The Father Of Quantitative Easing - Richard Werner | PBD Podcast | Ep. 161
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PBD Podcast Episode 161. In this episode, Patrick Bet-David is joined by Tom Ellsworth and Richard Werner.
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About:
Richard Andreas Werner is a German banking and development economist who is a university professor at De Montfort University. He has proposed the "Quantity Theory of Credit", or "Quantity Theory of Disaggregated Credit", which disaggregates credit creation used for the real economy on the one hand, and financial transactions on the other hand.
Patrick Bet-David is the founder and CEO of Valuetainment Media. He is the author of the #1 Wall Street Journal bestseller Your Next Five Moves (Simon & Schuster) and a father of 2 boys and 2 girls. He currently resides in Ft. Lauderdale, Florida.
To reach the Valuetainment team you can email: booking@valuetainment.com
0:00 - Start
4:43 - Breaking down the Japanese economy
10:40 - Who holds banks accountable
48:30 - The truth about interest rates
57:42 - Bitcoin/Crypto/biggest concerns
1:14:47 - Bailing put the students
1:25:26 - QE & Communism
1:37:50 - What happens if we don’t do anything to the economy?
Episode number 161 with the one and only Richard Werner.
If you don't know who he is, let me give you a little bit of background.
You're going to want to listen to today's podcast.
But, you know, sometimes you bring a guest in where maybe you're not in the world where you follow a name like that.
You're like, yeah, I've never heard of him before.
In 2003, the World Economic Forum, Davos, selected him as a global leader for tomorrow.
He, in 1995, proposed a program or, you know, he labeled these two words.
It was called quantitative easing.
And it was written in Nikkei, which is the DAO of Japan, but also the largest financial newspaper in the world with 3 million subscribers talking about the way to address some of the challenges that's being faced is possibly quantitative easing, which later on in 2008, we ended up announcing November of 2008 in US that we're going to do quantitative easing.
And by 2009, we ended up, I don't know, $1.25 trillion of mortgage-backed securities, $200 billion in agency debt, and $300 billion in long-term treasury that was bought by the government to help us bail out.
And some say that was a good idea.
Some say it was a bad idea.
Today we're going to talk about him if he was happy about proposing that quantitative easing that U.S. took.
And then I asked him off camera, and he did a documentary a few years ago in regards to Japan's economy and what happened to Japan.
And some of the statistics that some of you that are listening to this, the reason why this is, we're having a lot of conversations right now with market crash.
There are those that say it's not going to happen.
It's just fear-mongering.
It's gaslighting.
You know, you guys are just, people are just talking about that stuff because it's a business model, fine.
And there are those who are sincerely concerned.
Japan from 1990 to 2003, over 200,000 companies filed bankruptcies.
The market dropped 80%.
And I want to know why.
And I want to know if there's any similarities with what happened then to what happened now.
So all the way from UK.
Richard Werner, thank you so much for being a guest on the podcast today.
Thank you very much.
Thanks for having me.
It's a great pleasure.
Yeah, so for some people that don't know your background, if you don't mind taking a moment and just kind of tell them some of the things you worked on so they know your background.
All right.
Well, I'm originally from Germany, did my first degree in the UK at the London School of Economics in Economics, doctorate from the University of Oxford in economics.
But I wanted to find out how the world really works.
I was a bit disillusioned with the academic economics they teach you at university.
Very abstract, mathematical, and not really very much connected to reality.
So I took the chance while being at Oxford in the early stages of my postgraduate and doctoral work to go to Japan and was there initially as an intern for Deutsche Bank and then as actually a government scholar at the University of Tokyo and also doing a part-time job at the Nomura Research Institute,
learning Japanese, doing a bit of Japanese archery and also trying to speak to as many people as possible to find out what's really happening and what are the mechanics and what's going on.
When this year again?
What's the year you did?
That was in 1990.
Okay.
The following year, I became the first Shimomura Fellow at the Japan Development Bank, now called the Development Bank of Japan, government bank.
Shimomura actually is an interesting character.
If we have time, we can return to him.
But he's very little known, and they certainly also didn't tell me much about him at the time.
Anyway, and so I spent, well, in total, in the end, I ended up in Japan for 12 years and developing in the early stages my first paper that was out in 1991.
The big puzzle then was where's all this Japanese money coming from?
Because in the 1980s, Japanese money had been flooding the world, buying up everything in the US, Hawaii, in Europe, you know, plants, factories being established all over the world.
Japanese money, yes, Manhattan, Pebbles Beach, Golf Course, the World Trade.
What was it in Manhattan?
One of the big buildings.
Was it the land under Rockefeller Center?
Exactly.
I remember that.
All sorts.
And so the intriguing thing was, where did all this money come from?
Because it was actually more money than any economic theory would tell you should be coming from Japan.
And also they weren't really earning much money on it.
So it was against the economic incentives.
And nobody could explain it.
And these standard models of capital flows didn't work.
And so I wanted to solve that puzzle.
And at the peak in 1987, Japanese long-term capital outflows were, I mean, it was a world record amount, unprecedented.
It was twice as large as the already world record current account surplus.
Where was the money coming from?
And so I researched that.
And the answer to that gave me an answer to many other things, including enabled me to warn later in 1991 that Japanese banks, which at that time were the biggest in the world and the top 20 banks in the world were all Japanese by assets, you know.
The top 20 banks in the world were all Japanese.
This is 1990, 1991.
Exactly.
This is right at the end of Reagan's two terms.
Yes, and at the end of this, you know, Japanese economic boom and also Japanese money flooding the world.
And people were talking about the Japanese century now beginning, which didn't quite happen.
But it took people a long time to realize this.
So at that time, when Japanese banks were top and the economy is growing at 7%, there was a bit of a glitch in the stock market.
Stock prices had fallen a bit, 20%, 25%, 30%, a bit more.
But then the Bank of Japan in 91 was lowering interest rates.
And most people thought, well, that's the signal.
Now buy Japanese stocks.
That's when I put out my first paper.
My conclusion was, don't buy Japanese stocks.
Japanese banks are likely to go bankrupt.
And Japan is likely to move into the biggest recession since the Great Depression.
And you should short Japanese stocks, which you also did at the time.
And they knew it, which is why they were buying hard assets all around the world, like real estate.
And the answer to the question, where did they get the money from, is actually they just created it out of nothing.
Because I uncovered at the time the process that actually drives all of our economies.
And of course, I found out in the Japanese case, economic growth is something you get only when there's also money creation going on.
But money creation for GDP, your economy, gross domestic product, that's how we measure the economy.
So money creation that is used for investment and so on in the economy, for transactions fueling GDP.
If that increases, you get more GDP, more nominal GDP.
Of course, if money creation goes into asset purchases, you get an asset bubble.
So I discovered this mechanism.
And what is the money creation?
Most people think it's the government that creates the money supply.
Actually, much later, I did a survey with my students in Frankfurt.
We asked over a thousand people, sort of, you know, in central Frankfurt, so probably above average educational levels.
And the question was, who do you think creates and allocates the majority of the money supply?
And then give them some options.
And of course, being in Frankfurt includes the Bundesbank, the German central bank, the ECB at that time as well, also in Frankfurt.
But the German government, all sorts of options.
And most, I mean, 84% responded, well, it's either the government or the central bank.
You know, yeah, one of those ECB, Bundesbank.
That's what 84% thought.
And of course, that's wrong.
Because the reality is governments don't create any money these days.
That task has been given away, delegated.
That power has been given away by the people from the people to somebody else.
Central banks, well, they do create some money, essentially the paper money, the cash, but that's usually around only 2% to 3% of the money supply.
So the question is, who creates the 97% of the money supply that is fueling the economy, asset markets, if you do it correctly, creating economic growth?
Well, it comes from the banks.
Banks create money.
When a bank gives out a loan, it's not using existing money.
It's not using deposits.
It is actually newly creating money out of nothing.
So a bank loan is always new money creation.
New purchasing power is given to the borrower and added to the money supply.
And this is new purchasing power that didn't exist before.
Now, once you understand that, then you start to see how things fit together.
Don't they have certain limitations on how much money they can lend based on reserves?
Yeah, lever limits, right?
Right?
It's 40 cents on a dollar.
I want to say insurance is 40 cents.
I don't know.
Banks obviously can leverage a ton more where the numbers, the expectation isn't as high, but they have a certain number they have to go off, right?
Well, it does depend.
And really, this point that you're raising is an important one.
What's the story with these bank reserves and reserve requirements?
And isn't that a way for the central bank to actually control it?
So ultimately, the central bank is really fine-tuning the money supply.
Well, it doesn't quite work that way.
And you can see this immediately when you look at many countries such as the UK, but also Australia, New Zealand.
In fact, many countries nowadays have zero reserve requirements.
So then you realize, well, okay, the reserve requires can't be the key story.
There's zero.
Many countries have zero reserve requirements.
Yes.
Any of these countries or any of the bigger countries in the world?
Yep, such as the UK.
UK is zero.
It's been zero for decades.
So who holds them accountable on the amount of money they can lend?
Yes.
Well, there is actually another variable that's been used to influence banks.
And actually, it's a good point.
Perhaps let's go quickly through this.
I mean, I'm a professor of banking, and I was astonished to find that the experts, the textbooks, the researchers weren't even sure how banks actually work.
And I found that there's three theories of banking, three theories of how banking works.
And when we talk about banking, the key function that distinguishes banks from others is actually in their lending operations.
And the key question there is, where does the money come from?
Actually, one of my books, Where Does Money Come From, has this title.
So where does the money come from that the banks use when they give out a loan?
And that's where the three theories of banking are different from each other.
Now, the currently dominant one, the mainstream theory that is pushed in the textbooks is, oh, banks, they're not very special.
You know, nothing to see here.
Move on.
There's nothing special about banks.
They're just financial intermediaries.
That's the financial intermediation theory of banking.
And they say banks lend out their deposits.
Right.
Savings on the left, loans on the right, interest in the middle.
Yes, yes, exactly.
And with that theory, what regulatory tool to control banks is being used is actually capital requirements.
So since the Basel Accords in the late 1980s, it's been capital that's been used mainly to get a handle on what banks are doing.
And the idea is that this will control and restrict banks' activity so we won't have banking crises.
Well, has that worked?
Have we had banking crises since 1988?
Tons of them.
In fact, dozens and dozens, if you look at the whole globe, we had...
For some that don't know, you worked with Bear Stearns for 14 years or 13 years, right?
Not that long.
But I was at Bear Stearns Asset Management, Senior Managing Director, Senior Portfolio Manager.
I was also at Jardine Fleming Securities before in Japan as chief economist.
So the reason why I say that is to say you're not just a professor, because sometimes, you know, professor is seen as, you know, the intellect who just stands up and talks and has never been in the operating room that's doing the work.
You've been in both places.
Precisely.
And in fact, that's the whole point, because I realized these academics and their theories are mostly wrong.
And we have to hold them to account.
And we have to actually ask the question, what is reality?
How do things really work?
So this theory that banks are just intermediaries, they gather deposits, they lend out those deposits, and we can use, therefore, bank capital requirements as a tool to keep the banks under control is plain wrong.
But I'll come to that.
There's a second theory, and that's an older one.
That was dominant from the 1930s to 1960s.
And that is the fractional reserve theory of banking.
Now, a lot of people have heard this, and I'm sure you have, because you mentioned the reserve requirement, and that's important in this theory.
This theory says when a bank lends money, it needs to have some excess reserves, and it will be using those for the new lending.
And if banks are all loaned up with their reserve requirements, they can't give out new loans.
So they first need to have some excess reserves.
That could be from the central bank helping them, but that's the mechanics.
Now, that theory was dominant until the 60s.
And it did have an interesting feature that got a lot of people interested in this, namely the so-called money multiplier.
