Richard Werner Exposes the Evils of the Fed & the Link Between Banking, War, and the CIA
Episode Stats
Length
2 hours and 51 minutes
Words per Minute
173.34122
Summary
In this episode of the podcast, we speak with Nobel Prize-winning economist and Nobel Prize winner, Yoshihiko Shirakawa. She tells the story of how she became one of the most influential economists in the world, and how she helped solve some of the world s most baffling economic puzzles.
Transcript
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You're one of the best-known economists in the world, most significant.
00:00:37.480
But you have a story that I think that I didn't know.
00:00:40.960
And let me just summarize what I understand of it, and then I'm just going to turn it over to you to tell the whole story.
00:00:46.920
You're living in Japan, a consultant to the Bank of Japan.
00:00:51.440
And in 2001, you publish a book about the banking system in Japan in Japanese.
00:01:04.800
And that book about the Central Bank of Japan and explaining why the country is in this protracted recession becomes number one in Japan.
00:01:16.020
Which is kind of amazing, even in Japan, beating Harry Potter.
00:01:24.420
I think this is one of the more significant stories that I hadn't heard.
00:01:28.920
So if you don't mind, if you could take it from there, explain what the book was about, why people responded to it as they did, and what happened next.
00:02:01.060
I was, you know, working on the book and doing the research for the book, which really was the greater part of the 1990s.
00:02:12.800
By the way, the name of the book is Princess of the Yen.
00:02:18.060
And yeah, it's not so easily available, but I can mention that later.
00:02:26.700
You know, I'd come to Japan, I'd learned Japanese, and I was, you know, an economist, had studied economics at the LSE, was at Oxford, working on my graduate work and doctorate in economics.
00:02:38.580
And Japan was actually really posing some major puzzles that the world couldn't explain, and economics couldn't explain, and all the world-famous experts could not explain.
00:02:49.820
And for some reason, I decided, okay, I want to solve all these puzzles.
00:02:57.820
When really digging into it, it transpired that maybe I've bitten off a bit more than I can chew.
00:03:05.260
All the experts were shaking their heads and telling me, you know, give up, you have to change your topic.
00:03:11.020
You know, there's no solution to this, and you will never find out.
00:03:20.280
Well, there's several, but one was a concrete puzzle.
00:03:23.920
I was just doing an internship at Deutsche Bank in Tokyo at the peak of this fantastic stock market bubble.
00:03:30.840
Well, it wasn't called a bubble at the time, you know.
00:03:33.320
At the time, they were just saying, this is Japanese productivity, and, you know, this is all, it's going to go up more and more and more.
00:03:39.560
You know, it's only afterwards when they sort of point out, oh, well, okay, that was a bubble.
00:03:45.160
So in this bull market of Japanese, you know, stock market in 1989, and there were some problems with the official story.
00:03:56.320
And actually, they led to, they led me to conclude also that the stock market, it was a bubble, and it's going to crash, and it's going to take the banking system with it.
00:04:06.060
That's what I then, once I found the answers, that's what I then concluded.
00:04:10.680
So in 1991, I was one of the first to very loudly and clearly state, there's a discussion paper I published at Oxford, having come back, that we should be very cautious about Japan.
00:04:25.700
The international strategists were saying, oh, the Bank of Japan is lowering interest rates, it's stimulating the economy.
00:04:32.380
Stock market has come down, but, you know, growth is 6%, 7%, and the market has become cheap.
00:04:37.820
Buy Japanese stocks, that's what they were always saying, buy Japanese stocks.
00:04:41.520
I concluded in 1991, based on this research, that's, you know, answers to some of these puzzles, that Japanese banks were likely to go bankrupt.
00:04:51.240
And you see, you have to remember that in those days, 1990, 1991, the top 20 banks in the world were Japanese, okay, and the 21st century was going to be the Japanese century.
00:05:02.340
Japan was, you know, in the 80s, buying up everything left, right, and center.
00:05:05.900
And the Japanese capital flows, flooding the world, buying Rockefeller Center, Petal Speed, Golf Course, Hawaii, California, investments in Britain, you know, you name it.
00:05:15.800
And here I was saying, no, Japanese banks are likely to go bankrupt, and Japan is likely to move into the biggest recession since the Great Depression.
00:05:24.300
That's what I concluded in 1991, in this discussion paper.
00:05:28.920
And, of course, it took a lot of investors by surprise what happened in the following years,
00:05:36.560
when to me, it was very clear that this had to happen, although there were policy responses that could prevent the worst,
00:05:45.980
which I then also proposed, so I proposed a new monetary policy concept that I called quantitative easing,
00:05:53.260
which has been used and abused and distorted and has been quite popular with central banks, but we'll come to that.
00:06:00.660
So, but back to your question, so what were the puzzles in the late 80s, which led me to all these other things?
00:06:20.920
But also, not just the scale was so massive, it just was against all the economic theories.
00:06:28.100
Now, the main theories about capital flows concern, again, interest rates and interest rate differentials.
00:06:34.280
And Japanese money was flowing in the opposite direction.
00:06:38.840
Then, Japanese investors were also losing money because the yen was rising, so it was actually a losing trade to then invest abroad.
00:06:52.300
So, then I was going around talking to all experts.
00:06:59.780
I just graduated as an undergraduate from the London School of Economics.
00:07:03.040
But I had been thrust into these sort of positions and opportunity.
00:07:16.960
But I also then spent a lot of time with practitioners and actually investors that were investing abroad
00:07:22.740
and looked at the, you know, the institutional investors, life insurance companies and major international investors.
00:07:30.420
And then I was searching for a link to the other phenomenon, which was pretty crazy and economists couldn't explain.
00:07:40.900
So, in 1989, Japanese land prices had reached such stratospheric proportions that if you took the central Tokyo,
00:07:51.660
and it was particularly, of course, the big cities, but the central Tokyo land price to value something like the Imperial Palace Garden,
00:08:03.880
But it's not, you know, on the scale of things, not that large.
00:08:06.580
So, if you valued that at standard central Tokyo market prices and then exchange rates,
00:08:12.760
it would be the same market value as all the real estate in the entire state of California,
00:08:18.880
including Los Angeles, San Francisco, you name it.
00:08:27.540
Now, my idea was that, okay, there's got to be a link.
00:08:35.340
One is these absolutely nonsensical land prices in Japan.
00:08:39.080
And the other one is Japanese capital flows, just Japanese money seemingly fleeing the country, buying up the world.
00:08:45.480
Well, if I was a landowner, and, you know, these are the land prices, I would say, well,
00:08:50.920
let's quickly buy some land outside Japan or something else, anything outside Japan,
00:08:56.480
before people realize that the land price is overpriced, the yen is overpriced, you know, and so on, right?
00:09:06.600
There had to be a link, and I was convinced of that.
00:09:09.720
And so, it was going around, and, you know, in those days, it's pre-internet.
00:09:12.380
So, I had to literally, you know, how do you do academic research pre-internet?
00:09:16.980
He had to go to the library, get all the journals indices on topics, your topic indices, keywords,
00:09:23.980
and then physically go through various journals and journals, and, you know, 20 years ago, 30 years ago.
00:09:32.420
I was looking for some kind of economic model, a paper that linked capital flows and real estate,
00:09:39.380
because, you know, I thought, well, there is a link.
00:09:44.780
And I wasn't looking just on Japan, it could be any country, right?
00:09:47.380
I mean, you should be able to use the same analytical framework then from another country.
00:09:54.760
And actually, I was a bit in trouble, because at the time, I was the first foreign research fellow
00:10:01.540
at the Japanese government's development bank, the Development Bank of Japan.
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And I'd rashly chosen this topic as my research topic.
00:12:33.920
You know, I mean, they treat foreigners very well anyway in Japan.
00:12:37.360
But I was their first Shimomura fellow, their first foreigner.
00:12:40.940
And I was invited to all their events and all the clubs and circles.
00:12:44.260
Learning baseball, which for Europeans is kind of unusual activity.
00:12:47.920
With the other staff and, you know, Japanese calligraphy.
00:12:52.260
They give me this huge apartment in central Tokyo, which is part of this Shimomura fellowship.
00:12:58.680
And I felt like a bit of a fraud because I can't deliver my part of this deal.
00:13:05.540
All the experts, there was one capital flow expert in Tokyo at the Nomura Research Institute.
00:13:11.400
And they were saying, no, you can't find an answer to this.
00:13:32.360
If we have time, I can come back to that and explain how this happened.
00:13:42.660
Then, now, actually, before then, there was somebody saying, oh, there is a solution.
00:13:50.340
There's an American scholar who'd come to Japan.
00:14:03.740
Oh, I sent him the paper actually recently saying, hey, do you remember this?
00:14:06.980
You know, and so people were telling me in Japan, oh, there's this American and his collaborator, I think, Peter Boone.
00:14:18.020
And they had actually posed the same hypothesis that there's a link between land prices and capital flows.
00:14:24.080
So they were at MITI, the Ministry of International Trade and Industry, slightly renamed it now.
00:14:30.340
It was a famous ministry supporting the economy and trade.
00:14:37.140
So they will have the physical discussion paper that they produced on this topic.
00:14:45.760
So I went back to my research institute at the Development Bank.
00:14:49.480
And same idea, which is fine, because I was just a young researcher.
00:14:57.960
You know, I don't need to discover the, rediscover the wheel or come up with a great insight.
00:15:02.140
But then I came to that sort of main part and conclusion.
00:15:06.160
And therefore, we conclude there is no link between real estate, you know, land market and capital flows.
00:15:14.880
So, you know, at that point, I was really in trouble.
00:15:21.980
Because, you know, humanly, it was impossible to make this link.
00:15:25.840
And all the experts were saying there's no link.
00:15:28.820
And when I understood that, I knew exactly what data to get.
00:15:35.180
Now, what Professor Sachs and Peter Boone were arguing was that, you see, how, if you're a Japanese landowner, you own this super expensive real estate.
00:15:45.820
And now you figure out it's probably better if I buy half of California, let's say.
00:15:55.220
They were arguing, well, they would have to sell the land.
00:16:00.420
And it was true that foreigners were not buying Japanese land.
00:16:26.140
And the solution is, and it's the solution to many other puzzles in economics.
00:16:35.760
Macroeconomics has not been successful for 200 years.
00:16:43.140
There was a study in the, what's it called, Journal of Economic Perspectives,
00:16:50.440
which is, you know, quite a highly ranked journal,
00:16:53.320
in 2019 by two Stanford University professors about progress in economics.
00:16:59.020
And they mentioned that, oh, sadly, we haven't had any progress in macroeconomics
00:17:11.460
So, the solution to all this, and why economics has made no progress, is bank credit.
00:17:18.460
Now, bank credit, and actually you should say fully, bank credit creation.
00:17:22.960
This is a concept that's been a taboo or a secret in economics.
00:17:28.160
Banking has been frozen out of economics for a long time.
00:17:31.620
There's no banks in economic models and theories.
00:17:34.820
And that's, of course, also why they don't work.
00:17:36.320
Because in reality, if you ask some ordinary people in the business district of any town,
00:17:42.000
they will tell you, you know, what's important in the economy, they will mention banks.
00:17:47.680
But ask an economist, an academic research economist, and they will not mention banks.
00:17:56.540
Well, the reason is that the economists follow this theory that banks are just financial intermediaries.
00:18:03.840
They just, you know, gather deposits here, do their analysis, credit analysis, you know, risk assessment and all that.
