This video about the central banking system by Nigerian-Australian YouTuber, Dagogo Altreide aka Cold Fusion TV is a more detailed update to his excellent 2017 video, ‘Who Controls All of Our Money?’.
He says, “I’m also going to show you the true origins of wealth inequality. If you watch this episode the whole way through, you should have a well-rounded idea of what’s going on today. This journey starts off simple enough but by the end, you’ll start to see the insanity of what we’re dealing with.”
CHAPTER ONE: PHYSICAL MONEY BY THE GOVERNMENT
The first form of money is the one created by government. As the central bank of the US, the Federal Reserve issues the nation’s coin and paper currency. The US Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing produces the nation’s cash supply, selling the paper currency to the Federal Reserve Banks at manufacturing cost and the coins at face value.
This physical money makes up about 3% to 8% of the economy and it is created in order to meet the obligations of commercial banks, for when customers go to the ATM. Banks must ensure that they enough cash in order to meet those obligations.
A $10 note costs approximately 3 cents to print, creating a $9.97 of profit that goes to the IRS as tax revenue to the US Government. This revenue is called “seigniorage”.
The more money in circulation, the less it’s worth. The loss in purchasing power of money over time is called inflation and when inflation gets out of hand, money becomes worthless, as happened recently in Zimbabwe and Venezuela and during Germany’s Weimar Republic.
Dagogo explains, “For thousands of years, gold was the measuring stick of value. Gold was kind of like a physical anchor, keeping the money supply in check and governments responsible. In 1971, President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value. Since that point money, the measuring stick of Valley has become elastic.
“Since the US dollar backs all other currencies as a reserve currency Nixon’s decision changed the world. In all of this, you might still notice that despite politicians supposedly not being able to influence money creation, it’s happening anyway. This may cause problems, as we’ll see later in the episode. To recap:
- The government creates physical forms of money, like notes and coins. Only about 3 to 8% of money is made this way.
- Seigniorage is the income from printing physical money. This income is both a benefit to the government and the taxpayer. It reduces debt for the government and reduces the burden on the individual taxpayer.
- Governments don’t create more of this money due to inflation risk from political promises.
CHAPTER TWO: COMMERCIAL BANKS AND DEBT-BASED MONEY
About 97% of the entire money supply is created digitally by commercial banks. These private corporations invented digital money when they managed to persuade lawmakers that they should be legally allowed to create more deposits than actually exist, based upon debt. This is how governments outsource to the creation of digital money…
“Once banks were authorized to use these debt notes to circulate as money, banks were free to create and destroy debt and hence, money from themselves, rented-out, at interest…
“Today, when you go to a bank to borrow some money, the banking license gives that bank the ability to create money. Every time they issue a loan, they do this through the double-accounting system. For example, if you buy a $500,000 house, the bank creates $500,000 in their account and you have $500,000 in debt. That is the promise to pay it back with interest.
“This $500,000 debt can enter the wider economic system because when you purchased the house, the owner of that house can use that fresh debt that was created by the bank that they received from you to buy other things in the economy.
“This means, in our current system, if we want to have more growth, we need more debt. The key point here is that debt is actually money, just from a different point of view. To the lender, it’s an asset of money. To the borrower, it’s a liability of debt but they are one and the same…
“When a bank issues a loan, it’s not somebody else’s savings. It’s not money that the bank had. It’s essentially brand-new money that they create. They simply type it into a computer and it appears as a digital representation of the government’s money, which you can spend.
“The beneficiary of this brand-new money is actually the bank, because they get to charge interest on that money and that’s how they make a profit. Later, when you repay this loan, the debt disappears and the money also disappears but the bank’s profit from the interest remains.
“The real estate and property markets are the largest tools for creating digital money. This is because banks have decided that it’s the safest yet most profitable form of creating debt, because if you can’t repay the loan. The banks can simply take your house…
“So, that’s loans but what about deposits? When you deposit cash into a bank, you are no longer the legal owner of that money, the banks are. They keep 10% of your deposits on reserve and can loan out 90% of that money to someone else. That other person can deposit that money into another bank and then that bank can loan out 90% and so on. This is known as fractional reserve lending.
“If they say, ‘We’ll transfer it to your account,’ that’s wrong, because no money is transferred at all, because what we call a ‘deposit’ is simply the bank’s record of its debt to the public. Now it also owes you money and its record of the money it owes you is what you think you’re getting as ‘money’ and that’s all it is.
“When all is said and done, an initial deposit of $100, with a 10% reserve requirement can ultimately lead to a thousand dollars in total money circulation. Well, at least that was how it used to work until March the 26th, 2020. There is now a 0% reserve requirement. According to the Federal Reserve, ‘This action eliminated reserve requirements for all depository institutions.’
