What is Money?

we're going to do one called what is money and  we're going to explain the concept of money so people can understand it there are a lot of  misconceptions and misunderstandings about money uh we need to clear them up because if  you want to understand the current cost of living crisis and also the massive increase  in inequality over covid you need to understand what money is so this is going to be super  important for the viewer to understand very number one thing people need to  understand money is not real resources um so lots of very wealthy people don't  actually have huge amounts of money they have largely real resources money is a  separate thing we're going to explain that now one of the reasons why money is confusing  is there are actually a couple of different ideas around what money is bouncing around and  the best way to explain that is I think to go through an example so let's imagine I've  got 1 000 pounds and you've got nothing then I lend you for a week my one thousand  pounds how much money do you have then it's an interesting question right because on  the one hand you've got a thousand pounds in your pocket that I just gave you but on the other hand  you have a debt of one thousand pounds to me right so you literally physically have one thousand  pounds but as an individual when you consider how much money you have you should also consider your  debts right so if we consider also your debts you you don't have any money you've got a thousand  pounds and a thousand pounds of debt but if we just consider how much cash you have on hand  you have a thousand pounds the next question is how much money do I have so I've given you  all my money my one thousand pounds so you could say I don't have any money but you owe me a  thousand pounds and I'm going to get it in a week so if we consider all of my money including  money owed to me I've got a thousand pounds now most economists if they  looked at that situation would say that once I've lent you a thousand  pounds we both have a thousand pounds that's interesting right so once the loan  is made the amount of money is doubled okay and I think this captures the complication we  have with understanding what is money because some people would say if you have money but  you also have debt that you don't have money some people would say well if you have the money  it doesn't matter whether you have debt or not some people would say well if you've lent the money  out you don't have money and some people would say well if you're gonna get. . if you have money owed  to you, you have money, basically is do I need to have that cash in my pocket for it to be money? 

do I need to have no debt for it to be money? if I have somebody owing me money tomorrow do I have money and the reason this is complicated is most people's money is cash in the bank right  but actually when your money's in a bank account oh the bank doesn't actually have that money  in many cases that's money that they owe to you so there's a complication here about whether we  should include debt and whether we should include money that is owed to you and I'm going to argue  that yes we should include debt and yes we should include money that is owed to you and in a way we  have to include money that is owed to you because any money you have in the bank account is money  that owed to you so essentially everything that ordinary people think of as money with the  exception of cash is money that is owed to you so these are the fundamental problems  in understanding okay and we're going to run through it all so that everybody can  understand really clearly what is what okay so the first thing I'm going  to say is as an individual when I I ask you the question of how much  money do you have you should consider all your cash most people don't actually keep that  much cash any money you have in the bank any money that you have owed to you and also any any debts  that you have that is your total situation with regards to money it doesn't really make sense if  you borrow a million pounds and you have to pay that back in a year to say i'm a millionaire now you  have to include your debts it makes sense right so as an individual you should include everything  so then why is it that economists don't do that in order to understand that I think  we need to rewind a bit and go back to the understanding of how money is created  because this is another story around which there's some confusion so for example there are a  lot of people who will tell say to you when a bank lends you money they don't actually give you that  money they just create the money out of thin air um and I think that's quite  misleading and I will explain why the only people who are allowed to print  cash and create money out of thin air are the central banks so in this country (UK) the  Bank of England in the US is the Federal Reserve In Europe it's the European Central Bank (the ECB) okay these guys literally can create money nobody else can and we'll get later to  why people think not commercial Banks can and the. .

