The United States government spends

roughly [music] $2 trillion

per year more than it takes in. It runs

entirely on borrowed money.

So, how exactly is that same country

able to turn around and lend tens of

billions of dollars to other nations?

And the answer starts with a keyboard

and it ends with the price of your

groceries. Every week for the past

month, the same questions keep coming up

[music] in the comments. Mainly, where

does this money come from? And this is

the question behind every headline you

cannot quite explain. It is the question

almost nobody in finance or Washington

will answer plainly. But by the end of

this video, you will understand the

answer, the full machine from top to

bottom.

>> [music]

>> And once you can see it, you can't unsee

it. But first, a story because the

system that we live in under today is a

more sophisticated version of a machine

that was built 300 years ago. In 1716,

France was [music] broke. The old king,

Louis XIV, had just died and left the

country buried under a war debt it could

never hope to repay. The treasury was

empty.

>> [music]

>> The economy was frozen. And into that

desperation walked a Scotsman named John

Law, a gambler, a charmer, a man who had

once been sentenced to death for killing

somebody in a duel and had to flee his

own country to save his own life. Now,

Law had an idea so seductive that the

French government handed him the keys to

the entire economy. And the idea was

this: Stop using gold as currency. Gold

is heavy. Gold is scarce. And there is

never enough of it. Instead, let's

create our own currency. Let the bank

print paper money, paper that you can

create as much of as you need whenever

you need it. Now, for a while, it was

magnificent. The paper money flooded

France. Stock in John Law's companies

went straight up and ordinary people got

rich overnight. In fact, the word

millionaire was coined in Paris during

these years to describe the people that

got fabulously wealthy on John Law's

paper money. So, it worked right up

until the moment when a few people got

nervous about the quality of their paper

money and asked to trade it back in for

gold. Because here is the thing about

money that you can create from nothing.

It works perfectly as long as nobody

asks for the real thing. But, the second

people start asking, the illusion

collapses. And in 1720, it collapsed.

The paper in France became worthless,

and France was burned so badly it would

not trust paper money or even the word

bank for the better part of a century.

Now, I want you to hold that story in

the back of your mind because the system

that we live under today is a more

sophisticated version of John Law's

system, but we simply just got better at

hiding the gold problem. So, let's get

back to our question. Where does the

money come from? Let me start at the

very bottom because everything else is

built on top of this. The United States

government spends more than it collects

in taxes. Not occasionally, every single

year by a very wide margin. In a typical

year today, it spends roughly two

trillion dollars more than it takes in.

So, where does that missing two trillion

dollars come from? Let me tell you, they

borrow it. The government covers the gap

by selling IOU's. That's a Treasury

bond. A Treasury bond is nothing more

than a promise. Lend the government

money today and it will pay you back

later with interest. A two-year bond

pays you back in two years. A 10-year

bond in 10. That is the whole product.

For decades, these IOU's were considered

the safest investment on Earth because

everybody assumed the US government

always pays its debts. So, the world

lined up to buy them. Other governments,

pension funds, banks, you and me. So,

that is the first answer. Where does the

government's money come from? It borrows

it by selling bonds, by selling IOUs.

But that just moves the question back a

step because now we have to ask, who

buys the bonds and what happens if not

enough people want to? And that is where

this whole thing gets interesting. Now,

the government does not sell its bonds

on a website like eBay. It sells them at

an auction, the same way you would sell

a painting to whoever bids the highest.

But here is the part that almost nobody

knows. The government doesn't simply

hope that enough buyers show up to buy

its debt. It has a guaranteed list of

buyers who are legally required to show

up and they are called the primary

dealers. There's about two dozen of

them, 24 big banks and trading firms

like JP Morgan and Goldman Sachs. In

exchange for special access, each one of

them is obligated to bid at every single

Treasury auction. These are the buyers

of first resort. They are the reason the

auction always clears even on the days

when real demand is weak. So, picture

the machine so far. The government needs

money. It prints up a stack of IOUs and

holds an auction. The primary dealers

are forced to bid so the auction clears.

The government gets the money that it

needs. Everybody gets to go home. But

the dealers, those primary dealers,

don't want to sit on all those bonds,

all those IOUs. So, they turn around and

sell them again to everybody else, to

Japan, to pension funds, to you. This

reselling happens in what is called the

secondary market and the secondary

market is where the real story lives.

