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Money Created Out of Thin Air

It might be hard to absorb, but the fact is undeniable. Banks create money out of thin air. When you go to your local branch and apply for a mortgage loan to buy a house or apply for a personal loan to buy a car, you might think that the bank needs to have that money in its vaults to be able to lend it to you. Wrong.

In both cases, if the loan is approved, the money is created by crediting the amount to your bank account via the bank’s computer. That’s it. From that point on, you owe the bank real money that you must work for, to repay the loan, plus the interest, which the bank records as an asset it then owns.

Billions of dollars of new money are created every day by our private banks to service our desire for goods, for property, for investment, for wealth creation, all of which comes on the condition that, by accepting the money, we promise to repay it with interest, even though the bank never actually had that money in the first place.

So off to work we go, earning money by producing goods and services that we need and want, to improve the quality of our lives, all of which is predicated on the principle that we must repay this money lent to us, money that was created from nothing. The underlying principle is that money created from nothing, creates more money.

If that doesn’t hurt, try this. Sovereign governments through their Central Banks can do the same thing. Taxation isn’t necessary to fund government services. Governments can create their own money to fund all their needs and they can do it without charging interest. They can, but they don’t.

Governments fund all infrastructure projects, all our hospitals, our public transport needs, our schools, universities, scientific and medical research, all at the touch of a keyboard wired to a computer. This funding passes to the banks and the business world to kick-start the projects that provide the services we need.

This generates the employment needed for people to earn a living, to repay the monies they have borrowed from the banks and to pay the taxes governments charge us.

By this circuitous route you can see that nearly all money created eventually finds its way back to the people who created it.

If, by some chance there is money that doesn’t find its way back, that is, if people have any money left over, they can deposit it into a bank account, save it and the bank will pay a small amount of interest on those savings gained from the interest and principle they receive from you when you repay the loans they gave you, which they created out of thin air.

And I bet you thought it worked the other way round. Can anything else make it more obvious that all money created this way is geared to trickle upwards to a limited number of beneficiaries at the very top of the wealth tree?

It’s not a ponzi scheme, as some try to assert because it’s not based on faith. It is a scheme, nevertheless, specifically designed and structured to create obscene wealth for the favoured few at the expense of the many. We play our part because we want our share, based on the effort we put in.

We want a house to live in, a car to drive, a school to send our children, a hospital to look after us when we are ill and food and clothing to keep us warm. We want these things to sustain and, if possible, improve our quality of life.

So, if this all works to everyone’s benefit, and the government provides various safety nets for when we are sick, or unable to work or too busy raising and caring for our children, what’s the problem?

In a word, the problem is inequality. The scheme has gotten out of hand. Those at the top have become excessively greedy and want more and more. They get more by taking from those who have less and the government allows them to do this. That is the problem.

This whole idea of government having to borrow to fund services and build infrastructure, is a fraud. Sovereign governments never have to borrow anything. They can simply create the money to do these things.

But, by having us believe they must borrow, enables them to limit our wealth through taxation, and limit our access to services, ensuring that we only have enough to sustain our living standards.

It enables the banks to continue creating money that ultimately ends up back in the hands of government or in the hands of the super-rich who control the supply of goods and services.

By having us believe they must borrow, they control the prices of the goods we buy and the cost (interest) of the money we borrow and ultimately, the quality, or inequality of our lives.

All of this happens because banks and governments in tandem, create money out of thin air to fill the pockets of the rich, the ones who own the banks, who own the industries and the services we need and use.

If there was a modicum of honesty in any of these institutions or those that run them, all this would be common knowledge. But instead, most of us believe the very opposite.

It is time this truth which is self-evident was more broadly shared. But that will only happen from the ground up. For too long governments have blindsided their constituents with false notions of how money works.

Those of us who understand this, and feel passionate enough to explain it, need to become more aggressive in the way we espouse it.


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  1. mikestasse

    Well done John…… I never thought I’d ever read this here…. however….

    “So, if this all works to everyone’s benefit, and the government provides various safety nets for when we are sick, or unable to work or too busy raising and caring for our children, what’s the problem?

    In a word, the problem is inequality.”

    Yes….. and no. The OTHER problem is interest. Interest means the pot of money created out of thin air has to grow. With MORE money printed out of thin air.

    So debt grows faster than GDP. When the debt and GDP numbers are small, such as they were 50 years ago, it doesn’t really matter, but when growth goes exponential, and the debt is growing exponenyially faster than the already exponentially growing GDP, Houston, we have a problem.

