Okay. Welcome back to Garys Economics.

Today we are going to explain mortgages.

Okay, I wanted to do a video on mortgages.

And the reason being is

I talk a lot in this video

about wealth inequality increasing.

That means wealth is being transferred

away from primarily

ordinary people, middle classes towards the very rich.

And there's a variety of ways

in which we see that happening.

So number one is lower rates of homeownership.

And we're really seeing that

especially for younger people.

Number two

is the lack of ability of people to accumulate

financial assets like stocks and shares.

So we primarily see that through pensions.

Older generations were much more able to accumulate

financial assets in pensions. And now they're not.

Number three is the loss of government wealth,

which means government

privatisations and increased government debt.

But those first three...

well, the first one is very visible.

The second one,

less pensions

and less government wealth, we often don't see them.

What we often

do see and one of the most visible ways

in which ordinary families are becoming poorer versus

the very rich is increased sizes of mortgages.

And I wanted to speak a little bit about that,

because I think a lot of people don't

see the way in which increased sizes of mortgages

is a transfer of wealth from

the middle class towards the super rich.

I think they kind of think

house prices going up, mortgages are bigger,

that's just the way it is.

And in this video I'm

going to explain

how increase to mortgage debt

is a manifestation of increased wealth inequality.

So the first thing I need to explain

in order to explain

this is something that I have spoken

about before on the channel.

We've got two videos, one called Debt and one called

What is Money?

If you want to understand these concepts better,

you can go and watch them afterwards.

The basic concept which you need to understand is

total mortgage debt is always zero.

This is the first you need to understand.

Total mortgage debt is always zero.

If you look at the amount of debt across

the whole society, mortgage debt is always zero.

And that might seem crazy.

You know,

so many people have mortgages,

how could it possibly add up to zero?

That is because

every debt has a creditor.

For everyone who is in debt,

there is somebody who is in credit.

Your money is always owed to somebody.

So what that means on a very simple level

is, the total amount of debt

always has to equal the total amount of credit

and the total amount of mortgage interest

that is

paid always has to equal the total

amount of mortgage interest

that is received by somebody.

So what that means is, it is not possible for

mortgage debt to

grow massively for the middle classes,

for ordinary families,

unless somebody is accumulating a huge amount of money.

Now this is an important concept,

and I think I'm going to sit on it for a little bit

and explain it a little bit more clearly,

because I think it's important

to understand

how debt works

and how money works in order to understand

how mortgages are working in our society.

We live in a debt based monetary system.

That's true whether you're in the UK,

the US, Europe, Australia, anywhere.

Our monetary system is a debt based monetary system.

What I mean by

that is

all money in our society

is created by the making of a loan.

So at the very first instance,

money is created by, in this country,

the Bank of England,

lending money to a commercial bank

such as Lloyds, Halifax, Barclays. So at that point

a bank borrows money from the Bank of England.

They get money and they also get debt.

The money and the debt are created at the same time.

And that's important

and it has to work like that

because the person who has the money

receives the interest,

and it is only possible to receive interest

if somebody is paying interest.

And if somebody is paying interest,

that means somebody has debt.

Now all money in our monetary system works like this.

It's not obvious that that is happening.

And I'll explain why, I’ll give you an example.

So say I borrow £100 from the bank.

I've got £100.

Then I use that £100 to pay Jack

for filming this video.

Jack then has the £100, but he doesn't have the debt.

I've got the debt.

So from the perspective of Jack, he just thinks, well,

I've got £100.

You know, there's no debt against this £100.

But if you look from the perspective

of the whole of society,

there has to be a debt balancing it.

And in this case, I'm the person with the debt.

So I pay interest to the bank that lent me the money.

And then the Bank of England pays interest to Jack. So

I really want to hammer this in.

Because you need to understand this.

All money is credit. All money is debt.

All money is credit.

All money is debt.

In fact,

I think you understand money better if you

you almost stop using the term money at all

and you just think about money as credit.

Every form of money is credit.

What that means is

it is money owed to you by someone,

and they pay you interest on that money.

So if you have money in Barclays Bank, that's credit.

Barclays owes you that money.

If you have a government bond that's credit

the government owes you that money.

And even if we think about cash,

if you pull a banknote out of your wallet,

you will see at the top it says here,

I promise to pay the bearer on demand the sum of £20.

I don't think you'll be able to get that,

but if you've got a £20 note.

So even this cash is

essentially a form of credit

the government offers to pay you money.

And if you give this money to a bank,

the government will pay interest on this cash.

That's why you can make money on cash.

So all money is credit, and all money is debt.

There is always somebody in debt

for every piece of money or credit anybody has.