Now, here is the one rule you need to

understand about this and it is much

simpler than Wall Street would like you

to believe. When lots of people want to

buy bonds, the price goes up and the

interest rate actually goes down. When

lots of people want to sell bonds, the

price goes down but the interest rate

goes up. Price and interest rate move in

opposite directions, always. Now, why is

that the case? Think of it from the

buyer's side. If a bond pays $50 a year

in interest, and I can buy it for

$1,000, that's a 5% return. But, if

everybody's dumping that same bond, then

I can scoop it up for 80 cents on the

dollar, so $800, I'm still getting my

$50 per year payment, but on a smaller

outlay. My return just jumped. The

effective interest rate rose, not

because the government offered more, but

because the price of the asset fell, and

the payment remained the same. Now,

scale that up. When the world is

predictable and everybody has confidence

in the US Treasury market, prices are

high and the government borrows cheaply.

But, when holders start selling all at

once to raise cash, maybe to buy oil on

the open market, prices fall and the

interest rate the government has to pay

on its next round of borrowing climbs.

The interest rate has a name. Wall

Street calls it the yield. And, the

yield is the single most important

number in the global economy. Now, here

is a confusion that I see constantly,

and it's worth clearing up. Most people

think the Federal Reserve sets the

interest rates, and it does, but only

one of them. The Fed sets the overnight

rate, the base rate, the rate banks

charge each other to borrow for a single

night from each other. And, that is the

rate you hear about on the news when the

Fed cuts or hikes rates. But, that is

not the rate that sets your mortgage.

Your mortgage, your car loan, the rate

your government pays to borrow for 30

years, those track the long-term

Treasury yields, and those yields are

not set by the Fed. They are set by the

market, by supply and demand, by buyers

and sellers every second of every day.

And, that is why the Fed can cut its

base rate and mortgages can go up

anyway. The Fed controls the overnight

rate, but the market controls the rate

that actually runs your life. And, when

the world starts selling US bonds, the

market drags that rate higher, no matter

what the Fed wants. So, now you

understand the engine. The government

borrows by auction. The primary dealers

backstop the auction. The bonds trade in

the secondary market, and supply and

demand in that market set the price, the

borrowing cost for the entire economy.

There is just one problem. What happens

when the selling gets so heavy that the

yield climbs to a level that the

government cannot afford? And this is

where money is actually created. When

real buyers will not show up at a price

the government can live with, when the

yield threatens to spiral, the Federal

Reserve steps in and buys the bonds

themselves, keeping price high and rates

low. And the Fed does not buy them with

money it earned, or money it taxed, or

money it borrowed. It buys them with

money it creates on the spot. Somebody

at the Federal Reserve enters a number

into a computer, and dollars that did

not exist 1 second ago exist now. The

Fed uses those brand new dollars to buy

the bonds nobody else wants, which props

the price back up and pushes the yield

back down. There's no printing press,

there's just a keyboard. That's all it

takes. The primary dealers are the buyer

of first resort. The Federal Reserve is

the buyer of last resort, the one with

an unlimited checkbook, because its

checkbook is conjured from nothing. When

you hear the term quantitative easing,

or QE, this is all it means, the Fed

creating new money to buy the

government's debt when the world will

not do it. So, now you have the full

answer to where the money comes from. It

comes from two places. The government

borrows it by selling bonds, and when

there are not enough buyers, the Fed

creates it out of thin air and buys

those bonds themselves. Now, hold on to

that, because we're about to watch the

same trick do something that should not

be possible. Here is a question that

should stop you in your tracks. We just

established that the United States

borrows roughly $2 trillion

per year because it does not have enough

money. It needs the rest of the world to

keep lending to it every quarter just to

keep the lights on. So, how exactly, if

that's the case, is that same country

able to turn around and lend tens of

billions of dollars to other nations?

Because that is what's been happening.

Over the past 2 months, the United Arab

Emirates and reportedly a whole string

of Gulf and Asian countries have gone to

Washington asking for emergency dollars

for what is called a currency swap line,

a short-term loan of dollars from one

central bank to another.

Now, how does a country that runs

entirely on borrowed money suddenly

become a lender? And the answer is the

same keyboard. When the Fed extends a

swap line, it does not dip into a vault.

