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[Music] let's say you go down to your local bank and speak to the manager about getting a home line you have a good job a 20% down payment and you have always been very responsible with your credit card and your car loan so you get approved to borrow four hundred thousand dollars to purchase that new home good on you and for most people this is where their inquiries into the bank would end they would get their four hundred thousand dollars to settle on their new property and they would be very happy little jelly beans but what actually went on here a lot of people have a lot of assumptions about where that money actually came from and most of them are probably not true if you really open up the hood of the modern monetary system you will find something very far removed from what most people would expect and even something that is pretty different to what existed just 100 years ago cash is something that is so important to a society because it is the counter asset to almost every transaction we make we buy houses and cars and avocado toast with cash we get paid in cash and we pay our taxes in cash modern monetary theory is a very contentious macroeconomic idea that goes a long way to explaining how money works in a modern economy and then by extension how cash and fiscal spending and monetary policy can be used to benefit the greater good of society some people go so far as to say that the proper utilization of modern monetary theory will mean that economic slowdowns or recessions like the one we have probably going into at the moment can be all but eliminated and if that wasn't all enough modern monetary theory makes sense of how massive government debt like the trillions of dollars owed by the US government right now isn't necessarily a huge deal but of course as with every new economic theory there are critics with genuine criticisms but we can address those later in the meantime or get everything you think you know about money and get ready to learn it all over again let's go back to that example the person applying for a home line for a second a very limited understanding of how this transaction would work would be to assume that the bank just loans out money that other people deposit and so for every $400,000 line they write they would have needed someone else to have deposited $400,000 and you know what a very very long time ago this would have actually been the way things worked when the world used gold as a currency banks would really only be able to lend out what they actually had it would either be their own personal wealth or it would be loaned out on behalf of individuals that trusted them to make responsible lending decisions and they would share in the profits similar I suppose in many ways to how you receive interest today for leaving your money in a high interest savings account it seems so simple but of course these days that simplicity is not true this kind of banking was extremely limited and was really only reserved for governments and nobility and we just don't have the same limitations today there is a very very good chance that most of you watching this video today have never seen a gold coin let alone actually used it to trade for anything since the times of ancient civilizations we have moved from transacting in gold to pieces of paper that were transferable to gold to just regular pieces of paper and now today most of our transactions happen with digits on a computer screen and that's exactly what happens with your money today when you go out to take a four hundred thousand dollar loan the bank basically opens up a very secure Excel spreadsheet and types in four hundred thousand dollars then hey presto you have that money in an account that you can use to buy your house the bank can't do this endlessly in most nations they still have to have some genuine cash on hand to back up this imaginary money but still a large majority of the money credit today is not printed out it is literally just typed into existence in the form of credit this is such an abstract concept that a lot of people don't quite fathom its raw simplicity so I find it's often easier to explain like this say you are playing a video game like World of Warcraft or runescape war or my favorite leave online all of these games have some kind of currency be it gold or credits or esque it doesn't matter it functions effectively the same as cash that we know and love in our everyday lives now the game developers in this game effectively have the power to log into the backend of the server and type whatever figure they want into the bit of server memory relating to your wallet if they wanted to type out a trillion gold sitting in your wallet they could they're really really limited by how long they want to sit there pressing zeros this sounds simple enough but exactly the same thing is effectively true for real cash but in the same way that a game developer would probably get fired and also completely ruin their game if they just went around maxing out people's wallets the same kind of rule applies for banks today things like reserve requirements and responsible lending standards means that there is an effective limit on bank's money generation but the process is still effectively no different now once you understand this the next logical question is what makes money worth anything then if it can just be created out of thin air now the answer to this is complicated people often incorrectly assume that currency actually doesn't have any value it's just what we decide it's worth and a lot of smart people even point out that it's right there in the name the fear in fiat currency is Latin for let it be done or basically because I said so this money is worth something because I said so and a lot of people use this as proof that these paper rectangles or digits in my bank account and not really worth anything but the truth is money does have value just the same as any