And that has to be true.

Otherwise there would be nobody to pay the interest.

On the flip side, if anybody has debt,

there is always somebody with credit against it.

This is the way money works.

I always get some people get very angry

when I say this on the channel.

Unfortunately, it is true.

We live in a debt based monetary system.

Debt and credit always have to totally equal.

So what this means is

if mortgage debt is suddenly exploding

and getting much bigger,

somebody somewhere must be accumulating

an enormous amount of credit.

Somebody somewhere must be accumulating

an enormous amount of money.

And the reverse is also true.

If some group

somewhere is accumulating an enormous amount of money,

somebody must be going into debt.

It's the only... it's the only way it works.

These two things have to balance.

So if one group in society tries to accumulate money,

somebody else has to accumulate debt.

If one group in society starts to accumulate debt

somebody else has to accumulate money.

These debts and credits, this debt and money

that are the same thing,

there are two sides of the same coin.

One side cannot exist without the other.

So when you see mortgage debt increasing massively,

or for example,

when you see government debt increasing

massively during Covid, you should be asking yourself

who is accumulating money here?

And you should be understanding

it is only possible for those debts to increase

because a group is accumulating money.

And in fact, if a group accumulates money,

they are forcing somebody to go into debt.

So in a very real sense,

these increased mortgages, these increased debts

of ordinary families of the middle class,

they literally

are the accumulations of wealth of the rich.

It would not be possible

for your family, for your kids,

for your grandkids to go massively into debt

unless some group of people, which in this case is...

which in this case is the very rich

are accumulating money.

In fact, what you are seeing here

is a manifestation of what I talk about

in my Flows of Wealth video,

which is when you live in a very wealth,

unequal society, as increasingly we do.

What that means is a small group of people own

all of the

companies, they own all of the commercial property,

they own most of the properties.

And ordinary people

are continually having to pay them rents,

profits and interest.

If inequality

gets very large,

these flows of cash

from ordinary families to the rich become very large.

And they have to balance somehow.

And there's only really three ways

that those cash flows can be balanced.

One is ordinary

people work much more for the rich,

although in reality, if you try and do that,

it tends to just push wages down.

Two is ordinary families sell their assets to the rich,

and that is why we are seeing reduced

homeownership rates and reduced ability

to save in pensions.

But the third one is

the rich can lend that money back to the poor.

And that is what we're seeing when we see

mortgage sizes increase.

What you are seeing

there is the rich taking enormous

amounts of money from working families

and then lending it back.

Okay, but up till now, that's

all been very theoretical.

But I want to talk about how it works in practice.

So let's take a practical example,

which happened recently.

So I speak a lot on the channel

about how during Covid, governments

gave out an enormous amount of money.

And that money was largely,

in the end, accumulated by richer people.

If you want to understand how that worked,

you can go and watch our first video on the channel

How The Rich Got Rich From Covid 19.

When these rich people started to accumulate cash,

what do they do?

So rich people,

they tend to want to own a balanced portfolio.

What that means is

they want to own things like stocks and shares,

but they also want to own things like bonds,

because bonds pay a very regular interest

and they want to own things like gold.

They want to own property as well.

At first they'll go out and they'll...

they’ll buy the stuff that's easy to buy,

stocks and shares these kinds of things.

But eventually

they're going to want to diversify

and they're going to want to own property.

But the problem with property is it's very difficult

for super rich people

to buy enormous amounts of property.

So say,

if you if you're very rich

and you suddenly receive an income of £10 million,

you can quite easily buy £10 million of stocks.

You can do it really at the drop of a hat.

It's much harder to buy £10 million of property.

If you were to buy

£10 million of property, you would then have to manage

these properties.

You'd have to worry about tenants, worry about rent.

You have to worry about people's boilers breaking.

It's a hassle, basically.

So what do rich people do?

Well, let me give you an example.

If I had £500,000 cash and I wanted to buy a property,

I could go out and spend £500,000,

buy a flat in London.

£500,000 is kind of roughly

what a flat in London costs nowadays.

I could rent it to my sister and she could pay me

rent every month.

Alternatively, I could lend that money to my sister.

She could go out and buy the house herself,

and then she could pay me interest every month.

How are these two things different to me?

Well, the first thing I want to point out is,

what is the difference between those two examples

on the housing market and on house prices?

The answer is that is exactly no difference.

You know the housing market doesn't see whether it's me

or whether it's my sister,

whether I'm buying directly

or whether I'm lending to my sister.

All the housing market sees

is somebody’s coming in with £500,000

and buying a house.

So what that shows you is

whether I buy the house directly

or whether I lend the money out to buy the house.

In both cases, I drive the house price up.