00:18:22.200
It's one theory of banking, and it's still the one that's still dominant.
00:18:25.460
All the textbooks and the leading journals, they still use that.
00:18:29.320
But actually, if you look into it, you realize there's three theories of banking.
00:18:33.080
A second theory, slightly older, that was dominant until the 1960s, so-called fractional reserve theory.
00:18:39.100
And you may have heard this fractional reserve banking.
00:18:43.620
Well, this theory says, and this part is similar, each bank is a financial intermediary.
00:18:48.480
It just collects deposits and then does the analysis, lends out the money.
00:18:52.840
But in aggregate, as banks interact, there's money creation.
00:18:59.580
Oh, and that's where students' ears should have pricked up money creation.
00:19:09.060
And that one had been made out to be a wacky conspiracy theory.
00:19:15.360
But it is the one that was more or less quite widely known until about a century ago.
00:19:22.180
And that's the credit creation theory of banking.
00:19:24.920
And this one says, banks are not financial intermediaries.
00:19:30.580
They have a unique power that no other player in the economy has.
00:19:42.520
And actually, that theory had been called all sorts of names like, oh, this is kooky people.
00:19:49.720
Cain said in his general theory, or it was the treaties on money.
00:19:53.040
You know, these are the cranks who talk about the banks creating money.
00:19:56.400
I think the average person believes the right, the ability to create money is reserved for governments alone.
00:20:03.820
In fact, I did a survey with my students in Frankfurt in 2011.
00:20:09.260
My audience was getting larger when I was teaching at Goethe University Frankfurt.
00:20:13.620
It was only sort of for a few years, substitute professor, optional courses.
00:20:18.380
So the first one was only 50 students, but the next one was already 150.
00:20:25.260
And so I thought, oh, this is a great audience.
00:20:31.020
So I sent them out, you know, because you've got so many people.
00:20:34.120
Then if everyone does 10 questionnaires, you know, you're talking big numbers.
00:20:42.220
And one of the questions asked was just this question.
00:20:44.660
Who do you think creates and allocates the majority of the money supply in the economy?
00:20:49.160
And to make it easier, here's multiple choice answers.
00:20:52.160
The government, the central bank, the financial markets, the banks, and so on.
00:21:01.360
You know, give a few options or savings, you know, people through their savings, which is another economic theory.
00:21:08.300
So, and the answer was, just as you said, and, you know, you spoke the facts.
00:21:15.360
84% responded either the government or the central bank are the ones that create and allocate the majority of the money supply.
00:21:24.140
Because that's common sense, you know, it's something very important that clearly affects everything and everyone.
00:21:39.440
Well, of these three theories of banking, which one is correct?
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Well, it turns out I was the first to do an empirical test of the three theories of banking.
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The replication is debated, whether you can always replicate it.
00:25:35.040
And we can certainly control for certain things.
00:25:38.100
And I thought it's crazy that, you know, you had for over a century this debate between
00:25:42.160
these two theories, but nobody had actually done the scientific thing.
00:25:46.700
Let's just test with the data and observation which of the theories is in line with the
00:25:53.220
Now, to do this, I needed a bank that would cooperate.
00:25:57.260
And my plan was, well, I'm going to take out a bank loan.
00:26:00.440
And we're going to watch inside the box, inside the banking's accounting, the bank's accounting
00:26:04.340
system, how are they accounting for this and what transactions are taking place when I
00:26:13.780
You know, the intermediation theory says deposits get lent out.
00:26:17.840
The fraction reserve theory says that the bank needs to have excess reserves at the central
00:26:24.040
And the credit creation theory, you know what it says?
00:26:26.040
It says, when you get a loan, no money is transferred away from anywhere else and you just credited
00:26:35.440
new money out of nothing that is not transferred away anywhere inside or outside the bank, which
00:26:45.820
In fact, one uses, the convention is to use Latin for this.
00:26:49.220
The money is created ex nihilo, out of nothing.
00:26:51.880
So, when it did the empirical test, the conclusion was the financial intermediation theory is
00:26:58.880
rejected and the fraction reserve theory is rejected.
00:27:06.100
It's the most downloaded paper of all Elsevier publications called, and it's open access.
00:27:12.260
So, can banks individually create money out of nothing?
00:27:29.000
When you take out a loan, the money that you're given as the borrower didn't previously
00:27:36.500
It is net new purchasing power that has been created and added to the money supply, and
00:27:42.360
Now, to understand how the system works is a precondition for having good economic analysis
00:27:48.220
And that explains for over 100 years, macroeconomics has made no progress.
00:27:56.680
You know, when the 2008 crisis happened, and the journalists, I'm sure yourself also, you
00:28:13.960
The honest answer of all the professors of economics would have been, well, I'm sorry,
00:28:33.680
They're pretending because they don't want the public to know.
00:28:42.840
But I did not know until you just told me that banks play no role in economic models.
00:28:49.260
So, when the 2008 crisis happened, the central banks were using the so-called DSGE models.
00:28:57.540
Dynamic Stochastic General Equilibrium Models, which sounds very sophisticated.
00:29:01.500
There's some, like, super bright rocket scientists in there with complex models.
00:29:06.460
Well, the whole thing is nonsense from start to finish.
00:29:11.960
And it's built on really pretty crazy assumptions that are true, perhaps on some remote planet
00:29:25.740
I just think, as a non-expert, the idea that banks would play no role would not be included
00:29:35.500
A macroeconomic model seems insane because the experience of every person living in the
00:29:44.640
And the trick was to argue, well, we don't need them because, you see, they're just an
00:29:56.100
The money just goes through one-to-one in here, out there.
00:30:05.160
By the way, that's the second big myth I busted in economics.
00:30:11.680
You know, this idea that interest rates drive the economy.
00:30:16.340
And, of course, even today, I mean, every central banker, every market commentator,
00:30:27.600
And it's, yeah, everyone's supposed to, it's this presupposed knowledge that if we lower
00:30:35.760
And it's been said in the last 50 years, I don't know how many thousand times by all
00:30:43.440
How many empirical data-based, fact-based studies exist that demonstrate this?
00:30:49.900
That actually demonstrate that, you know, look, here's the data.
00:30:57.540
I would assume none because I've never met anyone who doubts it.
00:31:10.700
An axiom is something that is so true, we never have to check whether it is true.
00:31:15.000
And if we did check whether it's true, we'd find it's not true.
00:31:20.800
We wouldn't believe the results because we know it's true.
00:31:25.620
Well, in fact, you've described now the methodology of the dominant mainstream economics, which is the hypothetical axiomatic deductive methodology, where you just pose an axiom that you know to be true, so you don't have to check whether it is true.
00:31:42.020
And if you did check it's not true, it would be the result.
00:31:44.520
And then you add assumptions, which you admit are simplifications, heroic assumptions, which are, yes, we know they're not true, but it doesn't matter.
00:31:54.840
And then you build your model on it, and that's the approach they use.
00:31:59.620
Now, this approach is particularly useful if you have a predetermined conclusion you'd like to come to, because then you can actually start out with your preferred conclusion, work backwards, then define what assumptions do I need to pose this model, what axiom do I need to present this, and then the key step, present in reverse order.
00:32:16.160
Ladies and gentlemen, let's just, for sake of argument, assume these and these things, look at this, the model is telling us, you know, interest rates, lower rates lead to higher growth, and higher rates lead to lower growth.
00:32:26.680
We don't need to look at banking, it's totally uninteresting, don't go there, move on, nothing to see here.
00:32:32.940
What you're saying is, I mean, I believe that there are a lot of people who just never thought that option three, your description of banks, the bank credit creation, could be a meaningful factor, they just never thought of it.
00:32:44.820
But there had to have been a lot of people who realized this before the 1990s, so if it's not publicly known, it sounds like it was hidden.
00:32:53.200
Absolutely. Oh, certainly. Well, actually, so I've got two papers on this. One is the can banks individually create money out of nothing.
00:32:59.260
The other one is called Lost Century in Economics, about these past 100 years.
00:33:05.580
Your fellow economists, sorry, sorry to interrupt, they must hate you.
00:33:08.360
And I do go through the literature and the sort of history of economic thought, and there's some very curious things happening.
00:33:17.140
So, for example, there's John Maynard Keynes, and many people would say, well, he's certainly the most famous economist of the 20th century.
00:33:24.360
That's really the one who's quoted a lot, cited a lot, and had some policy influence, and so on.
00:33:29.420
Now, when you look at his writings with the topic of credit creation, bank credit creation, his development is kind of curious.
00:33:44.120
There's a book by him from 1924 in which he, the book was on something else, but he stumbled on this, and he writes, I mean, I'm paraphrasing,
00:33:52.440
something like, and, you know, look up my papers, then you'll see the exact quote, but he was writing, like, oh, the bank's actually adding to the money supply through their activities.
00:34:03.420
That's a very important fact that changes everything.
00:34:08.660
It's something that will have to be examined further.
00:34:12.120
Well, six years later, in his important book, Treatise on Money, two volumes,
00:34:17.180
he had moved from the credit creation theory that he clearly had discovered in 1924 to the fractional reserve theory.
00:34:26.220
He was saying, oh, banks are just intermediaries, but yes, in the system, the interaction is creating some money.
00:34:33.580
Six years later, he published the famous general theory, and in that general theory, he'd moved on to the financial intermediation theory.
00:34:42.060
Now it is, again, the savers who need to save money and then deposit it, and that is then lent out by the banks.
00:34:56.440
So, with each successive theory, he obscured the role of the banks ever more.
00:35:01.180
Now, interestingly, his financial wealth increased proportionately, and by the last stage—
00:35:09.680
I think people have stayed this long in the conversation.
00:35:10.920
This is really interesting, and you're a great explainer, by the way.
00:35:14.200
It's almost like you came—are you really an economist?
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Well, you see, in the last few years of his life, he had been, I mean, most people don't know this, but he had been appointed director of the Bank of England.
00:39:46.600
And you have to realize the Bank of England was 100% privately owned.
00:39:50.340
And to be a director, you had to be a significant shareholder.
00:39:56.240
So he was doing pretty well, moving away from the truth step by step.
00:40:03.480
But you see, it's similar with some other economists.
00:40:17.540
Now, he was, you know, he was a good macroeconomist.
00:40:25.820
Anyway, and he used to, you know, he did his research.
00:40:30.040
He started out research on the Great Depression, where he was beginning to realize banks were a factor.
00:40:36.380
I mean, he didn't write this, but actually 10,000 banks were busted.
00:40:41.160
I mean, it's one of the saddest periods of U.S. and world history.
00:40:46.500
You know, the Fed was created on the pretext, on the main argument, because there's lots of doubters who didn't want the Fed.
00:40:56.800
And they were very sneaky to actually get the Fed and get the law passed.
00:41:00.180
They used some of the rules on how you can schedule a vote.
00:41:04.780
And they went for the most obscure procedure, which is easy to overlook, that there's actually a vote.
00:41:14.000
And most congressmen actually weren't even aware.
00:41:16.900
But in any case, they're already gone for Christmas.
00:41:20.140
And so it was just the hardcore group of insiders, and they voted the creation of the Fed.
00:41:28.040
But in terms of arguments in favor of establishing the Fed, the main argument is the lender of last resort function.
00:41:36.500
And it's true that if you have a fantastic bank, very solid, strong, conservative, is doing well, is helping many small businesses, good bank.
00:41:46.500
If a very convincing, nasty rumor is circulated, and let's say it's effective and people believe the rumor, and they just run for their deposits, they all pull out the deposits, that good bank will be in trouble.
