 Our next lecture is Dr. Philip Boggis and his lecture is going to be on banking and financial markets. Philip? Hello again. So, and today I will first outline what the function of financial markets is in a free society and then I will compare it with our system of financial planning. So, financial markets in a free society work as intermediaries of savers and investors. So, commercial banks, savings and loan banks, mutual funds, investment banks, they serve as intermediaries to connect savers and investors. Why do we need intermediaries? Well, take a producer of tomatoes, maybe he knows very much how very, very good, he's very good in growing tomatoes, but he's not so good or does not have time to look for his customers to market his production. So, financial institutions connect savers that offer present goods and investors that demand present goods. Why don't they connect directly lenders and borrowers, for example? I mean, of course they do and sometimes they can and sometimes they do. But again, in most cases it's just more convenient to have specialists doing the job. That is done by intermediaries. Intermediaries can also tailor to one's needs. So banks, for example, can receive many small loans and give one big loan to a company. And they can also divert risks when I take all my savings and I give it to my friend. Then I'm putting all X in one basket when I lend to the bank and many other people lend to the bank. And the bank gives many, grants many loans to different borrowers and I'm not putting all the X in one or the bank is not putting all the X in one basket. So what are the options to finance in financial markets? One is equity financing that would play a much bigger role in a free market. Now equity financing is pushed aside by the artificially cheap credit. So if you take a balance sheet, equity financing looks like this. We have here the assets, the liabilities and equity financing is to get cash, for example, $1,000. And then you have here the equity, the shareholders that finance you $1,000. You can also finance yourself by issuing bonds. It would be just to issue a bond on your liability side of $1,000 and then you get more cash. Now I have cash $2,000. So in both cases, private savings are channeled into investment and this is often done through intermediaries or also through investment funds, etc. And another third possibility is to do it through savings and loan banks or commercial banks that serve as a true intermediary. So a bank, for example, a bank has its balance sheet and it receives a loan from customer A of $1,000. Then it gets cash here. Let's say the loan is 10% and then it receives on the one hand and it grants a loan on the other hand. Then it grants a loan to a company B of $1,000 and the cash goes to this company at 15%. So then there's a profit for the bank. It has functioned as a true financial intermediary. Well, another important institution in financial markets in a free society is banking for safekeeping. That is totally different. The most important reason why we hold money is the uncertainty of the future as I explained yesterday. Because if I hold money, I can react to opportunities or to problems that arise because I own the most liquid goods that everyone wants to have. If I have money, I rule. And an important service is to have a bank that is safekeeping the money for me and that gives me additional services such as bookkeeping service or payment services. And safekeeping and deposit contracts also exist for other goods, for other non-specific goods. Those goods are also called fungible goods such as oil or wheat. So for instance, for wheat several farmers put their wheat in one big silo. Instead, every one farmer has his own small silo. So the grains of wheat are mixed in this big silo because it's cheaper to store it there. When you deposit your grains of wheat and when you receive it, you may not receive or you will not receive the same grains of wheat but the same quantity and quality. And the Latin word is tantundum. You receive the tantundum, the same quantity and quality of what you deposited. And it's the obligation of the depository, the owner of the silo to maintain the tantundum, the same quantity and quality of the good deposited, always available to the depositors. Illegally, it's a misappropriation if the owner of the wheat silo uses the wheat for his own ants. And what is true for wheat is also true for money. Imagine that I'm a cashier at a big grocery store that closes over the weekend. On Friday night, I'm the last one that leaves the store, switches off the lights, and they are $1 million in cash. I'm responsible, I'm safekeeping it for the weekend, but I have an idea. Why not take the money and have it work for me over the weekend? Have a little investment. So I take the money, a big plastic bag and carry it on to the next casino, roulette, simple game, everyone understands it. $1 million on red and then ding, red. $2 million on Monday morning before the store opens. I'm the first one in the office and I put the $1 million back. And no one has noticed. How clever am I, you know? How stupid are the rest? I haven't done damage to anyone, obviously, and I won $1 million. I've done nothing wrong. Well, of course I've done things wrong. I'm a criminal in any country, civilized country of the world. I would go to prison even if I returned on Monday morning the $1 million. Because I'm guilty of misappropriation. Of course it could also go wrong. It hits black, for example. I personally know the case of a wheat depository. Because 10 years ago I did an internship with a lawyer in the US. I remember perfectly, the depository, his name was called Barney. He was friends with other farmers. And they deposited the wheat with him. And he sold the wheat because he thought after the harvest the price of wheat will fall and then I will buy it back cheaply again. What happened was the price of wheat this time kept on increasing. And when his farmer colleagues wanted their wheat back, he didn't have it. So they went to court. We visited Barney in prison with this orange, nice orange suit. And it was touching in the court because the other farmers were crying his farmer friends. They were saying, Barney, how could you do that to us? We trusted you with the