The second thing is this question of

who actually owns the house.

So legally, technically, if

I lent the money to my sister,

my sister owns the house.

But what is her net worth after she buys it?

Well, she buys a flat that's worth £500,000.

She has debt of £500,000.

She's worth nothing.

So, essentially, I own the equity in the house.

So what I'm trying to say here...

Oh, we should also look at cash flows, right?

Given that interest rates now are about 5%,

the amount of rent you would pay if you rented it is

probably not that dissimilar to the amount of interest

she would pay on borrowing that money.

So really,

whichever way you cut it

and there are some differences.

Obviously if the house price goes up,

I prefer to own the house.

The house price goes down. I prefer to be the lender.

But really

the point I'm trying to make here

is lending money for mortgages

is essentially a way for the rich to buy houses

via the middle class,

and not have to worry about the house price movements,

and not have to worry about managements.

Mortgage lending

and the accumulation of credit by the rich

is the way in which rich people buy houses.

And if you are sitting on a house

with an enormous mortgage,

realistically you don't own that house.

The person who lent you the money owns that house.

And it's important to understand this

because as we go forward,

this increased size of mortgage

is going to be the primary way

in which we see the wealth of the middle class decline,

especially here in the UK.

In the UK,

ordinary people tend to hold their assets in property,

and there is

and there will be less direct owning of property

by ordinary families.

But what you will see increasingly, is

the government need to keep people

owning property politically.

The rich have this enormous amount of cash,

which is driving house prices up.

The way that the government can square

that circle is to encourage

rich people to lend that money.

And that money gets borrowed

eventually by ordinary people.

And I think this gets disguised somewhat

by the fact that this lending tends

to go through the banking system.

And I think a lot of people assume

that when mortgages go up,

what that means is the bank is accumulating credit.

But remember what I said

at the beginning of this video, that credit and debt

always equals in society.

So we can go and we can look at any individual

and we can say how much credit do you have?

How much money do you have versus how much do you have?

And you can take the credit and the money.

You can subtract off the debt

and we can work out your total money position.

We can do that to any individual in society,

any company in society.

When we add it up,

we know it's going to work out to zero.

If you look at the banks,

the banks do have an enormous amount of credit

because anyone who has a mortgage owes

money to the bank.

But the bank has also an enormous amount of debt.

And if you look at it,

you'll find that the debts of banks,

which is money they owe to depositors, money

they owe to lenders such as bondholders of the banks.

These debts, in most cases,

are pretty much the same as the total amount of credit

they lend out.

What this means is banks are essentially middlemen.

They borrow money from the rich,

they lend money to mortgages,

and the mortgage interest goes from you,

the mortgager, to the bank to the rich.

These people are essentially just middlemen in between.

So you need to understand this,

because governments

will see the only way to keep ordinary people in houses

is to encourage

high levels of lending, high levels of mortgages, to

do things

like reduce the checks on mortgage eligibility,

to encourage things like longer term

mortgages, to encourage things

like multi-generational mortgages.

And this is exactly

the transfer of wealth

from the middle class to the rich.

You are getting further and further into debt.

The rich are getting further and further into credit.

They are owning your house via your mortgage

and they are driving you into poverty.

Yeah, I should be clear.

I'm not saying don't take a mortgage.

I'm not saying don't buy a house.

Ordinary people,

especially ordinary young people, are

put in a situation

where you either have to pay rent to the rich,

or you have to pay interest to the rich.

There's no way of getting out of that

unless your parents are rich

and they can let you live in their house.

You can't really escape this system.

Over time, house prices tend to go up,

which means that financially,

you probably are better off

borrowing as opposed to renting.

But what this means is

your kids will have larger

and larger and larger mortgages.

They will have larger and larger amounts of debt.

You know, it's already normal for an ordinary person

that £500,000 of debt in a mortgage

that will become £1 million,

that will become £2 million.

And that means that your kids

and your grandkids will end up with mortgages

that they can never, ever, ever repay.

And that will be debt owed to the rich,

and it'll be interest paid to the rich.

And they can use that interest

to push house prices up even further and out

compete your kids for the assets that they need.

This will get worse and worse over time.

That is the nature of compound interest.

I want to be clear. I don't think banks are evil.

I don't think lenders are evil.

I don't think mortgages are evil.

But increased mortgages are debt to somebody.

They are debt to the rich, they will grow and grow.

This increased debt is the main way

in which we will see

ordinary families get poorer over time.

The only way to fight it is to rebalance power.

It's to increase tax on the rich.

It is to decrease taxes on ordinary families.

That's what we campaign for on this channel.

Please support us.

Tell your friends. Tell your mum. Good luck.