00:41:59.840
Of course, there's policies against that that you could do.
00:42:03.140
But the argument was, well, the best is to have a central bank, because they can provide endless liquidity through money printing, which is, you know, internal money reserves.
00:42:11.880
Or if needed, if they want cash, you know, the central bank provides the cash, paper notes, and therefore this good bank will not go bust.
00:42:22.320
But when it came to that, beginning of the Great Depression, what did the Fed do?
00:42:32.940
In the most, in the nastiest way, these were banks that were small, lending to local businesses, to the farmers in particular, and they let them go bust.
00:42:45.720
Now, in the 1920s, there was mechanization of agriculture, you know, tractors and so on.
00:42:50.680
So there's expensive equipment, and banks were giving the loans, the farmers were taking the loans.
00:42:56.780
Well, they were taken over by big banks, bigger banks, and banks that were part of the Fed cartel.
00:43:06.300
But to lose 10,000 banks is just such a setback for the economy.
00:43:11.600
Now, you'd think, oh, good for the farmers, you know, at least they're out of these loans.
00:43:16.940
Number one, when the banks went bust, there was no deposit insurance.
00:43:20.680
These families, these farmers, these small businesses, they all lost their personal savings.
00:43:30.600
Number two, you'd think they'd be off the hook from their loans.
00:43:36.220
The banks were then taken over, bought cheaply, and they still had to repay the loans.
00:43:40.900
But they had nothing left, and they were destitute.
00:43:43.200
Wait, you lose your deposit, but keep your debt?
00:43:50.460
Of course, the Fed could have, you know, done it very differently.
00:43:57.300
Well, the banking systems, once you set up a central bank that's not controlled by the people,
00:44:03.520
then, you know, you're in the hands of the central bank.
00:44:06.160
The Federal Reserve Bank of New York is 100% privately owned,
00:44:09.100
and that is really the center where all the decisions are made.
00:44:13.860
You have the Washington Board of the Fed, but, you know, that's a political shop.
00:44:18.880
The actual central bank operations are all in New York, 100% privately owned, you know.
00:44:25.520
So, and that, you know, what happened in the 1930s is, therefore, these farmers became destitute.
00:44:32.420
The land was the collateral for the loans they couldn't repay.
00:44:37.880
Some lucky ones became day laborer on the farms that they previously owned.
00:44:44.920
There was starvation in the United States of America of honest farmers.
00:44:51.300
And it's really such a, I mean, read The Grapes of Wrath by John Steinbeck.
00:44:55.040
You know, these are better descriptions of economic reality than the economics textbooks
00:44:59.880
where they tell you banks are financially intermediary, so we don't need to talk about banks.
00:45:06.580
So, the central banks, when push comes to shove,
00:45:09.580
they pursue the agenda of concentrating the banking system
00:45:13.260
and reducing the number of banks, which increases the power of the central banks.
00:45:18.500
But we were talking about the three theories of credit creation.
00:45:21.540
And so, conclusion there was, I did the empirical test.
00:45:28.120
They are, therefore, the most powerful economic player in the system
00:45:35.600
And the majority of the money supply is created by banks.
00:45:38.400
And knowing that changes the analysis entirely.
00:45:54.620
Can Banks Individual Create Money Out of Nothing?
00:46:22.680
And, but I really wanted to get to the bottom of this accounting.
00:46:27.980
the difference is, you know, when a loan is granted.
00:46:32.960
And, of course, we can take a loan from a non-bank.
00:46:35.240
I mean, there's major non-bank financial institutions.
00:46:43.180
And, you know, so why can't they do the same as the bank?
00:47:00.800
Because it's clear, if you compare the accounting,
00:47:35.580
okay, what is the thing that allows banks to do it this way?
00:48:38.700
And that means when we put our money with a bank,
00:50:12.020
but your phone is bound to run into trouble eventually,
01:23:56.960
countries you know we've had this macroeconomics
01:24:06.800
less the same and the IMF and the World Bank have
01:24:10.620
implemented this now globally since you know since
01:24:13.740
1945 developing countries forced to more or less
01:24:19.400
policies that are considered orthodox deregulate
01:24:22.560
liberalize privatize and allow foreign investment to
01:24:28.860
interest rate policies so how many countries using this
01:24:33.000
IMF World Bank approach to economic development have
01:24:36.360
actually succeeded and have developed you know we've
01:24:41.720
enough time to actually say okay let's take stock
01:24:44.400
it's a longitudinal study yeah yeah so how many
01:24:47.840
countries have decisively moved from developing
01:24:50.680
country status to develop country status as a result
01:24:53.140
of these policies well there isn't one none what
01:24:57.520
about Haiti well is that industrialized no no that's so
01:25:03.900
what I thought you're gonna say what about China for
01:25:06.860
example India what about well you see we do have some
01:25:10.660
countries that have developed the ones you can count
01:25:13.460
them on on on five fingers of one hand the countries
01:25:17.820
that in the 20th century and perhaps early 21st century
01:25:20.940
included have moved decisively from developing country
01:25:24.260
to develop country status namely in that sequence Japan
01:25:29.220
Korea Singapore Taiwan and China now with China if you want
01:25:36.540
to quibble some because it's such a huge country some parts
01:25:39.440
of it have not yet made that transition but you know key parts
01:25:44.200
of China have actually and and so I think we can include China
01:25:48.680
in this list in fact China is the best example of how this was
01:25:52.780
achieved they all achieved in the same way Japan was the first
01:25:56.060
in the Japanese model which is also what I found in my long
01:25:59.140
research on Japan and which is described in detail in the book
01:26:02.220
princes of the yen you know what is this high growth system it's a magic system
01:26:06.920
for having high growth and prosperity well China is the best example because
01:26:12.060
they most of the time in the post-war era they didn't follow this model on the
01:26:16.620
Mao it was Soviet Stalinist planned economy and of course also looking at banks how
01:26:25.220
how many banks did they have one the central bank the people's bank of China okay now after
01:26:32.840
Mao died there's some to and fro but then a new leader came to power Deng Xiaoping in
01:26:40.060
November 1978 Deng and he was a smart guy and he gave a speech very early on it's the first
01:26:50.260
speech where he was you know rising to power and he said that I mean I'm paraphrasing essentially
01:26:56.040
he said let's forget about all this ideological stuff I had to be careful obviously because
01:27:00.200
there was still hardcore Mao is probably in the room but let's not talk about ideology why don't
01:27:05.940
we focus on what delivers growth and prosperity essentially what he's saying you know it's a
01:27:11.520
famous expression it's like it doesn't matter the cut the color of the cat whether it's a red cat
01:27:16.100
or a or a black cat is what he should have said as long as it catches the mice it's a good cat
01:27:21.200
yes and he was talking about the economy you know it doesn't matter what we call the system as long
01:27:25.900
as it delivers and achieves what we want which is high growth prosperity which of course strengthens
01:27:31.240
China so everyone wants that let's do it that's what he was saying now and he was switching from
01:27:37.340
ideology to practical empirical work and he had there's another expression learn truth from facts you know
01:27:45.100
where you get these four Chinese characters yes proverbs made up of four characters so
01:27:49.760
seek truth from facts that's the empirical methodology not ideology which dominates economics
01:27:58.340
so it was pretty radical for China it remains revolutionary for western economics where they
01:28:04.400
still have ideology dominating and essentially their western type of Mao's little red book is still
01:28:10.540
dominating things in economics whereas the Chinese decided okay we've done that cultural revolution
01:28:16.260
great leap forward which was greatly backward I mean this all seems to be happening now in Europe you
01:28:21.740
know all this ideology and de-industrialization which is what they tried and didn't really work wasn't
01:28:27.880
really good so let's look at empirical facts what works now he had a neighboring country that was
01:28:33.960
performing really well Japan and what did he do he went to Japan already before he was appointed but in the same year 1978 he traveled to Japan with his experts
01:28:46.680
and he knew I think his because a lot of when I was I was in Japan for 12 years and
01:28:52.800
when I was a student initially you realize the large majority the biggest majority of foreigners in Japan is Chinese there's many Chinese and the you know among the students so many Chinese students so they know Japan well this generation generation they've studied in Japan speak Japanese very fluently
01:29:10.180
really know everything about it so he came with his experts and I'm sure they knew one charming feature which I also discovered of the of the Japanese people who are very kind
01:29:20.800
to foreigners i mean kind to everyone but you know very friendly and kind people um they have
01:29:26.280
this additional charming feature that they want to tell you the truth but culturally in japan
01:29:32.700
there's this interesting thing and you when you go to japan and you read some book about japanese
01:29:36.980
culture what are the difference usually it's mentioned oh in japan there's two truths two
01:29:42.360
truths what is that yes the official truth and the real truth oh yeah well that's true everywhere
01:29:48.420
isn't it but in japan it's culturally recognized and so what happened to me a lot of time when i was
01:29:53.940
in formal meetings during the day trying to ask questions about you know how does this work with
01:29:57.720
this foreign investment real estate transaction bank credit they would give me answers and several
01:30:03.120
times on the way out one of the group speaking to me would say richard that was of course the official
01:30:09.660
story well let's meet for dinner i'll tell you the real story you know the official story is called
01:30:15.340
tatemai which means the facade the front the outside the outer appearance and the true
01:30:21.680
truth is is hone the the real intrinsic truth and this happened many times because japanese people want
01:30:30.240
to tell you the truth and because it's recognized that what you hear in official meetings government
01:30:34.480
announcements or even business meetings during the day that's you know that's just the official
01:30:39.060
narrative but it's not true there's a gap and that's by the way also why they have to work such
01:30:44.240
long hours because there's a rule that after six o'clock it's off the record and you can speak the
01:30:51.040
truth in informal setting for dinner and so on so there's an honest part of the day yes but in fact
01:30:56.820
that's so important as you can imagine that's why they work so long you know they have to because
01:31:00.920
that's finally i would show up at 5 30 just to like get it out of the way so i'm sure things are
01:31:05.940
being new about that and i checked the records they did have some banquets some dinners with sake
01:31:10.340
and motai flowing and that's when they tell you the truth and he did ask the question he said i
01:31:16.540
have come you know here's the chinese leader coming to japan these countries were at war second second
01:31:20.620
world war and it was it was not just making peace it was literally he was saying thank you for for
01:31:27.260
receiving me i have come to you to seek the elixir of high economic growth he was alluding to this
01:31:35.400
legend that both the chinese people know and the japanese people know namely that there's this legend
01:31:39.940
there was an ancient scholar one of the sages with a long beard and the flowing gowns from china
01:31:45.680
going to japan seeking the elixir of life which is a bit like the you know philosopher's stone the
01:31:52.900
alchemy you know which you know is probably the link to money creation but anyway and it's a famous
01:31:58.340
story now he didn't find the elixir of life in japan but you know this chinese scholar seeking it so he
01:32:04.780
was alluding to that when he used that expression everyone knows and you know of course the japanese
01:32:09.780
know that that culture that the writing you know there's so much is from china that actually there
01:32:14.960
is a close relationship you know yes and i think both peoples actually quite appreciate each other
01:32:20.760
it's usually i must say you know it's it's like foreign policy neocons from the u.s who want these
01:32:26.580
countries to be apart it's like germany and russia must be apart but anyway um so um and he told him
01:32:36.280
that you know what that how the japanese reacted when he said i've come to you to to to ask you what
01:32:41.840
is the secret of high economic growth the elixir of high growth they told him now what did they tell
01:32:47.580
him well it's not recorded you know there's no transcript of this of this dinner um but we do know
01:32:55.020
what he did after that and i can imagine the conversation probably the first question these
01:33:00.400
were all senior people from the ministry of finance bank of japan um bank leaders um i can imagine they
01:33:07.420
will have asked okay so how many banks do you have in china with your i don't know at the time maybe
01:33:11.320
five six hundred million people already a multiple of japan um and of course now beyond a billion but
01:33:21.940