    GDP growth, usually called economic growyh, is finished. As we have used up all the low hanging fruit resources and only the hard to get at ones are left, we can no longer dig up resources fast enough to feed the growth monster. That (and yes several other things) is why we had GFC MkI. But GFC MkII is nigh.

    Here’s a cool little video I only discovered a couple of days ago that explains why the wheels are falling off…

    Losing our Energy Slaves

  2. Ross in Gippsland

    John Kelly, are you saying the commercial banks are just one big scam?
    Well cover me in flour and sugar and bake for forty minutes, who would have thought.
    But you have to bank somewhere, personally I prefer my credit union.
    At least they don’t treat you as an anonymous milch cow to be milked of money twice a day.

  3. Jake

    Goodgoogamooga…When you put it like that…wow!
    Maybe we should have one day a year when everyone goes to the bank and withdraws all their money in cash. When the banks can’t provide it, there’ll be some angry mofos out there, realising their money isn’t available….or real. It would be educational if nothing else.

  4. Pingback: Money Created Out of Thin Air – » The Australian Independent Media Network | winstonclose

  5. john o'callaghan

    So it’s true,Joe Hockey really is a bullshitter.””””

  6. Harquebus

    It’s not money that our financial wizards conjure up, it is currency. Fiat currency. Fiat currencies are intrinsically worthless. They are not backed by anything except faith. Confidence that you can exchange this worthless fiat for something of value. Money, like gold coins or gold backed currencies, have worth.

    The other con that occurs is fractional reserve banking. Google it. It is a confidence trick on a massive scale. They lend, you spend and the seller deposits some of that money in the bank which, is in turn lent out again. The fiat that you borrow is lent out over and over so, a conjured amount of fiat can provide some orders of magnitude more loans.

    Inflation is the inflating of the money supply. It erodes savings and wages and reduces as a proportion of GDP, government debt. This is why governments and bankers are determined to have inflation. They can just print themselves out of debt. The problem is, governments can not resist spending and create ever more debt.

    Only a gold standard and a Glass Steagall act can restore a stable foundation to our financial system. Governments hate gold standards. It means that they can’t just print currency to satisfy their wants.

    “All paper money eventually returns to its intrinsic value. Zero.” — Voltaire.

    Throughout history, there has never been a fiat currency that has not returned to its intrinsic value and for the first time in history, all currencies are fiat.

    Money for Nothing Inside the Federal Reserve 2014

    Mike Maloney’s excellent presentation. I highly recommend.

    Four Horsemen – Feature Documentary – Official Version

    Well done John Kelly. A subject that main stream journalists will not touch.

  7. Glenn

    you are only really telling half of the story here. Yup, the government with the banks create money of thin air. However the society has to produce goods and services to give that money value. And it’s a balancing act in terms of “printing money” and controlling the expansion and contraction of “money” to keep the economy humming along and encourage goods and services of value being produced. In theory, in a closed economy everyone lives well if it’s managed right. It is when there are imports which require value to leave the closed economy to pay for it that the risk of value loss is a threat. Balance import / exports and you neutralize this effect. Get that wrong and you’re f**ked. Hence why FTA are so dangerous, for example (but not dangerous to the very rich who straddle across national economies).
    Joe Hockey is a bullshitter, and an idiot. Debt is only a shortfall of goods and services production NOT lack of money. Sovereign governments can print away “debt”, but they do it by stimulating activity and one of the levers to doing this is controlling expansion or contraction of money supply.
    Dickheads we have in Canberra right now are all about contraction. They DON’T UNDERSTAND ECONOMICS IN A FIAT ECONOMY.
    …and please don’t harass my simple explanation. 🙂 I am keeping it high level. 🙂

  8. Gilly

    Never mind the day the robots will take over and rule the world. Money, created by people to be a tool of trade, has beaten them to it.

  9. Harquebus

    Robots already rule the stock market. High Frequency Trading. We don’t stand a chance.

  10. Matt James

    OK, one of your points I’m not 100% on. Taxes, or more precisely a taxation system which demands 2-4 times the amount mining corps, etc are currently paying as well as much steeper taxes for the well off. Isn’t relatively steep taxes for the rich a necessity for a progressive government? How else would you moderate the distribution of wealth?

    Aside from this I couldn’t agree more on how obscenely over rated our banking system and the stock exchange has become over the decades. Either way it comes as no surprise how the MSM here hasn’t breathed a word on the nationalization of the Icelandic banking system (technically speaking they remain private enterprises but in practice they have been socialized).

  11. John Kelly

    Glenn, I think I covered your point in paragraph 3 where I explain what we do with the money we borrow. Keeping it ‘high end’ your points are all valid and the whole system pivots on our ability to produce goods and services. It was essentially the inequality of the ‘trickle up’ effect that I wanted to highlight.