It does not pull the dollars from

taxpayers. It's not lending money that

it has, it's lending money that it

creates. It types those dollars into

existence on demand and sends them to

the foreign central bank. So, the

contradiction dissolves the moment you

understand the keyboard. A broke man

cannot lend you his savings, but a man

with the money printer can send you a

stack of fresh bills all day long. The

United States is not lending from a

position of wealth, it is lending from a

position of unlimited money creation.

Those are very different things. Now, a

couple of sharp questions have come up

here and they deserve straight answers.

Some of you in the comments with

previous episodes have asked, "Why

doesn't the country requesting the swap

line just use its US Treasury bonds as

collateral to borrow the dollars, a

normal loan against assets, instead of a

special swap line?" And the truth is

that it could. That's called a repo. But

pledging these bonds, or worse, selling

them to raise the cash, puts pressure

right back on the bond market we just

discussed, the exact thing Washington is

so desperate to avoid. The swap line is

cleaner because the Fed simply creates

the dollars and no bonds have to be sold

or leveraged. Now, others have asked,

"Isn't it the Treasury doing this? And

doesn't the Treasury have only a limited

pot?" And that's also correct. And this

is the key. The Treasury does have the

funds for this, but it's like a garden

hose or a water can, right? It's finite

and it can run dry. Where the Federal

Reserve is a fire hose with no off

switch. So, when the demand for

emergency dollars gets large, and it is

getting large, the real backstop, the

only one big enough, is the Fed. Which

means the man who inherits this entire

problem is the next chairman of the

Federal Reserve. Now, swap lines are not

new and it's worth knowing where they

came from because the history tells you

exactly how this ends. They were born in

the panic of 2008 when the global

financial system seized up and the whole

world was suddenly short of dollars. And

the Fed opened swap lines to a handful,

a small handful of major central banks

like Europe, Britain, Japan, Canada,

Switzerland to keep the system, the

global system from collapsing. And it

worked. The dollars went out, the crisis

passed, and the dollars were paid back.

The Fed did it again in 2020 when the

pandemic froze markets. Same playbook

and same small club of trusted

economies. Same outcome. The loans were

repaid and the created dollars vanished

back into nothing. And that is the

crucial detail. The system stayed honest

for one reason. The loans got paid back

and the new money disappeared again. No

permanent harm. The keyboard giveth and

when the loan matured, the keyboard

taketh away. But notice who was

borrowing. A tiny exclusive list of the

most stable and creditworthy economies

on Earth. But now, watch what's

happening to that list. Last year, the

club began to crack open, and Argentina,

a country with one of the most volatile

currencies on the planet and a long

history of default, was let in. Then,

over the last 2 months, the United Arab

Emirates came knocking. And in testimony

before the Senate, the Treasury

Secretary confirmed that a number of

Gulf and Asian allies have requested

swap lines of their own. This is my

thesis, and I want to be clear about it.

The list of countries borrowing

emergency dollars from the United States

is about to expand dramatically. And as

it does, the whole structure gets more

fragile, not less. And here's why. As

long as the borrowers are rock-solid

economies that pay the loans back, the

dollars vanish and the system stays

clean. But the longer this war drags on,

and the more countries run short of

dollars, the longer that list grows, and

the less credit-worthy the new members

are, and the less likely it becomes that

the loans truly get repaid. And what

happens then? The loans don't get

repaid, they get rolled. The deadline

gets pushed or extended, or a new loan

just replaces the old one. On paper, it

says repaid, but nothing was actually

repaid. The balance just moves into the

future. Now, Wall Street has a name for

this. They call it amend, extend, and

pretend. You amend the terms of the loan

to extend the payment deadline and

pretend that everything is fine. But the

moment the loans stop getting repaid,

the created dollars stop vanishing. They

pile up, and they never come back down.

And that is the answer to the people

asking where the limit is. There is no

clean wall the system slams into. There

is a slow tide, a pile of money conjured

from nothing, that simply keeps rising

with each rolled loan, forever.

And this is no longer theoretical. Now,

why is that my thesis? Because the

longer the Strait of Hormuz stays

closed, the longer the list of countries

that are going to run out of food or

fuel, and they'll have to raise cash to

buy what they need on the open market

because supply chains can't predictably

provide it any longer. The best way for

them to raise that cash is to sell US

Treasuries. But, too much selling of US

Treasuries crashes that market exactly

what the Fed is trying to avoid. So, how

do you convince a cash-strapped economy

not to sell their most liquid asset,

being US Treasuries, to raise the money

they need to buy food and fuel? Well,

you lend them the cash they need. You

offer them a swap line. And this is no

longer theoretical. The data this month

confirmed the cascade has already begun.