you think with one bank deciding the creation allocation of money you can get prosperity for
01:33:30.600
everyone think again you need to have many many banks you need small local banks you haven't even
01:33:37.760
finished your explanation of the meeting between dung xiaoping and the japanese leadership and you
01:33:43.640
you've just here's what i think you're saying we're about to say that the problem one of the
01:33:50.060
problems with china's economy was that one bank could never efficiently allocate credit which is the driver
01:33:58.360
of the economy you've made that case i think really um powerfully and so you said what you really need
01:34:06.200
are smaller banks because they can more precisely allocate credit to different parts of the country
01:34:13.460
that have different needs and um and if you don't have that you have like stagnation and
01:34:20.400
inefficiency and like death and that kind of describes what's happening in the united states i'm
01:34:26.420
sorry to ask you to pause that's that is that what you're saying am i following yes yes no you're not
01:34:31.820
just following you're that's exactly the next point um in fact i did a study on the u.s with my
01:34:38.100
collaborator former phd student of mine um because america still has just about the largest number
01:34:44.460
of banks in the world um although the the number used to be a multiple yes the fed killed 10 000 banks
01:34:50.740
in the 30s it killed 10 000 banks 50 almost 15 000 banks in the post-war era central banks want to
01:34:56.740
consolidate and reduce the number of banks but the more banks the better uh for an economy for the
01:35:02.200
country for the middle class what we found in the study is we looked at what is the link between
01:35:06.460
the uh the size of the bank and the size of the borrower and then and you know um and what we found
01:35:14.120
i mean it's it makes common sense but it wasn't really demonstrated properly in the in the uh in the
01:35:20.060
research by others yet it's a simple fact in banking big banks want to do big deals with big
01:35:26.180
customers makes sense that's how they earn big money who lends to small firms only small banks
01:35:33.100
now why are small firms important they're the biggest employer small and medium-sized enterprises
01:35:38.640
employ 65 70 percent of everyone in every country in the world in some countries it's 70 80 percent of
01:35:45.520
employment you know in when you study finance and i'm teaching finance in some at several universities
01:35:52.880
you know um basically um they focus on companies that issue stocks and shares well that's such a
01:36:00.940
minority 99.9 percent of companies don't issue and publicly trade stocks they're not listed in the
01:36:08.160
stock exchange they are small firms where do they get money from small firms you know 99 of the
01:36:15.560
companies are small medium-sized enterprises they get their money from i mean internal money friends and
01:36:21.440
family yes but external money is only from banks now which banks if you have an economy that's mostly
01:36:29.140
dominated by large banks extreme case is the uk five big banks dominate you know the the banking system
01:36:36.400
85 percent of deposits with five banks the big five then because they want to do big deals they
01:36:43.440
don't lend to small firms small firms don't get money and that means only big cities survive
01:36:47.800
yes everything becomes concentrated now germany it's reflected in demographic trends it's reflected
01:36:54.620
exactly wealth allocation exactly so because this is a trend like when i was born 1969 like there was a
01:37:01.800
lot of wealth in grand rapids michigan there was a lot of wealth in des moines iowa there was
01:37:06.500
portland oregon i mean there were it was more diffuse because there were more banks more local banks
01:37:12.220
everything is affected even fertility because if everyone you know has to move to the big cities
01:37:16.800
where property is more expensive smaller apartments small dwellings you know can't have another child
01:37:22.980
you know so many things in in society are actually affected directly by this trend and this trend has been
01:37:29.820
driven very hard by the central banks they want to reduce the number of banks sometimes it's official
01:37:34.040
like the ecb we think europe is overbanked there's too many banks and the ecb is the youngest
01:37:40.040
major central banks only founded around 2000 and it's already managed to kill 6 000 banks in europe
01:37:45.580
wow well done so it's very sad now germany in europe used to be the country with by far the largest
01:37:52.160
number of banks and still is the one with the largest number of banks but in the last 20 years
01:37:58.100
under ecb pressure through their policies of reducing banks profit margins you know zero interest
01:38:04.900
negative interest rate policy and then this over regulation made life so hard for small banks
01:38:10.080
they had no choice but to merge that was the goal and that was achieved so the number of small banks
01:38:14.640
goes down and that means banks lend less for productive business investment the best way to make sure that
01:38:21.820
banks create credit for the best of these three scenarios you know to make sure they don't lend for real
01:38:27.460
estate or for consumption but mainly for productive business investment is to have many many small
01:38:34.340
banks that lend locally to small firms and that was the system in germany but it's been under threat
01:38:43.240
but it also you know while germany was doing well until a few years ago germany produced the largest
01:38:50.580
number of hidden champions do you know what these are these are special small firms that that's why
01:38:57.380
hidden because basically we don't know the names of all these small firms they may be dominant in
01:39:02.080
their market niche but you know they're so small we don't know the names and you can look
01:39:07.840
internationally where these hidden champions champion because they have top one two three market share
01:39:13.860
gold silver bronze like a champion in the olympics that's where this concept comes from and if you look
01:39:19.220
internationally germany had by far the largest number of hidden champions of any country in the world
01:39:24.920
much more than china japan even the us and it's because of this extremely decentralized banking system
01:39:33.380
with all these thousands of small local community banks but by now the numbers already dropped a lot in
01:39:39.900
the in the last particularly under the ecb last 20 years um but that explains why germany in the past did
01:39:47.500
very well but that's now being eroded and it's the same in the us the us has been in the past a very
01:39:52.660
strong economy because there were so many small banks local banks so let's put it in political
01:39:57.360
terms i'm starting i'm not a genius this is taking a while to figure this out but it does seem like
01:40:02.680
there's a direct connection between the way credit is allocated and by whom and your political system
01:40:09.100
so yes a totalitarian system has a smaller number of institutions providing credit because they can
01:40:15.800
control the country more and therefore a smaller number of beneficiaries of the system exactly exactly
01:40:22.640
so the fewer sources of bank credit you have the more centralized your society is the more control
01:40:31.100
there is in a smaller number of hands the less democratic your country is exactly that's exactly it
01:40:36.000
okay and of course this is also what immediately deng soping realized for speaking to the japanese because
01:40:40.580
they told him well it's all about banking banks create great credit and credit is needed for growth
01:40:47.400
because what is growth growth means more transactions this year than last year that means more money is
01:40:51.520
changing hands for transactions this year than last year that's in our system only possible if there's
01:40:56.380
been more credit because that is the money supply expansion and of course then it depends what where's the
01:41:01.880
credit going is it going for asset purchases that's no good asset inflation consumption that creates
01:41:08.040
because you're blowing my mind so i mean again i've spent my whole life imagining that the m's
01:41:13.340
you know that's what they want you to be m1 m2 and all that um that the federal reserve was you know the
01:41:18.640
source of the money supply just the the fed but it's all banks of course it's true that the central banks
01:41:26.380
are powerful but they're powerful through their control of the banking system and they have power of the banks
01:41:32.520
uh and you know those who control these central banks is it's a small number of insiders you know
01:41:38.800
historically you know probably some big banking dynasties and so on um and of course they exert
01:41:44.240
the power they they reduce the power of everyone else all these other banks and the central banks can
01:41:49.240
manipulate banks for example to lend more for unproductive um unsustainable asset purchases create the
01:41:55.380
boom bust cycles that's what my my book princes of the yen shows that the bank of japan
01:42:00.240
created the acid bubble of the 1980s on purpose and i could even show that it was intentional
01:42:07.180
and it's it's demonstrated in in several dimensions of proof both eyewitness accounts the data um the
01:42:15.120
um anecdotal evidence um you know it's all there um essentially they've the bank of japan is admitted
01:42:23.720
that was the goal why would they want to do that in order to have what follows a massive long
01:42:29.900
recession i didn't expect to be a 20-year recession i mean that's pretty brutal and crazy
01:42:34.800
um but that's what they wanted why did they want in order to blow up the successful system
01:42:42.060
japan was far too successful it had to be destroyed just like the german economy and others in the past
01:42:49.200
who wanted it destroyed and why well you know if you if you go back to um japan's relationships
01:42:58.020
with other countries in the world in the in the 60s and 70s particularly 70s and then early 80s
01:43:03.300
it became clear the one country that was most unhappy about japan was the united states of america
01:43:08.740
they had one political initiative about after another to try to force the japanese to change their
01:43:15.620
economic system yeah slow down structural impediments initiative this that and the other no no this is
01:43:21.100
unfair you must change all your business practices now officially in terms of the economics the argument
01:43:26.860
was always we want to help you become a stronger economy are you sure
01:43:32.360
um and and you know that's it didn't work politically so the central bank was used essentially as a traitor
01:43:42.240
to blow up the system it's the same in the asian crisis you know the asian crisis i was sent i was
01:43:48.520
at the time at the officially um at the asian development bank and i was sent as an official
01:43:53.020
representative to the government and central bank of thailand to analyze what's going on with this
01:43:58.100
asian crisis and what are the right policies and it so quickly emerged the same mechanism the same
01:44:03.340
goals as in japan this was to destroy the success blow up the system create a crash create a crisis
01:44:09.360
then and then also imf forcing them to open up to foreign investment and because there was so much
01:44:16.580
strong growth and prosperity but the western um big um owners and banks didn't have any ownership
01:44:23.660
in this and the asian crisis and japan in crisis korean crisis was a way to force it open
01:44:29.840
and then the west could buy it up very cheaply so you think that the japanese recession was created
01:44:36.900
well by the bank of japan but with the encouragement of the west in order to slow down yes the u.s and
01:44:43.160
the fed yeah absolutely that's what i show in the book there's there's no there's no doubt about it
01:44:48.480
and there's no no been no contrary evidence um or that anything in my book was incorrect so you write
01:44:54.920
this book published only in japanese at least yes and it as i said at the outset rockets to the top
01:45:03.100
of the bestseller list in japan beating harry potter which is amazing and then what happens
01:45:09.500
yes what happened next why haven't i read this book and why is it not on our bestseller list
01:45:14.500
well yeah it's um what happened next was of course in japan i was constantly being interviewed i was in
01:45:23.460
the by the daily press by the weekly magazines by the monthly magazines i was given uh monthly columns
01:45:30.300
i was writing for years every month in the japanese economist the japanese newsweek i was on their
01:45:35.900
television there's some big japanese yeah it's all in japanese there was some big live show your
01:45:41.340
japanese is good enough to do to explain economics i wonder how many of our viewers will know what
01:45:50.660
you're saying um that's impressive um and so but it was all in japanese you know so it was you know in
01:45:57.760
the media there was some way you could see there's some pressure being applied some high profile live
01:46:02.640
sunday uh tv shows uh like canceled on the day and then the you know the senior executives inviting
01:46:10.420
me around embarrassed to try to explain and you know the japanese love the truth so they would
01:46:14.840
they did tell me the truth well sorry you know we it wasn't we had no choice you see our advertisers
01:46:22.800
you know the advertising revenue is very important and it was one of them it was our biggest advertiser
01:46:28.600
and told us richard verner can't be on this show so you mean a company like toyota canon or something
01:46:34.900
yeah i can't say the name but a company like that well hang on they have nothing against me i have
01:46:40.120
nothing against them why would they say that yeah of course it's not them and they also said that they
01:46:44.400
have nothing against you you know and i'm you know we're all really sorry about this but you know
