The Podcast of the Lotus Eaters - PREVIEW： Brokenomics ｜ Basic Terms Explained

00:00:00.160 Hello and welcome to Brokernomics. Now, as you know, I'm a diligent peruser of the comments under Brokernomics

00:00:07.400 and one of the themes that has been coming up a number of times is people have asked me to explain some of the basic terms

00:00:13.520 that I use because, of course, actually it might not be clear to everybody some of the more basic terms.

00:00:21.820 So, I am your humble artisan and if my patrons demand it, then of course I shall provide.

00:00:27.880 So, in this episode I'm going to go through 100 fairly basic terms, explain what they are, how they work,

00:00:34.000 and I will elaborate to the appropriate minimum, but obviously I'm me so I can't help myself from elaborating on one or two of them

00:00:43.000 and explaining a little bit more.

00:00:46.000 So, without further ado, let's dive into 100 fairly basic terms with appropriate elaboration, of course.

00:00:53.720 Right, okay. So, first on my list is I've got fiat money. What is fiat money?

00:01:00.280 So, this contrasts with the second term, which is commodity money.

00:01:05.060 So, for a long time, when people were given the choice of producing money or using something for money,

00:01:11.940 many things were tried, but ultimately it just went down to gold and silver and bronze

00:01:15.860 because they were portable, they were compact and they were sufficiently rare.

00:01:20.380 And then you've got that separation, the value bands between, say, copper, silver and gold.

00:01:27.700 Fiat money is money that has its value not because it is rare, it is actually infinite,

00:01:33.320 but because the government decrees that it is money.

00:01:36.180 So, fiat being, you know, by decree, that is what fiat money is.

00:01:42.320 So, it is basically just paper money and there it is.

00:01:45.600 Commodity money, we've explained, that's what people would go to if it was not paper money.

00:01:52.160 Now, paper money is prevalent in our modern age, of course.

00:01:54.960 In the past, paper money has been tried a couple of times and it's never lasted to the 50-year mark.

00:02:01.040 In our current iteration, paper money is about at the 50-year mark, so we will see if it will persist.

00:02:07.320 The previous time it worked was one of the sons of Genghis Khan.

00:02:14.840 Was it Kubra Khan, I think it was?

00:02:17.120 He instituted a system of paper money where basically if you turned up in the empire,

00:02:23.560 he would take your gold and he would keep that and then he would give you a piece of paper instead.

00:02:28.420 So, work out for yourselves why he liked that system.

00:02:33.740 Next term, legal tender.

00:02:36.000 So, this is basically linked to fiat money.

00:02:40.240 How do governments, once they've got their pieces of paper circulating,

00:02:43.940 how do they make you accept them?

00:02:48.480 Well, they make them legal tender so that you have to accept them 0.97

00:02:51.540 and also they say things like you can only pay taxes in this money

00:02:55.640 and that sort of gives it value because, of course, you need it for that

00:02:59.960 and you need it for exchange, so it ends up becoming the dominant form of money.

00:03:04.920 A couple more in the money section before we move on.

00:03:08.440 Monetary base.

00:03:10.040 So, this is basically cash.

00:03:12.320 Cash and coins that is held by central banks and by other banks.

00:03:19.220 So, basically, literally the money itself.

00:03:23.000 This one does confuse people.

00:03:27.060 I remember putting out a...

00:03:28.800 Well, I didn't put it out, but one of our chaps,

00:03:30.720 he clipped a section from my BlackRock video many, many moons ago

00:03:35.360 about how BlackRock has more money than the total amount of cash in the world.

00:03:42.180 Anyway, he put that out as a TikTok.

00:03:43.540 It did very well.

00:03:44.160 About 4 million people watched it.

00:03:45.740 And most of the comments were people saying, 1.00

00:03:49.000 this guy is an idiot. 1.00

00:03:49.980 How can BlackRock possibly have more money than all the cash in the world? 1.00

00:03:53.340 That's impossible.

00:03:54.540 Well, no, because the amount of cash and coins

00:03:57.140 is a tiny fraction of the total amount of money that circulates.

00:04:01.280 Most of it is electronic.

00:04:05.440 It's done for your debit card.

00:04:06.660 It's done for your bank records.

00:04:08.300 So, the monetary base is where you start the money at,

00:04:11.040 which with the paper and the metal coins,

00:04:15.780 but it's only a really, really tiny fraction

00:04:18.800 of the total amount of what we call money,

00:04:21.520 such as when you use your card or your bank account or payment transfer.

00:04:25.480 If you look at the total amount of money, it's significantly higher.

00:04:28.540 And the next couple of terms are going to be looking at some of the delineations.

00:04:32.700 And I'm only going to start with the first two.

