The Hidden Truth About Banks: How Money is Really Made

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Source: Banks Make Money Out Of Nothing! | Prof Richard Werner | Big Picture

Why the Common Understanding of Banking Might Be All Wrong

The common perception of banks is that they operate as simple intermediaries—institutions that take in deposits from customers and lend those funds to borrowers. This belief is deeply ingrained in our financial system, often taught in schools and universities, and reinforced by many financial institutions and regulators. However, this view is misleading and fails to capture the true nature of how banks operate and the profound impact they have on the economy.

The Real Power Behind Banks: Credit Creation

There are three main theories about how banks work: the Financial Intermediation Theory, the Fractional Reserve Theory, and the Credit Creation Theory. The first two theories, which dominate textbooks and regulatory approaches, describe banks as entities that either gather deposits and use them to lend or lend a multiple of their reserves held with central banks. While these theories paint a picture of a bank as a facilitator of money flow, they fall short of explaining the full power banks wield.

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The Credit Creation Theory, however, tells a different and more concerning story. It suggests that banks create money from nothing each time they issue a loan. When a bank approves a loan, it does not pull funds from deposits or reserves; instead, it generates new money and credits it to the borrower’s account. This process effectively increases the money supply in the economy without requiring any existing funds, fundamentally changing how we understand banking operations. Empirical research conducted by Professor Richard Werner, a leading expert in banking and economics, confirms that banks do not lend out existing deposits or reserves. Instead, they create new money from scratch with each loan issued, adding it directly to the economy.

The Negative Impact of Banks' Credit Creation and Lending Practices

Banks' ability to create money from nothing can lead to significant economic instability, particularly through the inflation of asset bubbles, such as in the real estate market. When banks issue loans primarily for real estate purchases, they inject large amounts of new money into the housing market, increasing prices and creating bubbles. This was starkly evident during the 2008 financial crisis, where excessive lending to the real estate sector led to inflated property prices and, ultimately, a market collapse. As these bubbles burst, they cause widespread financial distress, severely impacting investors who rely heavily on traditional banking products.

Minimal reserve requirements exacerbate this instability by allowing banks to maintain only a small fraction of deposits on hand, giving them leeway to create a disproportionate amount of money through lending. This significantly increases systemic risk, as banks are often unprepared to handle large-scale withdrawals or financial shocks. The lack of sufficient reserves results in highly leveraged banks, making the entire financial system vulnerable to crises when borrowers default or market conditions worsen.

By continuously creating new money, banks also contribute to inflation, diminishing the value of money held by consumers and investors alike. As the money supply increases without a corresponding rise in goods and services, prices rise, leading to a decline in purchasing power. This inflationary pressure erodes savings and investment returns, making it more challenging for individuals to preserve wealth, particularly when relying on traditional bank investments like savings accounts and bonds.

Banks' lending practices, often driven by profit motives, lead them to extend credit to sectors that may offer higher returns but also come with higher risks, such as real estate and consumer lending. This focus on short-term profitability can result in reckless lending decisions, where credit is extended to borrowers with questionable repayment capabilities. When these borrowers default, the repercussions cascade through the financial system, increasing the likelihood of bank failures and financial crises.

Additionally, investments held through banks are at risk of asset seizure or bail-ins should banks encounter trouble due to their lending practices. A bail-in is a process where banks can legally use the funds of their depositors and creditors to stabilize their financial condition during times of crisis, effectively seizing assets to cover their losses. This poses a significant risk to investors who keep their funds within bank-held investments, as their assets can be used to shore up failing banks, leaving them with little recourse.