  12. John Kelly

    Matt, I think the argument goes something like, if you overtax the rich they won’t want to play anymore. They will pick up their toys and play elsewhere. It is a false argument, but when it is your rich friends that got you into parliament in the first place, you wouldn’t want to upset them by over-taxing them.

  13. Geoff Andrews

    I (we) need an easily understood model of how the “debt” works to counter the LNP’s household model. I believe you may have touched on a suitable example in one of your earlier blogs: that of a company making a share issue to expand. (?)
    The money a company raises from the share issue is not a debt – there is no obligation to buy the shares back; the shareholders expect a dividend because the company is profitable.
    In arguing with the LNP “debt & disaster” mantra, is this a better simplistic example, is this a more accurate model?
    If the national debt is printed money, why is any interest payable and to whom?
    I presume that one of the effects of printing this money (both the government & the banks) is an increased inflation rate and possibly interest rates (for example in the mid 1970’s). If so, why have interest rates and inflation stayed low for almost a decade?
    He who knows not and knows he knows not: he is a student; teach him.

  14. Harquebus

    @John Kelly.

    The rich are now referred to as “job creators”.
    The poor: financially disadvantaged.
    Slums: Substandard housing.
    Kidnapping: Extraordinary rendition.
    Data retention/Mass surveillance: Bulk collection.
    Torture: Enhanced interrogation techniques.
    Battle fatigue: Post traumatic stress disorder.

    You get the idea.

  15. Matt James

    John thanks for the reply. I still cannot see any other way of moderating excessive wealth distribution other than a never seen before world wide crack down on what any one person or business can earn. I guess in saying that the western world is set too make a major swing to the left anyway. So with any luck the rich won’t have any real choice in the matter.

    I did read your column on Josh Frydenburg, Isn’t he an asshole? A few years back in another piece of NEO CON filth penned by The OZ he reveled just how much he hates the low paid by blaming, you guessed it, the unions FOR SABOTAGING THE ECONOMY!! Just a few years after the GFC which him and his Banker mates (ex Deutsche, like Baird) were resposnsible for he has the nerve to pick on the lowest paid wage slaves, the ones who need a strong Union the most.

    But… Just in case you don’t know already, check this FB left by Annie B on this very man. As nameless as it is it comes across as pretty genuine to me. More Later.

    Annie BDecember 3, 2014 at 9:05 pm

    Kay – all well said – and compiled as very good reading.


    OK – here’s letting the cat out of the bag – with thick gloves on and very carefully.

    No names, place names or dates to be shown. ………… but the truth – as it happened.

    I might have mentioned ( I have in fact – some time ago ) that most members of my family are intrepid Liberal followers. ….. the Libs could set off a nuclear bomb on ( ……………….. fill in your own location ) …… and they’d still be the bloody ants pants – as far as my family is concerned.

    I am the black sheep !!! ( LOL ).

    When my sister ( who is very heavily involved in Victorian Liberal politics – and I mean heavily ) .. was about to retire from full time work, Frydenberg heard about it, or perhaps ( I think ) she might have told him. …. She is exceptional in her work – as a PA, and business administrator.

    He asked her to become a member of his staff on a part time basis – at his office in his electorate which is Kooyong. A seriously blue ribbon / blue tie area.

    Initially she accepted with huge delight – until she was told ” Unfortunately xxxxxx, I cannot pay you anything. Our funds are limited and I only have what I have been allotted which is at capacity at this time ” …… ( or words to that effect ).

    She very wisely declined the offer, but not before I had belted out my own loud indignation at the sheer gall of this man to ask someone, who has done such a lot for that Party – to give more and more and more to the service of the Liberals – for absolutely nil return.


    I do know that all electorates have a certain amount they can spend – allotted by the Feds. ( or State if in power ). But if someone wants to get somewhere, they have to give something back – and he was not prepared to do that. …. Nothing from his own very substantial income ……… just trying to ‘use’ an avid follower of the party.

    This has NOTHING to do with him being Jewish. …….. it’s more the type of thing that many politicians jump on ( no matter their religion ) and they will use and abuse, while the starry eyed followers ask ” how high do you want me to jump, mein fuhrer “.

    As a current back-bencher Frydenberg earns almost $200,000 per annum. Yet he – along with his cohorts – and no doubt others from all sides of politics …. EXPECT undying devotion – and ‘free’ work ………… for ” the Party “. And believe me, he would have demanded more and more of her or anyone silly enough to fall for it. …….I am pleased that she put her own business interests, before Frydenbergs’ sweet talk – THIS time.

