Podcast Summary
Economist Richard Werner's discovery of endogenous money in Japan: Werner's research in Japan revealed that commercial banks create money when they make loans, challenging traditional economic theories and offering insights into financial crises and potential solutions.
Richard Werner, an economist with a background from the London School of Economics and the University of Oxford, gained fame in 2003 when the World Economic Forum selected him as a global leader for tomorrow. He is best known for proposing the concept of quantitative easing in 1995, which was later adopted by the US in 2008 during the financial crisis. Werner spent 12 years in Japan in the 1990s, where he noticed a puzzle: Japanese money was flooding the world, but economic theories couldn't explain where it was coming from. Werner's research led to the concept of "endogenous money," which suggests that commercial banks create money when they make loans. This idea challenges traditional economic theories and has implications for understanding financial crises and potential solutions. Today, Werner discusses his experiences and insights from Japan's economic downturn and its potential parallels to current economic concerns.
Banks create money when they issue loans: Banks create new money when extending loans, not borrowing deposits, and governments don't produce most of the money supply
Banks create money when they issue loans, not from existing deposits, but by bringing new money into existence. This was a significant discovery made in the late 1980s and early 1990s, which helped explain the Japanese economic bubble and subsequent recession. Contrary to popular belief, governments do not create the majority of the money supply; instead, it is the banks that hold this power. The misconception arises because people often confuse the role of central banks, which create some of the money supply as physical cash, with the role of governments in controlling the money supply. However, many countries, including the UK, have had zero reserve requirements for decades, indicating that reserve requirements are not the primary means of controlling the money supply. Instead, banks are influenced by other variables, which can be used to regulate the amount of money they can lend. This understanding of money creation is crucial for grasping the dynamics of economies and financial markets.
Banks as creators of money: Banks don't just lend out depositors' funds, they create new money when they issue loans, making them creators of money rather than intermediaries.
The way we understand how banking works has evolved throughout history, and the dominant theory today that banks are just financial intermediaries, lending out depositors' funds, is being challenged. An older theory, the fractional reserve theory, acknowledges that banks create money through lending, but with regulations requiring them to hold a certain amount of reserves. However, the oldest and most accurate theory is that banks are not intermediaries but creators of money. When a bank gives out a loan, new money is brought into existence. Empirical tests support this theory, making it the most accurate understanding of banking. Notable economists like John Maynard Keynes have even endorsed these theories at different stages of their careers. Despite this, the financial intermediation theory remains the mainstream narrative in textbooks and regulation. It's crucial to question and challenge these theories to gain a clearer understanding of reality.
Banks Create New Money Through Lending: Banks create new money through lending, which can lead to economic growth if used productively, but can result in inflation if used for consumption or asset purchases. Sustainable and productive money creation is crucial for a healthy economy.
Banks do create new money through the process of lending, a concept known as the credit creation theory. This is an empirically established fact, as evidenced by various studies that have rejected the dominant theory that banks merely act as financial intermediaries. However, the impact of this new money creation depends on how it is used. If it is used for productive business investments, it can lead to economic growth and job creation without inflation. But if it is used for consumption or asset purchases, it can result in inflation, asset bubbles, and banking crises. The key is to ensure that banks create new money in a sustainable and productive manner, which is more likely to occur with many small local community banks that focus on lending to small firms for productive business investments. Ultimately, understanding the role of banks in money creation and how it impacts the economy is crucial for making informed decisions about monetary policy and financial regulation.
Japan's Economic Bubble and its Impact: Japan's economic success led to inflated asset prices, particularly in real estate, due to government policies. This bubble burst in the late 1980s, causing widespread bankruptcies and job losses. Understanding the role of government policies and learning from history can help us avoid costly mistakes.
