Government Creates Money Out Of Thin Air

Governments aroun the globe create money out of thin air. If you'd like to understand how this process works, this Wikipedia entry explains it very well.

The following steps describe one way that new money can be created. It is an example from the US.

1. The government issues a Treasury security. This is simply an IOU, a promise to pay the holder a specified sum of money on a particular date. In this example, let's say the government issues $1,000,000 worth of bonds. Individual investors, pension funds, mutual funds, insurance agencies, banks, foreign government central banks, can all buy the bonds, effectively loaning money to the treasury. They do this to invest their money and receive interest in return.
2. The Federal Reserve prints a check, in the amount of $1,000,000 and makes it payable to the government. This check is the proceeds from the sale of the bonds.
3. The $1,000,000 is recorded as an asset by the Fed. (money owed to the central bank is called an "asset" by the bank) It is assumed the government, with its power to tax, will make good on its debt (this is why the people buying the bonds from the fed consider it a risk-free investment). The government deposits the check in its own account.
4. The government hires employees and buys things with the $1,000,000, and it does so by writing government checks. These government checks are then deposited in commercial banks. For the sake of simplicity, assume it all goes into one commercial bank, which has a zero balance to begin with.
5. The commercial bank now claims $1,000,000 in new liabilities (the amount on deposit in a bank is called a "liability" by the bank, because the bank has to pay interest to it, amongst other things). In the US, the law allows the bank to lend out 90% of what it has on deposit. This lending of money that it has on deposit is the precise point at which new money is created, because the depositor still has his money, and the person getting the loan now has money too.
6. $900,000 is lent out on Friday for someone to buy a house. This loan is in the form of a check. The home buyer signs the check and gives it to the seller, who deposits it right back into the bank on Monday. Note however, in real life that money would only come from the bank temporarily, which then would issue its own bonds or use a company like Fannie Mae to issue its own bonds, so that again investors can actually lend the money while the bank is simply a middleman, called a "servicer".
7. The commercial bank now claims $900,000 in new liabilities. 10 percent of that money is put into reserves, and 90% of that, or $810,000 is lent out. As soon as the $810,000 is deposited back into the bank, the cycle repeats and repeats until there is no more money to lend.
8. The total amount lent out to borrowers is $9,000,000. Add that to the $1,000,000 that it still has on deposit and the total is $10,000,000. Commercial banks make profit by charging fees for transactions, and by charging a higher interest rate to those they lend to, than what they pay for the funds. If the commercial bank charges 6% interest on the $9,000,000 it will earn $540,000 per year. If the bank making the loan pays 1% interest to the person who put the money on deposit in the first place it will cost them $100,000 per year. With 90% of that money lent out, if the original depositor wants their money back, the bank has to borrow that money from another bank (or maybe from another source), at rate of interest set by the government (the overnight rate, or the federal funds rate in the US). This is called "asset-liability bouncing", and is a delicate balancing act all banks must work on every day.

Now, let me re-tell the story in plain English. First, there was no money. Than the government created it, with a magic wand. You decided to buy a house. Because government created money out of thin air, it causes inflation. So houses are REALLY expensive. If you are a regular person, chances are, you'll have to slave for 30 YEARS to pay for the house. Now, let me repeat it, the money was created out of thin air. Really, there was no money. However, you'll need to work for 30! years to repay that mortgage. I don't know what you think, but it really looks like a modern slavery scheme. And US is really not that bad. Japan has 90 year mortages! Lives of three generations WASTED, so someone can profit from it.

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