other type of asset and I really want to drill down on a lot of the nonsense that people spout about money in the modern world a common anecdote that you may have heard thrown around is that if you were stuck on a desert island with a briefcase full of ten million dollars cash this money would be completely worthless to you and while this is true it does not go any way to prove that money has no value in the same way if you were stuck on desert island with a $10,000 gaming pc or a first-edition spider-man comics and Bitcoin or a Rolex they would also be pretty much equally useless to you but it doesn't mean that they're worthless even if you think about it in Reverse a desalination station a barbecue lighter and a bow and arrow would be very useful on that desert island but would be completely useless to you in the middle of New York City well for now at least just because something is not universally useful in every situation it does not mean that it does not have value so I never want to hear any of you using that terrible anecdote ever again when talking about cash because the truth is of course cash does have utility value in the sense that it facilitates trade on an individual nationwide and global level it can be used as a store of wealth even if there are probably better options available and most importantly it's the only way that you can pay your taxes so remember this one for later okay cool so money is actually worth something that may be news to some but it's not the big revelation here what is though is the fact that this thing of value can be created out of thin air just like we saw as of making this video we are in the middle of a financial crisis businesses are shutting down all over the world and people are turning to governments to increasingly pick up the slack of a failing economy many governments around the world today have quickly announced huge stimulus packages that run into the hundreds of billions or trillions of dollars and this has involved government's taking on lots and lots of debt now debt as you or I know it is probably pretty bad if you are hundreds of thousands of dollars in debt and didn't have a good income to pay off this debt well this can start to seriously impact your quality of life you may have to give up things like going out with friends or going on that holiday or whatever and all of this is because you are a currency user you work a job or run a business to earn money and then you spend that money on goods or services to maintain your quality of life money is more or less a means to an end as it passes in and out of your bank account some governments like the USA though are a little bit different they are the source of this money they are not a money user they are a money creator if they want to build a new school or a road or whatever they just call up the central bank tell them to fire up the money printers and you know burr there you go cash to build that new school and the other distinction here is that this is actual currency not credit like banks can create I will leave a link in the video description for a lecture on the difference between those two but for the sake of this video they're more or less the same it's all just money now the theory goes because of this almost unlimited ability to conjure money into existence there really is no reason that the government couldn't hypothetically fund anything and to an extent this is almost true we have policies like arbitrary debt ceilings and public opinion that dictate that debt bad surplus good and this means that oftentimes governments can't fully flex the power of their currency to truly bring the maximum potential prosperity to their economy but modern monetary theory dictates that if policymakers truly understood their power to throw cash at any problem they encounter they would be able to create a far more prosperous economy sounds pretty great right limitless cash flow for unlimited prosperity well of course there are limitations and those are just as important to understand as this whole weird and wonderful world of money creation the first and most obvious floor in this theory is that if countries can create something from nothing why would anybody want to keep this money that has no inherent scarcity why would anyone accept US dollars over these economics explain bucks that I have written up here on my little Excel spreadsheet they both ultimately amount to the same thing digits on a screen and look there there are only a billion of these economics explained bucks if anything they should be more valuable well of course this is not the case partially because US dollars are much more universally recognized but more importantly of all if you're a citizen of the United States you have to pay your tax in United States dollars you can't pay federal taxes in shares or bitcoins or chickens or even Australian dollars good old freedom bucks are your only option so if you don't want to go to prison you need to get yourself some of these dollars and this creates demand for dollars even with all of the other conveniences being ignored effectively in a way this is why governments tax people the US government doesn't need your dollars to fund it schools or roads or military or public welfare if anything it's the other way around the government conjures this money into existence to give us the currency we then need to collect to pay our taxes with in almost any given year they are likely to spend more money than they tax and this is fine remember they are the source of this currency so that's something to be aware of but not necessarily a problem now the next logical question is well if governments like the USA can just print money then why do they need to issue government bonds or take on debt or pay interest and this is another fair question the reason that all extra money is created with some kind of underlying debt be it Treasury bills or a mortgage or whatever is partially because of the relationship