wheat. We trusted in you. So for misappropriation you go to jail also for money if I deposited money with one of you. And you use it, you go to jail. So this is true for all economic agents except for one. For bankers, if it happens that you have a bankers license, you can use it. You got a privilege. And always when one group of people get a privilege, an exception of a general rule, there will be social harm. It takes the rule, for example, you should not kill other people. It's forbidden for all people to kill. But there's one group of people who can and they will shoot others. Of course there will be social harm. And the same applies here. We have the rule to maintain a 100% reserve ratio for deposits. But bankers are allowed to use the money. There are harmful consequences. Roger Garrison explained an awesome business cycle theory to you already. So however in a free society, this would be enforced for anyone. And then if you have a safekeeping bank here, a safekeeping bank, assets liabilities. So someone deposits its cash there and gets here a deposit or a bank account. $1000 appear here. This is only a memorandum item. So this is because this does not form assets. This does not really form assets of the bank. It's just a memorandum item. And then the customer pays the bank for the safekeeping and custody and additional services, a fee. And the money of course forms part of his cash balance. It provides him to reuse uncertainty. Even if the bank goes bankrupt, the money will be there because it's not being touched by the safekeeping bank. So we have to keep in mind these two kinds of banking are totally different. And this is important because mainstream economists tend to confuse the two and mix them, arguing that loans and amount deposits would be the same. But there are important differences between the two loans and deposits. And there are three economic differences. The first one is in a loan, economic difference. The first one is in a loan, their present goods exchange against future goods. So we exchange money today against money in one year, for example. While with the deposit, there's no exchange of present goods against future goods. The demand deposit is a present good. Second, in the case of the loan, the full availability of the money is transferred from the lender to the borrower. The availability is transferred. And while in the demand deposit, the depositor maintains the complete availability of the money. The third difference is that in the case of the loan, there are interest payments because there is an exchange of present goods against future goods, while in the demand deposit, a deposit of wheat, et cetera, or money, there are no interest. On the contrary, the depositor pays a fee for the safekeeping services. Then there are legal differences. The first legal difference is that the essential element of the contract in case of the deposit is the custody and safekeeping of the money or the tantundum. In the case of the loan, the essential element is the transfer of the availability from the lender to the borrower. The second legal difference is that in case of the deposit, there's no term. It's on demand. Any time you can demand the money. While in the case of the loan, of course, there must be a term. One year loan, ten year loan. And the third legal difference is the obligation. The obligation of the borrower is to return the tantundum, the money, at the end of the agreed term plus the interest. While the obligation of the depository is to have the deposited goods, the wheat or the money always available to the depositor. In the case of money, that means a 100% reserve ratio. So this is how financial markets would look like in a free society. There would be a clear distinction between loan and deposit contracts. And there would be true financial intermediation and much more equity and long-term financing than today. So let's now look how financial planning today looks like. How state intervention distorts this picture. So governments want to spend. They like to spend, they like to buy votes. They want to get support in the population. They want to get re-elected. So one way to finance government expenditures is through taxes. But taxation is very impopular because it shows clearly to the population that the government goodies do not come for free but have a cost. So if you as a government have the control over the money supply, you may just produce monetary units to pay for your expenditures. So you don't have to knock on the door of your citizens and at the point of a gun demand taxes. Taxes is like the visible fifth of the state. The alternative is to just produce money and if it's paper money, it almost costs you nothing to produce it and then you buy the resources you need. As a result, prices will rise and the costs will be spread on the population in the form of a relative loss in the purchasing power of money. But this is less visible. This is the invisible hand of the government's stealing from the citizens. And the citizens do not notice this as much as they do with taxes. So it has, therefore it has been always in the interest of the state to control not only money but also the financial system. Historically, the process in which the state has corrupted and invaded the monetary system has been slow and gradual. First, the state has taken the monopoly to mint coins allegedly to prevent fraud because they thought that private issuers of coins they would write like 100 grams of a gold coin that would be only 50 grams. Even though competition would prevent fraud there as in any other industry like when a company would sell milk and write one gallon of milk on it and it's only half a gallon in it, then competition competitors would capitalize on the fraud the same with money. However, the state used this as an presumption to assume the monopoly of coinage and started then to debase coins. Collecting old coins and reminting the coins for example gold coins adding copper to it and then with the additional coins the state could purchase what it wanted. Later, the state granted the privilege of banks to have fractional reserves to violate the legal principles of the deposit contract. This led to business cycles and in the recessions normally the banks' assets lose in value, they