but central banks are  not allowed to give money out so then if they're the only guys who can create money but they can't give money out how do we have money? and the answer is they loan money out, they loan money out, central banks only ever make loans so they create money they make loans to Commercial  Banks you know Lloyds Bank NatWest other banks are available um and then those Banks themselves  make loans so money gets loaned out but what what that means is quite interesting which  means that all money originates as a loan now since if you loan one if you borrow  money you always have a debt with it that means that whenever there is money there is  also debt that means that if I add up the total amount of money and the total amount of debt  in the economy it will always add up to zero now this is a fundamental truism of our money  system as it exists in in this country in Europe and the US in Australia most of the rich world  the total amount of money including the total amount of debt always is always zero is always  zero and that that is important to understand because if we know that then we also know that if  one group of people go into a mass amount of debt for example mortgage holders or the government  somebody else must be accumulating money or credit that is really important to understand because  that is it was that fundamental understanding that enabled me at the beginning of covid to know that  okay well if the government is going to accumulate £250 billion, £450 billion of debt somebody's  going to accumulate money elsewhere in the system because we know that these two sides always  balance up it's basically an accounting equation okay so this is the fundamental truism of  monetary systems as they are at the moment that they always always add up to zero that's the  way that they're designed and that is because money is always created by a loan and if the  only way to create money is to create debt then these two things always aligned they're  always balanced so we know with 100% certainty that the amount of money plus the amount  of credit is equal to the amount of debt um now I've separated out there money and credit  when I say credit it means money you are owed um and I think for Simplicity it's probably  best to say that anything you have other than cash in your pocket is credit money having  the bank is money owed to you for example and really it probably makes it easier to  understand the monetary system if you just assume that everything is credit everything is. . 

it's just a balanced system of who owes money to who who owes money to it there's always a balanced  amount of credit and a balanced amount of debt fundamentally Whenever there is money  there is somebody who owes that money I went over there is debt there was somebody  that money is owed to it has the balance now this is a little bit counter-intuitive  and it's the reason is because people don't think about money like that you know if you  have ten thousand pounds cash you know cash in your pocket or cash in your bank you don't  think somebody else is 10 000 pounds in debt you know you you as an individual can have  ten thousand pounds of cash without any debt but it's not possible for society to have ten  thousand pounds of cash without debt because the the way that the monetary system is designed is  that money is only ever created by the creation of debt so they are always balanced and on a  societal aggregate level they're always balanced now then that raises it an interesting question  of well if the total amount of money in society is always zero does that mean the total of money is the amount of money in society is constant what about things like QE? what about things like the Central Bank cutting interest rates? you know we hear at the central bank can change the amount of money in the system and that is because what the central  bank can do is make more loans so they can lend a lot of money into the system  so imagine imagine I'm a central bank and you are the economy and I lend you a thousand pounds  you've got £1000 of cash and you have £1000 of debt you're balanced but then what I can do as a central bank is I can lend you another ten thousand pounds now you've got £11,000 of cash & £11,000 of debt you're still balanced, but there's more loans floating around and once you think about money creation like  that you realize that in a sense anybody can do that, if you remember the example that  we had at the beginning of this discussion I said well if I have a thousand pounds you have  nothing and then I'd lend you a thousand pounds in a way we've both got a thousand pounds, you  see what I'm saying?

and this is worth sitting and thinking about because this explains to us the  two different understandings of what is money one of them says that whenever a new loan is created  both people have the money and that means Whenever there is lending money is being created and one of  them says no you have to include all of the debt and all of the credit and in that sense the system  is always zero does that make sense now this is this is not super simple but it's important to  understand and the difference between those two ways of understanding money are at the center  of so much argument of people on the internet and it's basically some people say that  it's some people thinking in the sense of you have to include all the debt in the system and  some people saying you have to include both sides so if I lend your money we both have the money  now if you if you and this is the way that most economists think about money they think when  I lend you money one thousand pounds now we've both got a thousand pounds they think that  all money lending creates new money so if you believe that all lending creates new money then  it is true that commercial Banks create money but they only create money by creating debt so  Commercial Banks cannot change the fact that the total amount of money always equals  the total amount of debt they cannot change that and in fact nobody can change that that is  a part of the design of the system the monetary system in Western economies in Britain in the US but because Commercial Banks can make loans some people say Commercial Banks can create money  and it is true that say you went to Lloyd's Bank and you say I want to borrow a million pounds  and they they accept your loan they will simply credit your bank with a million your account with  a million pounds that is true and you might think oh they've created money but as soon as you  try and spend that million pounds they have to actually pay it out of the money that they have  it's a little bit like if I said to you I've got a thousand pounds and I say I'm going to lend you  a thousand pounds but I'm going to keep it on account for you and you say okay fine okay you've  got this account one thousand pounds and of course I can just write that account and say you simran  1 000 pounds it's on the account I've just created money but as soon as you take the money out I  have to give it to you you see what I'm saying I haven't actually created any money all I've  said is if you want the money you can have it so I I hopefully that captures the situation here  the only people you can actually create money of the Central Bank the only way  they inject that into the system is by making loans that means that within the  economy money always balances perfectly debt by anyone including central banks including  individuals can make loans and when loans are made that means essentially many people  are accessing the same money I'm saying like I've got a thousand pounds but if you want to  use it you can use it we can both use the same thousand pounds but it doesn't take that balance  out of the system money is always equal to debt so that raises a question right if central banks  can only lend money they can't give money then who can give money into the economy  and the answer is really anybody can give money into the economy if I borrow  money from you and then give it away then I'm in debt and since you know that  debt equals money if I go into debt then the rest of the system has positive money  you see what I'm saying that makes sense but what the power the government has is they can  borrow enormous amounts of money and give it up and then what that does is it in a sense  puts the rest of the system out of balance it means that the rest of the system  is suddenly no longer adding up to zero so since the beginning of Covid the government  has increased its debt by £700 billion pound! and since we know that the system as a whole debt  always equals total money we know that the rest of the individuals in the game have have that 700  billion pounds they must have 700 billion pounds so we know that the average UK adult because it's  about 50 million UK adults must have an extra fourteen thousand pounds since the beginning  of Covid we know these things with certainty and it's just a question of who has that money  it's just a question of who has that money so then this sort of brings us onto other questions like what is QE? what does the Central Bank do?