So it says that each individual bank is just an intermediary.
They gather deposits and lend them out.
But in aggregate, as banks interact using this reserve requirement, somehow there is leverage money creation happening.
And therefore, there's a money multiplier there.
Now, that theory actually gave away the fact that there's something strange happening and banks create money.
And that was too much for the powers that be to handle.
That's why since the 60s they've pushed the financial intermediation theory which says, oh, there's nothing to see here at all.
Money creation?
Oh, no, no, it's not happening.
But there's a third theory, and that's the oldest.
And as it turns out, the one that's really true is the one that sounds initially slightly crazy, but it was dominant until the 1920s, 1930s.
And that one said that, oh, no, banks are not intermediaries.
They're not financial intermediaries.
Banks are creators of money.
If you get a loan, this is new money creation.
And the bank will create new money into existence.
That's the one that you're getting when you take out a loan.
We can talk about how this actually works and how they make it work.
But there's these three theories.
And that one has been suppressed quite a lot.
But you also find, actually, for each of the three theories, you find famous economists supporting them.
Keynes, John Maynard Keynes, the famous 20th century British economist, he actually supported all of them in sequence.
Now, he moved, first he supported when he was young the credit creation theory, that banks create money out of nothing.
Later he moved on to the fractional reserve theory and then even the financial intermediation theory.
So he moved away from the truth as it turns out.
Now I thought, well, this is ridiculous.
We've got three theories.
Which one is true?
What's the scientific thing to do?
Let's look at the data.
Let's look at the facts.
Let's do an empirical test.
So I conducted the first empirical tests of banking and how do banks actually work and which of the theories of banking is true, which was the first empirical test in the 5,000-year history of banking, if you want.
You can actually get this online if you just Google one paper is entitled, Can Banks Individually Create Money Out of Nothing?
Can banks create money out of nothing?
Individually create money out of nothing.
Yes.
Because in aggregate, you see that would be one of the theories, but actually individually out of nothing, that's the most radical one.
That's the credit creation.
Is that the one?
That's it.
That's it.
Exactly.
And secondly, the other paper is called Lost Century in Economics.
That one also has the three theories of banking has another empirical test.
These are two different types of empirical tests.
And that's the one.
And the conclusion is that the current dominant theory that banks are just financial intermediaries, that one is rejected by the empirical evidence.
And also the theory that the fractional reserve argument, money multiplier holes, has also rejected.
And the only one that is supported by the empirical evidence is the credit creation theory.
Banks create money out of nothing.
So it's now an empirically established fact.
But again, who holds them accountable, though?
So banks create money out of nothing.
Who holds them accountable?
Everybody has somebody to be held accountable to.
Who are they being held accountable to?
That's right.
Now, that's where it gets interesting.
And we can go back to Japan now.
Because once you realize, well, wow, this is how powerful banks are.
Because you see, their decision, who gets new money, who gets a loan, means somebody gets new money that didn't exist before.
And that will have an impact on the economy.
And the question is also, what is it going to be used for?
Which types of transactions?
Is it going to be for consumption?
And banks usually copy each other.
So if the banks lend a lot for consumption, then you will get inflation.
That's something we need to talk about later, because that's what we're currently getting.
And I've been warning since 2020 that we'll get significant inflation now, unlike, for example, after the 2008 crisis and the bailout measures then.
It's very different now.
This is inflationary.
If banks create money and it's used for purchases of ownership rights, such as property, real estate or financial assets, all these loans to do financial deals, that will push up asset prices because it's like creating new money.
Say, let's look at real estate property.
If banks give out a lot of property loans, real estate loans, it's like printing money and pumping it into the property market.
What's going to happen?
You don't need to be a rocket scientist to know, okay, they're pushing up asset prices.
And the third possibility, and there's only these three really, the third possibility, that's the redeeming feature of banks.
If banks give a loan, that means they create credit, they create money, and give it to a firm for productive business investment that implements new ideas, new technologies, increases productivity, that gives us economic growth without inflation.
That gives us job creation, that gives us really what we want without all the negatives, you know, without asset price inflation, without consumer price inflation, without banking crises.
Whereas the other type, lending for consumption and also bank credit for asset purchases, you know, you get the asset bubble.
And after the asset bubble, you will always get, and this is also what happened in Japan, of course, most dramatically, you'll get a bust asset bubble and then a bust banking system.
And when the banks shut down, they don't lend at all, then you also don't get economic growth because for growth, we need new money creation in the system.
And so I formalized that and tested that in the early 90s on Japan.
It's the general quantity theory or the quantity theory of credit, of disaggregated credit, where you recognize money creation, money is actually credit, bank credit.
That's how you measure the money supply correctly.
You know, central banks will always tell you, money supply, oh, we don't know what the money supply is.
We don't really know.
The textbooks also say that.
We don't know what money is.
Come on, got to be kidding me.
They just didn't want to tell you the true story.
It is bank credit.
We can measure it.
It can be identified quite clearly.
And the question is, what is this being used for?
And so if it's used for productive purposes, that's when you get job creation, growth, no inflation.
You get all the positive things and not the negative things, asset bubbles, banking crises, increased inequality and inflation, all these things.
That's when it's used for unproductive and therefore unsustainable purposes.
And of course, there's something we should talk about later as well.
How can you have a banking system that does the right things and therefore supports the economy best?
It's when you have many, many small banks, local banks, community banks.
And that explains why the US economy, despite the various bad government policies that have been going on for a long time, is still fundamentally quite strong.
The strength, the secret of the strength of the U.S. economy and also actually the German economy for the last 200 years and also the Japanese economy is because they've got hundreds, if not thousands, of small local community banks, banks that lend mainly to small firms, because the small firms mostly engage in productive business investment, which creates jobs, gives you growth without the bad stuff, without the inflation, without the asset bubbles and banking crises and so on.
But of course, you know, things can also go wrong, particularly again when the central banks intervene.
So back to your question.
So who's controlling these banks?
I mean, how does it work?
Well, what I found out in Japan, it was a bit of a detective story.
First I realized, wow, This House of Cards is going to come down now because they had all these property loans, real estate loans in the 80s pushing up land prices to stratospheric levels.
In central Tokyo, the Imperial Palace Garden, part of that is a public park.
And people calculated, okay, that's a central Tokyo public park.
Not that big, but, you know, okay.
What is the value if we use central Tokyo land prices?
And it turned out that the value was the same as the entire, all the property, real estate of the state of California, including Los Angeles, San Francisco, everything, which was crazy.
That was in 1989.
That was right up the answer.
I don't think the audience heard.
Say that one more time.
So the asset prices were pushed up.
The land price in Japan were pushed up through this mechanism.
Bank credit for land purchases and property transactions so much that at the peak, which was 1989, only a tiny speck of land in central Tokyo, namely the Imperial Palace Garden, they calculated the size, the footage.
Okay, it's this big.
What is the value using market prices of central Tokyo?
And it turned out it was the same value as the entire state of California, including all real estate.
This is not a long time ago.
This is 33 years ago.
Exactly.
And how big is that place?
The garden?
How big is it?
Oh, it's small.
I mean, it's not as big as Central Park in New York.
It's not as big as Central Park in New York.
Yeah.
like one third so so a part like some okay So while I'm watching the documentary, and you know, we've read a lot on Japan and how a lot of people would send their businessmen from here to Japan.
Hey, the Toyota Way, you know, look at Toyota, what they're doing, and a great job that Japan has done.
And they've done this and they've done that in capitalism and business.
And they have a very rich history of business.
They like building companies that have been around for 100 plus years.
I think they're the leading country in the world.
They got 50,000 businesses that have been around for 100 plus years.
And the oldest company in the world is based out of Japan.
That's something that we all know about.
So we typically, as entrepreneurs and businessmen, when you read, you're like, oh, Japan's got strong, they're long-term thinkers.
Their business plan is short-term business plan is 20 years.
In America, a short-term business plan is one year.
So we see, we study how they think for business.
But when I was looking at how they went from a democratic socialist model, they had their own Bernie Sanders or an AOC, which you'll talk about here in a minute.
And then they went from being nationalized to decentralized.
Then when it got decentralized, it took off and it did well.
Then they got back involved of wanting to be nationalized to get the bigger banks to get bigger by not doing smaller loans.
They got paid to do the bigger loans.
You know, let's not give away $20 million or $50 million.
Why don't we do $200 million, $100 million?
That's the bigger payday.
So brokers started buying two, three homes because they had that kind of money, these young brokers that are coming up.
And then all of a sudden, boom, they realize this is not working out from 1990 to 2003.
Market drops 80%.
200,000 companies file bankruptcy.
5 million people lose their jobs.
The leading cause of death in Japan and men ages 20 to 44 years old was suicide.
And that happens, right?
My concern is we in America have become oblivious to these things that we can study to make sure we don't repeat history that other countries have made.
And the case studies of these things are out there, Japan being one of them.
So for somebody that's watching this and is fully open to open-minded to want to hear your perspective, give us the similarities and concerns you may have.
Because later on, I want to get into inflation.
I want to get into gold.
I want to get into crypto.
I want to get into gas prices.
I want to get into all of that stuff that I want to talk about with the time that we have here together.
But what similarities are you seeing with the growth that Japan experienced and then the major fall that they had to what's going on right now in America?
Yes.
Well, first of all, it's exactly as you say.
We have these case studies out there.
And as it turns out, the number of very different cases is actually quite small.
Because most of the time we see the patterns repeat and repeat and repeat.
And so there are a lot of similarities.
So what are the things that made Japan strong?
It is indeed, as you said, the companies, of course, also, you know, education and so on.
But to have a large number of small firms is one of the key ingredients of success.
And this is true.
If you look at the whole world, two-thirds of employment is with small firms, small enterprises, even micro-businesses.
They account for the majority of employment everywhere.
That's true in the US, in Germany, Japan.
That's one thing.
And actually, it's an interesting comparison.
If you look, for example, at the UK today, they've been saying for the last, well, I don't know, five, ten years constantly, oh, we have a problem.
Our productivity is so low.
Why is productivity so low?
And it's because it's not because they don't have inventions, lots of patent, you know, registrations, lots of ideas, but somehow the business sector is not very productive and is not so successful in terms of exports.
And then you've got its comparison very close to the UK is Germany.
And it's very different.
Productivity is very high, very successful, strong exports.
Until 2009, German exports in absolute terms were larger than Chinese exports.
And of course, Germany is tiny compared to China by any measure.
So how is that possible?
And if you study that, you find that a big percentage of those exports are by small firms, family-owned businesses, local small firms, which are very important in the German economy, just like in the US.
So how do they manage to be so productive?
And the same story is true in Japan.
They've managed to be very, very productive.
And we can contrast this with the UK, where they're not very productive.
And the difference is actually in the banking sector.
Just to give you an example, say here's a small firm in Germany.
A new technology appears in their industry.
Some new mechanism, some new technology.
They didn't develop it, but they know it's out there.
If we don't get it, our firm is going to fall behind.
We're going to lose market share.
We've got to quickly upgrade.
Now, this costs money.
That's the main thing.
The small firms are not the ones usually that have the new patterns.
They don't have to.
They just need to implement the latest technology, but that costs money.
So in Germany, where we have thousands of small community banks and historically always had a very, very large number of community banks, thousands.
And the principle is they only lend locally.
So they know all their local small firms very well and have known them for years.
So the owner of the small company would go to the bank and say, look, we've got this new technology coming out in our market.
We need to get this.
We need money to upgrade.
Otherwise, we'll start losing market share.
The banker will already know the company.
They know that they're reliable.
Maybe check this out a little bit and they will quickly come to the conclusion.
Yeah, that's true.
They need the money.
We'll give it to them and get a decision on the same day, maybe the next day.