Japan's economic success in the late 20th century was built on a foundation of strong, long-term businesses and a high number of small enterprises. However, this success was threatened by government policies that led to inflated asset prices, particularly in real estate. By the late 1980s, the value of a small public park in Tokyo, the imperial palace garden, was calculated to be equivalent to the entire real estate market in California. This unsustainable situation led to a major economic downturn in the 1990s, resulting in widespread bankruptcies and job losses. The similarities between Japan's experience and current economic trends in the US, such as inflation, gold, crypto, and gas prices, are worth exploring to ensure we learn from history and avoid repeating costly mistakes. Another key lesson is the importance of understanding the role of government policies in shaping economic outcomes.
Robust banking systems and local community banks fuel small business success in Germany and Japan: Germany and Japan's strong banking systems and abundance of local community banks enable small businesses to easily access loans for technology upgrades, leading to a high number of globally successful small firms
The productivity and success of small firms in countries like Germany and Japan can be attributed to their robust banking systems, specifically the large number of local community banks that provide easy access to loans for small businesses. These banks, which have a long-standing tradition in these countries, have a deep understanding of the local business landscape and are able to quickly approve loans for small firms looking to upgrade or implement new technologies, thereby ensuring their competitiveness. This results in a high number of globally successful small firms, also known as "hidden champions," which are a significant contributor to the economy. In contrast, countries like the UK and the US, which have seen a shift towards larger, for-profit banks, have fewer small firms that are global leaders in their markets.
The Japanese banking crisis: A mystery solved by a hidden monetary policy tool: The Japanese banking crisis was caused by excessive bank credit for real estate purchases due to a hidden monetary policy tool used by the Bank of Japan, which allowed subtle manipulation of money supply and interest rates.
The Japanese economy faced a massive crisis due to an asset bubble caused by excessive bank credit for real estate purchases. This unsustainable lending created a ponzi scheme-like environment where everyone made money as long as new credit was available. However, when the music stopped and new credit dried up, asset prices began to fall, leading to non-performing loans and a banking crisis. The mechanism behind the excessive credit expansion remained a mystery until I discovered a hidden monetary policy tool used by the Bank of Japan. This tool, which was not officially acknowledged, allowed the central bank to influence the money supply and interest rates in a more subtle way. Central bankers and bankers I interviewed confirmed its use, but due to its unofficial nature, it was not widely discussed in academic circles. The discovery of this tool helped explain the dramatic expansion of bank credit in the late 1980s and the subsequent crisis.
Japan's Aggressive Push for Lending and Asset Price Inflation: During the late 1980s, Japan's central bank orchestrated an aggressive lending campaign through loan quotas, leading to a massive asset bubble without initial realization by those involved.
During the late 1980s in Japan, there was an aggressive push for lending and asset price inflation, which was orchestrated by the Bank of Japan. This was done through loan increase quotas given to banks as part of an informal monetary policy control tool called window guidance. The bankers and central bankers were simply following orders from their superiors, with some of them being selected as "princes" or future governors of the Bank of Japan. This aggressive lending led to the creation of a massive asset bubble, which was not yet realized by the people involved at the time. It's fascinating how the decisions made by a few individuals at the central bank set off a chain reaction that led to significant economic consequences.
Bank of Japan's Intentional Property Bubble and Recession: Bank of Japan's governors intentionally created a property bubble using window guidance, leading to a 20-year recession, despite having the power to intervene and solve the crisis at no cost to taxpayers.
During the late 1980s and early 1990s, the Bank of Japan's governors, Masaru Fukui and Toshihiko Fukui, intentionally used their control over bank credit to create a property bubble, which eventually led to a 20-year recession. This was done through window guidance, a method that forced banks to lend a certain amount to specific industries. The property bubble burst, leading to a banking crisis, and the Bank of Japan chose not to intervene to re-liquefy the banks or solve the crisis. This decision was made despite the fact that the central bank had the power to do so at no cost to taxpayers. The reason for this deliberate recession was to force structural change on the economy, but it is not agreed upon that this was the right approach. From 1986 to 1989, property prices rose by several hundred percent, and interest rates were very low, leading to a long economic expansion. However, inflation was low, as most money creation went into asset prices, and consumer prices remained constant. The flood of money from Japan was a result of bank credit creation in the asset markets.