    And – that’s how it works.


    p.s. …. Since the Liberals in Victoria went down the gurgler, I have not heard one word from her. !!!! …… which is kind of sad, but probably wise.

  16. Harquebus

    It gets better. I just came across this.

    “International Business Machines Corp is considering adopting the underlying technology behind bitcoin, known as the “blockchain,” to create a digital cash and payment system for major currencies, according to a person familiar with the matter.
    Unlike bitcoin, where the network is decentralized and there is no overseer, the proposed digital currency system would be controlled by central banks.”

    RED ALERT – IBM Moves to Create a Centralized, Central Bank Controlled Blockchain for Currency Control

    I’m sure that there are no end to ways that the wizards can conjure up nothing out of nothing and get something for themselves out of the process.

  17. Matt James

    Harquebus then turn around and hiss at the low paid who, unlike most of these hedge fund vultures actually do something.

  18. John Armour

    The other con that occurs is fractional reserve banking. Google it. It is a confidence trick on a massive scale. They lend, you spend and the seller deposits some of that money in the bank which, is in turn lent out again. The fiat that you borrow is lent out over and over so, a conjured amount of fiat can provide some orders of magnitude more loans.


    You can certainly find “fractional reserve banking” on Google, Harquebus. And probably Jesus too. While you’re there, also look up “some orders of magnitude”.

    FRB however is a myth, found mainly in (Old Testament) economics textbooks.

    The reality is that banks are constrained by the Basel Accord capital requirements, and the availability of suitably qualified borrowers. Reserves have nothing to do with it because the central will always provide any reserves the banks ask for.

    Once again, you are talking nonsense.

  19. Harquebus

    @John Armour
    The Basel Accord is pretty much meaningless in this era of QE and “always provide any reserves the banks ask for” is exactly the opposite.

  20. Jexpat

    ” Taxation isn’t necessary to fund government services.”

    Before replying to that, it would be helpful to know whether that was meant as satire?

  21. Pingback: Money Created Out of Thin Air | THE VIEW FROM MY GARDEN

  22. John Kelly

    It is certainly not satire, Jexpat.

  23. John Armour


    Here’s a speech by a former Chairman of the US Fed:

    “Taxes for revenue are obsolete”

    It was delivered in 1945. It’s not exactly a new idea.

    It’s a fundamental truth of a fiat monetary system.

  24. Jexpat

    Well then, here we have the answer as to why so many people dismiss MMT, in its entirety, out of hand.

    In case anyone was wondering why progressive parties (or progressive wings of those parties) won’t touch it.

  25. John Armour

    “The Basel Accord is pretty much meaningless in this era of QE and “always provide any reserves the banks ask for” is exactly the opposite”

    The Basel Accord, even in its 3rd iteration, is hardly a ball and chain, but it is pretty much the main constraint on bank lending.

    The Basel Accord places constraints on commercial bank lending whereas QE is a central bank operation and has nothing to with the capital adequacy ratios of the commercial banks.

    The following quote is from the Bank of England’s Quarterly Bulletin Q1 2014 “Money creation in the modern economy”, clearly contradicting your beliefs about the role of reserves.

    It confirms what Modern Monetary Theory has been saying for years.

    “In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks”

  26. John Armour

    Well then, here we have the answer as to why so many people dismiss MMT, in its entirety, out of hand.

    It was once commonly believed the Earth was the centre of the universe too.

  27. Harquebus

    @John Amour.
    From what I have been reading lately, most of the major international banks have less than a few percent in assets to cover liabilities.
    Also, several European banks have failed their stress test recently and only very recently, one major U.S. bank failed the test.
    I don’t think that there will be another bail out, a bail in is much more likely. The problems that cause the GFC have not been rectified, they have been expanded.
    The banks are going down. Grab your savings now and kiss your superannuation goodbye.

  28. John Armour

    Geoff Andrews,

    “I (we) need an easily understood model of how the “debt” works to counter the LNP’s household model.”

    It’s a good question Geoff and one that goes to the heart of the deception.

    The reality is that the debt is not really a debt: it’s a central bank operation to manage the interbank leading rate, the rate the banks pay to get additional reserves from other banks, the rate we call the “overnight rate” or the RBA’s “cash rate”.

    When the government deficit spends, excess reserves build up in the banking system (taxes remove reserves). Banks then compete to unload their excess reserves, potentially driving the cash rate downwards towards zero.

    The RBA seeks to prevent this by offering the banks interest bearing bonds in return for their excess reserves, which are then removed from the inter-bank market.