Because that's their main business.
And off they go.
they upgrade and they stay highly competitive.
There is actually a measure of such successful small firms.
I mean, there's a small firm definition, employee number, you know, less than 100 or something, and by capital and so on.
So just using the international small firm definition, a small firm that is globally successful has top market share, like a champion in the Olympics, gold, silver, bronze.
So, and they're known as hidden champions.
They've got top number one, two, or three market share in their niche.
But they're small firms, so we don't know the names.
So like hidden, you know, that small firms are fairly unknown by their names.
They're not household brands, right?
So these hidden champions are these globally successful small firms.
And studies have been done.
Okay, which country has most of these hidden champions in the world?
What do you think?
Which country has the most hidden champions in the world?
So small firms that are global leaders in their market.
Are you asking today?
Yes, today.
I mean, it has been true for decades.
It hasn't changed for a long time.
Germany?
I don't know.
Yes, that's the one.
Germany is number one by far.
Number two, and the other one that you'd think about is actually the US, because we know small firms are also very strong in the US.
And it is number two, but there's a huge gap.
So Germany's around 1,500 hidden champions.
The US has around 350.
Which is not bad, but there's a big gap.
Exactly.
So how is that possible?
It's because of the banking system.
Germany has so many small local community banks.
80% of all banks in Germany are not-for-profit local community banks, corporative banks, savings banks that lend only to these small firms locally.
That's how they're so strong.
And they constantly can upgrade.
And that's why job creation is so strong.
Now, Japan is a similar system.
And the US historically has had a similar system.
It's strongest in Germany because it remained unchanged in Germany for 200 years.
And none of these small community banks has ever gone bust.
None has ever needed a government bailout.
And they never changed the formula.
They only lend locally.
Once you start to change the formula, like in Spain, they had them.
And then they said, oh, no, they should be able to lend across Spain.
You know, you bust the system.
Now, in Japan, and that's what you mentioned earlier, they also changed the formula.
And the big banks started to dominate.
There's lots of bank mergers.
The banking system getting more concentrated.
And of course, this was part of the movement in the 1980s as banks were lending too much money, therefore creating too much money.
Now, I studied this mechanism.
And because the question is still, you know, how, you know, I still want to know that exactly who's.
What I want to know is I want to know, like, specific, what happened in Japan to have that massive of a crisis that they had, 80% in 13 years, 200,000 companies filed bankruptcy, five months.
What happened there?
And then what's, I know where you're going with the small banks right now, but for the audience that listening, before we get to just give the climate, here's what they did, this is what took place, here's what happened.
They need to know that history, and then we can get into some of it.
Because I want them to know exactly what happened then.
Exactly.
Well, I wanted to know that too, particularly once I predicted this huge bust, that Japanese banks will now go bankrupt and the whole Japanese economy is going to come to a halt.
I knew that from 1991 onwards.
I went back to Japan, actually, to the Bank of Japan.
I was visiting researcher at the central bank.
And my goal was to find out the answer to that question.
How could it ever?
At that time, most people didn't think it's going to get that bad, but I knew it's going to be really bad.
So the question is going to be so important.
How did we ever get here?
Who's responsible?
What's the mechanism?
And of course, the mechanism is the Excess bank credit in the 80s when they revved out bank lending for property, for real estate, creating this huge asset bubble, property bubble, which is unsustainable.
There's bank lending, therefore, money creation just for asset purchases.
It's a Ponzi scheme, like a pyramid scheme, snowball system.
While banks keep creating credit for new property purchases, everything will go up.
Everyone is happy, everyone makes money.
Even the tax man gets more revenues, everyone's happy.
But it's a game of musical chairs.
Once the music stops, once banks stop creating credit for these asset purchases, then asset prices don't rise anymore.
They start to fall.
Then the late-coming speculators will already not have profits.
They'll go bust.
You start to get non-performing loans more and more.
And then the banks will, of course, reduce bank credit further until you get a full-blown banking crisis because non-performing assets just need to reach 10% of banks' portfolios.
And the banks are bust because it's all supported by capital.
If you've got non-performing loans, it's a hole on the asset side of your balance sheet.
Where does the money come from?
You've got to take it from capital.
But bank capital is 10% or less.
So while in an asset bubble, you push up asset prices by 100, 200, 300, 400% from the peak, they only need to fall by 10% or a bit more than that, 15%.
And the banking system is bust.
That's why we have these recurring banking crises after the asset bubbles.
So the question is then: why and how was bank credit expanded so dramatically for land purchase and property transactions?
So I researched that.
And the standard tools that are researched by economists and researchers in this interest rates and central bank tools, reserve requirements, all sorts, they didn't yield any answers because nothing unusual was happening that could explain this dramatic development.
And I kept asking people and reading more, and I started to hear that people say, oh no, there's another tool.
Oh, but let's not talk about it.
What do you mean?
Another tool?
Oh, no, that's not official.
Well, I don't care.
You know, I want to find out.
Even as, oh, no, that's not an official tool.
It's a bit of a hidden tool.
All right, tell me more.
In Japan, you have to, if you really want to find out what's happening, they will always tell you, but you've got to go for dinner and there has to be a bit of sake.
And because it's off the record after six o'clock, they will tell you.
You're not supposed to quote it and attribute it to them, but they will tell you the full story.
And the full story is that, of course, there is a secret monetary policy tool that has been used by almost all central banks, but is not written about very much because central banks don't want people to look at it.
Academic economists, I mean, many of them, you know, get assignments with central banks or are ex-central bankers and they know what to write about it, what's good for your career and what not to write about, which is not good for your career.
And writing about this is considered slightly dangerous for your career.
So there's almost nothing at the time when I researched this on this topic.
And then I did my, again, empirical research.
I said, okay, I want to interview bankers that personally, as individuals, were in the late 1980s at a bank and they were at the big banks and they were dealing with the central bank concerning this tool.
And I want to interview central bankers that were implementing this tool vis-à-vis the banks.
And I want to hear their stories.
And actually, I recorded them.
I managed to do this because at the time I was visiting research at the Bank of Japan.
I had my name card, Bank of Japan.
And you go to the bank, you know, they will make time for you.
So I went to the banks and also to the central bankers, you know, meeting them for lunch and and so on, and and some um actually agreed yeah, I can record this, that's fine.
Now, starting with the banks actually, I started by initially asking people that were in the, in the branches of the banks um, loan officers, just ordinary loan officers.
I started with those and they told me the story already um well, the beginning of the story.
And so they were saying well, the 1980s was a crazy time.
I was giving loans left, right and center, property loans, real estate lending.
I mean, I was actually cold calling companies and owners of of companies or just um, you know people who I thought are wealthy enough.
I was cold calling them and saying look, we found a property for you.
We've done the calculation, we'll give you the money, please sign here.
Next year is going to go up by, you know 60, 70 percent.
You're going to make this much money.
Please sign here and you'll get the money, you'll get the property.
That's how aggressively the banks were pushing.
This is 80s yeah, this was second half of the 80s.
And these people would also say, and and while we did this, we were very concerned because I think we were creating an asset bubble.
Oh yeah, you surely were.
Well, so my question then was, okay, so why were you doing it?
You realize this is kind of risky.
Well, I was just doing as I was told.
Oh, by who were you told?
Well, our branch manager gave us loan increase quotas for every quarter, every three month period.
We had to increase lending by this much.
So we're just doing that, you know, fulfilling our quota.
So then I asked the branch managers I wanted to get introductions to branch managers that in the late 80s were managers, heads of branches of banks, and I interviewed those and the story was the same.
They were saying oh, late 80s, crazy time.
I did all this in 92 93, so it's still fairly fresh, you know, in people's minds.
And at the same time people didn't realize the enormity of what had happened yet.
Okay, so they don't know what's about to happen yet exactly.
It hadn't really hit the fan yet.
So and I asked those um, and they they would say oh, crazy time.
We were really, I was telling my my, my loan officers to increase lending dramatically property, we were really pushing up asset prices this way.
It was kind of risky.
I think we're creating a bubble.
So why did you do it?
Well, I was just doing as I was told.
Or by who?
Oh, by the.
The head office strategic planning department gave us the, the loan increase plans.
So then I interviewed people at the, the headquarters of the big banks, in the strategic planning department, and what I heard there was, oh, late 1980s, crazy time we were pushing out those loans left, right and center.
We're really pushing up asset prices by by telling our loan officers, you know, to increase lending this much.
I think we're creating a bubble.
It's kind of risky.
All right, okay.
So why did you do it?
Well, we're just doing what we're told by who?
Like the chairman of the bank?
No no, chairman in Japan Richard, you must understand, they're just figureheads, you know.
No no, they're not involved.
We, we do.
You know, we make the decisions for the bank.
So who told you to do this?
Well, the BANK OF Japan, of course, the Central BANK.
Oh yes, the Central BANK, because we were given credit loan, you know, increase quotas as part of the window guidance Central BANK informal, extra-legal monetary policy control tool.
Oh, that's very interesting.
Actually, some of the bankers already told me, oh yeah, and that was decided at the Central BANK in the planning department in the um actually the banking department where they deal with the banks and head of the banking department in the second half of the 80s was somebody called mr Fukui he by the way, this was in 92 when I asked these questions he will be governor of the BANK OF Japan, maybe in 10 years time or so.
Oh really, are you sure?
Yes, he's one of the princes.
What do you mean?
And they were using the English word.
I mean, these were interviews conducted in Japanese, but they would suddenly use the English word prince.
What do you mean?
He's a prince.
Oh, he's been selected to be governor of the BANK OF Japan um 20 years ago, you know, when he was in his, in his 30s of age.
He would be selected to 30 years later become governor, and there's a very small number of people who were selected this way.
They're known inside the BANK OF Japan and in the financial circles as the princes because of this unusual, very early selection.
So then I interviewed the central bankers um, and I managed to find some of those who were at the Central BANK in charge of meeting out those central bank loan growth quotas to the banks, and and they told me of their jobs and you know, because at that time it wasn't yet controversial they just freely told me what they're doing.
Well, we were telling the banks to increase their lending.
It was kind of risky.
We're really um asking them to increase their property lending quite a lot.
I guess we were creating an asset bubble there, weren't we?
Oh right, so why were we doing it?
Well, I was just doing what I was told.
By who?
By the head of the banking department, I see.
And from 1986 uh, to 1989, just when this huge asset bubble and this huge, you know massive, massively inflated property prices were created, it was somebody called mr Fukui, completely under the radar at the time.
Nobody in Japan would have really, outside the financial banking sector would have known him, but one of the princes who, as I wrote in my book, Princes OF THE YEN, would be future governor, and the book came out before he became governor.
A lot, a lot of people doubted that he will become governor, but of course he did become governor of the bank.
He was one of the princes.
So the bank?
So the answer is the BANK OF Japan using its um, very much hidden control tool of directly directing bank credit, because that is the key variable and therefore, of course, it does make sense.
You know, if you want to run the show, you directly tell the banks how much to lend, and they also did this by industrial sector to some extent, whenever they wanted to.
With this window guidance, they forced the banks to create this property bubble, which then had to completely blow up the banking system and create a situation where you then can have a 20-year recession if you want, because the banks will be paralyzed.
Now, the only way out and to to sort of re-liquefy the banks and get the economy going again is actually only if the central bank wants to.
And the central bank can get out of this very, very easily, at no cost to the taxpayer, if it wants to, and the BANK OF Japan chose not to do this.
That's detailed in the book Princes Of The Yen.
Quantumpublishers.com is actually where you can get it.
It's slightly hard to get, but there you'll get it very easily and and cheapest.
Um, The reason why they wanted this, of course, was the next question.
I mean, what's the next question I ask, what is that reason?
Why were the central bankers doing this?