00:04:34.180 There's many of these.

00:04:34.940 But M1 is a term which is basically the monetary base

00:04:40.520 plus things that are in an account, like your current account

00:04:44.620 or the version of current accounts that banks have,

00:04:49.500 the central bank and so on.

00:04:50.680 So, that's M1.

00:04:51.440 That is not often used.

00:04:52.660 However, I do often use M2, which is another measure of money.

00:04:58.120 So, it is basically M1 plus short-term deposits.

00:05:04.080 So, if you make a deposit overnight with a central bank

00:05:07.320 or with another bank or even slightly longer than that.

00:05:10.980 So, these are things that are either money or very, very close to be.

00:05:14.740 Basically, something that you can move around very quickly.

00:05:17.160 All of these is highly liquid money that can go from one place to another.

00:05:21.660 And it's the M2 measure that I tend to focus on

00:05:25.660 because you can see the growth in that as more money is printed.

00:05:32.660 Although, as we will come back to shortly,

00:05:34.820 printing money isn't exactly how it works.

00:05:37.080 But yes, think of M2 as the monetary base, M1.

00:05:41.580 So, basically, it's cash coins and liquid reserves,

00:05:45.680 which are not physically money but are numbers in a bank account

00:05:50.080 which are not tied up for anything other than basically immediate withdrawal.

00:05:55.560 So, I track the total money supply, which I basically mean M2.

00:06:02.960 And by following that, I can see the level of debasement of assets,

00:06:09.040 which is another term I'll come back to.

00:06:10.740 In fact, no, let's explain it now.

00:06:11.840 So, the total amount of stuff in the world,

00:06:14.100 and you divide that by the total amount of money in the world,

00:06:16.560 you get the price.

00:06:17.340 Because, obviously, all the stuff in the world has a price,

00:06:20.520 and all the money in the world has buying power.

00:06:23.220 So, if you divide one by the other, you basically get the price of everything.

00:06:26.820 And if you increase the amount of money,

00:06:29.700 and the best proxy I use is M2, very liquid money,

00:06:33.840 you can track the rate of which money is being debased.

00:06:38.840 So, if suddenly the amount of money were to double and grow,

00:06:42.620 obviously, the price of all the stuff would have to get re-denominated by double

00:06:47.640 to take into account the fact that the money supply has grown.

00:06:51.600 So, there you go.

00:06:52.180 That's also debasement.

00:06:54.460 So, yes, M2 is a common term I very often use in Brokernomics.

00:07:00.220 So, yes, it's good to explain it.

00:07:03.800 Next term I've got is liquidity.

00:07:05.420 So, money that you can spend quickly, probably the easiest way to describe that.

00:07:14.240 So, let's think about liquidity.

00:07:16.500 If you are a...

00:07:19.560 You could be rich, and a good example might be an English lord who has inherited a castle.

00:07:27.600 He might technically be rich because he lives in a castle with lots of land,

00:07:32.400 but he might have next to no liquidity, and this is an actual thing that happens a lot

00:07:37.140 with the sort of English lords, is they are technically rich in that they have an awful

00:07:42.580 lot of assets, being the castle and the family land that they've inherited,

00:07:46.840 but they have no liquidity.

00:07:49.140 So, functionally, they're actually quite poor, and they can't afford to get the roof fix,

00:07:53.820 because the roof fixer is not going to come along, and you can't pay him in a quarter of an acre of land

00:08:02.200 that you've got out back.

00:08:04.120 What he wants is cash, but the lord, he doesn't have cash, because even though he's rich,

00:08:08.560 it's all tied up in land and castle, and he has very little actual money.

00:08:12.840 So, he's illiquid.

00:08:15.940 And liquidity is a crucial term, because no matter how rich you are, if you don't have it,

00:08:21.520 you can't do things, and it's very easy to get yourself into a bit of a pickle.

00:08:25.260 So, when I talk about governments have a liquidity problem, I'm basically saying that

00:08:30.640 they might need to refinance their debts, pay their welfare bills, buy a new submarine,

00:08:36.760 whatever it is that they've got on their mind, but they can very easily have a liquidity crisis

00:08:41.100 where, even though they've got assets, even though they've got the ability to generate more,

00:08:45.280 well, at least they've got the ability to generate money by printing it,

00:08:50.260 they might not have any liquidity.

00:08:52.320 Why does liquidity matter?

00:08:53.800 Well, and I measure liquidity through M2, which is why I wanted to explain that first.

00:08:57.640 When I talk about the cycles, I talk about periods where liquidity is increasing,

00:09:04.540 and that basically means that governments and businesses are having to increase the short-term

00:09:10.960 money on hand.