Interest rates and economic growth: The correlation is positive: Higher interest rates can lead to higher growth, and vice versa. The causation runs from growth to interest rates, meaning interest rates are not the best monetary policy tool.
The relationship between interest rates and economic growth is not as straightforward as commonly believed. Contrary to the popular belief that lower interest rates lead to higher growth and higher interest rates lead to lower growth, an empirical study found that the correlation is actually positive. This means that higher interest rates and higher growth go hand in hand, while lower interest rates and lower growth do as well. Moreover, the causation runs from growth to interest rates, indicating that interest rates cannot be the best monetary policy tool. Central banks often focus on interest rates to distract attention from the real causes of economic phenomena. In the case of inflation, for instance, lowering interest rates will not address the root cause, which is money creation for unproductive purposes. Instead, it may even exacerbate inflation by making certain things more expensive. Therefore, it's crucial to look beyond interest rates and focus on the underlying economic dynamics.
Understanding the Complexities of the Economy: The relationship between Bitcoin and the stock market is not always straightforward, and the Fed's actions may not have the expected outcomes. It's essential to consider historical context and nuances when evaluating the economy.
The current economic situation and market trends are complex and may not follow traditional patterns. For instance, the relationship between Bitcoin and the stock market is not as simple as some believe, with Bitcoin often moving in the same direction as the stock market rather than acting as a safe haven. Additionally, the Federal Reserve's actions, such as increasing interest rates, do not necessarily lead to expected outcomes, like decreased inflation or a collapsing dollar. It's crucial to look beyond simplistic explanations and consider the nuances of the economic data and historical context when evaluating the future of the economy. For example, the 2008 financial crisis and the Fed's response provide valuable insights into the importance of bank credit expansion and the role of the Fed as a catalyst for economic recovery. Ultimately, understanding these complexities can help individuals make informed decisions and navigate the ever-changing economic landscape.
Central bank buying nonperforming assets to restore liquidity: During financial crises, central banks can buy nonperforming assets from banks to restore their liquidity without causing inflation, but stricter rules and even distribution of benefits are necessary for effectiveness.
During the 1990s and early 2000s, the author advised Japanese policymakers to have the central bank buy nonperforming assets from banks to restore their liquidity and stimulate economic recovery. This recommendation was implemented by the Federal Reserve during the 2008 financial crisis, making it the only central bank to do so. The central bank's purchase of nonperforming assets did not result in inflation because it was a booking exercise within the banking system and did not inject new money into the non-bank economy. The author believes that this approach could have been more effective if the central bank had imposed stricter rules and distributed the benefits more evenly among banks, rather than favoring the largest institutions.
Central banks' actions can lead to economic issues: Central banks should use emergency measures judiciously to avoid creating unsustainable economic situations, and quickly correct mistakes to prevent potential recessions and inflation
Central banks' actions, such as creating asset bubbles through bailouts, may provide temporary relief but can lead to more significant issues down the line, including potential economic recessions and inflation. The speaker argues that central banks should instead quickly correct their mistakes to avoid these consequences. Using historical examples like Japan in 1945 and the US in 2020, the speaker emphasizes that while these measures can be necessary in emergency situations, they don't create inflation and should be used judiciously. Ultimately, the speaker calls for a balance between protecting the economy and avoiding the creation of unsustainable economic situations.