And I found that, so Mr. Fukui, who was in charge of this window guidance in the 80s, and his boss, who was at the time deputy governor, Mr. Mieno, the earlier prince, in the 1990s, they both moved up.
Mr. Mino became governor of the central bank.
And Mr. Mino became, in the second half of the 90s, deputy governor.
And then during the 90s, they ensured that the Bank of Japan kept the bank credit tight.
And they did not solve this emerging banking crisis, but it was clearly festering, would get bigger and bigger.
And then in the 2000s, again, they didn't really solve the problem.
So we had, and therefore banks didn't create credit, new credit for business investment.
And therefore, there was a 20-year recession.
It was these two guys, Mieno and Fukui, and I studied this in detail and what they said.
And actually, it's certainly not a conspiracy because they very clearly said in their speeches, in the 90s, they said, well, we don't really want a recovery now because the recession is good for the economy because it forces structural change on the economy.
Do you agree with that?
No, I don't.
I think it's not right to have an artificial recession.
No, no, not artificial recession, but how about a – okay, so you said – let me take you back a little bit.
I got that.
So 1990, 1991, you are curious at this point on what's going on and you start investigating.
You went all the way down from the bankers all the way to the top of the Bank of Japan and you kind of realized, Fukui, what's going on?
Great.
So in 86, if you can, 30 seconds, if you can just kind of give us some perspective.
From 86 to 89, how much was value of real estate going up and what kind of money were these guys making?
Just for us to kind of get a visualization.
Well, property prices were rising by several hundred percent per year in well, in total.
So in this three, four year period.
You mean to tell me like a half a million dollar property could end up being a $2 million property?
Oh, yeah, of course.
You're serious.
Yes, yeah, yeah, yeah.
Okay, so, and this is happening in specifically three years.
Yeah, maybe four, if you add half a year on both ends.
So then how similar were interest rates?
Like, you know how we dropped the rates down to zero and we had 128-month economic expansion.
Oh my gosh, what a great time it was.
And then, you know, what were they doing with interest rates?
What did inflation look like?
What did gas prices look like?
What did unemployment look like?
Was it like a 1.2% unemployment?
Interest rates were really low.
What were the conditions there?
Unemployment has always been low in Japan.
That started to rise only from the second half of the 1990s when the recession started to get bad.
And then in the 2000s, you know, we hit peak unemployment, which by international standards is still low, but by Japanese standards was the highest ever in the post-war era.
Yes.
Inflation in the 80s was very low as well, because most money creation was going into asset prices.
And well, so the normal measure of inflation is consumer prices.
In fact, there was some deflation because the yen was rising, import prices were going down.
And so you didn't see what was happening.
And that's actually the reason why, as Japan, if we quickly move to capital flows briefly, Japan was creating all this money via the asset markets, inflating asset prices, and some of that spilled over as capital outflows.
That explains this flood of money.
And I solved that puzzle.
This flood of money from Japan was this bank credit creation in asset markets.
Now, normally you'd see that, and you say, well, they're just printing money and they're buying foreign assets.
The yen should go down.
But it's not an automatic mechanism.
Market players have to understand this and realize, oh, they're just printing the money.
That's why we're going to sell the yen.
And they start to sell the yen.
But this didn't happen.
They saw, oh, consumer price inflation, zero or negative.
Well, the yen, they're obviously not printing money and the yen should be strong.
And it stayed strong while they went around the world buying up assets everywhere.
Now, you mentioned interest rates.
Of course, that's an interesting question always, because any central bank watcher, I mean, in the mainstream, will focus on interest rates.
And central banks themselves will always try to get your attention focused on interest rates.
And it's a bit like the magician on stage when they're performing a trick.
And of course, they don't want you to see what really does the trick.
When they do that hand movement, they will distract your attention with the other hand.
They say, look here, this is happening.
Maybe have a little diversion story.
And that's what interest rates are.
But it's such a huge diversion.
It's worthwhile spending a few moments on this.
Because actually, famously, there's so many different schools in economics, right?
Different schools of thought, different economies.
They all have different ideas.
They always argue and squabble.
Well, there's one idea that all the different schools of economic thought of the last 200 years in English language economics agree on.
Namely, they all say if you lower rates, this is good for the economy.
Growth will go up.
If you raise interest rates, this will slow the economy.
You can go back to David Ricardo, classical economists, Alfred Marshall, neoclassical economics.
Keynes certainly said that.
Monetarists said that.
You know, all sorts of new classical economics, neo-Vixelian, all the schools of thought agree on this point.
And central bankers for the last 30 years have been saying this on a daily basis.
Watch interest rates, because when we raise them, it's going to slow things.
If we lower them, it's going to stimulate.
They say this constantly.
Now, because this is repeated so many times, we all assume, quite reasonably, that, of course, this has been empirically tested and checked hundreds of times, maybe thousands of times.
So we don't need to check this, right?
Well, how many empirical studies exist that demonstrate this relationship?
Five.
Zero.
Wow.
There isn't one because I did the first empirical check of this.
It's very hard to publish this.
Nobody, you know, the economists don't want you to see this.
But what I found is it's not true.
It's just not true.
There is no empirical evidence for this.
So the officials show what we're doing today in the States when we're increasing rates to prevent from inflation taking place, that makes zero sense to do.
It's not going to help it.
It's not going to help if the real cause of inflation, which is not interest rate, is still in place.
And that is money creation for unproductive purposes for consumption.
If they keep doing that, and you can do that at higher rates, you can still push out the credit creation in the banking system.
You will get accelerating inflation.
And in fact, then you'll find that the high interest rates make certain things more expensive, mortgages and whatever, rents will start to move up.
It's not going to end inflation if the credit creation continues.
So I did, but I wanted to show this, because you can always have scenarios where maybe you think it could work or not.
So it's an empirical question.
And I did the first empirical test using data on the US, the UK, Germany, and Japan for half a century.
And it was open-ended.
My question was simply, what actually does the data tell us is the relationship between interest rates?
And we tried together with a colleague, econometrician.
And we asked, well, looking at three different types of interest rates, short rates, long-term 10-year government bond yields, and so on.
What is the relationship between interest rates and economic growth?
The official story is, is a negative correlation.
Lower rates, higher growth.
Higher rates, lower growth.
So negative inverse relationship and causation is supposed to be from interest rates to growth.
There's supposed to be some causation there.
What we found was diametrically opposed to this in both dimensions.
The correlation is actually positive.
So higher rates and higher growth always go hand in hand.
Lower rates and lower growth always go hand in hand.
And the causation, statistical causation that you can test for, runs from growth to interest rates.
Interest rates follow growth.
And therefore, they can't be the cause.
And that tells you that can't be the best monetary policy tool at all.
That paper is published.
You can also look it up.
That's called it's also open source, reconsidering monetary policy.
The only journal that will publish this is a fairly good journal still, but it was Ecological Economics.
It's in there, peer-reviewed journal.
An empirical examination of the relationship between interest rates and GDP growth.
We've got another paper coming out now, which looks at real growth, industrial production for 19 countries.
It's the same conclusions.
The reality is interest rates work differently and they're not really the cause of what's happening.
But central banks love to talk about it because that way they distract your attention.
You focus on something that's not key and they can then use that to make sure you don't really understand what they're doing.
Can I challenge you?
Please do.
So here's my challenge.
I'd like you to, for the next questions I ask, speak to us as if people don't have an MBA in finance.
I want you to explain to the average person that's listening to this, because I know sometimes when I'm around intellects or professors or teachers, they speak in that language and they never know how to take the hat off of that language.
Who was a professor that we had that flew out here that we had on the podcast a couple months ago?
Extremely smart man.
Yeah, Berlinski, who I'm like, can you speak at the level of the average person?
So I'm going to ask you some questions.
And I really because I've watched, I know how much value there is in seeing this.
And today in the U.S., a lot of people were sitting there.
Historically, we've been told when a market crash happens or too much of dollars being printed, gold prices go up.
Nothing happened.
So the gold crusaders were like, oh, you're going to see what's going to happen with gold and gold's going to go to 5,000.
Okay.
All right.
Sounds good.
Why?
If you look at the numbers with gold, anytime we've done this, gold's gone up.
It's time for the gold.
We printed 40% American money.
We printed a lot of time.
We've never done this before.
Okay, fine.
Sounds good.
The crypto community says, well, let me tell you, decentralized.
People have been asking for decentralized.
We have it here, right?
And it's decentralized.
And the reality of crypto is the fact that, you know, it's different than everything else where recently a paper came out.
If you can zoom in here, showing that Bitcoin has been trading with the stock market this year.
So, for the Bitcoin community that's pitching the fact that if the stock market goes down, Bitcoin goes up or whatever, you know, it's not the same.
I'm sorry, if you go a little lower to show the data, go a little lower if you show the data right there.
Go a little lower to the second paragraph.
The data right there shows of the 98 trading days we've had so far, Bitcoin and SP 500 index have moved in the same exact direction, 73 of them while moving in the opposite only 25 times.
So, is there anything unique about Bitcoin compared to the stock market, or is Bitcoin just now a digital gold?
It's just another stock, right?
So, okay, so we were thinking Bitcoin, if the market was going to tank and we're going to print money, Bitcoin's going to go to 100,000, 200,000.
Nope, it's at 29,000 today.
Okay, well, if we increase interest rates and Powell's going to increase interest rates, that means inflation is not going to go up and it's going to stay at around 4% or 5%.
Nope, it's at 8.5%, and we keep increasing interest rates.
And yeah, but if we increase interest rates, you know, real estate value is going to take a hit and blah, blah, blah.
But it's okay.
So out of all the things that we're looking at today, what are the main data we ought to look at to say, listen, we know the definition of a recession is two quarters in a row, right?
It's the numbers two quarters in a row.
When COVID happened and the market dropped, what, 50% or 40% in the span of a month, it came back up.
That's not a recession.
That's a market crash.
Okay.
It's got to be two quarters in a row.
Fine, we know that.
What are some of the most concerning data that you see in America today that you're sitting there saying things are not going to be good?
And if it's something where you are saying things are not going to be good, how bad are things going to be in the U.S. economy the next 12, 24, 36, 60 months?
Okay, well, there's a good comparison, and that is 2008.
And then, you know, what happened since 2020.
In 2008, we had essentially a bubble collapsing that was more similar to the Japanese situation.
So the banks were creating a lot of credit that was used for property, but also various financial instruments.
So you had your asset price surge.
And once bank credit suddenly tightened, which happened very dramatically in September 2008, and the banking system is actually shut down, then the asset bubble collapses.
And we saw that.
Now, at that time, the Federal Reserve acted very quickly.
In fact, internationally, among central banks, it was the one that reacted fastest and also in the most proactive way.
But the key thing is bank credit shrank after that for a year.
Bank credit just did not expand.
And that's the biggest part.
That's the money supply.
The Federal Reserve stepped in, it created a lot of credit on its own.
A lot of people said that this would create inflation now and the dollar would collapse because look what the Fed is doing.
I was one of the few who were saying, no, the dollar is not going to collapse and there's not going to be inflation.
Why?
Because the Fed is a small cog and the big wheel is the banking system and they're shrinking.
So the total money supply was actually not expanding despite the Fed being hyperactive.
Now the Fed did implement one of my policy recommendations from the true quantitative easing that I'd formulated in 1995, which is, and my true definition of true quantitative easing, of course, is to increase bank credit creation for the real economy.
How do you do that?
And there's some steps that the central bank can take to do this.
And one is to help the banks restore the problems on their balance sheet, which they didn't do in Japan for a long time.
And I told them many times in many publications.
And my book, Princes of the Yen, was the number one bestseller in Japan ahead of Harry Potter for six weeks.
I was on the Japanese media very regularly, 2001, 2002, 2003.