are bad loans and people lose confidence in banks. And then in this financial crisis people and banks demand help because they think they will lose their deposits, they will lose everything so they demand help which then comes in form of a central bank where the gold reserves were put. However, central banks could neither save all banks in a recession because also the gold reserves of the central bank are finite that is the central bank cannot produce gold to save the financial system so the next step in the logic of monetary interventionism was that the central bank obtained the monopoly on money substitutes on banknotes, banknotes were like warehouse receipts that you deposit 100 grams of gold and then you get a receipt and you could always go with the banknote and redeem the gold so the central bank assumed the monopoly to issue banknotes supposedly to be able to save the financial system when it came into trouble then of course in an emergency situation that threatens the financial system but the total collapse due to redemption of the depositors so the state always declared then that it was no longer possible to redeem the banknotes and gold this has happened when the World War I broke out or in the US during the Great Depression so then the notes and bank and money tickets were not redeemable into gold anymore but they continued to be used as a medium of exchange for several reasons first they were protected by legal tender laws so you had to accept them and people were also told that the suspension of redemption would only be temporary and also that they had an advantage to these notes because taxes had to be paid with them so now then we had fiat paper money that could not be redeemed into gold anymore and now central banks can produce any liquidity necessary to save the fraction reserve banking system in a recession and in a banking panic however there still remains a limit to inflation since not all central banks inflate in the same rhythm some central banks inflate faster than others and when they do this, when they inflate faster than others there is an embarrassing devaluation or depreciation of the currency it can harm financial cooperation, international cooperation it's also clear sign to the population that there's something wrong that your currency has less value every day and the population may want to adopt foreign currency so the difference, the different rhythm in inflation is a problem for central banks for example the German Bundesbank inflated traditionally less than other central banks such as the Fed or the Bank of France that's the reason why it then was brought under control through the ECB, through the Euro, the Bundesbank so this explains that there's a tendency to avoid fiat currency which is the logical end of the monetary interventionism in the financial system so once fiat money is installed in any country the government through its central bank has the absolute control over the money supply the central bank has an incredible amount of power it would be impossible to assume in a free society while communism collapsed in 1989, 1990 the central bank still continues in the monetary sphere the Fed and the ECB they exert total control on the monetary sphere they have the power to create money as at their will and this is important because the welfare of the state depends on this, on this monopoly on money so now I would like to do another thought experiment with you imagine that you had the power the Fed has the Federal Reserve has you would be the only person that can't produce money let's say you just can print it with your computer or more simply you can access online your bank account and you can put any number in it and everybody would have to accept the money you produce then you would have a power that is comparable to the ring in Lord of the Rings would you use this power? you know the ring is almost irresistible, the temptation is almost irresistible in fact Gandalf didn't want the ring because actually you might try to do something good with it but the result of the setup always would be a permanent flow of goods and services to you your friends and your family and of course this would lead to a tendency for prices to increase for example if you want to buy a BMW you just produce new money and then you would have to over with the person that would have bought the car if you had not produced the additional money so prices are bit up now you get the BMW the other person don't does not and then the dealer has more money and the dealer may want to buy a code for his wife bidding up prices of codes and then the code producer's income is higher and he starts spending and gradually as I explained yesterday the new money extends through the economy increasing prices and changing the stream of goods and services towards the first receivers of the new money so the power of the printing press is virtually irresistible but you have to be very careful not to overdo it for several reasons people might start to resist the scheme and try to destroy your power when they see that you just have to print money and you get rich and they get poorer all the time they may reward so before it gets to this point you may want to restrict your money production what can you do beside well you can try to get important and powerful allies in the establishment so let the establishment participate in the scheme by channeling some money into their pockets make them dependent on the system and make them dependent on the continual increase in the money supply then the establishment will always support you and the monetary system in itself they will use their power and influence also in the media to support the system what can you do further well there are other means of diluting the source of unrest and resistance so you could develop a strategy to conceal the money creation and create diversions so you may transfer the new money through several steps in a very complicated system whose mechanisms are very hard to grasp you may also try to convince people that actually the scheme is good for them you may say what you are doing is actually you are stabilizing the price level or you are atroistically trying to spur employment increase employment which by the way are the two official goals of the Federal