00:09:12.500 And you can do that by selling assets, but more likely, liquidity upswing is going to come

00:09:18.320 from governments by the next term that we're going to talk about, quantitative easing.

00:09:25.560 Finding these short-term deposits, if you're a government, you print them.

00:09:28.500 If you're a business, or actually, you might also borrow them as well.

00:09:32.400 And if you're a business, you're going to borrow them.

00:09:33.960 And also, if you're an individual, again, of course, you can take out loans and other

00:09:39.680 things to increase your personal liquidity at the expense of later debt.

00:09:45.180 And as I will come back to you later, I'm sure with one of these terms, I'll talk about

00:09:48.620 the cycle.

00:09:49.640 There are times when liquidity is increasing, when governments are spending more, they're

00:09:54.220 taking out more debt, they're printing more money, effectively.

00:09:57.720 Businesses and individuals are taking on more debt, or whatever it is they're doing.

00:10:03.420 But the increase of liquidity is going up.

00:10:05.660 There's more money sloshing around, looking for somewhere to go.

00:10:10.680 And actually, my whole investment philosophy is based on keep track of that liquidity and

00:10:16.260 figure out which assets respond the best to an increase in liquidity, money sloshing

00:10:22.460 around in the system.

00:10:23.300 And bear in mind that liquidity is cyclical, and it tends to operate over roughly a four

00:10:29.760 or five year timescale.

00:10:31.080 If I can see that liquidity increases for a couple of years, and then decreases for a

00:10:36.120 couple of years, well, I want to be buying assets at the beginning, when liquidity is low.

00:10:41.680 And I want to buy assets that respond very well to an increase in liquidity, which as I've

00:10:47.120 talked about, tends to be basically Bitcoin and high performing tech stocks.

00:10:50.160 And I want to ride that as a liquidity cycle increases.

00:10:54.660 And then I want to take profits when the liquidity cycle peaks.

00:10:58.980 And that's what we talk about an awful lot on Brokernomics.

00:11:01.900 And then I want to have a higher cash position when liquidity is decreasing, because if liquidity

00:11:07.400 is decreasing, any liquidity that you have, any money that you have is now becoming more

00:11:11.780 valuable against any given asset, especially things that respond well to liquidity.

00:11:17.420 Because, of course, when liquidity is decreasing, things like tech stocks and crypto and basically

00:11:23.080 all of them, but to a greater or lesser degree, your money goes further.

00:11:29.420 So you can buy more of these, and then you can ride the cycle again.

00:11:32.700 Now, that dynamic for playing the markets will maybe change one day.

00:11:38.060 But that, at the moment, is the predominant, and certainly for me, the easiest way to make

00:11:44.340 money.

00:11:44.800 And so that's what I focus on, that liquidity cycle.

00:11:47.540 But liquidity itself is essentially money on hand that you have at a moment's notice.

00:11:54.660 OK, next term I've got is quantitative easing.

00:11:58.460 What is that?

00:11:59.060 The very simple way of explaining it is to say that it's money printing, but it's not technically

00:12:06.540 that.

00:12:07.080 Technically, there is no money printing.

00:12:11.080 There is simply an increase in liquidity.

00:12:13.680 And that increase in liquidity is achieved through quantitative easing.

00:12:16.920 And that is done by the central bank taking a stock of its country's own debt that it had

00:12:25.020 previously bought, for whatever reason, and selling that out into the market so that it

00:12:30.700 gets the cash instead.

00:12:32.240 So it increases the liquidity that's available by taking bonds that are rather locked away

00:12:37.920 on the central bank balance sheet and pushing them out into the market.

00:12:41.600 So that's, yeah, well, you know what I mean.

00:12:43.400 You know what I mean.

00:12:43.840 It's increasing the total amount of liquidity available, which functionally is the same thing

00:12:49.740 as printing money.

00:12:50.940 So even though it is technically wrong to say that the government are printing money, because

00:12:55.740 well, sometimes they do do that, but mostly they're actually doing this quantitative easing

00:13:01.100 process.

00:13:02.040 And the reason that they do that is because then, at a later date, they can do something

00:13:07.940 called quantitative tightening, which is basically the opposite.

00:13:09.920 They go back and they reverse the process.

00:13:14.180 And what that does for them is it allows them to pretend that they were never in the process

00:13:22.680 of simply printing money into existence in the first place.

00:13:28.120 And therefore, this is not a banana republic.

00:13:31.560 That's essentially what they're getting at.

00:13:34.440 So there we go.

00:13:35.660 That one covered as well.

00:13:37.640 Well, let's do some terms from macroeconomics.

00:13:40.120 Of course, these always get mentioned as well.

00:13:41.640 Let's start with GDP.