I was invited by Parliament.
I was advisory to various government committees.
But the central bank never did this, whereas the Fed.
And you see, at the time in the 1990s, when it's proposing this first, from 95 onwards, Ben Bernanke, as academic, was participating in these debates about Japan.
And he, as head of the Fed, did implement one of my key recommendations.
And that was the only central bank in the world that did that in 2008.
It was the Fed.
Namely, he took away these non-performing assets from the banks, from the big banks, very quickly by simply, and this was my recommendation, by simply having the central bank buy them up.
Of course, not at market value, at something, you know.
20 cents on a dollar or higher?
Much higher.
Okay.
Maybe not at a hundred supply.
Why though?
Why?
Stressed assets, right?
So why, though?
Because the banks are special.
They create the money supply and you need them if you want an economic recovery.
And while they're impaired, you could have a 20-year recession.
That's what Japan demonstrated, right?
And so my recommendation was the central bank should go and buy these non-performing assets, let's say at face value, at 100.
They're only worth 20, but the central bank goes out and buys them at 100.
What happens?
The banks, of course, are immediately restored.
I mean, they are more liquid than ever.
Their balance sheets are super strong.
They can now go out and create credit, do their normal business.
And of course, you should impose some conditions.
You guys stop the bank lending for the asset purchases, give out loans for productive businesses.
They didn't do it, though.
Well, that's what one could impose.
The Fed didn't do that.
No.
But to help banks increase lending again, if you get rid of the non-performing assets, you buy them up, that solves the problem.
There's no tax money involved, and there's no cost to society.
And you might say, well, hang on, there could be two types of costs.
The central bank now has the non-performing assets.
That's a cost, isn't it?
Yeah, but the central bank is a special institution.
First of all, it doesn't have to mark the market.
So you won't see this.
Also, central banks are always profitable because they create the money supply or at the core of the money supply process, let's say.
So, I mean, if you want central banks to be profitable, I mean, you should arrest all the central banks for insider trading.
Of course, the central bank will always be profitable.
So it's not a problem that the central bank is purchasing.
But actually, they're not even having any losses.
Why?
If the central bank buys these non-performing assets from the banks at 100, they're worth only 20.
It is possible to book this in the accounts of the central bank as a loss of 80.
But that wouldn't reflect reality.
And accounts should reflect reality as much as possible.
What is reality?
What is the true gain or loss that the central bank has?
It doesn't have a loss.
It has a gain of 20.
It owns something worth 20.
And what did it pay?
Well, the cost of funding is zero to the central bank.
So that's why you don't have to worry about that.
It's a gain to the central bank to buy anything.
But where's the money from central bank coming from?
You could say the central bank creates it.
Now, that would raise the red flag for you to say, well, hang on, there's another cost, inflation.
And that's where we come full circle.
No, this does not create inflation because inflation can be created when the central bank and the banking system create and inject money into the non-bank economy.
And they do this for unproductive purposes.
They do this too much.
You get inflation or asset inflation, right?
But this is not what happens here.
What happens is a booking exercise within the banking system.
The central bank and the banks are together, the banking system.
And all we're saying is, oh, the central bank is now going to use its powers to clean up the balance sheets of the banks.
That in itself doesn't inject any money into the non-bank economy and therefore cannot lead to inflation.
There's not a single dollar that is injected into the non-bank sector as a result of this.
And that's what happened.
So bank credit recovered after a year, 4%, 5%, 6% bank credit growth.
America was the first country to recover after the 2008 crisis.
So you think it was the right move?
It was the right move if, well, I mean, I would have done it even better because they should have imposed certain rules.
We know when you bail out the banks, you have a lot of power and they could have used this to say, okay, from now on, we're going to do this properly.
They didn't do that.
Secondly, they could have not favored the big banks so much.
They really favored the big banks.
And really, you should have done this.
Do you believe in socialism?
No, I don't.
But it's a crisis.
You see, I believe in the principle of moral hazard.
That is, who is responsible for this crisis?
It's the central bank.
They should pay up and end it.
It shouldn't have happened in the first place.
Yeah, but central banks is getting money the more they put into it.
My dollar goes lower.
So you're hurting me.
No, if you're doing that.
It's not creating inflation.
And you're delaying a time bomb.
No, you're getting rid of this.
But as a capitalist, I'm a capitalist.
I'm a full-blown capitalist.
I believe in capitalism.
Well, then we must abolish central banks.
And I would agree.
We don't need central banks.
But now that we have them and they're creating asset bubbles.
Yeah, but you're feeding the machine, though.
You're making it, you're delaying the time bomb for the next generation to pay the price.
You see, compared Japan and the U.S. in Japan, the central bank didn't do this.
So then we had a 20-year recession.
All these suicides you mentioned, that's the result of the central bank.
Let me ask you a question.
You see, because the central bank power is increased when they have boom-busted government.
I have a hard time with that.
And this abolishes the boom-bust cycle.
Can I push you back?
Can you push me back?
Just push me back what I'm saying.
So, okay, so let's keep creating fake success so the current people of power don't take a lot of hit because God forbid the two big to fail companies take a big hit.
Let's protect those guys.
And then you get the average guy that's sitting there saying, well, you definitely believe in capitalism, but it's capitalism for the poor and socialism for the rich, right?
Let's protect the bigger.
And when a person gives me that argument, I sit down and I said, you're partially right because we keep doing this.
So, okay, so today, let's go to today.
But I'm not saying, you know, what we should do is this is not success.
You know, the central banks have created the asset bubbles.
They should then use the tools that they have to quickly delete their mistakes.
That's what I'm saying.
That's affecting me and my generation.
But it's not, you see.
If the central bank does it this way, there's no money creation.
There's no inflation.
In fact, that's the big difference to today, 2020.
So let me compare that.
There's no money creation.
Where does the money go to the bank?
If they're going to buy a $20 stock rather than pennies on a dollar, they made out $100.
Where do they get the money to give it to the bank?
There's no money injected as a result of this bailout, say that the Fed through its maiden lane 1, 2, 3, purchasing the non-performing assets of the banks.
That in itself doesn't inject a penny into the non-bank economy because it's cleaning up the banking sector.
It's an intra-bank transaction, you see, inside the banking system between the Fed and the banks.
Therefore, that in itself doesn't create money.
And the proof is in the pudding, you know.
There was no inflation.
As I was saying, most people were saying, oh, the Fed balance is a bank.
But that's not proof in the pudding, though.
I disagree.
Because just because there's no inflation right off the bat, the first year, second year, third, that doesn't mean it is not coming.
That doesn't mean winter is coming.
All you did is you delayed winter for 10 to 15 years.
And then severe winter is coming.
Then let me give you two more examples where this was done.
And then I think you get the point that it is a limited measure for emergency situations, but it doesn't actually create inflation.
Therefore, once you are in the situation, you should do it.
But of course, you should also see why did the central banks get us here in the first place and avoid that.
So the two examples are Japan, 1945.
What was the state of the banking sector?
Well, it was actually worse than in 1989, 1990, when the bubble burst.
It was worse.
In 1990, the non-performing assets in the banking system were 25% of the bank balance sheets, which is a lot.
That is a lot.
Anything more than 10% is enough to bankrupt the banks.
But in 1945, the non-performing assets in the Japanese banking system were like 100% because they had two types of assets.
They had greater East Asian prosperity bonds, war bonds forced on the banks of a country that just lost the Second World War.
And secondly, forced lending to the munitions industry of munitions companies that were also bust, many now not even in Japan anymore because Manchuria, Korea, Taiwan are not part of Japan anymore after 45.
So 100% non-performing assets.
Fine.
Now the Bank of Japan decided, okay, we've just been defeated, devastated.
The cities have been eradicated.
A lot of incendiary bombs, flat earth here where there used to be a city.
It's not a good moment to have a banking crisis.
Let's not have a banking crisis.
They always have this option.
So what are we going to do?
We will purchase the non-performing assets from the banks at face value.
It was actually a bit less than face value, but these are details.
And that's what they did.
And so there was, so after the 1945, much bigger banking crisis.
How long was the recession?
How long was the period in which banks did not lend to businesses anymore?
Only one year.
Then they refed up lending, the economy recovered, you're doing well.
In the 1990s, when the non-performing asset problem in the banking system was much smaller, how long did it take?
20 years.
Why?
Because they still had their non-performing assets.
The banks continued to be risk averse.
They reduced, they did not increase bank lending.
The reason for the 20-year recession is very simply, look at bank credit to the economy, negative for 20 years.
That's why there was no recovery.
It's because they constantly had these non-performing assets, this obstacle on their balance sheet.
Second example, August 1914.
The United Kingdom of Great Britain and Ireland declared war on Germany, Austrian-Hungarian Empire and the Ottoman Empire.
The First World War had begun.
Now the city of London bankers came to the government and the Treasury and the Bank of England said, oh, by the way, we're bankrupt now.
Why?
What happened?
Well, London already was the world's financial center.
So all the paper, securities traded between Germany, Austria, Istanbul and so on was going through London.
A lot of it was going through London.
They were holding what then was considered irredeemable enemy paper and it was too much.
Value zero because of the war.
They were bust.
What did the Bank of England do?
Hmm, we've just declared war.
The First World War is beginning.
Let's not have a banking crisis.
So they purchased the non-performing asset at face value.
And by the way, you can actually even make a profit with standard accounting out of this as well.
So what I'm saying is that When you are in such a bad situation created by the central banks, and we should hold them to account why we're here, but then they do have responsibility to get us out of this in the quickest possible way without a long recession, without suicides by business people as we saw in Japan because of the recession, because the banks don't lend to them.
So more and more firms go bust.
That can be avoided.
And it is this obstacle called non-performing assets on the bank balance sheets.
And you can just take them away at zero cost to the taxpayer.
I don't, I okay, so let me let me ask you a question.
So say the economy at the time where in March of 2009, we put $1.25 trillion into the market, quantitative easing.
How much was in the market at that time?
How much money was circulating at that time?
Give me a number, give or take.
Whatever.
Let's make a number up.
10 trillion?
12 trillion?
I look at it on a flow basis because credit creation is actually a flow concept.
And whereas, you know, you're asking now about the stock of money, but really the question is how much new money is created.
Now, that in 2008 was actually negative because banks didn't create credit at the end of 2008.
And the central bank, yes, put in trillions, but in total, that was still less than the shrinkage of the money that's going to be.
But that doesn't matter.
It doesn't matter.
All I'm asking is I'm asking if we had 10 trillion and we put 1.25 trillion plus another 200 plus another 300 billion.
So add that to 1.75 trillion.
And if we have 10 trillion, that's 17.5% my money devalued.
But it's not, but it's not.
$100 became $83.
You have to understand the transaction I'm saying is a transaction to shift assets from A to B inside the banking system.
And that does not create any money in the economy.
It does not increase the money supply at all.
At all.
And that's why.
So where did the money show up?
What are the two trillions?
It doesn't show up anywhere.
Because you're immediately retiring it.
You're putting it into these non-performing assets.
It's the central bank saying, let's delete these non-performing assets.
Was there money given from central bank to banks?
That's right.
Was there money that was in the middle of the market?
Okay, so where did that money that the central bank?
It was retired by writing off those non-performing assets.
The central bank is just writing.
But that's still money, though.
The money went.
No, it didn't.
It just solved the bookkeeping problem.
What am I missing here, Tom?
Well, you have to understand that.
I think what you need, excuse me, I think the point we're missing here, and you need to help us.
And when Pat says, let's take the hat off the complexity for the average person.
So right now I have a toxic asset.
I'm having to pay interest because that's levered.
So that has a cost to me.
I have, correct?
I'm collecting from you a payment on this trillion-dollar asset.