Reserve to stabilize the price level and to increase employment people may actually start to like you claim that without you the financial assistance system would collapse one important point is also that in your arguments you should always concentrate on one effect of your monetary increase in the money supply that is lower interest rates at a reasonable level so you say that what you are actually doing is controlling the interest rates which is the effect of your policies and don't mention very much what you are doing to manipulate them that is producing more money say that with lower interest rates more investments and employment is possible metaphors are always very useful say that your money production is like lubricating oil necessary for the smooth functioning of the economy and of course develop fancy theories to support your scheme you can externalize this to so you have more free time to hire some economists to develop the theories one thing you may argue is what you are doing is necessary to prevent the disaster of falling prices so you want to spread the myth that falling prices at price deflation is disastrous for the economy and that the money supply must increase at least as fast as the economy grows you can always then say in the gold standard this would not occur so thanks to my money production we can have more economic growth another idea to spread is that the banking system needs new money and would otherwise collapse with apocalyptic consequences and then you have achieved your end finally when the victims and losers of the scheme actually start to think that you are doing something good for them by producing more money now when you are at this point you must be careful not to disturb the economy too much by your money production because you don't want to have too much chaos because you still want to be able to buy your BMW and enjoy some technological progress because if people stop saving and investing due to inflation then car production may be also hampered and if uncertainty increases too much or the monetary system breaks down you will have to forgo many advantages of the division of labour so if the newly produced money causes too much disturbances and distortions in the form of business cycles productivity may be hampered too much and this might be not in your interest surely you don't want hyperinflation or the monetary system to collapse because then no one would want your new money anymore and your power would be gone, your ring would be broken and as mentioned before it's important for you to cover your tracks and this can be done by erecting a complicated financial system that is hard to understand so you may give some privileges to some in exchange for the eternal friendship and help and this privilege consists in letting them participate in your power gives them some sort of franchise in money production and these your friends we may call them fraction reserve bankers they cannot print money themselves but if they hold money reserved with you they will be allowed to produce money substitutes demand deposits for example so let's look at a simple example to show you how this franchise system of fraction reserve banking works but historically it arose through a violation of the legal obligations inherent in the deposit contract demand deposit contract that I explained to you earlier first the governments did not persecute these violations but ignored it ignored the misappropriation of banks of deposits because banks took the money of their depositors and lent it to governments so they didn't persecute that and only later than governments formally legalized the practice of fraction reserve banking but let's start again with the example of we have here bank A you print 100,000 dollars to buy a BMW for your wife so the dealer gets the new money and he deposits it in the bank so the bank has here new cash the 100,000 dollars you just printed and liabilities here we have here the demand deposit the amount deposited by the from the BMW dealer which is also I said 100,000 no this would be very not yet as expensive very expensive car so 100,000 so now the bank holds 100% reserves to the deposit of the BMW dealer and the dealer deposited the money with intent of having full availability and according to general legal principles the obligation of the bank is to maintain always the same as the example of the wheat always the full deposited good the tantundum at the availability of the depositor it has to be available at any time so imagine that we now give our friend the bank A the privilege of holding only 10% reserves instead of safekeeping the money so this implies that the bank has only hold to a cash 10,000 dollars instead of 100,000 so now the bank can buy assets it can grant loans to other people or can buy houses buildings and pay with newly created deposits so the bank simply can make loans to a person and put new money in the bank account of this person so for example it can give a loan of 90,000 to person you let's call him you and then we have here the demand we put it in his bank account simply in the computer the deposit of you is 90,000 so now the bank has created 90,000 dollars out of thin air and put it into the bank account of person you so let's now assume that you use the loan to buy something from another person and gets the cash out of the bank then the balance sheet of bank A remains like this we have here the assets and liabilities we have still here the demand deposit of 100,000 of the dealer the demand deposit of you disappears because he gets the cash out of the bank that means cash is only 10,000 left and of course we have here the asset of the bank still the loan of 90,000 to person you now we have a reserve ratio of 10% that is 10% of the demand deposits are there in cash what has happened to the quantity of money? what is the quantity of money that in our example people rightly think to have available how much money does the BV dealer think he has? well he thinks he has 100,000 dollars so as you do and when he makes purchases he takes into account how much money he has in his bank account as you do also when you make a purchase you know how more or less how much money you have in your bank and it forms part of your cash balance so from an economic