between the federal government and the Reserve Bank but primarily it's because the government wants to create demand for this extra currency if you can earn one percent interest by holding on to US dollars it actually becomes an attractive asset to keep on hand and the opposite is also true if you need to pay five percent interest on your home loan you need US dollars to pay that back and this furthers the natural demand for this currency now the next issue of course is inflation we have seen nations like the line ma Republic Venezuela or Zimbabwe print more and more and more money and all it caused Wars inflation and this is genuinely the big limiting factor here if governments do just go crazy and print all the money they want the supply of that money is going to massively increase and hence the actual value of the money will decrease it will very quickly get to a point where the feedback loop of printing money to keep up with inflation will cause more inflation and then your money does actually become worthless just like we saw in all of these other countries to make matters worse the money that private banks create massively outweighs the currency that is created by federal governments of the world which means that they aren't necessarily the only ones with the key to the kingdom on the money supply and controlling the supply and demand of money becomes much much more difficult in reality controlling the supply of cash in economy and by extension inflation is the primary role of a central bank and it has to be really careful with this to put it simply imagine that an economy is a dam and the water in the dam was cash in the economy there are things like government spending that fill up this dam and there are things like taxation which releases the cash out of the economic dam the role of a central bank is to make sure that the dam doesn't overflow with cash causing hyperinflation and also that it does not completely run dry of currency either to those of you who play MMOs like World of Warcraft and all the other examples I gave earlier you may know this as a currency faucet and a currency sink again what is true for these virtual economies is more or less true for our real ones so yeah there you go in is still important it's one of the big reasons why we reserved our crazy spending four times like say well I don't know right now now the final floor in modern monetary theory is that unfortunately some countries can't actually take much from its teachings almost every country in Europe for example uses the euro which means that the sovereign nations that make up the European Union are not at liberty to conduct their own monetary policy in any capacity this is what makes things like the Greek debt crisis so bad if this debt was still denoted in Greek drachma the Greek government could just print more money to keep up with these repayments Italy for example had a debt to GDP ratio of about 120 percent in the early 90s and no one really cared because the debt was denoted in mirrors so it was not a problem for them to maintain these repayments for the same reason the government debts of the USA in Japan today and not really a problem only household and business debt is but if you are a nation that doesn't use its own currency sorry all this fun stuff doesn't really apply to you the other people that get passed up on are countries with kind of sketchy currencies if the Democratic Republic of the Congo for example wanted to raise money from the international community to build a new port it would need to take on debt but almost no rational financial institution is going to take payments or except tree payments in Congolese francs the currency is just too volatile and not accepted widely enough and that means that normally these debts are denoted in some kind of reserve currency more often than not in US dollars which is not great for the Democratic Republic of the Congo which is a very very poor country that could probably use all the help I could get but it's fantastic for the United States the wealthiest most powerful economy in the world because suddenly it has even more demand for its currency and its national debt is all that a little bit more meaningless so yeh I guess modern monetary theory is something so simple yet so complex all at the same time it does really involve divorce in your mind from how you personally interact with money to ultimately grasp our cash works at an economy-wide level a lot of supporters of the theory push it as a cure-all to any economic ailments and you know what with the money printers firing away just like they are right now we may finally get a chance to find out if they are correct but in reality it's not a prescription to fix a broken economy as much as it's just an insight into how modern economies work and mechanic can't fix a car if they don't know what an inlet manifold a doctor can't perform surgery if they don't know the difference between a fibula and a defibrillator and governments can't effectively manage an economy if they don't understand how cash works in the modern world will you ever personally get a chance to act on the principles of modern monetary theory probably not unless you want to become a world leader or a central bank board member but it's still important to know so you can be a good citizen who understands that money does have value and that government surplus isn't the be-all and end-all and perhaps most importantly you have no right to complain about your tax dollars going to fund anything Karen if you have been completely removed from what currency actually means consider giving some of it to me like these lovely people did over on patreon beyond that a like' and subscribe' would go a long way I will leave a link in the video description for a t-score server so feel free to jump on to that to participate in our Q&A session which will be held after this video and also to enjoy other discussions amongst fellow economics nerds thanks guys bye