    It looks like “borrowing to fund the deficit” but it’s not. The government is just borrowing back funds it just spent.

    To quote Professor Bill Mitchell:

    There has never been an empirical relationship shown between tax level changes and debt level changes lagged however many years you like. The notion is ridiculous. “

    “Every generation chooses its own tax rates. That is, the mix of public and private sector involvement in the economy is a political choice. If the future generations want more private and less public they will choose lower tax rates etc.”

    “The idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical. The funds to pay for the bonds originate in the government net spending in the first place.”

  29. Jexpat

    Quick clarification: “furthering the notion” that equitable taxation isn’t required…,

    Which undermines our core values, the most basic of which is:: a fair go for all -which in turn equates in the overall revenue system to everyone contributing their fair share in return for the bounty, stability and subsidied economic conditions that they enjoy.

  30. Jexpat

    @John Armour:

    It doesn’t matter whether you quote Bill Mitchell or the Bagwhan Shree Ragneesh in an attempt to support such an assertion.

    Much as we’d like it too, water doesn’t flow up hill (without additional energy/mechanical inputs) -and similarly, monetary expansion over time has much in common with entropy, the unforgiving Second Law of Thermodynamics.

    What I read Bill Mitchell’s gravamen to be is the abondonment of full employment as the overriding goal of BOTH fiscal and monetary policy in Australia.

    And he has some very impressive historical, moral and economic arguments to support that proposition.

  31. Harquebus

    Doing economics still largely means “sitting in a chair and making it up” (Bergmann, 2009)

  32. John Kelly

    Jexpat, Zimbabwe has no place in this discussion. It’s worthless currency was the product of its government destroying the country’s ability to produce anything the rest of the world wanted.

  33. Jexpat

    John Kelly:


    Even assuning that you’re correct (which you’re not) recognising that the example (one of many of many throughout history) is the finale’ of a slippery slope might be wise with respect to our own behaviours.

    Particularly with respct to coal- given the recent 175 page Deutsche Bank report (hello Mr. Baird) or the Bank of England’s warning about stranded assets- or the UN’s admonishment and encouragement to divest.

    To name but a few.


  34. John Armour

    “As an online economic discussion grows longer, the probability of a comparison involving Zimbabwe or the Weimar Republic approaches one.”

    Both were caused by the destruction of the productive capacity of the economy first.

    Everybody can recite “too much money chasing too few goods” but the causality in these cases ran the opposite way.

    Zimbabwe for hyperventilators

  35. Geoff Andrews

    Thank you for your response to my questions, John.
    I shall have to study your quote to try to convert it into an easily digestible three word slogan.
    In the meantime, would my LNP economist friend have to grudgingly concede that comparing the d-d-debt and d-d-deficit d-d-disaster with (say) BHP raising capital by issuing shares was a better metaphor than the household model, which although inaccurate is at least digestible?

  36. John Armour

    Hi Geoff,

    I think the metaphor, though “digestible”, dilutes an essential truth, that the government is not financially constrained.

    Until this is clearly understood by the citizenry, it will always remain possible for conservative governments to run fear campaigns based on debt, and all that flows from it such as the contraction of welfare, high unemployment, privatisation etc.

    Without the debt myth the LNP policy structure is a Trojan Horse, totally hollow, yet full of menace.

    Because the alternative (and correct) explanation of so-called “debt” is a bit complicated, and even counter-intuitive, it’s been an easy task for the neo-liberals to sell what seems “common sense” to the people, despite it being total nonsense.

    Bill Mitchell has 3 intro essays on the subject, starting here:

    Deficit spending 101

  37. John Armour

    Some more on debt…

    A former Deputy Secretary of the US Treasury (Frank E Newman) wrote a book “Six myths that hold back America” wherein he spends a lot of time on the subject of so-called debt.

    A couple of quotes…

    “People often have misconceptions of Treasuries because they think of them as similar to personal debt. In many ways, applying the term “debt” to Treasury securities leads to a number of assumptions that are relevant for individual debt but are simply not applicable to Treasury securities”

    The US has had so-called debt outstanding since 1791.

    “Whilst individual securities are redeemed at maturity, the aggregate total is never paid off, and there is no need for extra taxes to pay them down”

    So it’s not just Bill Mitchell who thinks the debt is a myth, Newman has a very impressive CV in banking and cannot be easily dismissed. There are a few YouTubes of Newman talking about debt. Here’s a brief one:

    When you’ve read (or heard) Newman you’ll understand that when Hockey talks of a debt of $20,000 for every man woman and child, you realise he’s got it exactly arse-about: for the people, it’s not a debt, it’s an asset!

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