“So, banks can now create infinite amounts of money with no reserves and it doesn’t stop there. When banks hold your deposit, they can, along with hedge funds gamble with it through investments in financial instruments, such as derivatives and securities. They do this in order to make superior returns…
“The problem today is that banks are playing with so many derivatives, sometimes stacked on top of each other with leverage multiplying factors that nobody actually knows how much money is tied up in this gambling. Some estimates put the derivative market at over one quadrillion dollars, over ten times the global economy…
“Since 2008, the economy was dead but has been on life support ever since. A decade of hyper-low interest rates, which basically made the cost of borrowing money free has caused market distortions so large that has compounded the entire problem…but as you’ll soon see, we have to pay these debts back…through taxation of us and our future generations.
“It’s important to note that governments don’t actually support the people it’s the people that support governments through taxation. Taxation and trade are the two major ways that governments can raise money. This raised money is used to pay back the central bank loans with interest, so when governments use the central banks to bail out [commercial] banks for their risky behavior, the governments are left with the debt, which eventually has to be paid back by the taxpayers in the future. To recap:
- [Commercial] banks create the vast majority of money – about 97% of it.
- They do so by creating loans.
- The process is as simple as typing numbers into a computer.
- Banks can, to an extent spend and gamble consumer deposits, as they legally own it.
- Too big to fail banks are backed up by the central bank creating a moral hazard.
CHAPTER THREE: CENTRAL BANKS
That brings us to the final and most insane form of money creation: Central bank digital money. The third form of money is quantitative easing or QE.
“Quantitative easing is a new form of money that was invented by the Japanese central bank in 1989. It was later popularized by the Federal Reserve in the United States during the 2008 crisis.
“QE is where a central bank creates money in order to issue loans directly to the banking sector, Large corporations and most recently, the public. It’s a way of flooding money into the economy at times of extreme events, like the financial crisis of 2008.
“As a result of this, the central bank’s balance sheets have gone completely out of control, in order to prop up the economy a little bit longer. In 2008, during the crisis and the first time this was tried outside of Japan, the $700 billion bailout of QE was very controversial. It was thought to be a one-off emergency scenario but over the next decade, the Federal Reserve was unable to reverse it.
“To give you an idea of how significant all of this was, it took from the foundation of America in 1776 all the way up to 2008 for the nation to attain less than $1 trillion dollars in debt. By 2014, that number had expanded to $4.4 trillion and since the onset of the COVID pandemic, $3 trillion was added in the span of three months…
“So, how does this money enter the system? Central banks use their magic money to buy the equivalent amount of bonds from the government. They do this through the bond market, which exists to lend money to corporations or governments. Although the stock market gets more press the bond market is actually bigger. So what is a bond?
“For the purposes of this video, it’s basically the same as debt but is issued by a government or corporation. Central banks, which have no savings can create money to buy these bonds.
“So here is an important question: Can a central bank go bankrupt? Well, according to the European Central Bank, which published a paper in 2016, central banks are protected from insolvency, due to their ability to create more money. If you think this sounds a bit unfair, just wait.
“Governments, in our current situation are stuck between a rock and a hard place. They can’t raise money, except for raising taxes but owe trillions to central banks. The hope is that the borrowed money can kick-start the economy but something else is happening. When central banks buy bonds given by the government or corporations, they can end up owning a lot of the world’s assets.
“For example, the balance sheet of the Japanese central bank is bigger than the entire GDP of Japan. They own 80% of their stock market. That’s right. The Central Bank of Japan is their stock markets largest shareholder (!)
“The Swiss central bank owns $90 billion in American stocks, including Apple, Microsoft, Google and Amazon. When I first heard of this a few years ago, I simply couldn’t believe it was legal.
“So, these central banks are creating money out of nothing and they can’t go bankrupt but yet they’re buying real assets. Even a toddler can see that something is wrong here!
“It turns out that creating money out of nothing and buying things does have some consequences. These sorts of central bank interventions remove stock markets from reality. Throughout the 20th century, the stock market actually used to reflect the economy but recently, that’s gone completely out of whack.
“The US stock market has become almost twice as big as the entire nation’s GDP, which literally makes no sense. Central bank intervention is the main reason why, in April 2020, 30 million people became unemployed in the United States but the stock market had its best month since 1987!
“The central bank printed trillions, gave it to banks and hedge funds, with almost zero percent interest rates. This money made it straight into the stock market, while the real economy barely got any help.
“Earlier, we discussed that money printing leads to inflation so why haven’t we seen it yet? Well, we have. We’ve seen inflation globally, in housing prices and stock markets. The printed money ends up in all of these assets, pushing up the prices so the few people who own large amounts of stocks end up ridiculously wealthy, while there’s no growth in the real economy.
“The rich get richer and the poor get poorer. A lot of people can feel and see the wealth inequality but they have no idea where it’s coming from. I’m going to show you in three charts. Since the 1980s, the wealth of the upper echelon of society has been tied to the stock market.