00:13:42.460 GDP is a term that you will often hear on the news, in articles, and so on.

00:13:48.420 GDP is rising, isn't that good.

00:13:50.420 We want GDP to go up and all that stuff.

00:13:52.760 But what is it?

00:13:53.820 Essentially, it is a sum of spending.

00:13:57.480 So there are various components to GDP, such as consumer spending, revenues of businesses,

00:14:03.400 and government expenditure.

00:14:05.160 You add up all of these components and you get a total measure of spending.

00:14:09.660 And that has come to be considered the main indication of health of an economy and how

00:14:17.440 we compare each other.

00:14:18.500 I have issues with this because it is very, very basic to define somebody's wealth by the

00:14:26.520 amount of money they spend.

00:14:27.740 Now, if you are comparing yourself to your neighbor or family member or whatever, you probably wouldn't

00:14:34.320 do it like that.

00:14:34.940 You would probably judge somebody's wealth by the stock of assets that they have or the

00:14:38.780 skills that they have or whatever it is.

00:14:41.660 That would be something like how you measure it.

00:14:43.620 What you would not do is measure it purely on the amount of money spent.

00:14:48.060 Because some people basically just spend an awful lot of money when they don't need to, and

00:14:53.100 they support that through debt.

00:14:55.340 Or in the government's case, they support it through immigration.

00:14:58.960 Now, if your household was basically taking in random Syrians every other week and running 0.97

00:15:06.360 up your credit card, your household could presumably output an awful lot of spending.

00:15:11.740 But I wouldn't consider that to be a healthy metric by which to judge you.

00:15:17.040 So I don't like the fact that we tend to judge countries by GDP.

00:15:20.580 The other thing I don't like about it is it also assumes that all government spending is

00:15:25.460 equal.

00:15:26.840 So put it this way.

00:15:28.460 Let's say the government were to borrow a load of money and use that to build a bridge

00:15:34.920 that went halfway out the Atlantic Ocean.

00:15:38.700 So it's a bridge to nowhere, effectively.

00:15:40.200 Yeah, it serves no purpose whatsoever.

00:15:42.800 However, what they would have done is spent an awful lot of money doing that, and that

00:15:49.460 would be recorded as an increase in GDP, simply because it's an increase of spending. 0.98

00:15:55.500 And if they then decided, oh, actually, that was a stupid idea, we're going to get rid of 0.95

00:16:01.960 this bridge. 0.94

00:16:02.420 If they then demolished it, the money they spent demolishing it would then also be recorded

00:16:06.940 as an increase in GDP.

00:16:08.260 So this is the thing.

00:16:09.500 It assumes that all spending is good and not wasted, which is, of course, complete nonsense.

00:16:15.320 And it's this kind of thinking that, you know, the most poignant example of this I found was

00:16:20.140 it was assumed that, say, Russia would be defeated very quickly in the Ukraine war because

00:16:27.360 the U.S. was supplying Ukraine with more money and it was assumed that all the money was spent equally.

00:16:34.000 But what was discovered fairly quickly is that it cost the Russians 50 times less to produce an

00:16:40.360 artillery shell than the U.S. made one because of corruptions in the system, lobbyists, regulations, 0.90

00:16:46.660 taxations, all of those kind of things.

00:16:48.160 So if your economy is 50 times more efficient, and I'm not saying the Russian economy is 50

00:16:53.480 times more efficient at everything, but in this particular case they were, it makes no

00:16:58.120 account for that.

00:16:59.660 Also, it makes no account for the fact that if your GDP was got there by just importing 0.98

00:17:04.540 immigrants or running up debt or stupid infrastructure, you know, the bridge to nowhere or the NHS, 1.00

00:17:10.080 whatever it is, it makes no allocation of how wisely that money was spent or on what, or whether 0.98

00:17:18.040 the skills or security or happiness of the people goes up.

00:17:21.940 So I don't like using GDP.

00:17:26.360 And when I look at countries, what I tend to look at is things like their output.

00:17:32.440 So a good proxy is energy output.

00:17:35.320 Not to say that all energy output is being wisely spent, but it tends to be more wisely

00:17:41.300 spent than when government is controlling about 40% of your GDP and government spends

00:17:46.760 money very unwisely, or look at agricultural output or steel output, or, you know, basically

00:17:53.680 look at anything functional or real, as opposed to a simple measure of spending.

00:17:58.560 So yes, that is GDP.

00:18:00.300 Another way of looking at GDP, actually, and this is valuable, is you could look at,

00:18:05.320 GDP, and I'm going to have to bring in some terms that I haven't explained that I've got

00:18:08.200 later in this document.