Banks holding onto non-performing assets can hinder economic recovery: Central banks can write off non-performing assets to free up resources for banks and prevent prolonged recessions
Non-performing assets on a bank's balance sheet can hinder economic recovery by limiting their ability to lend. This was evident during the 20-year recession caused by banks still holding onto non-performing assets, which led to a decrease in bank lending. A historical example can be drawn from the Bank of England during World War I, where they purchased non-performing assets at face value to prevent a banking crisis. However, during times of economic downturn, such as the 2008 financial crisis, central banks implement quantitative easing by injecting large amounts of money into the economy. But, as discussed, this doesn't necessarily increase the money supply or create new money. Instead, the central bank is essentially writing off non-performing assets, removing them from the banks' balance sheets and, in turn, eliminating the interest payments. For consumers, this means that if a borrower, like a student, is unable to make payments on a loan, the central bank can take the non-performing asset off the bank's balance sheet, freeing up resources for the bank and potentially preventing a default. This can be a crucial tool in preventing a prolonged recession and its associated hardships.
Frustration with Unfair Economic System: Speaker argues for a more equitable economic system that supports individuals and small businesses, rather than just large institutions, to prevent negative consequences of government interventions and consolidation of banking system
The speaker is expressing frustration with what they perceive as an unfair economic system, where large institutions and corporations are receiving bailouts while individuals and small businesses are left to fend for themselves. They argue that this approach weakens the economy and undermines capitalism. At the same time, they acknowledge that the government's actions, such as printing money and expanding its size, can also have negative consequences. The speaker calls for more support for small businesses and community banks, and expresses concern about the potential consolidation of the banking system under a single global entity. They also reference historical figures like Marx and the Rothschilds in relation to this issue. Overall, the speaker is advocating for a more equitable economic system that supports individuals and small businesses, rather than just large institutions.
Central Bank Debate: Inflation and Economic Stability: Central banks' monetary policies, particularly quantitative easing, have led to inflation, disproportionately affecting small businesses and ordinary people during the COVID-19 pandemic. Some argue for eliminating smaller institutions, while others criticize the implementation of these policies.
The debate revolves around the role of central banks and the impact of their monetary policies, specifically quantitative easing, on inflation and economic stability. While some argue that central banks should focus on maintaining a single central bank and eliminating smaller institutions, others criticize the way these policies were implemented during the COVID-19 pandemic. The speaker believes that the massive money creation and direct distribution to individuals led to inflation, particularly affecting small businesses and ordinary people. The speaker also distinguishes this situation from the 2008 financial crisis, where asset inflation was the primary concern. The speaker expresses skepticism towards the effectiveness of quantitative easing and predicts a potential recession.
Inflation not going away soon: Policymakers must consider long-term consequences of actions to prevent inflation from becoming more entrenched and potentially leading to stagflation.
Despite the Secretary's attempts to downplay inflation as temporary, it is clear that the problem is not going away soon. The use of quantitative easing as a solution, as suggested by some, could further delay the resolution of inflation and potentially lead to more serious economic consequences. The speaker argues that allowing the economy to naturally recover without intervention could prevent the need for additional quantitative easing and help prevent inflation from becoming more entrenched. However, if no action is taken, there is a risk that inflation could accelerate and lead to a period of stagflation. It is important for policymakers to carefully consider the potential long-term consequences of their actions and avoid relying too heavily on short-term solutions that could create more problems down the line.
Decentralized banking for economic success: Decentralized banking systems focusing on business investment and productivity, rather than asset inflation and mortgage lending, are crucial for a healthy economy. China's economic success after Deng Xiaoping's reforms serves as an example. Small businesses need access to funds, and overly centralized government interventions can hinder growth.
A healthy economy relies on decentralized banking systems that primarily focus on business investment and productivity, rather than asset inflation and mortgage lending. This was demonstrated in China's economic success after Deng Xiaoping's reforms, which led to the creation of thousands of small banks and a shift away from a centralized economy. The speaker argues that this approach is essential to prevent asset inflation and ensure small businesses have access to necessary funds. However, the speaker also criticizes recent government interventions in the economy, which they see as overly centralized and detrimental to economic growth. Ultimately, the speaker advocates for a shift towards local community banks and decentralized decision-making to foster a more capitalist and productive economy.