point of view this 100,000 forms part of his cash balance and at the same time person you has 90,000 dollars in cash that he got from the loan to spend so now the money supply has increased through credit expansion from 100,000 to 190,000 100,000 in forms of a monetary substitute the demand deposit and 90,000 in cash in the hands of you so this is a truly transcendental event because new money was created or money substitutes were created now the money supply in the broader sense including monetary substitutes is 190,000 and of course the creation of money titles out of thin air is a very profitable business for the banks because then I can produce money, I can lend it, then I get it back with interest I can invest in stocks, I get dividends, I buy myself my nice buildings or last but not least I buy a government bond but the story does not end here with the creation of 90,000 let us imagine that you use the 90,000 and he buys something from person we and we happens to be client of bank B and he deposits the money there so we deposits 90,000 in bank B so we have here the demand deposit of person we 90,000 so now bank B can expand credits and holding a reserve ratio of 10% it can grant a loan of 81,000 to person W so it gives a loan of 81,000 to W and puts it in the bank account of W now W can use his loan, he will get the money from his bank account so this is similar here when he gets the money out of the bank the balance sheet remains as follows of bank B the cash is reduced to 9,000 and the demand deposit of W is there of course still and there is the loan of 81,000 to W so let us now assume that we use the money buys a house for example from person X and X now happens to be client of bank C so we have here bank C and he deposits the 81,000 in cash in bank C gets a demand deposit and his bank account appear 81,000 and now if bank C holds 10% reserves you can see that it can give a loan to another person so person X is the next one of 72,900 that appear in the bank account of X and when he takes then the money out of the bank X the balance sheet of bank C remains as follows we have here the cash of 8,100 demand deposit of 81,000 and here is still the loan and of course we could continue this much longer but we have only one hour so let us stop here because then X would pay person Y Y could go to his bank D deposit the money there and so on but we can already see that how much money do we have now well we have here the 100,000, 90,000, 81,000 plus the 72,900 circulating in cash when we continue this to the end which we don't have time then we would get to we would see that the money supply would be multiplied by 10 reserve ratio of 10% and under assumption that there is no frictions or unused loans so in a miraculous way the banking system has created new money in the form of bank accounts now the money supply is one million dollars so the BMW, W dealer, persons V, X they hold together one million dollars in their bank accounts and the banking system holds a cash reserves ratio of 10% that is the original 100,000 that we printed to buy the car so this very profitable business of creating money has only become possible because of the privilege of the government so in one sense the government is the boss of the banking system and the person you for example that gets here the first loan maybe the government itself so the government gives the banks the privileges to have fractional reserves to create money and exchange the banks finance you by granting you loans or buying your bonds so if you put aside all the distracting maneuvers and intricacies it is easier to think of the system of one owner of the printing press that is you, the government that has this power and the banking system as one institution it's like a franchise system of fractional reserve banking it potentiates the power of money creation out of 100,000 newly created, newly printed notes the system made one million dollars and of course by buying up the bonds of the government bonds prices are bit up and yields fall and the government also pays lower interest rates moreover as the side effects you also get very powerful friends not only the banks but the banks by granting or not granting credits, loans have also control over the industry business establishment that gets dependent on the banking system so you make the whole business establishment your friend so this of course is a system that is too nice to let it collapse however there's one problem because credit expansion leads to business cycles and in recessions the market value of bank assets collapse and normally the confidence in banks vanish and then people come and demand their money and bank runs occur with the central bank of course and fiat money you can produce any paper money to bail out any bank but again you don't really want this because then there might be hyperinflation that is not in your interest because you want to enjoy the division of labor and you want savings to continue so what you want to do is to control the banking system that does not overdo it so you want to regulate it and control it so through the central bank or through regulations Basel 2 or Basel 3 or through the FDIC through this regulations you can also induce banks to buy more government bonds twisting the regulation in such a way that you say you have to have so many safe assets and you declare the government bonds one of those however this may not be enough to prevent harsh recessions and in a harsh recession you don't want to overinflate the money supply so you also need taxpayers to bail out banks because if you don't and you print too much money the confidence in the money may vanish and the system may collapse so what you also do is to use taxes to bail out banks and you have to justify it so you develop a theory of too big to fail or your friends in academia do that there's one paper by Larry White where he finds that 74% of all monetary all papers on monetary theory published in academic journals 74% are all published in FED published journals or written by FED economists co-authored by Federal Reserve economists so you have them develop this doctrine of too big to fail which basically states that the banks are so big that they cannot collapse because that would be an apocalypses so the government