01:46:48.540
is their bank saying that that they have to say this but hang on i don't even criticize the banks
01:46:53.920
because i show that it was the central well yeah you see that the bank had to say that because the
01:46:58.720
central bank asked to do so so that's the chain of command you know and so then i was canceled in
01:47:06.440
that show or some magazine editions even there was one it was one of the top um weekly magazines
01:47:12.960
i was interviewed in that you know it was very proper and formal they came with several uh photographers
01:47:19.540
and recorded i checked the script you know they everything was a big deal and they even then
01:47:26.380
sent me the actual copy of the magazine but there was no article of me it was like last minute they
01:47:33.480
even forgot to take me off the distribution list um so i called them thanks for sending this but
01:47:42.660
and they explained well we yeah we had to kill it because of pressure so um so that happened on the
01:47:55.220
one hand but you know still i mean i would say more than half of the time i you know my interviews
01:48:00.980
got through i thought at the time wow that's pretty controlled i now realize with hindsight that was
01:48:05.780
pretty open because once i went to the uk it was like fully controlled and you know i did not have
01:48:12.200
this media access anymore but it was only in japanese so one day i got a call from a reuters journalist
01:48:19.840
from reuters this and this name british guy on the phone apparently and and he mentions my book oh so i
01:48:26.580
thought oh that's impressive because it's all in japanese and usually you know the foreign journalists
01:48:30.460
they don't speak japanese so i was quite curious so and i expected you know he wants to interview me
01:48:35.580
on the book and then he's oh no no it's um no sorry it's this is uh it's about your book but it's a
01:48:40.360
personal matter really personal matter yes i'm calling it's a private matter um i want i want you to
01:48:49.220
to help my wife right well i'm confused can you explain well you see her job is to translate your book
01:48:58.480
well hang on this book has been translated it's a great translation i helped with it the publisher we
01:49:04.380
sat together we you know we're really uh word smithing every sentence to make sure it's got
01:49:11.720
the right nuance i wrote in english yes but it's it's a it's a very good translation what do you mean
01:49:15.720
her job is to translate my book yes her job is to translate it back into english she's given a very
01:49:21.160
tight deadline and you know if you give us the manuscript the original english then she's done with
01:49:29.080
her job excuse me what you know i own all the language rights i've sent it to some american
01:49:35.120
publishers i'm still waiting for the result this is like a pirated translation i'm sorry i mean i'd
01:49:40.000
love to help you and your wife but i can't do this against my own interests so it's a decline now he did
01:49:47.200
say where she worked and it was one of the major i don't want to say i don't want them to get in
01:49:51.580
trouble even after even though it's 20 24 years ago but it was one of the major places in japan
01:49:59.400
that are more considered um official where you where you also think well hang on why do they need
01:50:07.360
to read need to read this in english because the japanese people are quite happy if something is in
01:50:13.100
japanese they will only read the japanese you know you've got a choice nobody will say okay i'll read
01:50:17.400
the english so it was clear there's somebody outside japan who wants to read this but who could use
01:50:25.540
one of the major was considered government institutions as a translation bureau well the puzzle was solved a
01:50:36.140
few months later when somebody came to visit me from america from washington head of one of the think
01:50:45.220
thanks and he constantly had met him before he knows me when you know he's doing japan he wanted
01:50:48.640
to a lot of people came through to see me on japan and ask me on my analysis and so you know um we met
01:50:56.280
and and first thing he says richard great book you wrote in japan princess of the yen well hang on you
01:51:02.900
don't read japanese no of course not no i don't but you know the translation is circulating in washington
01:51:10.220
and and and then um and then you know uh a few months later i got the call from the u.s embassy
01:51:22.260
it was you know clearly a japanese lady working there very polite as you'd expect professor warner
01:51:29.120
um we have a request from the u.s state department it's like okay um there is a there's a senior person
01:51:40.260
from the state department who wants to arrange a meeting with you uh well i guess that's in
01:51:45.560
washington i have no plans to go to washington at the moment sorry no he's coming to tokyo to see you
01:51:51.560
so i thought okay let's um meet in a public place as opposed to a dark alley
01:52:00.600
um and sure enough um when we met the main message was you know the cia is watching you
01:52:12.420
that was the message that was the main message it's like there was no there's no quizzing or trying to
01:52:20.420
manipulate me or get me out you know it's just the cia is watching now what you're doing
01:52:25.780
they weren't trying to learn from you they were trying to tell you something
01:52:28.620
no no actually somebody suggested when i told him the story that that also was my opportunity to ask
01:52:36.800
for something like you know be president of one of the federal reserve banks in the u.s
01:52:42.420
as part of the deal to stop talking about credit creation actually it reminds me i need to
01:52:47.960
uh finish another story i started you know i told you about canes moving away from the truth
01:52:53.480
i just want to pause and savor this from a moment so you publish this book in japan in japanese
01:52:58.720
explaining the japanese recession and within a few months you get a visit from the cia
01:53:03.880
yeah yeah well i i spilled the beans on what is the most powerful mechanism for both economic growth
01:53:11.920
and prosperity or arranging for the boom bust cycles and of course this is something that's been
01:53:17.100
happening across the globe in the last 200 years uh quite a lot and i was mentioning names and i did
01:53:25.500
okay i need to tell you to finish that before we come back to the uh to ben benanke and and colleagues
01:53:31.320
um i after that visit all the u.s publishers sent back their polite letters turning down my book
01:53:38.880
i mean imagine this is a book that was the number one bestseller in japan it did have a chapter in it
01:53:44.200
on the u.s there was a link i had a chapter on asia the asian crisis same story and i had a chapter
01:53:49.360
on my encounter with alan greenspan and based on that encounter and some analysis i concluded that
01:53:57.940
was in that chapter that actually the federal reserve was on track and alan greenspan was still
01:54:02.680
um hitting it at the time um was on track to create the biggest asset bubble in history
01:54:12.400
and they will do likely the same as in japan and it will be a crisis uh it will be a bust but because
01:54:19.140
it's america it's going to be a global financial crisis that was in my book in the it's published in
01:54:25.340
original japanese in 2001 um now this this i then found one publisher that has a i don't want to
01:54:32.480
mention the name is a very good name um and they have international offices global uh excellent top
01:54:41.020
reputation and their u.s um operation is quite independent has editorial independence and i met to
01:54:47.780
i sent the the whole manuscript to the ceo of the you know their u.s side and their excellent
01:54:56.000
distribution in the u.s and then i i went to new york and i called him and said i happen to go through
01:55:03.080
new york can we meet oh of course uh we met um in the four seasons the first thing he said when he
01:55:10.120
he saw me is richard thanks for sending me your book i read your book it's the best business book
01:55:16.400
i've ever read that's what he said of course we'll publish it so that's how the lunch started and i
01:55:22.060
thought well this is good this is starting good i better immunize him a little bit on the what's
01:55:26.480
going to happen next people will approach him and i experienced this in japan they will say that
01:55:30.840
this is a dangerous book that phrase was used some particular journalist working at the new york
01:55:36.400
times but probably also rather you know in the mockingbird style perhaps working for some of the
01:55:41.440
agencies um they did some um some sort of uh activism against my book because i wanted a book
01:55:49.780
launch on the japanese book for the foreigners and foreign journalists in japan at the foreign
01:55:54.980
correspondence club and the head of the foreign correspondence told me that these u.s journalists
01:55:59.920
were really trying to block that anyway so i told him you know they will say this is dangerous and
01:56:05.360
and he was just laughing it off you know nobody can stop me i have total editorial
01:56:09.780
independence and this is a brilliant book it was best selling japan you're kidding me
01:56:14.520
of course we'll publish this so two weeks later i was back in tokyo email from this guy um
01:56:23.620
dear richard it's great to meet you in new york i love your book unfortunately we can't publish it
01:56:29.160
he don't i guess he also got a visit from from the the cia people was it ever published in the u.s yes
01:56:39.180
so then i was i was getting to be honest a little bit frustrated because i wanted the message out it
01:56:45.700
was already more than a year that i couldn't find a publisher for a book that's a bestseller
01:56:50.000
so i thought okay what what what is it that in the u.s they're particularly upset about and i
01:56:56.580
concluded it must be that chapter with alan greenspan and i need to now tell you the background
01:57:00.680
of that and what happened when i met alan greenspan you see my first article after you know after i
01:57:07.900
published this paper in japan for the development bank in japan solving the puzzle of capital flows
01:57:12.880
was credit creation was the answer and you know it's still the only paper to explain japanese capital
01:57:19.900
flows with credit creation for asset purchases explains capital flows and also this huge outflow and the
01:57:25.420
collapse it's published then it takes years with these academic journals published in 1994
01:57:29.880
land prices in the japanese asset bubble and and and um and capital flows and so um that i'd sent to
01:57:41.540
the economist at the time because i'd also i'd taken the next step because i realized this is so
01:57:46.620
powerful i can explain capital flows but i realized with this i can explain almost everything i can
01:57:51.280
explain explain japanese gdp growth and that worked i can explain you know the ups and downs of of the
01:57:57.820
business cycle uh i'm now expecting a credit crunch and a banking crisis so because i linked it into a
01:58:06.120
macro model there is one um very simple macro model that links money in the economy which is quite famous
01:58:12.100
throughout modern economics in the last three four hundred years actually so-called the so-called
01:58:16.980
quantity equation mv equals py py py is prices times some reason they use y for real gdp real income
01:58:25.260
because the i had been used for investment by canes already then used y for income real income
01:58:31.320
times prices is nominal gps really we're saying money m times a constant velocity equals nominal gdp
01:58:38.520
that's what it says so there's a direct link between money supply and gdp but the relationship broke down
01:58:43.840
because velocity wasn't constant and it was all over the place and that's when monetarism failed
01:58:50.440
in the 80s and people thought it's not working but what i realized was that that equation is wrong it's
01:58:56.620
a special case and because it's basically wrong on two counts number one is it assumes that all money
01:59:04.220
creation is used for gdp transactions but what about credit creation money creation used for asset
01:59:09.460
purchases yeah it's just which of course since the 80s has ballooned and that explains the velocity
01:59:14.280
decline you see that explains it so i realized we have to have two equations one is the money going
01:59:18.960
into gdp the real economy money going into asset markets and i did that and it worked well how could
01:59:23.480
i do that milton friedman himself at one stage said oh i wish we could divide money into its use
01:59:29.040
well we can if we understand the money creation process which is credit creation the credit data you can
01:59:34.820
disaggregate credit for the real economy credit for asset purchase and that's what i did so i call it
01:59:40.320
the quantity theory of disaggregated credit it's really the general quantity theory because it turns
01:59:45.840
out the ancient mv equals py is a special case i've got the general case which is credit as money and
01:59:52.880
divide it into the two flows money for the real economy money for asset prices anyway so that's what i what
01:59:58.440
i did at the time i sent this to the economist they wrote a brilliant write-up a whole page on my
02:00:03.680
uh on my work this was the economics editor at the time and because this is pre-internet now anyone
02:00:10.740
who wants to read this i i actually it was in the public domain i'd give a presented this as various
02:00:15.480
conferences economic royal society economic conference and an asia pacific conference anyway
02:00:21.100
but people had to write to me who wrote to me it was the bank of england um ross childs jp morgan
02:00:29.280
and oh the fed now they were like there was a fax there was a phone call at oxford where i was in
02:00:37.520
the institute of economic statistics and it was like urgent everyone's telling the fed the senior
02:00:42.180