I think we'll go into it in future videos but to summarise at its heart money is a loan from the central bank and then that circulates throughout the economy some people go into debt which means other people go into credit, the total amount of debt always equals the total amount of credit so we know for example the average UK adult has. . was it 30 000 pounds of Mortgage Debt?

yeah, we did that in the debt video, so we know that the average UK adult must have £30,000 of mortgage credit, we know that the government has increased its debt by £14,000 £14,000 per adult so we know the average UK adult has increased their credit by £14,000 and hopefully I'm communicating that there are these two different conceptions of money one of which includes all debt, includes  all credit and always adds up to zero and one of which is about total amount of loans  in the system they're both important if there are loads and loads of loans in the system, what  happens is the interest rate will fall but it's not the same as the government going into debt and giving huge amounts of money out basically the central bank can lend money and that brings  interest rates down but the government can give money and that causes cash accumulation amongst  individuals since the beginning of Covid-19 the government has increases that by £700 billion we  know that cash has accumulated amongst individuals um it's not the same as QE right there's two  things happening here QE is another form of Central Bank lending it's more loans in the  system I think we'll do that in the next video QE this 700 billion pounds is not QE, this is the  total amount of government debt accumulated since Covid, it's money that the government  has either printed or borrowed and given out but either way if I print money and give it to you  you have more money if I borrow money from you and give it to you you have more money because money  and money owed to you are very similar things if I borrow money give it back to you have  the money and you have the money owed to you so did you think that's clear? *yeah* so I think  that's this is the key thing I want people to understand um money is it's a balanced  system it's really it's a balance point system we know it some people are in debt some  people are are in credit if you have mortgage debt somebody has credit, if the government  is in debt somebody has credit and it's a system of owes money to who and of course the  people who are in debt constantly need to find ways to get that money from the people who are in  credit otherwise they can't pay their debts back so really it's a points-based system it's  perfectly balanced throughout Society but the problem is in many cases it is a small  amount of very wealth people who are on credit and it's the government and a large amount of  mortgage holding individuals who are in debt so it creates an imbalance and the people who are  in debt such as the government which means the taxpayer and families who have mortgages have  to constantly find money to pay to the rich but that's it money is a balanced system, comes  from the central bank, commercial banks they can't create money but they can create loans and if  you create loans it in some sense it seems like more money being made because people have money  even though they have debt against it have access to money um but crucially what is most important  for this channel for the message of this channel that's 700 billion pounds is the increase  in government debt which means we know there has been an increase in private holding of money to the extent of £14,000 for every adult in the country, which is increasing in most cases that money is sitting in the bank accounts of wealthy individuals  which means your average wealth individual has accumulated £100,000-£200,000 extra cash since the beginning of Covid this is not per household, it's per adult right so it really is a huge amount of money and it's. .