In March, Japan sold more US government

Treasuries than it had in 4 years. China

sold, too. So did a long list of others.

One country, Turkey, sold its American

bonds so aggressively that it ran out

and then had to start selling its gold.

This is what a cash squeeze looks like.

That is the forced selling I warned

about. It's here. And watch how

Washington is responding. In the past 2

months, the Treasury Secretary has twice

lifted sanctions on Russian oil in the

middle of a war to give desperate

countries somewhere else to buy fuel so

they don't have to sell their American

bonds to afford it. The US is also

draining its emergency oil reserve at

the fastest pace in history and shipping

it abroad. Same purpose. The entire

machine is now bent towards one job,

stop the world from selling America's

debt.

Which brings us to the deepest question

of all, and the one I most want you to

sit with. If the United States is

quietly bailing out the rest of the

world, keeping the bond market from

crashing and keeping everybody else's

lights on, then who actually loses? The

countries getting the dollars or the

dollar itself? And let me answer as

plainly as I can. The country that gets

the swap line is fine. They get their

dollars and they keep their lights on.

The bond market is fine. It does not

crash because there's no force selling

into it. Washington gets to look like

the hero.

So, who pays? The dollar pays. Every new

dollar created from nothing makes every

existing dollar worth a little less. And

that loss does not show up in a headline

or a bond auction. It shows up quietly

in your life, in the price of your

groceries, in your rent, in a paycheck

that buys a little bit less than it did

a year ago. And that is where the bill

goes. Not to the nation that got bailed

out, but to the person holding and

earning dollars, to the worker whose

wages never quite keep up. That is

inflation. And inflation is like a

secret but deadly weapon that

governments use all the time because

inflation happens over years. It's

invisible. Nobody can trace the price of

eggs back to a decision made at the

Federal Reserve 2 years earlier. So,

nobody gets blamed or the wrong person

does. The politician blames greedy

corporations or foreign countries or

immigration or the last administration.

The central bank's name is never on the

list of enemies. So, given a choice

between a crash in the bond market that

everybody sees and a government that

runs out of money or a slow erosion that

nobody can pin on them, they always

choose the erosion every single time.

Every central bank in history, when

forced to choose, makes the same call.

And some will tell you this is not a

flaw in the system. This is the system

working exactly as it's designed, a

machine for quietly moving wealth from

the people who hold dollars to the

people who hold assets. Now, I won't go

as far as to say that somebody sat in a

room and drew this plan up to rob you

specifically, but I will tell you this,

designed or not, that is precisely what

happens and almost no one notices while

it's happening. That is John's law

machine, 300 years later, running on a

keyboard instead of a printing press.

Now, a few of you will ask the only

question that actually matters in your

own life. You'll say, "Okay, great. What

do I do with this information?"

Now, I'm not going to tell you what to

buy or sell or what to do with your

investment portfolio, but I will tell

you how I think about it. If the bill

for all of this gets paid through a

slowly shrinking dollar, then the worst

place to be is sitting in cash and on

paper promises measured in that dollar.

And the best place to be is in the real

things, the scarce things, the things

that cannot be typed into existence on a

keyboard. Things like energy, hard

assets, gold, the boring physical stuff

that holds its value when the measuring

stick is shrinking. When France finally

woke up from John Law's dream, the

people who were wiped out were the ones

holding the paper. The people who came

through held something real, and that is

the whole lesson 300 years later, but

nothing has changed. So, the next time

you hear that another country got a swap

line, or that the bond market held, or

that the economic crisis was avoided, I

want you to remember what you know now.

The crisis was not avoided. It was just

moved. It was postponed. It's been

hidden, not in the bond market, but in

the dollar. It's been hidden in your

pocket. The money comes from nowhere,

but the bill goes to you.

Honest question, what am I missing? Let

me know in the comments. If you enjoy my

content, my name is Jay Martin, and this

is the Jay Martin Show. We drop videos

just like this every week right here on

the channel. If you enjoy it, do me a

favor, click like, hit subscribe, but

most importantly, share this video with

a friend, somebody that you know needs

to see it. For more on this topic, check

out one of these videos and I will see

you next week.

>> Beautiful.