00:18:09.460 GDP is increase in population, effectively, plus increase in debt, plus productivity.

00:18:19.160 I want to come back to all of those, but essentially it's measuring the debt, the population growth,

00:18:27.600 and the innovation.

00:18:29.380 And really only one of those is good.

00:18:30.900 Only really the productivity increase, getting better at doing things, is real and measurable.

00:18:39.900 Increase in debt is not good.

00:18:41.620 Increase in population, well, it could be good if it was native-born citizens who are inculcated 1.00

00:18:47.900 in that society from birth, who understood its norms and customs.

00:18:53.420 Less good if it's a third world, a sort of immediately shipped in. 1.00

00:18:57.680 The debt is obviously bad, and productivity is being strangled by the fact that taxes and

00:19:02.780 regulations are so high.

00:19:06.340 But nevertheless, GDP can be useful as a reductive and simplified measure when we're comparing

00:19:13.060 it to something else.

00:19:14.220 And there's something else is a term that we have already explained, so the debt.

00:19:19.340 The total debt in the UK is about the same size as the GDP.

00:19:23.740 So at that point, it becomes very simple to look at which of the two is growing for highest.

00:19:28.340 Because if they're both at 100%, if they're both the same level, then at that point, you

00:19:32.940 can simply look at which one of those is growing faster.

00:19:35.820 And in the UK, certainly, in fact, most Western countries, in fact, almost all of the Western

00:19:39.780 countries now, I think about it, the debt is growing faster.

00:19:42.500 And you can measure that simply by the amount you have to pay servicing the debt.

00:19:47.140 That's about 4% or 5%.

00:19:48.520 Whereas GDP growth, especially in the UK, is utterly negligible.

00:19:52.820 It's a little bit better in America, not much better in most of the other Western countries.

00:19:57.020 And actually, the growth that we do have is being fuelled by debt and immigration.

00:20:00.680 Very little by productivity increase, if any, if that isn't even negative.

00:20:04.320 So I suppose it has one or two functions.

00:20:07.920 But otherwise, GDP, commonly discussed term, you commonly see it in the news.

00:20:12.020 It's just a function of spending, and it makes no allocation as to how wisely that money is

00:20:17.380 spent.

00:20:17.820 Don't like it, but it is a key term that you'll see on the news all the time.

00:20:21.500 Inflation.

00:20:22.040 Again, another term you're going to see on the news all the time.

00:20:25.080 This is a good one.

00:20:26.300 Inflation.

00:20:26.940 Here's a challenge for you.

00:20:27.880 If you can find an old dictionary, a dictionary written before about 1990, maybe 1985, something

00:20:37.420 like that.

00:20:37.720 If you go and find an old dictionary, you look up the definition of inflation, and it

00:20:41.880 will tell you that inflation is an increase in the money supply.

00:20:44.480 So we talked about debasement above, about how the total amount of money, M2 or liquidity,

00:20:51.000 is basically expanding.

00:20:53.600 The increase in the money supply itself, that's what I think of as inflation.

00:20:58.760 However, it has become twisted in recent terms in that when you increase the money supply,

00:21:04.840 as we talked about, it causes the price level of everything to increase, so prices increase.

00:21:09.060 And it has become warped lately that the cause has been superseded by the effect.

00:21:14.200 So in a modern dictionary, they will tell you that inflation is prices going up.

00:21:19.280 That's not true.

00:21:21.520 Inflation is really the total amount of money going up that makes it look like prices are

00:21:27.400 going up.

00:21:27.860 And that is an important distinction, because otherwise you're putting the cart before the

00:21:31.600 horse.

00:21:31.840 Because of the desire to make it look like it's not government causing the inflation by

00:21:38.920 increasing the money supply, and they want to make it look like inflation is a function

00:21:43.520 of, I don't know, greedy shopkeepers putting up their prices for no reason at all, or greedy

00:21:50.960 workers trying to get more pay, they turn it around that other way.

00:21:55.920 And that's why we've started using the term debasement to mean what inflation used to

00:22:03.280 mean until relatively recently.

00:22:05.520 But yeah, if we were having this conversation a few decades ago, we wouldn't need the word

00:22:09.820 debasement because we would just use the word inflation instead.

00:22:12.580 So that has become twisted.

00:22:13.600 But essentially, what it means now is prices going up.

00:22:18.080 Don't like that term either.

00:22:19.640 Deflation.

00:22:20.880 That is when prices fall.

00:22:23.780 Not something you see often.

00:22:25.420 That is actually the natural state of the world.

00:22:27.960 That is how it should be.

