Debt: What Your Bank Don't Tell You

Deep dive in what most people don't know about debt or money.

In 2014, an economics professor walked into a small bank in Germany and convinced them to do something nobody had ever done in the history of banking. They let him sit right there in the room while they approved a loan. The books were open and the system was running. He watched the bankers, step-by-step, create money out of absolutely nothing and became the first person in history to prove it on paper. The man was Richard Werner. He's a professor of banking and finance from Germany. Shortly after his study came out, the Bank of England admitted the exact same thing in their own official papers.

See, money creation is so simple your brain refuses to accept it. We think something this powerful has to be complex, sacred, mysterious. It isn't. Every time a bank makes a loan, they don't touch their reserves. They don't borrow from someone else's deposit. They just open a computer, type the loan amount into your account, and in that exact moment, money is created. 10,000 bucks that didn't exist a minute ago is suddenly sitting in your account. And if you think, "No way. That can't be right." You aren't alone. When over 1,000 people were asked who creates the money in their country, 84% said the central bank or the government. If you asked me a few years ago, I would have said the exact same thing. We were all wrong. The government barely creates any money at all.

By the end of this vlog, you will have the entire hidden map of how this system works and how it affects your wallet. Let me show you. There are basically three types of money in the system. The first type is central bank reserves. You and I can't touch this money. Only banks can use it to settle payments between each other. The second one is cash. This is the paper banknotes and coins in your wallet. Your central bank prints it. Cash makes up less than 3% of all the money in the economy. The third type is digital money. The official name for this is commercial bank money, which is just a fancy way of saying money that private banks created and typed into your account. This is the remaining 97% of all the money in the economy. Look at that ratio. Government made money, 3%, privately made money, 97%. So, how do they actually do it? Well, the answer most people have is wrong.

Here's the story you've probably been told. You deposit your savings at the bank. The bank keeps 10% as reserves. They lend out the other 90% to someone else and charge interest. The cycle repeats. And that's supposedly how money gets created. That model is wrong. If banks actually needed your deposits to survive, they would fight to get your cash. They would offer you 10% or 15% interest just to store your savings. Instead, they offer you almost nothing. They don't need your money. So, if banks don't need your deposit to make a loan, where does the loan money actually come from? It doesn't come from anywhere. They just type it. Here's what that looks like on their books. Banks keep their accounts in two columns. On the left side is what they own. On the right side is what they owe. Every transaction has to appear on both sides. It's called double-entry bookkeeping.

Let me explain. When the bank types $10,000 into your account, two things happen at the same time. On the left side, they write "This customer owes us $10,000." That's the loan contract you just signed. The bank now owns your future payments. That's their asset. On the right side, they write "We owe this customer $10,000." That's the money now sitting in your account. The bank now owes you every dollar of it. That's their liability. Both sides grow by $10,000 out of nothing. Just because the bank wrote it down twice. That's the entire mechanic. That's all it is. And here's the most interesting part. By law, banks don't even need to hold any money in reserve to do this. In most Western countries, the legal reserve requirement is zero. Mhm. Let me say that again. Zero. Not 10%. It's just zero. The bank doesn't have to keep a single dollar in their vault before giving you a loan. Which means the only real limit on how much money a bank creates is who they decide to lend it to. Hold on to that. We'll come back to it. And don't take my word for any of this.

The Bank of England, the actual central bank, published this in their own official paper in 2014. Commercial banks create money in the form of bank deposits by making new loans. When a bank makes a loan, for example, to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of bank notes. Instead, it credits their bank account for the size of the mortgage. At that moment, money is created. That's the central bank itself saying out loud that the system works exactly the way I just described. So, back to your loan. Money was typed into your account. Real enough that you can spend it on whatever you want. You start paying the bank back month by month for the next 5 years. This is where it gets interesting.

A loan has two parts and most people only see one of them. The first part is the principal. That's the $10,000 the bank typed into your account. The second part is the interest. Let's say an extra $2,000 over 5 years. When you pay back the principal, it doesn't go to another customer. It doesn't go into a vault, either. It just vanishes. $10,000 real dollars just gone. The same keyboard that made it deletes it. Banks don't just create money, they also destroy it. I know it it sounds wild, so let me give you a thought experiment to bring this to life. It's not a perfect legal analogy, but it exposes the raw mechanics of how this works. Imagine the bank rents you a car, but the car isn't real. It's imaginary. But the moment you sign the rental papers, the car becomes real. You drive it around for 5 years. Every single month you pay real rent on it. Then, on the day you finish paying, you return the car and the car vanishes the same way it appeared. Like it was never there in the first place.

The only real thing was the rent you paid every single month. Now replace the car with a standard bank loan. The loan money isn't real. It gets created when you sign the contract and it gets deleted when you pay it back. But the interest you paid every month for 5 years, that was very real, and that's exactly what the bank keeps as a profit. It's almost like the bank lent you an imaginary car and collected real rent on it. Which brings us back to the question I asked you to hold on to. If the only real limit on bank lending is who they choose to lend it to, who do they choose? And the answer is not you. Not the small business owner, not anyone trying to build something new. Now, don't get me wrong. I'm not trying to say bankers are evil and they're doing evil things. I actually have banker friends. They're regular people, just like you and me, trying to take care of their families. Most don't even know this is how it all works. The problem is the system they're in. Because the system rewards them for lending in one specific direction.

