; for others it’s a blessing and a driving force of the
economy. For John Maynard Keynes it was a process that
“engages all the hidden forces of economic law on the side of destruction, and does it
in a manner which not one man in a million is able to diagnose.” We hope that after seeing this video you will
be this one man in a million. Let’s look at the case of US dollar creation,
as it is a global reserve currency. Many people don’t realize that any dollar
spent by the government sooner or later, one way or another, will be taken from the taxpayers’
pockets. The government can finance new spending in
several ways. Raising taxes is one way to do it, though
this method is unpopular. Another option is to cut spending in some
sectors; but this can provoke dissatisfaction or even social unrest for the groups cut off
from the money faucet. However, there is another option. The government may increase the budget deficit
and thus finance current expenditures at the cost of increasing debt. The US Treasury can issue securities like
government bonds. Simply put, a bond is a promise to repay a
certain amount of money with interest after a certain date. It constitutes a debt obligation. The government bonds are sold to financial
institutions at auction. By itself, issuing bonds doesn’t necessarily
lead to money creation. Bonds can be bought by a private individual
with previously saved money. However, some bonds are bought by means of
open market operations by the Federal Reserve, which is the US central bank. The process goes as follows: The Fed buys
bonds from a commercial bank by issuing a check in its own name. There are no savings in the Fed’s account. The Fed reports bonds on the asset side of
the accounting equation, and on the liabilities side the Fed reports new money equal to the
value of the check. When the check is received by a bank which
is selling the bonds, the check simply becomes a new money in circulation. Complicated? Well, let’s try to simplify our story here. Let’s just skip the intermediary, the financial
institutions. The government issues bonds and then sells
them to the central bank who buys them with newly created money or, in other words, the
check for the government debt. What we now call money, or more precisely
monetary base, is created by the fact that the two institutions exchanged paper or digital
records. Each asset purchased by the Fed increases
the monetary base. Government bonds are interest-bearing, so
it is necessary to pay interest on each bond issued. This is called debt service. In order to pay for an existing bond the government
usually just issues some new bonds. This doesn’t seem to be reasonable at all,
does it? Imagine if you borrowed some money, and spent
it all at once. Now suppose that you took another loan to
pay off the previous debt, even though you were still paying interest. This is called “rolling over” debt. Although the face value of the loan is never
repaid, the periodic interest is. This procedure is listed among other budgetary
items as the cost of servicing debt. These costs are incurred regardless of whether
the money is created or not. When the citizens buy bonds from the government
for their savings, the interest on the debt is still paid. At the same time the Fed gives earnings from
interest to the government. Thus it is cheaper for the state to borrow
through monetization of the debt, rather than to simply sell bonds. It is important to understand that in this
way the debt becomes a burden for everybody and for years to come, regardless of whether
the debt was incurred by involving money creation or not. Debt equals borrowing from our future prosperity. Money creation exacerbates the problem further
by reducing purchasing power of money holders, and by allowing for a greater debt than would
be possible otherwise. However, the monetary base is only one narrow
measure of money; let’s see what happens next. The government still spends money on things
like the military, pensions, social programs, and many other things. So the money is eventually received by the
public one way or another. This money is then deposited by the public
in commercial banks. As you already know from the previous video
about fractional reserve banking, in a process of lending to the public the commercial banks
can in turn create even more money based on the newly deposited funds. About 95% of the US currency is created precisely
in this way, rather than being issued directly by the government. If you watched our video about inflation,
you probably already know the effects of money creation. Each new dollar reduces the purchasing power
of every dollar in existence. This is why inflation is sometimes referred
to as a hidden tax. Not many people understand this phenomenon. Most of us just feel that each year we can
buy less and less for the same amount of money. But it is easier for some to put blame on
the greed of entrepreneurs who raise the prices. To sum up: each newly created dollar causes
the purchasing power of all other dollars to decrease. As a result of this process, the dollar’s
inflation is also exported abroad due to its global position as both reserve currency and
a unit of account. You may have noticed that throughout the entire
process the newly created money is based on debt. When the Fed increases the monetary base,
the public debt also increases. And granting a loan by any of the commercial
banks necessitates an act of fiduciary media creation. The money thus created ceases to exist once
the debt is repaid. Without further borrowing, the repayment of
the debt would have resulted in a strong monetary deflation. Economics Professor Robert Murphy once said:
“if people in the private sector ever paid off all of their debts, and the federal government
paid off all of its bondholders, then the supply of US dollars would be virtually extinguished.” In spite of this fact the money is not the
same as debt. The bonds and loans are. Perceiving money as debt is a rather popular
misconception. Inflationary policy not only reduces the purchasing
power of money, but it also leads to clusters of malinvestments, as we have already seen
in our video entitled “Austrian Business Cycle Theory”. For this reason, many Austrian economists
oppose this kind of monetary policy, and they even consider the very existence of central
banks as detrimental to both society and economy. Please visit econclips.com where you will
find our other videos. You may also visit us on Facebook. If you liked this video, please share it with
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19 Replies to “💲 Money Creation | How does it work?”

  1. So what can an individual do to "protect" itself from the negative effects that money creation does?

  2. If all debt were paid off, no currency would exist what so ever.
    Tell me then, how government spending that contributes to stimulating a Monetary Sovereign (Currency Issuer) Country's economy, eg. infrastructure and decreasing unemployment (which is high in Australia for example) "becomes a burden for everybody and for years to come"

  3. How do your videos have so little views?!!! As a student of money/debt for 20 years, it was very clear and dead on (under 7 minutes). Love your channel. Well done!

  4. Banks create money by issuing a promise to pay for the lendee.
    Their signature creates a dollar amount. The bank then uses these new money deposits as collateral to lend again to the next person, interest is also included but isn't the primary factor in creating new money. New money is literally created into existence through your credit worthiness and your promise to pay. So money is created from nothing, backed by nothing and can never return to a state of worth since the exponential curve of its creation can't be reversed. Its only course of action is to inflate until it's worthless and die.

  5. Can I Suggestion increasing the speed of your voice-overs to 1.25x, as it makes your projects sound more fluid and exciting to watch. Currently, the tempo is too slow, and I think if you would increase it, it would attract more views to the channel.

  6. Let say we started a country and there is no money in circulation. Goverment gives bonds to new central bank and now we have circulation. But with interest rate, gov dept will always bigger than money suply, is this right? So money =debt

  7. Taxation is so unpopular that they have to find ways to tax us that aren't visible on the surface. And then people wonder why everything gets more expensive with time.

  8. Inflation goes up, your salary stays the same- must be those evil corporations increasing prices. meanwhile Burgerking is desperate to invent a new rat burger for $1 to keep its customers happy lol

  9. so the problem is that the us gov is basically renting money when they could issue it themselves interest free

    people would argue that the us gov would then make money like crazy but that's not in reality true because money is a special promise made by the obligor(issuer obligated to work to return the money out of the system) meaning that the more money created the more in debted they are which the us gov does not want.

  10. Money wasn't a well thought out creation it just kinda happened and it does seem ppl did corner the control of money the system will have to fail before it will change. Also with different currencies makes things messier

  11. Too Complicated Man. Make it simple, Like you are explaining it to african people who dont know what and who the F FED is….. DiSliKe … Sorry.

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