people from the fed they need the paper we needed yesterday so okay and i sent it to all of them
02:00:48.740
um i never heard back from anyone but they were all clearly curious about because you know the in
02:00:54.220
the write-up um the keywords credit creation were mentioned and you know my whole approach was
02:01:00.180
mentioned and the author who's a good economist clive crook you know he wrote you will hear more
02:01:05.920
about this or perhaps he expected it to spread faster he perhaps um underestimated the resistance
02:01:11.980
against the truth spilling out he may be at some other me i think he's still writing maybe for forbes
02:01:18.860
or i i don't remember yeah anyway so um there was this write-up i sent it out and then the fed
02:01:26.640
had wanted to see it so later when i was actually also thanks to that write-up i got job offers from
02:01:33.080
various investment banks to be their chief economist in tokyo i was interviewing with
02:01:37.720
goldman sachs had an offer from swiss bank corporation to be head of research and then jardine
02:01:42.320
fleming offered me that job as chief economist which i thought that's not bad you know for my
02:01:46.740
young age of what was a 25 years old so i took that went to tokyo because they gave me the leeway
02:01:53.100
to implement my credit creation model and so quickly rose to being one of the top economists
02:01:57.400
in the various surveys institution investor survey granite survey a top three economist on japan
02:02:02.780
because my forecast worked if you look if you use credit creation it works you know you can
02:02:07.200
forecast what's happening what's going to happen um and um but so they sent in and you know these
02:02:15.220
these firms send you around the world you sing and dance for the institutional investors you're
02:02:18.580
on the sell side um presenting and you know you get some really tough questions it's a good way to
02:02:23.560
um to get feedback and get critiques of your theories and models so they've been pretty much
02:02:29.620
you know tested against a lot of resistance and when i was um and of course you go to places where
02:02:34.840
there's money so new york boston was also part of the itinerary usually going around the world
02:02:38.920
but i managed to arrange an afternoon in washington and then i i went to see the fed
02:02:46.400
and the senior economist at the time wanted the paper we had a good meeting and so i asked him at
02:02:51.760
the end so you know who was that senior senior board member you had mentioned wanted to read my paper
02:02:58.820
oh that was alan of course oh okay alan greenspan great so made my day and then another two years
02:03:06.240
later there was the annual you know biannual meeting of the imf and the world bank is outside
02:03:11.100
washington is somewhere in the world and happened to be in hong kong and my investment bank the asian
02:03:16.080
headquarters was in hong kong so they had a big dinner with all the big cheese people there and i
02:03:22.180
managed to get myself to come over from tokyo and there was alan greenspan usually crowds around
02:03:27.560
him and you know all the top guys you know finance ministers central bank governors everyone there
02:03:32.180
and at one moment crowds had receded okay my chance i'll go and talk to alan greenspan introduce
02:03:40.000
myself and i'd prepared this chat up line which i then immediately used may i excuse me may i introduce
02:03:45.900
myself my name is richard verner i believe you've read some of my research of course you'd expect this
02:03:51.880
is four years later you'd expect him to say your research like what was that about tell me more
02:03:58.580
which is sort of what i was expecting you know what he said richard verner credit creation
02:04:06.400
the paper on japan yeah i read it twice in the economist and then the actual paper
02:04:17.700
would you venture to comment on my paper next surprise you know what he says
02:04:31.560
hang on it's just proven that he remembers every single detail of this but he clearly didn't want
02:04:41.320
to talk to me so that was that was kind of scary and so when i got back to tokyo we had the system
02:04:47.340
called reuters 3000 uh you know it's all sort of pre-internet or very early stages so i looked up
02:04:55.440
greenspan's publications his speeches anything written anything uttered by him because you know
02:05:03.620
he said it richard verner credit creation the key words so you know when and how and how often has he
02:05:12.720
used credit creation in his and he you know he was central bank um chairman of the board of governors
02:05:18.720
for what 18 years so you know and you know he's been prolific in his in his utterings and speeches
02:05:25.940
and publications you know how many times he's used credit creation i did this keyword search
02:05:34.880
now of course i knew through this encounter that he knew extremely well
02:05:42.340
why this is so important so powerful he knew this very well that was very clear
02:05:49.020
but he was playing ball this is a taboo he's never used it and i thought that can't be there must be
02:05:55.520
i kept searching and then i discovered there's a book um edited by ayn rand and he wrote a chapter in
02:06:03.940
it in 1967 when he was not yet at the fed and it's about oh credit creation and how gold is a much
02:06:14.440
better way to run the system because once you give central banks this much power they will create too
02:06:19.500
much credit he basically when you read it he criticized the fed for creating the um the asset
02:06:25.780
bubble of the 1920s in the u.s and then the great depression in the 1930s which was the fed's job
02:06:31.660
they did that and it wasn't an accident and of course the bank of japan was doing the same thing in japan
02:06:37.580
so i realized wow this is how it works he then was offered a job at the fed but he was he was basically
02:06:44.420
told never to talk about this again and the same is true now back to ben benanke he started to work
02:06:50.680
on credit when he wrote about the great depression and you know there's some papers but he hadn't
02:06:57.540
discovered the credit creation aspect like banks create money out of nothing he'd never written about
02:07:03.420
that and but you know he's more and more writing like oh we need to look more at credit and banks
02:07:09.400
why do we drop out banks we need to understand what's happening there this sort of thing you know that
02:07:13.240
was his work until 1993 this is already after my first paper was out and i think the fed decided
02:07:19.880
we need a counter argument now and there was this paper by benanke with a headline credit creation and
02:07:28.260
the macroeconomy wow that's like wow this is what i'm talking about so i read it and you know what he
02:07:35.280
says oh credit creation is the financial intermediation of banks gathering deposits and then lending them out
02:07:43.000
he's defined it away there was no credit creation and then he also writes oh i used to write a lot
02:07:48.280
about bank credit but it's not so important mea culpa even in a footnote i was wrong writing about
02:07:53.880
bank credit it's not so important and where was this thing published federal reserve federal reserve
02:07:57.900
publication that's where his career started and his career then took off and he became chairman of the
02:08:02.820
board of governors of the fed but he would never talk about it now when he did use the knowledge was
02:08:07.900
when he copied my quantitative easing and i must mention this because of course you know i said
02:08:13.500
earlier once you create this asset bubble you get a banking crisis but it doesn't need to be a
02:08:19.040
20-year recession it doesn't need to be a 10-year recession as a result it doesn't even need to be a
02:08:24.140
one-year recession you can have an immediate recovery and you can get rid of the non-performing
02:08:29.660
assets in the banking system just like that at zero cost to society so whenever they say oh we need to
02:08:35.320
use fiscal money we need to have national debt now based on this bailing out the banks and now we
02:08:39.860
need austerity all the ordinary people need to you know tighten their belts now this is all a lie we
02:08:45.720
don't need any of that it's just an accounting problem and the central bank has the tools to legally
02:08:51.360
just change the accounting such that there's no more problem namely and this is my original proposal
02:08:57.700
so i published this in the nikkei nihon kese shimbo in the main um newspaper financial newspaper daily
02:09:03.120
highly respected big article second of september 1995 headline we can have a recovery and high
02:09:12.500
growth through quantitative easing which was my proposal i explained i explained bank credit
02:09:17.400
creation so the first thing is you know we have to boost bank credit creation for the real economy
02:09:22.280
and here's how to do it and i have basically there's three things the government could do and
02:09:27.140
so you know simplistically calling it just qe1 is the first thing qe2 second type and then
02:09:32.420
the third measure qe1 is for the central bank when you have a bus banking system with all these
02:09:37.640
non-performing loans the central bank just buy them up of course at face value as if they were still
02:09:43.780
valued at 100 at par and the banks clearly will be very happy about this their balance sheet will be
02:09:50.800
very strong they will be more liquid than ever in their whole history you've solved the banking
02:09:55.860
crisis there's no more banking crisis now you could say well hang on aren't we just shifting the
02:09:59.780
problem to the central bank well no because the central bank doesn't have to mark the market
02:10:05.200
you can just forget about these holdings but hang on isn't the central bank now creating money aren't
02:10:10.660
we paying for this through inflation and a weaker currency no because it doesn't create money
02:10:16.420
because money creation is when the banking system creates credit and injects it into a non-banking
02:10:21.980
system but this isn't a transaction within the banking system between the banks and the central
02:10:27.080
bank the central bank buying non-forming assets from banks it doesn't create money at all it just
02:10:33.080
cleans up the bank balance sheets at zero cost to society there's no need to use tax money why not do
02:10:39.300
that exactly well whenever now listen to this whenever the central banks don't want a banking crisis
02:10:47.440
to turn into a major thing and recession that's when they do it i'll give you two examples
02:10:53.860
august 1914 the united kingdom of great britain and ireland declared war on germany and her allies
02:11:03.800
which meant austro-hungarian empire ottoman empire yeah okay so that's how the first world war started
02:11:10.400
britain declared war just like with the second world war um the trouble was on i think the next
02:11:17.620
day the treasury the bank of england and the government got visitors from the british banks
02:11:25.420
and they said maybe clutching some balance sheets and documents uh sorry uh you've declared war
02:11:32.660
war were bust well how did that happen the british banks were bust not all of them but quite a lot of
02:11:38.640
them well london was the number one financial center for everything so even for bills of trade bills of
02:11:46.660
exchange and financial settlement between ottoman empire and hungary often it would go through
02:11:53.300
london london was the place and and of course often also pound denominated that was the most liquid
02:11:58.120
international currency you know and because now all these countries these are major countries germany
02:12:05.100
ottoman uh austria-hungary they're now considered enemy country all the paper held by british banks were
02:12:14.820
deemed non-performing because irredeemable enemy how do you get the money exactly so and it was large
02:12:22.940
enough for the banks to be bust because capital is not high in banking 10 or less so you quickly reach
02:12:28.060
that point where your equity is wiped out and you bust now because britain had just declared war on
02:12:33.980
all these countries was it a good moment to have a prolonged banking crisis recession economic depression
02:12:40.820
no so this was a situation where the central bankers did not want this to turn into a big thing and so
02:12:47.140
what did they do my qe1 the bank of england just bought those up at face value they had also another
02:12:52.560
policy where the treasury issued paper money actually because they felt we need to somehow protect the
02:12:57.480
credibility so we'll we'll have this measure as well so people look at the treasury they don't look at
02:13:01.940
the bank of england buying these assets at face value but anyway that was the key thing second
02:13:06.440
example and and so yeah the problem is gone no banking crisis may i ask you since you brought up
02:13:10.940
the first world war and we're on the cusp of a war right now potentially a global war what is the view
02:13:17.620
of war uh by the banks like what do the banks think but you've described the banks as the single
02:13:23.660
greatest um control mechanism of human behavior in a society i think particularly the central banks
02:13:30.940
because they have the bigger the bank the more the power but their power extends beyond just like
02:13:35.740
their relations with other banks their power like determines a lot of what happens in your country
02:13:40.160
yeah and they're not under the control of voters right so it's a it's an extra democratic institution
02:13:46.120
which happens to be the most powerful which is like crazy i'd love to know how that happened but
02:13:49.520
how do they feel about war well central banking and warfare are very closely linked the as i said i mean
02:13:59.460
the the modern um major bank the first modern major bank and central bank was the bank of england of
02:14:05.760
course and in the very um act law act of parliament the law founding it it says this um institution and