00:22:29.260 If we didn't have fiat money, the first term that we explained, if we were using a money

00:22:34.580 that had a relatively fixed supply, like gold or silver or Bitcoin, then due to productivity,

00:22:41.860 people finding out better, faster, smarter ways to work, the price of everything would

00:22:47.700 fall every year.

00:22:48.540 Because of course, there's more stuff all the time.

00:22:50.820 And that stuff bubble is growing.

00:22:51.980 And the money bubble is kind of fixed.

00:22:56.820 I mean, actually, even with gold or something, they can mine about 2% a year.

00:23:00.480 But still, that's pretty much close to fixed.

00:23:03.280 So the normal condition for the world would be a slight price increase every year, as long

00:23:09.900 as that productivity rate was higher than the rate that you can mine gold.

00:23:14.180 So if gold is being mined at 2% a year, if productivity is 3% a year, you should see a

00:23:19.520 1% deflation every year.

00:23:21.240 Price is getting smaller.

00:23:22.520 And actually, you do get a little bit of deflation.

00:23:25.440 Because things like, I don't know, computers, smartphones, stuff like that.

00:23:30.500 I mean, a handful of things are being innovated, and they have such a high productivity rate

00:23:38.000 that the price of these things actually falls.

00:23:40.880 But remember, in a normal world, everything would fall.

00:23:43.620 So you need to have a prodigious rate of productivity improvement for a price to actually

00:23:49.820 fall in a world where money is being debased at around 11% to 14% a year.

00:23:56.400 OK.

00:23:57.360 Monetary policy.

00:23:58.120 Again, another term you're going to hear in the news a lot, alongside fiscal policy.

00:24:02.160 What is the difference?

00:24:03.960 Monetary policy is basically led these days by central banks.

00:24:08.860 And it's setting of interest rates, influencing the money supply.

00:24:13.480 We've already talked about deciding whether we're going to do quantitative tightening,

00:24:16.500 quantitative easing, what the interest rate is going to be, whether we're going to offer

00:24:20.540 swap lines.

00:24:21.480 We won't go into that now.

00:24:22.940 But so monetary policy is basically deciding how money is priced effectively.

00:24:28.120 And for the last two, maybe coming on three decades, monetary policy has been dominant.

00:24:36.140 That is the key decision you make about the price of money.

00:24:40.560 Before that, it was the other one.

00:24:42.500 It was fiscal policy.

00:24:43.360 What does fiscal policy mean?

00:24:44.320 That is the setting of taxation and spending and how the money is spent, what gets taxed.

00:24:52.280 That's all fiscal policy.

00:24:53.620 It looks like we are possibly, certainly the US with a return to Trump, returning to a period of fiscal

00:25:01.420 dominance and not monetary dominance.

00:25:03.640 Why is that significant?

00:25:04.840 Because the US is running a deficit of about $2 trillion a year.

00:25:08.660 And for the last couple of decades, we've been using monetary policy to make that an easy burden

00:25:14.640 to bear by basically making money cheaper every year, easier to borrow, less attractive to save,

00:25:25.020 so you're more incentivized to spend and so on.

00:25:27.640 We've basically run these large deficits and forgotten about them and then just let monetary

00:25:31.760 policy make it a less bitter pill to swallow or easier to swallow.

00:25:36.440 There is a recognition with Doge and the incoming Trump administration and hopefully other places

00:25:42.560 in the Western world soon that you need to return to a sensible set of fiscal policies

00:25:48.680 where you don't tax as much and the money that you do spend, you spend sensibly,

00:25:54.960 which is going to mean hopefully less dramatic monetary swings.

00:25:59.360 So it might mean an end to my investment thesis that I talked about, which is very cyclical based,

00:26:05.800 very based on a monetary dominant environment.

00:26:11.240 It might lessen the impact of that and mean the focus becomes all about appropriate tax and spend

00:26:16.800 and whether that's efficient, which could mean that the investment strategy that I'm currently using

00:26:24.000 needs to be thrown away or at least modified or I find a new one or whatever it is.

00:26:29.360 Which I'm all up for because it would be a bit of work for me, but we're going to drive ourselves

00:26:35.420 off a cliff if we don't do it and I don't want to see that.

00:26:40.740 So I welcome the return of fiscal dominance and fiscal policy.

00:26:45.240 Next term that I've got is recession.

00:26:47.620 Recession. So there is a technical definition of this. Recession is when there are two consecutive quarters

00:26:53.680 of falling GDP. As we've already talked about, I don't like GDP, but whatever, we're stacking bad

00:26:59.720 on top of bad here. So that's the technical definition.

00:27:04.320 I've got a much easier definition, which is when you get poorer.

00:27:07.440 Well, not you individually, but the collective you, all of you. When we're all getting poorer,

00:27:14.840 that's a recession. And when we're not, it's growth.