Economic hardship caused by monetary policies: Monetary policies causing inflation, local banks' strength crucial in mitigating economic hardship, introspection on past decisions needed
The current economic situation, fueled by massive money printing and potential lack of productive lending, could lead to significant economic hardship. However, the impact and duration would depend on the strength of local banks and the collective decision to avoid further bailouts for larger corporations. History shows that inflation can be caused by monetary policies, not external shocks, and the current situation is a result of bad decisions made in 2020. To mitigate this, a change in policy and introspection on the root causes of these decisions is necessary. The US economy's strength lies in its multitude of small local banks, which could help weather the storm. Doing nothing and allowing the economy to correct itself, while difficult, might be a better option than creating more money and accelerating inflation.
Supporting local community banks for economic growth: Failing to support local community banks could lead to economic hardship for individuals and communities, potentially lasting up to 18 months.
Local community banks play a crucial role in supporting small businesses, job creation, and economic growth. However, these banks are being squeezed out by larger institutions, leading to concerns about the impact on the economy. If we allow the money supply to contract and stop the inflationary policies, the effects of the current financial situation could be felt for about a year and a half before moderating. Historically, recessions have typically lasted around 18 months. It's essential to hold those in power accountable for their financial decisions and ensure that local community banks are given the support they need to thrive. The consequences of not doing so could lead to significant economic hardship for individuals and communities.
Uncovering the truth about productivity and contributions: The documentary 'America: The Reckoning' exposes deceitful individuals and companies, Elon Musk demands 40 hours in office, gold as a hedge against inflation, decentralized systems, and hard work and transparency are key.
The next few years will reveal the truth about who has been truly working and contributing during the last 2-3 years. The documentary mentioned in the conversation, created by Michael Hovart and Michael Oswald, sheds light on what's happening in America today, exposing some individuals and companies that may have been deceitful about their productivity. Elon Musk's recent email to Tesla employees, requiring a minimum of 40 hours per week in the office, is a sign of things to come. The conversation also touched on the importance of gold as a hedge against inflation and the potential dangers of central bank digital currencies. The speakers expressed their support for decentralized systems and their own involvement in projects like Valhalla Network. Overall, the conversation emphasized the importance of hard work, transparency, and decentralization in the face of upcoming challenges.
Decentralization is the antidote to increasing centralization: Join a decentralized community, support pro-crypto individuals in office, and enjoy membership benefits through a membership program.
Decentralization is key to counteracting the current trend towards increased centralization of power, whether it's in finance through community banks or in politics through the election of pro-crypto representatives. Ollie and his team are setting up a decentralized autonomous organization and using cryptocurrencies and the Valhalla Network for this purpose. They believe that decentralization is the antidote to the Sovietization of various systems and the potential bailouts by central banks. The community is encouraged to stay strong and vote for pro-crypto individuals in office. As a token of appreciation for their support, the team has introduced a membership program, offering benefits such as custom badges, denoting membership length, members-only polls, and a monthly webinar with the host. To join, viewers can simply click the "join" button on the channel and choose from the offered tiers. The podcast aims to facilitate discourse and learning, even if it means challenging one's own beliefs.
Productive and respectful discourse during a podcast conversation on gun control: Engaging in respectful and open-minded dialogue can lead to new insights and perspectives, even when opinions differ.
Productive and respectful discourse can lead to a better understanding of complex issues, even when there are differing opinions. During a podcast conversation, the host and a guest engaged in a lively debate about gun control. The guest suggested a ban on automatic weapons, while the host proposed adding training as a solution. Although there were moments of disagreement and sarcasm, they ultimately ended the conversation on a positive note, acknowledging that they were not enemies and that the purpose of the podcast was to foster discourse. The conversation showcased that engaging in respectful and open-minded dialogue can lead to new insights and perspectives, and that it's important to remember that we can all learn from each other, even when we don't initially agree. The podcast concluded with the host inviting listeners to join a special episode featuring Nikki Fried, and encouraging everyone to have a great weekend.