02:14:18.740
mechanism because they they didn't want resistance they don't mention bank of england what we're doing
02:14:22.700
here is establishing the bank they kept that secret we're doing a mechanism a new mechanism by these
02:14:27.360
investors to raise and lend a lot of money to the government namely by establishing a company
02:14:34.800
will be allowed to establish a company that's the bank of england in order for what in order to wage war
02:14:40.560
it was in order to make war so they're closely linked and of course if you look at its founding
02:14:46.680
documents in the in exactly the act of parliament establishing the bank of england it said the
02:14:51.960
purpose is to make war do you know why the federal reserve was established and there was a rush to
02:14:57.040
establish it for 1914 the year the first world war started exactly destroyed europe and again it was
02:15:03.820
done with subterfuge i mean you know the gathering everyone yes on the 23rd of december 1913
02:15:10.820
when nobody was there and then also introducing income tax that's also the bank of england it was
02:15:17.460
established together in the same act um calling for establishing new taxes why because when when
02:15:25.080
you have these central banks privately owned central banks established especially this trick where
02:15:29.640
these entrepreneurs persuade the government oh you don't want to make you know you don't want to
02:15:34.540
issue money issuing money we'll issue money for you what that's what they're essentially saying
02:15:39.860
without being so direct about it but that's what they want to persuade governments to give up the
02:15:44.320
power to create money themselves we'll do it for you and we'll lend you the money and henceforth well
02:15:51.360
how do we get our money back well we love to lend to the government because you can raise taxes
02:15:55.800
and that's why taxes were introduced the federal income tax didn't exist before the creation of the fed
02:16:01.120
it's also great you couldn't have one without the other well whenever central banks created they
02:16:07.980
introduce new taxes one way another yes and the the central bank of the united states the fed
02:16:18.240
was created during right before the war i mean yes and right before the war exactly months before the
02:16:23.780
war what was the role of the central banks during that war the most important war in the last thousand
02:16:29.860
years yeah well it was it was really at the pinnacle of the war economy there's no doubt about that
02:16:36.720
it's very clear and the same is true of course for the other side and now from 1917 the us and germany
02:16:44.320
were at war which is very sad a lot of americans of german descent and germans didn't really want to be
02:16:51.040
at war with germany but that's what happened so we've got these two countries at war sad the soldiers dying
02:16:57.620
the trenches and their economies organized as war economies at the pinnacle of the war economies
02:17:04.820
are the central banks so who were the key players in the german central bank the reichsbank which is
02:17:10.820
100 privately owned was somebody called max warburg or max warburg you might say in english and who was
02:17:19.460
at the pinnacle in fact was a founder um of the federal reserve and who was the key person there
02:17:27.940
it was somebody called paul warburg paul warburg his brother but of course the soldiers have to kill
02:17:35.180
each other and these two countries are wait wait wait the head of the german central bank and the head
02:17:39.960
of the american central bank were run by brothers during a war between the u.s and germany yes now i have to
02:17:46.740
qualify they weren't the formal governors but they were the key people did anyone notice this
02:17:52.420
well some people did i mean probably encouraged i mean with with paul warburg it was obvious because
02:17:58.960
until 1911 he was a german citizen he'd only just come over for that purpose to set up the fed
02:18:05.140
and he was speaking i mean half german basically when he spoke english so you know um it wasn't i mean if
02:18:12.460
you were looking for some details you'd quickly find this how did the the brothers do during the war
02:18:18.620
were they destroyed were their fortunes taken away oh no no no of course um max warburg stayed in power
02:18:24.940
at the at the reichsbank he was the one who who signed off on hitler's proposed head of the central bank
02:18:36.900
they were those i can't believe brothers were at absolutely yeah yeah those banks yes and of course
02:18:46.600
i don't want to just you know pinpoint the warburg family but you know i mean there's other families
02:18:52.120
and there's many families there's jp morgan you know and there are various backgrounds and and you
02:18:56.980
know uh ethnic backgrounds and whatever but the principle is we we do have um that it's an inside
02:19:03.380
game well yeah bankers particularly those that are close to central banks and maybe are private
02:19:08.600
owners of these central banks and the reichsbank was 100 privately owned and you know when i mentioned
02:19:14.140
keynes you know when he became a director he must have been an owner of this privately on center because
02:19:17.980
they have these rules if you're a leading person well you must be a leading shareholder you know
02:19:21.920
that's how it works so now i just want to give you the other example of you know to prove this
02:19:28.140
point that you don't need to have a crisis and a recession even when the banks are bust because the
02:19:33.760
second key example is 1945 japan even japan so the bank of japan knew very well how to get out of
02:19:40.840
these problems because in 1945 it was much worse the banks were 100 percent bust they were lending to
02:19:48.000
the government east asian greater prosperity bonds basically war bonds of a country just defeated
02:19:53.000
you know you could trade them in the flea market for almost nothing and secondly um forced ammunition
02:20:00.760
loans to you know the the the military industry um most of which was also bankrupt or was not even in
02:20:11.200
japan any longer the country of japan shrank a lot right after 45 the whole of manchuria no longer
02:20:17.840
under japanese influence taiwan and korea were intrinsic parts of japan until 1945 for half a
02:20:24.100
century philippines vietnam of course these were added um you know during the second world war but
02:20:30.800
you know korea and taiwan were already for 50 years were part of japan in 1905 um exactly so um
02:20:38.360
so these banks were bust because all these loans had no value it's like 100 non-performing loans what do
02:20:46.560
you do is 1945 a good moment to have a big banking crisis and long recession no because they had
02:20:51.920
bigger problems you know that most cities were devastated by these incendiary bombs and the
02:20:57.040
carpet bombing of civilians also like in germany so then you don't want a banking crisis and recession
02:21:02.700
what do you do you don't need to have one the central bank buys the non-performing assets face value
02:21:08.680
and the problem is solved and that's what they did so you can't tell me the bank of japan didn't know
02:21:13.860
what to do that's qe1 now i was quite convinced that even if in you know say uh i proposed this in
02:21:21.840
1995 even if at that time the bank of japan were to buy all these non-performing assets most people
02:21:27.580
at the time were still saying oh it's not so big a problem these non-performing assets richard
02:21:30.680
verner always talking about i was quite clear that they would rise to 25 of all bank assets non-performing
02:21:37.160
because you just look in the 80s what was you know the real estate lending how much did it increase
02:21:41.400
and you got the numbers and that turned out to be a very correct estimate so i was convinced that
02:21:47.760
even if the bank of japan just wiped that clean by buying it up at face value you would still
02:21:52.920
not get a recovery in bank credit but you need that for an economic recovery because the loan
02:21:59.000
office is a shell shock they see what happened and you know it's human nature and even if you get
02:22:03.240
bailed out you're not going to immediately increase lending so i came up with this proposal
02:22:07.640
on how the central bank can force banks to increase credit which you know we can call qe2
02:22:14.520
so qe1 is the central bank buys non-performing assets from banks okay qe2 is the central bank
02:22:22.300
buys performing assets from non-banks and i gave the example in my report at the time for investors
02:22:30.040
i wrote well the central bank needs needs just to buy real estate in tokyo because all this is going
02:22:35.900
to turn into non-performing assets dud loans and the real estate is the collateral the central bank
02:22:41.760
should buy it up the loans the real estate therefore coming with it and turn it into parks
02:22:47.000
because we don't have enough park space in central tokyo it's not such a green city as it could be
02:22:52.560
and that is a very simple thing to do which improves quality of life but also it creates
02:22:59.260
money it forces banks to create credit why is that it's because normally let's say here's a property
02:23:05.240
owner they don't have an account with the central bank so when the central bank buys their land
02:23:10.640
they will tell the center well please pay me okay what's your bank account number okay they give the
02:23:16.940
central bank his you know their bank account number what happens next on the balance sheets is the
02:23:22.100
central bank instructs the bank to pay this client of the bank and because this is between the central
02:23:29.660
bank the bank this is unusual right um the bank gets reserves from the central bank on the asset side
02:23:36.700
and it must now credit the account of this customer with those deposits which is deposit creation that
02:23:45.300
is the credit creation as we discussed earlier that's how the central bank can always force banks to
02:23:50.160
push up bank credit now for and and then you get a massive within six months you get a massive economic
02:23:56.000
recovery there's just no way around that because japan was in deflation the economy is shrinking credit
02:24:00.780
was shrinking negative credit growth it was really bad for many many years and so this proposal would
02:24:06.880
have solved the problem i i actually contacted in greece later after the european sovereign debt crisis
02:24:12.300
and greek credit creation was negative same game always spain credit creation negative huge
02:24:17.800
recession uh vast youth unemployment 50 percent dying population yes and and and the whole cost of
02:24:24.160
this is the human cost and you know the young generation basically their future wiped out you know
02:24:29.280
no job prospect so i i went to greece to speak to the treasury and um because there's even when the
02:24:37.800
central bank is not playing ball and the ecb was clearly trying to create this problem it wasn't was
02:24:43.120
not trying to help there's something the government can do that's the third form of of qe without the
02:24:48.660
central bank treasury qe which is again something we have to look at in the us i think there'll be
02:24:53.200
treasury qe as well this is where you know if you look at the bond markets with this crisis the bond
02:24:59.680
yields jumped in greece you know double digit 50 percent 60 percent spain approaching seven percent which
02:25:06.240
was quite crisis level ireland double digit 20 percent why would they even issue bonds and i told
02:25:12.860
all these great question don't issue bonds what is the interest rate borrowing from banks in your
02:25:19.600
country oh it's only four percent yeah and when you borrow from banks unlike the bond market you're
02:25:25.520
creating credit directly but you're in a shrinking economy credit creation is shrinking that's the
02:25:29.860
solution that's the third way you can reflate the economy now they all refuse to do it not because
02:25:35.280
it wasn't possible it was legal i checked with an expert on ecb law it's perfectly legal they could
02:25:42.000
have done it um that's where the political power comes in they were um essentially scared into not
02:25:48.640
trying these policies the bank of japan for years said oh no we can't do this qe1 qe2 we can't do it
02:25:56.260
it's like no no no well came 2020 march 2020 they all suddenly could do it and that's the next
02:26:05.060
surprise so what happened actually in march 2020 was the federal reserve implemented qe2 and i should
02:26:13.820
also add in 2008 so actually bernanke you know he implemented my qe1 he made actually a speech at that
02:26:21.640
time in january 2009 saying well i'm not doing the what the bank of japan had done because they used
02:26:26.520
my expression qe but they were faking it they were just buying performing assets from banks which
02:26:31.920
doesn't really do anything you have to buy non-performing assets from banks or performing
02:26:36.900
assets from non-banks that works exactly but he the bank of japan didn't do that but bernanke did in
02:26:43.220
2008 that's why the u.s recovered first from the global financial crisis even though it started in the
02:26:48.620
u.s it's because he he borrowed my proposal of uh purchasing the non-performing assets from banks
02:26:56.280
he didn't credit me when he gave country is a bank bailout yeah yes but who pays for it you see
02:27:02.120
it shouldn't be the taxpayer it should be those who messed up that's the federal reserve so they
02:27:06.220
should pay for it and they did so that was fair that's to to tackle the moral hazard problem
02:27:11.380
those who mess up have to pay up which is uh one of the main problems in the united states
02:27:16.000
so the last area i want to get i mean i could go on forever this is like you've totally overturned my
02:27:21.920
primitive understanding of economics um thank you you're first welcome what given your your record
02:27:29.120