00:27:20.320 Why do I not like the technical thing? Well, because it's easy to manipulate GDP through extra

00:27:27.640 taxation or immigration. It's easy to manipulate the benchmarks that you might be comparing it

00:27:34.920 against inflation by just changing the definition of inflation, changing the way that it's measured.

00:27:41.880 It's very easy to rig the set of numbers coming out of the government so that it doesn't look like

00:27:46.600 we're actually in a recession. But to my mind, we have been in recession since at least the end of

00:27:55.740 the COVID hubris when money was being splashed around. And actually, probably we've been in recession

00:28:01.000 since 2008, the great financial crisis. But if I were to say that in a mainstream environment,

00:28:08.860 they would say, no, no, no, it doesn't meet the technical definition, they or not. But remember,

00:28:12.920 my definition is a lot simpler. It's just when we're all getting poorer. And almost inevitably,

00:28:17.140 that has been the case since at least COVID, if not 2008, like I say. So yes, it is the economy

00:28:23.860 contracting, but they rig the measurements a lot. Depression. What does that mean? So a depression

00:28:29.600 doesn't have a technical definition. It is used by the mainstream to basically mean a severe

00:28:39.180 recession or an ongoing recession or a prolonged or chronic recession. But actually, what's really

00:28:44.260 going on there with that is that these terms get changed over time when they start to make

00:28:50.900 government look bad. So originally, they didn't talk about recessions at all. They just said depressions

00:28:57.880 to me when people were getting poorer, a bit like my definition, which I won't give up. And then

00:29:02.440 people started to dislike the term depression, because it made them realise that their political

00:29:07.000 leaders were making bad decisions. So then they would swap it around to things like slump or recession.

00:29:14.740 It basically means the same underlying thing, people are getting poorer. But it's just whatever is in

00:29:20.400 vogue at the time. And depression was in vogue kind of pre-1950s. And governments came to hate the term

00:29:29.040 so much, they decided, well, let's just call it recession instead. And there's kind of a movement now to say,

00:29:35.860 OK, well, recession's making us look bad, so let's call it a contraction instead. But effectively, it is just a

00:29:41.920 politician's shifting of terms in order to avoid the appearance of blame. Right, economic cycle. Right, that was something that I

00:29:50.220 started to touch on before. Again, a core concept in brokernomics, so it is worth explaining properly.

00:29:56.160 It's linked to the liquidity that we talked about. So think about this. Quick, quick model of the entire

00:30:01.360 economy. And it's very simple. We have transactions in markets. And a market could be anything as simple as

00:30:09.300 the hot dog market. So there's a buyer and a seller. There's a transaction. Here's some money. I want a hot dog.

00:30:16.840 And if you add up all of the transactions of people buying hot dogs, that's the hot dog market.

00:30:21.140 You add up all the transactions in the oil market, that's the oil market, and so on. So you've got all

00:30:27.780 of these different markets. And how are they paying? How are they making these transactions? Well,

00:30:32.140 they're either using money or they're using credit. Now, as we've already talked about, actual money,

00:30:37.260 as in cash, notes and coins, is a very small percentage of the overall what we call money.

00:30:44.760 The money base is a tiny, tiny fraction of total money. And what I didn't get into at that bit

00:30:51.220 was the deeper level, is that on top of money, there's also credit, borrowing. And here's the thing,

00:30:59.400 credit spends just like money. So if I buy a hot dog from you, you're not particularly concerned.

00:31:07.660 Let's assume your hot dog seller is one of those machines that goes beep when I present you my card.

00:31:12.140 You're not particularly concerned whether I'm spending money from my current account or my

00:31:17.180 overdraft, or if the money in my account is from a loan. From your point of view, you've received money,

00:31:23.820 but almost certainly every time you do a transaction, you earn money from people, you've almost

00:31:28.900 certainly accepted credit from somebody else. So how does this relate to economic cycles? Because

00:31:36.420 credit is essentially borrowing. In fact, essentially, it's borrowing from yourself in the future. So you

00:31:41.700 can spend more money today at the cost of spending less money in the future. A nice easy example for

00:31:48.660 maybe you're in your late twenties, early thirties, and you buy a house. And so the year you turn 31 or

00:31:56.160 whatever, you spend £300,000 that year. And what you actually did is you borrowed from yourself in

00:32:04.320 the future in order to buy a house. And then for the next 25 years, you spend less than you otherwise

00:32:10.480 would, because you're paying back your past self when you were 31 and you bought that house.