has to bail them out with taxpayers' money of course this implicit bailout guarantee for the financial system then leads to even more distortions and the financial crisis has shown that not only fractional reserve banks got into difficulties but also investment banks and investment banks don't do that they don't accept demand deposits so why did they get into trouble in the last recession? because they engage in what is called maturity mismatching they in depth themselves short-term at low interest rates and then then long-term at high interest rates they exploit the so-called yield curve we have here the yield curve here the interest rate and here the maturity and then the yield curve is normally rising for example you have here a one-year loan and we have here 5% interest and the three-year loan there we have 10% interest why is it normally rising? well because of uncertainty aversion we want to be liquid rather sooner than later if we have to think of the following example you have two options the first option would be you have a five-year bond where that gives you 2.5% interest and then you buy it with the option to have another five-year of 2.5% so you get total accumulated interest of 5% the second option is you have a 10-year loan of accumulated 5% interest but of course you would choose the first option because there you are liquid rather sooner than later and this explains why normally with growing maturities you have to offer higher or you get higher interest rates so what did investment banks do in the financial crisis where they borrowed for example a short-term commercial paper three-month commercial paper at 3% here 3% for one month and then they invested for 30 years in mortgages at a much higher interest rate at 5% for example so they gained this difference of 4% of course this is a problem because after a month the banks have to repay the commercial paper so they have to roll over the loans they have to find again someone who gives them a loan and they have to try to sell the commercial paper again the economic problem of this is that you have short-term savings invested in long-term projects and imagine that people only want to save for three months because in three months they go for a vacation and they don't need the money now so they lend it for three months however the savings are taken and invested into a 30-year investment project so then there's a misalignment in the savings and investment behavior very similar to the traditional Austrian business cycle theory and then after a month the loan cannot be renewed because people want to increase consumption now the 30-year projects will be revealed as male investments the banks have to sell the mortgages, the housing price is 4 so in the recent recession an important part of the bubble was caused by investment banks that mismatched maturities giving the illusion of an amount of long-term savings that was not there and that induced many entrepreneurs in investing in two long-term projects especially in the housing sector and these mismatching behavior of investment banks is spurred by several government interventions first, if a bank knows that it will be bailed out by the government because it follows this doctrine of too big to fail then it will be more eager to engage in this maturity mismatching or if a bank knows that the central bank will in times of trouble buy its assets, buy the mortgages then it will also engage more in it or lastly fraction reserve banking itself that leads normally to a rising money supply when the money supply keeps rising then it's easier to find someone to roll over to renew the short-term debt so to conclude the connections between central bankers, bankers and the government are not superficial they form an elite group that cooperates closely they are very seldom, they are critical of each other they frequently dine and chat with each other they switch professions investment bankers such as Henry Paulson become secretary of the treasury central bankers such as Timothy Gatner become secretary of the treasury so it's one very interconnected group and what is then done is that the government you have here the government has here its printing press, its central bank it prints bonds and gets then the new money from the central bank of course then the government has to pay interest through the central bank but then the central bank most of the has and profits at the end of the year and the profits then I returned to the government so it's a very nice way to finance your expenditures to finance your deficits when the bond comes due you don't pay it either you just issue a new bond and so on and on a lower level then the franchise system comes into play you just put the banks there so you have here the banks and here we have the central bank so you sell to make it not so obvious to sell the bank bonds to the banks you get money from the banks and the banks then sell the bonds to the central bank or pledge them as collateral for new loans and they get new money, new reserves from the central bank but at the end of the day the system is very simple it's just a printing press that produces huge temptations because with it you are able to buy votes and win elections, fulfill political dreams and it favors the government to receive us of the new money to the detriment of the rest of course you try to conceal it you call the central bank independent so it's not so obvious but the central bank still buys the government bonds or receives as collateral and the banks in the franchise system they participate in this advantages of money production and help to finance the government then investment banks also participate and are protected by implicit bailout guarantees and put additional fire to the booms through maturity mismatching so while this is all complicated it all boils down to nothing more than in our thought experiment that one individual you have a printing press and you use it for your own benefit so what I said yesterday for money that almost no one understands money I want to watch you for the financial system but now you do and I urge you again spread the truth because only then we will have a chance to go to a free market system and money and this is crucial for the future of civilization thank you very much