“Since 2008, when the economy went on life-support, the stock market became glued to the Federal Reserve. The more they print, the more the stock market goes up and the richer they become. Since 1980, their wealth has grown 420%! When central banks print money, the first recipients of that newly-printed money enjoy higher standards of living at the expense of the later recipients of that money.
“When inflation has already taken hold, this phenomena is known as the “Cantillon Effect”. Experts believe that when the rich finally starts selling their stocks and real estate, so as to buy other assets in times of distress, the money velocity – that is, the rate at which money changes hands in the economy – will start to pick up and that is when we’ll start seeing real inflation in the general economy.
There is so much more to this but I’ll leave it here for today. To recap:
- Central banks have no savings in their account, they can’t go bankrupt but can create infinite amounts of money by buying government bonds.
- A bond is an exchange of money for a promise that the government would eventually pay it back with interest.
- This money eventually must be paid back by future citizens of a country either through taxation or inflation.
“So what do we do? Decades ago, societies and nations should have focused on wealth-creation instead of excessive housing, financialization and gambling. That is, banks should have made loans to productive areas of society. Small- and medium businesses, entrepreneurs, education, manufacturing, innovation research and development. All of these kind of things. Just imagine how our world would be today, if banks invested hundreds of billions of dollars into these kind of things, instead of property or gambling or if the price of something will go up or down?
“Just imagine. It’s riskier for the banks but the benefits lead to more jobs, more innovation, better competition and better living standards in the long run. Also, governments can collect more taxes from these incomes without necessarily raising taxes. These extra taxes from generally higher living standards can then be spent on social programs to help those who are truly in need.
“You can print money but you can’t print wealth. But focusing on wealth-creation and productivity takes time effort and hard work and it just seems today that people don’t have the appetite for that and frankly, it’s too late for this option. If we focused on funding wealth creation before COVID hit, all of our economies would be much less fragile. Most individuals and businesses would have a healthy amount of savings to ride it out, like in the late 20th century. But for now, we’re just going to have to deal with the consequences of a fragile system.
“So what’s going to happen next? In my view, I think this is all going to lead to something very big and unpleasant over the next decade. I don’t know how it’s going to look like but it may involve massive amounts of inflation and slow economic growth, a situation known as ‘stagflation’. This happened in the 1970s but this time, it could be much worse, due to excessive amounts of debt, with the added effect of social instability.
“The mainstream view is that eventually the world will lose faith in the US dollar, though some macro-economists think that the American dollar may actually rise in value, as other nations try to sell their goods or exchange falling currencies for the US dollar because it’s the cleanest economy out of a world of falling economies.
“This is called the Dollar Milkshake Theory. Some people think that digital stable coins will be able to solve a lot of problems. There are others still who argue that nations can print infinite amounts of money, just as long as they keep producing enough goods to pay the interest on the debt that the government owes the central banks.
“The argument here is that the debt actually never has to be paid back, only the interest. This is called Modern Monetary Theory. I can’t comment on if this will work or not. I don’t think anyone can, because it’s never been tried before but I can’t help but think that this looks like another fragile solution.
“Small communities in Venezuela and a small town in Italy have taken the power back themselves and just issued their own currency. All in all, who knows what’s going to work? I have no idea.
“On the bright side, all of the events to come might spawn massive reform. As I did learn while writing my book, out of the worst circumstances, the best innovations arise. So, what can the individual do? Obviously, I can’t give financial advice. I’m definitely not qualified for that. But it might be worth thinking about converting some of your money into other assets that aren’t debt-based as a form of insurance.
“If you’re older, you may be thinking about gold, since no central bank can print gold. Bank of America and even Goldman Sachs, the last people on Earth hear you and think to be positive are seen gold’s potential and they’re calling it ‘The money of last resort.’ Even other central banks, like China and Russia have been buying gold in record amounts for years. I think they understand what’s about to happen.
“If you’re younger, you may be attracted to cryptocurrencies. Governments and the banking system are starting to take the technology seriously, now. If you’re more daring, you can play the central bank’s game against them. Study and invest in the assets that you think they’ll cause to rise in price.
“Ultimately, I can’t tell you what to do here. You have to think for yourself and research, to find out what you believe is best. The way money is created and the overall banking system seems like madness and people have started to notice that the system is no longer working. The monetary system is so ingrained and so pervasive it becomes invisible to see. Nobody ever questioned it.
“When things started going wrong, they pointed at the things that were visible, things that look like problems, surface issues which you could see and understand. Looking at the surface, some would point the finger at Capitalism but you have to dig deeper and when you do, you can see it’s an unfortunate and untimely mix of the debt-based system, extreme financialization, moral hazards and a rampant Cantillon Effect that’s causing extreme fragility and ever-increasing amounts of massive wealth inequality.”