All of a sudden, you can't make the payment anymore.
Well, I've got a little tiny payment over here that I was paying to the central bank on the original on the original dollars.
So what you're saying is the central bank knows that you're going to stop paying me.
So now this is toxic, a non-performing asset, right?
Not performing anymore, just stuck.
So they'll say, I will take it off your balance sheet so you no longer have to pay the interest on the underlying capital, and I'll just take and own this.
A minute later, that doesn't show up on my balance sheet.
And a minute later, I don't have to make the cost payment.
And I'm not getting the revenue payment from you.
So therefore, it's off my balance sheet.
Is that what you're talking about?
Yes, that's right.
Okay, so for a consumer, help us understand this because we're talking in the United States about student loans.
And you're the student.
And they're saying, well, the students aren't going to be able to pay these.
So bullshit.
Let me tell you why this is pissing me off.
Here's why I'm getting upset with this.
I'm not agreeing.
I'm saying I'm getting that, but let me tell you what is happening.
the one and a half trillion dollars of student debt that we have right now, whatever the numbers.
I think it's a trillion dollars of credit card debt, a trillion and a half of student loan debt.
So I'm here defending not to bail out student loan debt, right?
Because you're weakening the economy if you keep bailing the average person out, right?
I'm defending not doing that because I'm defending capitalism.
But at the same freaking time at the top, you guys are doing deals to get in your essentially bailing out the freaking big banks.
How do you expect people to not get pissed off?
That's certainly true.
And so now, so now we're about to go into the next phase today that we're sitting there.
Oh, it's okay.
We keep printing money.
Oh, it's okay.
Oh, it's okay.
The government keeps getting bigger and bigger and bigger.
It's okay.
Don't worry about it.
Doesn't affect you.
Don't worry about it.
It doesn't affect you.
And these banks are doing buyback stocks.
And then you're essentially the people that are the small business owners that are sitting there saying, no, man, go out there, make your money.
You can do it on your own.
You can be a small business owner.
The market is not unfair.
The market is not this.
And the average person is sitting there saying, but Pat, do me, dude, okay, fine.
I want to agree with you.
But at the same time, look at these suckers getting bailed out.
How about me?
The money never flowed to me.
I remember during that time, real legitimate small business owners in 08, 09, after these guys got bailed out, like, okay, great.
Money's going to flow out.
Do you know how difficult it was to get a $200,000 loan from Chase?
Chase was saying, no, no, What do you mean, no?
Bank owner, no, You just got this money to bail people out.
So I can see how this produces the level of division to get the average person to say, here's why I'm pissed off.
And by the way, they have a point.
And the people that are trying to do it the right way, saying, listen, man, I don't have that kind of access to capital.
So to say, yeah, don't worry about it.
The money doesn't do anything.
It's not what you think it is.
But is it being printed?
Yeah, but it's not the way you think it is.
It's a distressed asset.
And they're buying 20 out of 100 bucks.
So you're not really going to feel it.
I am going to feel it.
It's $2 trillion.
No, but it's not.
So if people like you who are the intellectuals that have gone and done this research, this is not my world.
This is your world.
This is why we have, this is why I'm asking you the questions.
You're not asking me the questions, right?
You're the expert.
I'm the guy that's trying to learn from you.
My concern is then the market now is going to have a correction.
Let me give you what I think is going to happen and then give me your argument on what's the right solution now.
Just before then, just to point out where we, you know, that we actually do agree, because you see, there were two problems with this bailout in 2008, 2009 by the Fed.
And one was that it was mainly the big banks that were being bailed out.
And that is unfair and that should be criticized.
And that is true capitalism.
And also.
That's where SIFI came from.
And you see, but the central bank did that because most central banks actually have another agenda, which is not a good one.
And that is to concentrate the banking system.
And they use that to help the big guys.
Whereas the small banks, they were not helped and they had to merge.
And so in the last 25 years, 5,000 banks have disappeared in the U.S. and 5,000 banks have disappeared in the Eurozone under the ECB.
And that's the agenda.
They want to have fewer and fewer and bigger and bigger banks.
And that's not bad.
That's not good.
We should found constantly new small local community banks, which is something I'm doing actually and working on that.
We have to hold against this.
So that is one problem of the way they did it.
And I wouldn't have done it the way they did.
That's the old Rothschild-Bilderberg argument, right?
That they're going to concentrate everything at the top.
Am I correct?
Well, I'm just looking at the data, and the data says in the Eurozone, since the ECB arrived, 5,000 banks have disappeared.
And it's not the big ones.
It is the small ones.
They're being forced.
It's not good.
But you know what I'm asking about, right?
There's a longstanding thing.
This is World Economic Forum, Davos, is that there are shadow organizations that date back to the Rothschilds and the Bilderbergs, which is aimed toward ultimate elimination of country boundaries and consolidation of the banking system under a single global parent.
Actually, you can go back even further.
Read the Communist Manifesto by Karl Marx of 1800 and something.
And it says Marx came after this part.
Right, but it says what they want is one bank, which is the central bank.
And so get rid of all these banks.
Unfortunately, that very much seems to be the agenda, at least of the ECB.
But the second point I wanted to say where we also very much agree is the way it was done since 2020 has been very different and even worse.
There we have all the bad sides of this intervention.
Namely, in 2020, what they did is they forced the banks to increase lending at a time when bank credit was already growing by 6%, 7% and the Fed expanded.
So we had massive, massive money creation in the economy and therefore inflation.
And that's the big difference, 2008, 2009.
So I was forecasting since May 2020, we will get significant.
So can I ask you about that?
Can I ask you about that?
And that hurts the small guys in particular and ordinary people.
Yeah, I'm sorry to interrupt you.
It's just sometimes it's hard to follow you because you don't appear to breathe, right?
Take a breath between sentences.
So in 2020 and during COVID, we basically just printed money and gave it to the common man.
So what you're saying is what I'm listening to is once upon a time, value of money was tied to gold.
Gold had a supply.
Supply was finite.
And there was a value on that gold.
So the value of the finite gold supply determined the value of the money or therefore the money supply at the time.
Over time, gold became property and asset bubbles associated.
And the banks were actually lending against that at some percentage, right?
And so the money supply would go exponentially as banks were making quotas and issuing loans.
So I can see how there is also always an asset tie.
And then all of a sudden we come to COVID and we print a whole bunch of money in the United States and we give it to the common man.
You're saying that's inflationary because it wasn't tied to an asset.
And that in 2008, the problem was that the mark to market on the asset created an insolvent point for the bank because now the asset flipped.
Am I correct?
Well, we don't need the asset.
So in my analysis, the asset here is not the key.
Money creation, banks can always create money and always could in the past, even in the gold standard.
I'm not declaring.
I was following you.
I want to make sure I understood that.
Are you seeing a question or are you verifying what he's saying?
I'm verifying what you're saying, but I'm asking a question.
The question is, therefore, because the banks are on quotas to make loans against things and for businesses, you said that.
They said, what's going on?
Well, you know, it's the central banker, right?
You know, Fuki, you know, Fukui, you know, is out there telling us we have a quota and we have to make loans.
That, you said, was not inflationary.
What was inflationary was printing a bunch of money and giving it to the common man?
That's my question.
In Japan, it was creating asset inflation, which is bad.
And, you know, that...
Do you see my question, Pat?
I'm saying that.
What you're saying is, yeah, quantitative easing is good if not...
If I would have done it, I would have done it differently, right?
Okay.
So what's the difference between that statement you're making versus the socialists and the communists that say, yeah, I know everybody says communism doesn't work and socialists doesn't work.
But if I would have done it, I would have done it differently.
No, it doesn't work.
Quantitative easing doesn't work.
This system doesn't work what they're doing because again, today we're going to enter.
My prediction is I've been in the financial sector for 21 years now.
I got started day before 9-11 with Morgan Stanley.
I'm Sirius 7663126 Life and Health.
This has been my world for the last 21 years since I got out of the military.
Okay.
Am I a Ray Dalio?
Of course not.
Am I an economist?
No.
Am I the guy that went to MIT or any of the universities?
Oxford?
No, I don't have a four-year degree, nor do I have a two-year degree.
I'm the regular guy that's concerned and asks questions, who works his ass off and has got big dreams and is curious.
That's where I'm at.
So I know my prediction, I may be wrong, shit's about to hit the fan.
July 1st, it's officially going to be announced.
My prediction is recession.
Okay.
Q3, it'll be two quarters in a row.
It'll be announced, is recession.
I don't think they can do anything about it at this point.
They'll announce recession July 7th, July 14th, but in the first week or second week of July, they're going to announce recession.
Okay.
So now they announce it.
So the Powells of the world and a Janet Yellens of the world who are sitting here saying on October 29th when she did this interview with Wolf Blitzer, I don't know if you've seen this before.
If you can just play the video, I just want people to see the 20 seconds of it.
So she's supposed to be the person who's the former Fed chair.
She's supposed to be the Secretary of Treasury.
She's supposed to be the person that we all trust and she's brilliant and she's a genius and she's this.
October 29th, Wolf Blitzer, rewind it a little bit and pause it so they can hear it.
On October 29th, she says when she's asked about inflation, she downplays it.
So watch this here for 30 seconds.
And yesterday she says, whoops, sorry.
Tom, go back again because Tom spoke so we missed it.
Go back a little bit.
Clearly, Madam Secretary, this inflation problem in the U.S. is not temporary, right?
Well, I still would say it's temporary, although I don't mean just a matter of a month or two.
Although monthly inflation rates are substantial, have substantially declined from where they were just four or five months.
Madam Secretary, to downplay this inflation risk.
Did that contribute to the problems we're all seeing right now?
Well, look, I think I was wrong then about inflation would take.
As I mentioned, there have been a lot of people who are going to be able to do it.
You can pause this if people want to see this.
They can see the rest of it.
So, okay, so we go into recession, say, first or second week of July.
Then they're going to come out and they're going to say, oh, my God, you know, it's a recession.
And then they're going to come out with numbers.
And what we have to do is Powell's going to come out with Yellen and Biden and all these guys.
Quantitative easing is what we have to be mixed.
So then we go and print another $3 trillion for it.
It's not a big deal.
No one's going to see it.
So this keeps getting delayed and delayed and delayed and delayed because a guy like you, whom I want to believe, you know this is not going to work long term.
Temporarily, it could work.
But for us to prevent inflation, I guess where I'm trying to get to is if we leave it alone and we don't do any quantitative easing, there's going to be many guys like you that are going to say do quantitative easing.
I'm not saying that.
I'm not saying what you do quantitative.
In fact, I've said the opposite.
Since May 2020, I've been warning they are creating inflation.
They need to stop.
They are creating inflation.
They need to stop.
It's idea 95, though.
Yeah, but it's for different purposes.
It's when you have a bust banking system after an asset bubble and you've deflated and now bank credit is shrinking.
In 2020, bank credit was growing already already in February, January, February, by 6%.
You don't need this, QE.
The QE was the wrong policy.
And I was very clear on that.
Say we don't do QV.
Say we don't do QV.
Say we don't do any QV.
Okay.
We naturally, let us say, you said a quote in your documentary that was, there's not a country who's changed its social or economic system without a crisis.
This is in your documentary, which I recommend everybody watching, right?
Okay, sounds good.
So, okay, I agree.
I actually agree fully with that statement.
But I also think that we've been extremely spoiled.
It's like kids who all of a sudden get into a rich family and they've been in it for a while.
They don't know what hard work is.
They don't know what's going on.
And then daddy or mommy loses all the money and they have to go through the pain.
And you can't just bandaid, put a band-aid on it, right?
Kid, listen, son, we lost everything.
Yes, you have to go get a job.
You have to go make money.
I no longer have that $100,000 that I'm paying you every year as a allowance.