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Why Investors Should Shift Towards Gold, Private Alternative Assets, and Private Portfolio Managers

Given the vulnerabilities associated with traditional bank investments, it is crucial for investors to consider diversifying into Gold and alternative assets managed through private portfolio managers. Here’s why:

Gold has long been recognized as a safe haven asset, known for its stability and reliability. In times of economic turbulence, Gold’s value remains consistent, providing a protective shield against inflation and financial uncertainty. Unlike bank deposits or paper assets, Gold is a tangible asset that maintains its worth over time, making it an essential component of a well-diversified portfolio. Gold is not subject to the risks of asset seizure or bail-ins, offering a level of protection that bank-held investments cannot guarantee.

Investing in private real estate, such as multifamily rental properties, offers a valuable diversification opportunity. Real estate provides a steady income stream through rental yields and the potential for capital appreciation, independent of stock market performance. With the growing demand for rental properties driven by immigration and demographic changes, private real estate can enhance portfolio resilience, providing a complementary asset class to Gold’s stability. These investments are typically not held within bank structures, reducing exposure to systemic banking risks.

Working with a private portfolio manager allows investors to access a broader range of alternative investments often unavailable through traditional banks. Private portfolio managers can offer tailored strategies that focus on capital preservation, generating consistent, tax-efficient returns that are uncorrelated to public markets. These professionals provide access to exclusive investment opportunities, including private equity, private real estate, precious metals, and tax-advantaged corporate insurance solutions. Private portfolio managers operate independently of the banking system, thereby avoiding the direct risks of asset seizure and bail-ins associated with troubled banks.

A Holistic Approach to Wealth Management

As a dedicated advocate for de-risking business, family and multi-generational wealth, I am partnered with one of Canada's leading independent private wealth management firms. My team serves high-net-worth clients nationwide. We provide professional investment management and comprehensive wealth planning solutions from a fiducially focused, client-first perspective. We provide access to sophisticated tax-advantaged strategies and solutions traditionally reserved for the ultra-affluent.

Capital Preservation First

We are driven by a "capital preservation first" philosophy. Our team generates consistent, tax-efficient returns uncorrelated to public markets. By leveraging our expertise, you are granted access to key industry professionals, gaining exclusive entrance into alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax-efficient structures, and tax-minimizing corporate insurance solutions offered through mutual life companies. All are designed to fortify, secure and de-risk your family, business and estate assets against financial risk, economic threats, inflation and higher taxes.

To receive a complimentary digital copy of "Who's Investing Your Money?," email me at [email protected] or book a complementary portfolio evaluation with me through my Calendly Link.

Complimentary Portfolio Evaluation

As a valued reader, I am offering a complimentary portfolio evaluation to discuss how investing in alternative assets such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax-efficient structures, and tax-minimizing corporate insurance solutions can help to fortify and de-risk your portfolio against financial institution risk, economic threats, inflation, and higher taxes.

To book your consultation, email me at [email protected] or use my Calendly Link. Alternatively, you can contact New World Precious Metals to discuss purchasing options for physical precious metals.

The Custodial Model: An Additional Layer of Protection

In light of the revelations in David Rogers Webb's book The Great Taking, to further safeguard wealth, the firms I work with employ a custodial model, where client assets are held securely by an independent third-party custodian rather than commingled with the firm's assets. This crucial segregation of assets provides an additional layer of protection, reducing the risk of seizure or misappropriation in a financial crisis or institutional insolvency. The custodial model offers investors a safeguarded solution to help secure their wealth separately from the investment management firm.

Watch The Great Taking Documentary

Additional Resources:

• The Great Taking PDF
• The Great Taking - Documentary
• The Great Taking Download
• The Great Taking (Audio Book) by David Webb

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References

1. Financial Post: The Role of Credit Creation in the Canadian Economy
2. CBC News: Banking Regulations and Local Economic Impacts
3. Globe and Mail: How Canada’s Big Banks Control Credit
4. Canadian Banker Magazine: The Case for Decentralized Banking

#BankingReform #CanadianEconomy #FinancialStability #DecentralizedBanking #CreditCreation #GoldInvestment #PrivateRealEstate #WealthPreservation #ItStartsWithGold