00:32:16.860 So borrowing is basically pulling money into the present from the future. And that's a simple

00:32:23.260 example of the house. But more broadly, individuals and businesses and even governments, when times are

00:32:29.960 good, and it looks like the economy is doing really well, and everything's really clever, and good times

00:32:36.400 have come, people are inclined to take on more debt. So they pull in more spending from the future into

00:32:44.200 the now. So you imagine, you know, my line that I gave you, it goes up, and then it goes down.

00:32:53.320 Well, let's break that down on a granular level. So year one, you borrow a little bit of money.

00:32:57.700 Year two, you borrow a little bit more. Year three, you borrow a little bit more. Year four, you borrow

00:33:02.140 a little bit more. And so you create that cycle. And then eventually, you will, oh, hang on, I have to

00:33:05.420 pay this back. So I borrow less, I borrow less. And then I'm down here, I'm repaying, I'm repaying,

00:33:09.740 and paying. So you can imagine that arc that goes like that. That essentially is the cycle. It's a

00:33:16.540 phenomena based on borrowing and spending, pulling from the future, and for every future, and for every

00:33:26.000 dollar or pound that I spend today at the expense of the future means I need to pay it back, which in

00:33:31.120 itself creates a cycle. And that's the economic cycle. And again, a big part of what I talk about

00:33:36.640 on Brokernomics. I did an episode early on, I can't remember which one, but one of the relatively

00:33:41.440 early episodes, I break that down in a lot more detail. But yes, core concept in Brokernomics is

00:33:47.760 the cycle. Trade balance is the next one. Again, a term you hear on the news a lot, worth going into

00:33:54.100 this one. So what is a trade balance? It is basically, let's say there was only, you know, two nations in

00:34:00.300 the world, Westeros and Eastros or something. If one of them is exporting more, and the other one

00:34:05.160 is importing more, then let's say Eastros is a net exporter, and Westeros is a net importer,

00:34:13.020 then you could say that Westeros has a negative trade balance, and Eastros has a positive trade

00:34:17.640 balance. Essentially, one is exporting more. Right, why is that important? Because if you've got a

00:34:22.620 surplus, then people are having to pay you for that. And how are they paying you for that? Well,

00:34:28.360 they're going to have to be reducing their wealth to increase yours. In our Eastros and Westeros

00:34:34.720 example, Westeros is going to have to be shipping gold over to Eastros because actual assets are

00:34:42.140 coming in, you know, cloth or weapons or, you know, whatever it is that, you know, they ship in.

00:34:47.700 But gold is going out the other way. So Eastros is getting richer as an example. That's a simple

00:34:52.080 example of two nations, but you can scale it up to 196 or whatever, how many countries that we have.

00:34:57.600 There is this complex interplay, but you can boil it down to, are you exporting more than you import?

00:35:03.500 And the way you should look at that in a slightly more reductive model is if you are exporting more,

00:35:09.340 you're getting richer. There is a big exception to this, and that is the United States.

00:35:14.360 The United States is an exception to this because it runs these huge deficits, and it has for a long

00:35:21.340 time, where it imports a lot more than it exports. And you might think, okay, well, it's getting

00:35:25.340 poorer as a result of that. Well, actually, it isn't, because what it's doing is because it's

00:35:31.280 got the dollar, and it has managed to enforce the dollar as a global currency that even other

00:35:40.060 nations use when they are trading between themselves. The dollar has what has come to be termed this

00:35:45.980 exorbitant privilege, which it can run these deficits, and it can pay for it with printed

00:35:52.220 money, with debt. And that basically never comes due, because there is always growth in the world

00:35:59.660 somewhere. So there is always further demand for dollars, and therefore it can always get away

00:36:04.940 with increasing the total amount of debt that it pumps out there. And therefore, it is able to run

00:36:10.240 a permanent deficit at no cost to itself, which is indeed an exorbitant privilege, indeed. So yes,

00:36:17.920 very clever for them. The only problem they've got is what happens if an alternative to the dollar

00:36:25.140 comes along and people start adopting it, whether that be the BRICS currency or Bitcoin or gold or

00:36:29.660 whatever it is. At that moment, the US would be in a bit of a pickle because there are trillions of

00:36:36.700 dollars out there that would then become, would then just come rushing home because they've got

00:36:41.220 nowhere to be. And it would find itself with dollar tanking and foreigners being able to come in and 0.90

00:36:49.100 buy up assets. And it would look to the foreigners like these assets were incredibly cheap.

00:36:56.920 And that would obviously be very bad for the US. I suspect they would respond in some other way if

00:37:02.140 it came to that. But yes, trade balance often comes up, is important. Just bear in mind the US is an

00:37:08.000 exception. If you would like to see the full version of this premium video, please head over to

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The Podcast of the Lotus Eaters - February 11, 2025

PREVIEW： Brokenomics ｜ Basic Terms Explained

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