You no longer have that kind of luxury that you've been living for the last 15 years.
But dad, what are you talking about?
You know, what am I going to do?
My girl's going to leave me.
She's going to leave you, bro.
And you're going to lose a lot of friends you party with.
They get all the tab at the bar.
You're right.
You're going to lose that car of yours that you go on a date with all the time that you look hot and you look good.
You ain't going to be as cool as you've been the last 10 years.
The coolness you've had the last 10 years has been fake, son.
Son, you're actually not cool.
You have to go earn the coolness is what you got to earn.
America has millions of people that have been cool the last 10 years that should not be cool.
They need to lose it.
So for me, if we don't do nothing, they're going to propose another quantitative easing.
They're going to propose it.
If we do nothing, okay?
No quantitative easing.
And we have to go through this without anything being put into the system from Federal Reserve, without anything being put in the system and bailing out the next bank that's going to be going down.
What happens if we do nothing and how long will that last?
Well, if already since 2020 they had done nothing, it would have been much better.
Because what they created, and these were government decisions and central bank decisions, is they, on the one side, restricted the supply artificially, which was unnecessary, and at the same time created money and gave it into people's hands.
And the Federal Reserve forced the banks to increase credit by purchasing assets from the non-bank sector.
So that puts a lot of money into people's hands.
So you restrict supply, you increase demand, you create a lot of money, you will get inflation.
That was very clear from May 2020 onwards.
And I warned about this and I said this is wrong.
And unfortunately, we are still on that path.
And it could now move towards accelerating inflation.
We have a period of stagflation that's being created artificially.
And that's the key thing.
That means, however, we can at any time end this and have proper policies.
And the proper policies are when banks mainly and ideally only create credit for productive purposes.
And that is when banks, small banks lend to small businesses for business investment, increase productivity, implement new technologies.
That should be increased.
And everything else should be reduced.
If people want a mortgage, they should get it from a non-bank lender.
And banks should not be allowed to invest in that.
So that's how you make sure only existing money is used for asset transactions.
Then you don't get asset inflation.
And you make sure small businesses have enough money by helping the small local community banks.
America has a lot of those.
They need to be supported by the central bank, not the big banks.
Now, actually, we can compare now to China, I think, which is an interesting example because there used to be, you know, essentially Stalinist type, Soviet Union-type economy in the 60s and then early 70s.
Then in 1978, Deng Xiaoping came to power.
And you know what he did?
What was the biggest thing he did that created this success of the Chinese economy?
He traveled to Japan.
He went going to these evening, these dinners with the Japanese, drinking a lot of sake and Mu Thai.
And he got the truth out of them about window guidance and that you can use this window guidance tool for good if you make sure banks, first of all, that there's a lot of banks, a lot of small banks, and the banks create credit mainly for business investment.
And so when he came back and he rose to power after 1978 in China, what he did is he created a lot of banks.
He started with this Soviet system of one bank, mono bank, the central bank.
But then he created thousands of banks, small banks, community banks, savings banks, regional banks, provincial banks, a few national champions as well.
But now China has almost 5,000 banks, almost as many as the US.
And that created these 40 years of double-digit economic growth, multiplying national income.
And that is very capitalist.
To have small local banks, that generates a capitalist economy.
Why?
Because you see, the money supply creation process actually belongs to all of us.
It's our privilege.
And if a central institution is making these decisions, that's never good.
It needs to be decentralized.
And the best way is to have small local banks.
You can watch what they're doing.
You can attend their meetings.
You can hold them to account.
If they suddenly support a strange project, locals can influence them because they're small.
You just flip, though.
You just flipped.
In 20 minutes, you just flipped.
Because 20 minutes ago, you said what they did was right because the money wasn't felt or seen.
In that situation where we already have the wrong system, which is so centralized.
But I'm against the centralized system.
I'm telling you, I mean, I see you.
Well, you said this massive government intervention rather than the economy.
Rather, the economist says that the more relevant comparison is what happened from March 2020 is much more akin to certainly centrally planned Stalinist Soviet Union types restrictions in what scenarios.
What we have is massive innovation by the government in the economy by introducing restriction, including price controls, on so many parts of the economy as we've never seen before in the UK, right?
We're seeing that also in the US.
Well, exactly.
And that's what I'm criticizing.
I know you are, but you're also saying what they did with 2008 was the right move.
And you said if you would have done it differently, you would have done it slightly differently.
But you're still supporting the central bank getting more powerful.
But you see, there's a sequence.
They had created this asset bubble with their centralized bad system and bad policies.
Once you have created this, it's like you're falling over your bike.
Should I not help you so you don't crash?
Yes, I'll help you quickly.
And you're saying, oh, you shouldn't intervene and shouldn't help me.
Well, look, I know you can quickly solve this problem.
But the bigger story is we need to shift away from the centralization that the central planners love.
That's not good.
And we need to decentralize.
And the best way to do this is establish local community banks, new small banks.
Then we get the centralized, the decentralized system.
And that's what made even China successful.
They moved from the Soviet system.
I would have done it in a way of let all the however many companies you got.
Like I remember when AIG was going through, AIG had a fleet of planes that they're sitting on.
AIG wants planes?
Yes, go look it up.
AIG had a fleet of planes that the new CEOs like Bob Ben Moshe, what are we doing?
What business are we in?
And Bob Ben Moshe comes in and cleans house and does what he does, the $183 billion and the $21 billion of interest he pays back within three to five years, seven years, whatever the timeline was.
But if some of these companies that are bigger companies, I'm sitting there saying, do you specialize in planes?
No, sell them.
Do you specialize in this?
No, so what is your core competency?
What are you doing?
Here's, if you want any kind of help, I'm okay with your hundreds big company, small companies within a big company.
I'm okay with you selling these to these other people, but you can't sit around doing this because you don't know how to operate companies.
I want more companies than a few people that are controlling the entire marketplace, which is what happens every time we bail out.
They end up buying some of these other companies and get more and more powerful.
But going back to it, say we don't do anything today in the U.S. 40% of the dollar has been printed, whatever, the last two years, right, that they keep talking about.
Say we don't do nothing.
How bad are things going to be and how long would it last?
Well, does that include not to increase the money supply any further, which would be good?
I mean, we should not increase it any further.
Zero, nothing else.
We vote on nothing.
We say we're going through this.
We're going to buckle down and go through this.
How long will it last and how ugly will it be?
It will depend on the strength of the community banks, the local banks.
And they are quite strong in the U.S.
So I think the U.S. will weather this because small firms will still receive backing from their community banks.
Whereas in more centralized economies where you also don't have these many small local banks, things would look much worse.
I think that is actually a good policy at this stage.
Of course, we should have done that already in 2020.
They took the wrong policies.
They created too much money for unproductive purposes.
All my work shows that that is wrong.
You should only create money for productive purposes.
And when I say create means inject into the economy, the bailout I mentioned before doesn't inject new money, you see.
That's why under specific circumstances, it can help you have a healthy banking system, but it should then also have the right incentives to lend for productive purposes.
So say they don't do anything.
So I'm going to go back to my question.
In 2020, you said they shouldn't have done it.
They shouldn't have done lockdowns because if you forced you to lock down, then you have to pay me.
So they should have not done the lockdown so you don't have to give the money because when you did the lockdown, you hurt the restaurants.
But today, say we somehow, Democrats and Republicans, both agree on one thing.
I don't want any more bailouts.
Okay.
And we drive the hell out of this messaging.
We want no more bailouts to these bigger companies.
We don't do nothing.
We're going to unite and we're going to go through this time.
And these bigger guys that have been spoiled for the longest time and they've not been working, let them go through the pain to see what we went through to come to the top.
Because you don't know what it is to go through it, right?
If we don't do nothing, how ugly will it be?
How long will it last?
And when I ask ugly, here's what I'm asking.
Jimmy Carter era, you know the interest rates where they hit, right?
16, 17, 18%.
It's pretty ugly what happened during that time, right?
And then Reagan came in and he did what he did.
Why did this happen?
I studied the 70s and most people think, oh, it was an external shock, a supply shock.
Even like today, there was a war and then energy price shock.
That's the reason.
No, it's not true.
Already over one year before, because oil prices only started to rise from late 73, 1973.
But I can already see in the data of the central banks and bank credit creation, a massive expansion from 1971, 72, all of them.
And that's what created that inflation.
They then were looking desperately for a cover so that the focus is not on them.
But they created this inflation.
It was only sold and marketed to people as, oh, it's the oil price shock.
It's energy.
It's the Middle East, blah, blah.
It's not true.
It was the central banks.
That is a fact.
And they should take responsibility for that.
Unfortunately, they're doing the same thing again now.
The inflation is again created by monetary policy.
So you say central banks.
Yes.
Okay.
But say we didn't do any creative policies during that time.
How long would have those high interest rates lasted?
And how different would the economy have been?
You see, the high interest rates, what I showed with my earlier study, reconsidering monetary policy, is interest rates follow growth and they follow nominal growth.
So the money creation was revved up a lot in 1971.
So one and a half, two years later, you get nominal GDP rising and huge inflation.
And that's why interest rates had to go up.
Interest rates always follow growth.
That's what's happening now.
It's all predictable.
Your concern is not interest rates.
You're not worried about interest rates.
It will be painful for people, clearly, with mortgages that are, you know, floating mortgages and so on.
And that's something one should look at as policymakers.
But in general, just looking at the macroeconomy and giving a quick answer, it's clear that what's happening now is the result of these bad decisions from 2020.
We should stop making bad decisions.
Doing nothing would be better.
That would be a better policy than what they're likely to do, which is create even more money and accelerate the inflation, which could be very disastrous.
So it is time to change policy, but also then to actually question this.
Why do we have such a system where these wrong policies are taken?
What can be done?
And we should look at the strengths of the U.S. economy.
And one of the great strengths is that there's thousands of small local banks.
We need to help them and make sure that they won't be squeezed out because the big guys want to kill them.
That's what's happening in Europe.
Of course.
But they are what's needed to make sure that your local small firm will survive.
They need that supply because even a tiny local community bank will create money when it lends.
That's like your own local money creation.
It should be done for productive purposes by giving it to a business small firm that is doing something productive.
Then it's fair and transparent.
How many meetings are being had right now, Tom, you think, with these big bank guys that funded the campaigns of different candidates that are saying, oh, okay, you don't want to do anything?
Oh, okay.
No problem.
Yeah, don't do anything.
See what we're going to do when it comes down to re-election time.
How much do you think the policymakers are afraid of not bailing out the bigger guys because the bigger guys have bottom through campaign support and different kinds of things?
Or do you think that does not play a role?
I think candidates are scared to death of big banks.
I think both sides of the aisle are scared to death.
To Patrick's question, can you follow up one part that you haven't addressed yet?
So he was saying, how bad could it be?
How do we get out?
How long will it last?
Can you go to how long will it last?
Because you've said how bad could it be?
It could be reasonably bad on interest rates and the average guy with the mortgage.
And then how do you get out?
We need strong local community banks helping local businesses.
That helps job creation, local growth, local economy, taking the pain off the people who just got hit with their credit card interest and their mortgage interest, right?
Main Street, as we call it.
How long do you think this will take?
That was the third part of Pat's question.
I'd love your take on that.
Yes.
Well, if the scenario is that we are not increasing the money supply further for the big guys and we don't have this inflationary policy anymore, then it's just going to be one, one and a half years for the previous money creation to feed through and then stop.
And then inflation will stop because inflation needs constant expansion in money creation.
And you'd think, this is so obvious, that when you have inflation, they would actually stop the money creation.
But the history shows, no, they keep going and they keep creating more money, sadly.
But we're talking about the scenario where you do nothing and you don't increase the money supply.
Well, then also the inflation would stop after one and a half years.