Let me ask you a question. Walk into a bank tomorrow. Ask for $50,000 to start a small business. They'll grill you for weeks, charge you a high rate, and probably still say no. Walk in and ask for a $400,000 loan to buy a house? It's a completely different story. It's way easier to get approved. Why? Because lending to a business is risky for the bank. Almost three times riskier than lending against a house. If your business fails, the bank loses the money. If you stop paying your mortgage, the bank takes the house. So, if you were running the bank, where would you put the new money? Of course, into mortgages. Look at the data from the UK between 1997 and 2011. 14 years of bank lending. As you can see, mortgage lending exploded. But lending to small businesses almost stayed the same. The new money the banks are creating isn't going to people who build businesses and grow the economy. It's going to people who already own things. Houses, property, stocks, existing assets. Now watch what that does.

Banks pump trillions of new dollars into the property market. Same number of houses, way more money chasing them. You don't need to be an economist to know what happens next. Prices go up. You've probably heard houses are expensive because of supply and demand. Like not enough houses, too many buyers, immigration, foreign investors. There's a little truth to all of that. But the real reason houses keep getting more expensive, the one nobody talks about on the news, is easy bank credit. Every time the bank approves another mortgage, new money gets typed into the system. That money flows straight into the property market and it pushes the price up of the house you're trying to buy. That's why your parents bought a house at 24 and you're 30, working harder than they ever did, still renting. It's not because you're lazy. It's because the rules of the game changed and nobody bothered to tell you.

Now you know. And if that's making you angry, good. Hold on to that feeling. Because this system can be fixed. Remember Professor Richard Werner from the beginning of the blog? He didn't just prove how the system works. He also got an answer for how to fix it. Werner is one of the authors of the book this whole blog is built on, Where Does Money Come From? And the solution he gives is simple. We don't need to tear down the whole system. The problem isn't that money (clears throat) is created out of thin air. The problem is which direction it flows. Let me show you what he means. Think about two different scenarios.

The first one, bank lends $1 million to someone buying an existing house. That money flows to the seller. The seller now has a million dollars. But what was actually created in the economy? Nothing. No new factory got built. No new jobs got created. The same house changed hands. More cash enters the market, making housing more expensive for everyone. Now, look at the second scenario. A bank lends $1 million to a small business owner. He uses it to hire 10 workers, buys equipment, develops a product. Now, the economy has more output, more jobs, more actual wealth than it did before. Same banking system, completely different outcomes. One pushes prices up, making houses more expensive. The other builds a real economy. So, the obvious answer is just lend to small businesses instead. So, why don't banks do that? Big banks don't actually want to lend to small businesses because the math doesn't work for them. Processing a $50,000 loan for a small business takes almost the same effort and time as processing a corporate loan worth 50 million. The paperwork is the same.

Only the number on the contract is different. Big banks focus entirely on massive corporate deals because the payout is a thousand times larger. If we want banks to actually fund the part of the economy that builds real things? We need a different kind of bank. We need many small banks. Not a few giant ones that only do business with big companies. The kind of small bank where the manager actually knows the small business owners in town by name. Two out of every three jobs in advanced economies come from small businesses. When the banking system is dominated by a few giant banks, those small businesses can't get the loans they need. The jobs that should exist don't get created. The economy stops growing while house prices keep running up. Now, I know what you're thinking. That all sounds great in theory, but has any country actually done this? Does it really work? Yes. And the example might surprise you.

It's China. In 1978, Deng Xiaoping came to power. And the first thing he did was fly to Japan to figure out the secret behind their economic miracle. He came back knowing exactly what to do. He founded thousands of banks. Small banks, local banks, village banks. Everywhere. His reasoning was simple. One central bank can't run lending for an entire country from one room. Millions of bankers on the ground can. And he was right. China then delivered four decades of skyrocketing economic growth. Lifting more people out of poverty than any country in human history. They did that not by getting rid of money creation, but by pointing it at the right thing. So, why don't we have this? Because almost nobody knows the system works this way.

Let's talk about what all this really means for you and me. We sell our lives to earn money. Think about it. Every hour away from people you love, every early morning, every late night grind, that is your limited precious time on this planet. You are selling pieces of your life to earn money. Money is literally just your time stored in a computer. So when they create money out of nothing and push prices up, they aren't just messing with numbers. They are stealing your time. They are making it so the hours you already spent working are worth less. It is absolute madness and it hurts every single one of us.

Look, I honestly hate asking people to like or share my blogs. I don't like begging for clicks, but I'm breaking my own rule today because we cannot change a system we don't understand. If you feel in your gut that this is important, please share this blog with at least one person you care about. I genuinely believe this is the single most important topic of our generation. Thanks for reading.