. this is not money they've borrowed it's money they've  essentially been given ultimately from government and this is how it was very easy to predict at  the very beginning of Covid that there would be a massive increase in in asset prices and  I think what's quite interesting is now so we're filming this in the in the middle of January  last week both the gold price and the stock price the FTSE-100 (UK share index) came within   1% of a new all-time high and that's interesting because economists and traders will normally say  gold goes up when the economy is weak and stocks go up when the economy is strong but both of these  things have gone up massively and I predicted this at the beginning of Covid and in my opinion the  reason for that is the government has given out a huge amount of money that has ended up being held by rich individuals. .

it's hundreds of thousands of pounds for every rich individual they  tend to buy assets you know they buy all kinds of assets they'll buy stocks and property and gold  so all asset prices go up doesn't matter whether the economy is bad or good; simply because these  guys have so much money, the flip side of it is the government is in a huge amount of debt, partially  that's QE funded we'll do that in the next video but they have to pay interest to the rich every  single month and for that reason that is why they're saying we can't afford to do things and  both of these things have consequences the debt of the government hurts public services and  it hurts public sector pay creates austerity but the credit of the rich pushes up asset  prices and it pushes up other prices too um this relates to the thing we said at the very  beginning of this video which is money is not real resources so ultimately money is a token that  you use to buy real resources so if these guys the rich have a ton of money now they're going to  buy more stuff they're going to push the price up and you the ordinary person of this country will  get less stuff so um this amount of money £700 billion is unbelievably large, from the very  beginning of Covid I've said it will overwhelm basically all other economic effects until it is  resolved, it won't be resolved, it doesn't look it's going to be resolved, so the end result is prices  will will stay high they won't come back down especially asset prices will continue to rise  and living stands will continue to fall so that's the video what is money a little  bit complicated but it's something that's important for people to understand if they want  to understand what's happening with the economy we're going to do more explanatory  videos but the key message here is the government has gone enormously into debt that  means somebody has increased their money holding my analysis says it's overwhelmingly the rich  that increases inequality that increases asset prices and price in the shops and it decreases living standards for ordinary people okay so there's one point I want to add on  money which I think is very important for people to understand which is I think one common  incorrect way that people conceptualise money is they think about as if it is a finite resource  so imagine I had like a pile of firewood okay and then I burned the firewood bit by bit over the  course of a month and there's no firewood left and then there's no fire but we need to go get  some more firewood people think about money as if it's like that, because on the perspective  of an individual it kind of is like that if you spend all your money then money, money runs  out but and then for example during covid the government spent a lot of money so then this is  kind of perceptional the government spent a lot of money we've run out of firewood we all need to  be poor now, there's nothing we can do, but money always adds up to zero, always adds up to zero, money from perspective of society cannot run out it can only pass from person to  person it can only be held so if the government has accumulated a huge  amount of debt all that means is some other group of society has gotten rich and it  doesn't mean that we as a society have lost our resources it's very very important to  understand that money is not real resources money is I think I described in another video as a  competitive resource or a distributional resource money is only used to determine who gets the real  resources and if you have lost a load of money that can only be because somebody else has gotten  a load of money because we know with guaranteed certainty the total amount adds up to zero and I  think this idea that money we've run out of money I mean it was it's really powerful in politics you  know the big thing is after 2010 when the labour government was voted out and the conservative  government was voted in there's this we've run out of money because there's no more money  there's no more money and it's totally impossible and because money is only a distributional  resource we know that if a problem can be fixed by distribution of money we know that that  problem can only been a distributional problem you cannot fix a lack of resources with  money it's not possible because money is not resources and money cannot create resources  if you have if you don't have enough energy you need to go and get some more energy you know  you need to get some more coal or some more wind power or some more firewood whatever you're  using for energy you can't make out of money um but I think this is It's been used powerfully  against the labour party I think they've said you know "they spent all the money" but it's actually  quite powerful to understand that money can never run out; resources can run out and you know  there may be instances you know for example this year just gone we've seen there's been  less energy and the energy price has gone up resources can run out but money can never run out the government can never run out of money if the government has run out of money, somebody has that money, if the government has  gone into debt somebody has that debt there, it's really important to understand money. .