Okay, so you're saying, this is just a clarification, that, okay, guys, it'll take about a year and a half.
Let your strong local banks support local economies.
That $1.4 trillion was like food poisoning, and you got to get it through the body.
You got to go throw up, you got to go to the bathroom, you got to get it through it.
But once it's through, largely all these things are going to turn to nominal and inflation on things, everything from milk to gasoline, which hurts the average person, is going to moderate.
Is that what you're saying?
And it's about a year and a half?
That's right.
And historically speaking, Pat, what's very interesting, if you look back even the great recessions, not depressions, but great recessions have usually only been about 18 months.
And so you're saying that the historical norms, that the peak impact of the recession, because remember, there's a lot that happens into it.
But when we all admit, yeah, crap, it's a recession, 18 months.
That's what you're saying.
18 months, yes, yeah.
Okay.
That is the lead time.
And that's also why in 2020, I was forecasting significant inflation to hit us one and a half years later, which is, you know, which has been this year.
It also goes with the thought that says all recessions are three years.
From the moment you know something's happening and you don't admit it politically, Pat, you know, like, you know, milk is going up, gas is going up, but you don't admit it.
No, it'll be like Janet yelling a year and a half ago, just speaking to TV.
Oh, yeah, maybe a month or so, two months.
So from that moment to when we really see growth again, it's a 36-month cycle.
And what we really have in the United States is we have a year of denial by the political folks that are speaking to voters.
So there's a year of denial, then there's 18 months of, oh, my God, this is real.
And then we have evidence of growth.
Yeah.
And of course, the problem has been lack of accountability.
You know, if you take wrong, which is the year of there is accountability at the voting booth, which is why you start with a year of denial.
But not by this, you know, there's no accountability of the central planners.
The ECB has been saying, oh, there's no inflation.
It's transitory.
You know, they're all speaking the same, reading of the same script.
Well, they need to be held accountable.
You know, all the top layer needs to go because they… Richard, when's the last time you watch your own documentary?
Prince of the Yen, the whole one.
Well, I've watched bits and pieces because people make me aware of this part and that part.
But the whole one, that goes a few years back.
You haven't watched it yet?
The whole watch.
How many years?
How many years has it been?
The whole one, well, maybe, I don't know, three years or something.
Who owns that documentary?
It's, I think it's open source.
Oh, it's open source.
Yeah, you can see it on YouTube.
So there's nobody that owns, owns the documentary.
There wasn't a media company or network that did that that was.
Well, it was done by two guys.
What are they called?
Something with politely.
You'll see it.
It does mention it, you know, Michael Hovert and Michael Oswald.
Are these guys you're in contact with or no?
Yes.
Okay.
I'd be interested in buying the documentary.
If they would like to speak, I'd like to speak to you about buying the documentary because I think it reveals a lot of what's going on in America today.
I thought it was very well done.
And I think people were a little bit oblivious the last few years.
And we've been too overly confident about how much money has been made, thinking we are that smart and we're that brilliant of moneymakers.
But I think a pruning process is coming.
I think some people are going to be exposed the next 18 to 24 months.
And I wouldn't mind some of these bigger guys that keep getting bailed out.
And I wouldn't mind it being some of them to go through it because it is unfair for the guys that are trying to do it the right way who are constantly being categorized in the same level of these other bankers that get bailed out and these small businesses that are doing the work.
Because when crisis comes, the founder, the CEO and the C-suites, during the next 18 to 24 months, if you thought you were working a lot the last three years, you were not working the last three years.
Matter of fact, I'm willing to bet that most people had the least, hardest working season the last two to three years, okay?
Most people, because it's been as hard as it may sound, oh my God, it was so hard.
We've not really worked that hard.
We've actually gone lazier.
If we were to look at it, again, I may be wrong.
No, I'm with you.
100%.
But I think the next two years, because you heard what Elon Musk said yesterday.
Elon Musk said, look, if you're going to pretend that you're working 40 hours from home, come pretend at the office that you're working from home.
And if you're not coming to the office anymore, you're fired.
Go to another company, right?
That process is coming very soon, and we're going to know who was actually working the last two years and who wasn't.
This is an email that we send out, right?
I don't know.
Did you see the email he sent out or no?
I saw a comment on it.
So, yeah.
Yeah, he says, don't go pretend somewhere else where you're working.
No, here it is.
He says, anyone who wishes to do remote work must be in the office for a minimum of 40 hours per week or depart Tesla.
Parenthesis, and I mean minimum.
Yeah, this is less than we ask of factory workers.
Okay, so meaning if the frontline guys are working out art, you ought to as well.
If there are particularly exceptional contributors for whom this is impossible, I will review and approve those exceptions directly.
Moreover, the office must be a main Tesla office, not a remote branch office unrelated to job duties.
For example, being responsible for Fremont factory-human relations, but having your office to be in another state.
So I think the next two years, people are going to be actually working.
The last couple of years, we haven't been working, folks.
If you're listening to this, if you claim you're a worker, and if you're not a worker, you're going to pay price next two years.
But if you are a worker, the market's going to definitely recognize you the next couple of years because winter is coming.
Sometimes we have to be able to sit down and have serious conversations with our family, with our friends, with our peers, with our kids, with our business partners to say, okay, guys, buckle down.
We're going to see what these guys are going to be doing.
The reality of it is we're not presidents.
We're not governors.
We're not policymakers.
We've got to kind of do what we're doing right now.
And hopefully we'll get through the season together.
But appreciate you for coming out.
I thought this was great.
I want you to know I'm truly interested in that documentary.
So if you do speak to the two guys, I'd love to have that conversation with them.
If I can just say a few more things, some of the things you raised, which I haven't responded to gold.
I like gold.
I think it's a good hedge against inflation.
I think the price is totally artificially suppressed.
Central banks are the biggest owners of gold.
And there's a lot of ways with paper gold, you can manipulate the price.
And I think what we're seeing is simply it's artificially low, which in a way is a great opportunity.
You know, people that have been slow, they can still get into gold.
Crypto, well, I think that's part of the, at least part of the central planners' goals to establish central bank digital currencies, which we also should work against because that's going to be very dangerous.
It's a control tool, not a currency.
So you're against digital currencies.
You're against central bank digital currencies.
Central bank digital currencies.
I'm very much for decentralization.
And if people want a decentralized system, they want to start their own.
I'm all for it.
So I'm actually backing Valhalla Network, Ollie Studd heading it, one of my associates.
And we're setting up a system, a decentralized, autonomous organization, and where people can vote.
And also we're using this to set up community banks.
So everything needs to be decentralized.
We need to hold against this current very strong pressure by the central planners.
They're using all these crises to centralize everything.
And that is really bad.
That is, you know, that is communism.
What we're seeing is increased Sovietization of one thing after another.
And we have to hold against it.
And I think decentralization is the key, setting up local community banks.
We're doing this with the Valhalla network as well.
So in that sense, I like, you know, cryptocurrencies when they're decentralized, and that's a key part of their strategy.
We'll see what's going to happen there.
I'm just curious when this recession hits and we go through the next six, 12, 18 months.
I'm so watching all the triggers to see how crypto is going to respond, how gold is going to respond.
Is gold actually going to have its vertical move here?
Were they going to go to 2,500?
I think gold is cheap right now, if you ask me.
Yeah, same as me.
You agree with that?
I totally agree.
I think gold is cheap right now.
And I think if the crypto community stays strong and they vote more people into office, whether it's Congress, Senate, Governor, whatever it is, they get more pro-crypto people that go into office.
I think they'll be able to hold off long term.
But if we go through the central bank, Federal Reserve bailing out all these other guys, I hope that doesn't happen.
But I feel a messaging coming that we have to do this or else in the next two, three, four, five, six months.
I don't know.
I hope I'm wrong.
But anyways, we're going to put the link below to the documentary.
We're going to put the link below for your book and how to find you.
Couple those papers that he mentioned, if you can put that in the description as well, I think you mentioned four or five papers for those that want to read it.
Just put in the, it doesn't need to be in the chat box, but put in the description that people can find.
Tyler came up with the idea of us introducing membership.
Him and Mario talked about it, and we just launched it because many of you guys were asking about it.
So now we're doing that.
If you saw a few people that became members here today, Tyler, can you take a quick moment?
I mean, I can recognize some of the names.
We have Underwood, we have Yimi Marino, we have Doug, a few other people that became members of the PBD podcast.
Can you share with them the benefits and what this is going to look like, what access they have, what different things we'll be doing with this?
Yes.
So it's, I mean, it's just a really good way for us to give back to the people that support the podcast the most.
Like everybody that tunes in every day watches, et cetera.
There are certain things that you can get through YouTube memberships that you just can't get anywhere else.
Like custom badges denoting how long you've been a member, custom emojis.
We're doing members-only polls, members-only calling to the show, access to a private YouTube community that we're going to set up.
Only members can be a part of.
Members-only questions.
Like we're really trying to give back to these guys.
We're even going to try to set up a monthly webinar with you just for people that are subscribed to the YouTube membership.
So like we're really trying to.
And is it one that we can communicate?
They'll be able to ask me questions.
Absolutely.
It's going to be a monthly Zoom with you.
They can ask questions.
They can send in their questions.
You'll spend time with them.
They'll get to be on a call with you once a month.
We're really trying to give back to people that we know who supports the channel and is always here and always watching.
We want to do something special for them.
Well, I love it.
So how do they find out more about it?
Is there a link to press?
Is there something to do or no?
Yep.
So we're going to put a link in the description.
Anytime they go to the channel, there's a button that says join.
If you click the button that says join, you'll see we have a few different tiers offered.
And we'll make sure that this is everywhere.
It's easy to access, easy to look to.
And we'll get back to you guys.
Appreciate you.
Is that mine or is that yours?
Because it's not mine.
Okay.
Appreciate you.
And folks, you know, as you guys go through this journey with myself and us here by Tim and the PBD Podcast, I'm simply a regular guy that's curious and wants to learn.
And I ask the questions and I want to know what the hell is going on.
So if you're somebody that's also curious and sometimes maybe I'm asking a question that you're thinking about, we appreciate your support.
And sometimes I may ask a question that you're not thinking about or I may ask a question and make a comment that you don't agree with.
But this podcast isn't created for us to agree.
This podcast is created for us to be able to have discourse.
Yesterday, a guy sent me a message on Twitter saying, you motherfucker, you know, I can't believe you're saying this about guns.
Did I share that with you or no?
And then he says, and I respond back to him, you're a fucking moron.
I said, your approach is why we can't make progress.
Give me your solution to the problem on guns and try your best not to insult.
Well, your sarcasm on Twitter involves comparing cars made to transport to guns made to kill.
I'm stupid to your level.
I said, take a deep breath and try giving solutions.
We're not enemies, kids.
So then he says, ban on automatic weapons, no civilian needs, and he gives all this stuff.
I said, great.
How about adding training?
Thanks for sharing your ideas.
It gives me insight on how you would approach a complex issue.
Did you watch the video?
And anyways, we finished it off on good note and we're laughing and talking to each other, right?
Purpose of this podcast is for discourse.
And many times I'll be wrong.
Many times we'll challenge the guests like we did today.
And many times we'll be right.
And many times the guests will be right.
But regardless, we will all leave hopefully thinking, saying, huh, that was an interesting conversation that I was a part of earlier today on the podcast.
So hopefully you enjoyed the podcast as much as I did.
And if you did, give us a thumbs up and subscribe to the channel and follow our guest today, Richard Werner.
Once again, thank you for coming out and being a guest on the podcast.
This was great.
Thanks for having me.
I enjoyed it.
Thanks very much.
Take care, everybody.
Saturday, we have a special podcast that we're doing with Nikki Freed.
If you don't know who she is, you may want to join us.