of prescience in assessing you know where economies are going you look at the united states what's your
02:27:35.500
tenure projection for the u.s well it depends on so many factors um actually before we come to that
02:27:43.840
can i just tie together some loose ends we have they'll be very very brief so on greenspan
02:27:50.880
the reason why i talk about bananke and greenspan because we were saying princess of the yen
02:27:55.960
the publisher's turning down the book uh it wasn't published in english and you see
02:28:03.020
i'd concluded at the time how did i get this published uh by a you know good u.s publisher
02:28:09.700
it's probably that chapter where i write about alan greenspan my encounter but credit creation he said
02:28:16.040
the words so he knows credit creation are his chapter um and i concluded he's doing the same
02:28:21.520
thing as the bank of japan that's why he doesn't talk about it secret so it's going to be a global
02:28:25.480
financial crisis that was my prediction it's probably that chapter so i took it out
02:28:30.820
it's the last chapter send it to the next publisher an academic publisher that they also had some
02:28:37.820
books on asia i thought they could be interested they immediately accepted it and it was published
02:28:44.040
without that chapter later that publisher was bought up by a british publisher i wrote to them
02:28:49.000
the new owner i want my copyright back oh yeah of course they thought it's just some academic book
02:28:54.300
okay fine got it back so i've now republished it with quantum publishers.com including the long lost
02:29:02.040
last chapter so it's back in there and one can get it um that was on that one on on deng xiao ping
02:29:10.180
so once he found out the secret the elixir of high economic growth he went back to china and what did
02:29:17.780
he do he founded thousands of banks small banks local banks regional banks provincial banks village
02:29:26.140
banks savings banks thousands is almost as many now in china as in america almost 5 000 banks
02:29:33.580
and economic growth took off and of course their job was to lend to small firms and the logic is very
02:29:39.660
clear if you compare the soviet system that he had previously with one bank that's maybe let's say
02:29:45.860
there's five people at the board making the decision how much money to create and who to give it to
02:29:49.920
well the japanese must have laughed at that and told him look why don't you have 5 000 banks which is what
02:29:56.360
we have now almost in china 5 000 banks with 35 branches each with 30 loan offices each branch lending to
02:30:07.620
small firms checking millions literally of loan applicants checking them kicking the tires does it make
02:30:14.100
sense can this be repaid you know then you have more than five million decision makers if you do the
02:30:20.520
calculation these loan offices is more than five million deciding how to create and allocate this
02:30:27.200
money and who to give it to and it will be used for productive purposes business investment so which
02:30:32.180
system is better those five guys at the central bank trying to do this for 600 million people or the
02:30:38.160
five million loan offices and of course i think denxiaoping was smart enough to realize okay this
02:30:43.540
is a no-brainer we'll have these banks and economic growth took off china delivered double-digit economic
02:30:48.780
growth for four decades you know when you have 15 15 growth then every four and a half years you double
02:30:56.800
national income and that tells you we can all have prosperity all we need is for bank credit creation to be
02:31:04.260
mainly used for productive business investment and can be done and has been done all the high growth
02:31:09.040
economies we can have in the u.s we can have it in any european country we can have it in any
02:31:14.700
developing country a lot of our credit creation has gone to asset purchases exactly and boy does it show
02:31:21.400
exactly um it's a whether it's counted as inflation or not it is inflationary i mean it just things are
02:31:28.260
more expensive well asset inflation and then derivative from that you get right all sorts of other
02:31:32.480
prices going up so um given that like where does the u.s stand right now exactly so exactly and it's
02:31:40.720
good to contrast this to what is possible because the fact is every country in the world can have
02:31:46.440
high sustainable equitable economic growth without crisis and without inflation and wouldn't any
02:31:51.680
politician want to deliver that you'd think but and and i think they would actually like to deliver it
02:31:57.300
but they realize the steps to achieve that are just not allowed and they they quickly reach the
02:32:04.720
limits of their power and they get whispered in the air which steps are not allowed in one well
02:32:08.720
to create many small banks you know our research on the u.s shows that even the small banks as they
02:32:14.300
merge as they do naturally as they do under central bank pressure to merge and the number of banks goes
02:32:18.880
down as it has in the u.s dramatically yeah um thousands have disappeared already but even the
02:32:25.480
small bank and so then banks stop lending to the smallest firms as they get bigger they lend only to
02:32:30.660
the bigger firms and you already get less economic growth and secondly even the smallest banks as they
02:32:37.400
merge you know they they reduce their lending to to the smallest company so we constantly need to
02:32:45.160
create new banks actually just to stay at the same level of having money going to the small firms and
02:32:51.440
the small firms are the productive job creators you know give five hundred thousand dollars to a large
02:32:56.440
firm it's not going to create jobs no give it to a small firm oh there'll be three four new jobs you
02:33:01.180
know exactly and and that's what people need to understand so we need a decentralized banking system but
02:33:06.360
that also gives power purchasing power and prosperity to the middle class to local communities and that's what
02:33:13.840
the central planners don't like no and so it is actually a war against the middle class that's
02:33:18.620
happening it means autonomy i mean a country with a strong middle class is an independent minded country
02:33:24.400
because you've got self-reliant people in it exactly country that's rich and poor very easily control
02:33:31.220
exactly the latin american model um exactly and sadly that seems to be where we're heading so with
02:33:36.380
this background back to your question if you look at you know long-term historical charts
02:33:43.880
it's very sad how economic growth has been declining in the post-war era in the u.s most european
02:33:51.100
countries now we're being told oh that's because of demography and you know aging societies climate
02:33:58.040
change and exactly climate change and the need in fact to lower growth because of the limits of growth
02:34:04.760
i quickly want to address that point because you know there are many people out there who seriously
02:34:09.760
you know they have good intentions and they think well hang on richard's talking about trying to have
02:34:14.760
higher growth but isn't that a bad thing isn't growth bad aren't we destroying the environment
02:34:19.640
well hang on i am all for protecting environment i love nature i think you love nature and and we want
02:34:26.140
to protect the environment yes but economic growth is not the problem absolutely not it's not the enemy
02:34:33.440
of the environment of nature no and the quickest way to explain why is to actually to analyze what is
02:34:42.760
economic growth well ask a physicist who studies physics what is economic growth and they'll say
02:34:49.640
well i don't know it in physics there is no growth what are you talking about you see it's nothing
02:34:56.280
tangible and therefore there is no limit to economic growth in physics there's no growth you can only
02:35:04.020
transform energy from one state to another matter is neither created nor destroyed exactly so what is
02:35:09.340
this economic well it's economic growth and where does it come from well it's a statistical illusion
02:35:14.500
created by statisticians now i looked into the history of this sure enough you hit on the same you know
02:35:22.440
you find the same answers so when did this start the way we calculate national income and gdp when it
02:35:27.920
used to be gnps gmp and national income what's the history of that where did it start you know it
02:35:33.520
started just before the creation of the bank of england why because the bankers were going to lend to
02:35:39.820
england and they wanted to figure out what is the ability to pay of these people in england
02:35:45.980
we need some statisticians to measure this and that's what national income accounting was created for
02:35:53.140
and that also yes exactly to assess the credit worthiness of the borrowers it's the ability to service
02:35:58.340
national debt wow and that explains the other puzzle and actually again tying uh together loose end here
02:36:04.320
you know i told you that that when we talked about how the the interest theory is the main propaganda
02:36:10.400
you know lower rates lead to higher growth higher rates low growth well and i told you there's zero
02:36:15.520
studies showing that there's no empirical evidence whatsoever for that and so i did the first empirical
02:36:21.780
study on that it's published again open access you can look it up it's it's called reconsidering
02:36:28.480
monetary policy and then something interest rates and growth and we know what we found is together
02:36:36.540
with a very good statistician from korea um and it's it's you know it's it's state-of-the-art
02:36:42.380
econometrics you've got to do this properly because and it took years to get this published because
02:36:47.080
everyone hated this because i'm what we found is that the relationship between interest rates and
02:36:52.380
economic growth is the opposite of what they tell us in two dimensions it's the opposite the correlation
02:36:59.780
is supposed to be inverse negative yes of course low rates high growth and no one questions that
02:37:05.840
and the causation is supposed to be from interest rates to growth yes interest rates are supposed to
02:37:11.700
affect growth of course well we found that both are not true and it's the opposite the correlation is
02:37:18.740
positive and the causation as far as statistics can prove it you know granger causality statistical
02:37:25.220
causality is from growth to interest rates so instead of the official story low rates lead to high growth
02:37:31.400
the real true narrative is the hone the real truth as the japanese would say is high growth leads to high
02:37:40.060
rates low growth leads to low rates it's the other way around that's the true story and now actually what we
02:37:49.500
also found is that i found this much earlier ready that long-term interest rate 10-year government bond yields
02:37:54.940
they follow gdp i mean sometimes coincidental of course but they don't lead gdp okay and it's roughly
02:38:02.100
always the same and i'm always puzzled about that why is you know 10-year government bond yields usually
02:38:08.360
similar to nominal gdp growth which of course was therefore also why i was forecasting when i was
02:38:13.260
forecasting inflation for 21 22 you know huge bond market crash because rates will have to come up with
02:38:19.600
such high nominal gdp growth due to inflation um but why is it that bond yields usually very nicely
02:38:27.580
track in the u.s very nicely track gdp growth why and you see it's the same answer it's because what is
02:38:35.140
gdp it was created by the bankers to gauge the ability to service national debt so think in those
02:38:42.880
terms now you've created gdp to figure out how much can they pay yeah then what is the interest rate
02:38:50.540
you're going to charge well you want to charge the maximum without blowing up the system which what is
02:38:56.740
that well it is the the same as the as the economic growth rate because that is the income generation
02:39:03.380
right if you charge too much it becomes a debt trap exactly your debt spirals out of control and
02:39:08.560
i'll mention that in a moment and if you charge too little that means below growth you're leaving
02:39:13.840
money on the table which they don't want to do so that explains it you see so to to address the debt
02:39:20.980
trap for a second well when interest rates um are higher than the economic growth rate which is your
02:39:29.980
you know economic growth national income growth is the ability to service and repay the debt but if the
02:39:35.460
debt rises faster then you can never get out of it right and it compounds it will spiral out of
02:39:41.200
that's what they did to developing countries that's the imf world bank system to exploit developing
02:39:48.240
countries because what the imf world have done over the last 80 years is tell them based on this
02:39:53.580
economics which is true and very scientific axiomatic deductive made up equilibrium stuff there's no
02:39:59.800
equilibrium um that's heresy by the way to suggest there's no equilibrium but it's just ordinary you
02:40:06.320
need a food taster um and so they're told well you need to deregulate liberalize privatize um you want
02:40:12.920
growth well you need savings sorry oh you don't have enough savings well will you you need to get
02:40:18.660
you need to borrow foreign savings the world bank is willing to lend you some the imf will they're
02:40:24.960
claiming that the loans they're delivering from the west are the product of western savings yes
02:40:29.340
exactly exactly and so there's a moral cast to all of this you certainly see it here
02:40:34.460
just blaming fat working class people at walmart for all of america's problems yeah yeah yeah yeah i mean
02:40:40.500
they there is a sense in which they turn the the culpability the moral responsibility onto the
02:40:46.320
victims of the scam yeah it's your fault exactly exactly and and so these countries have been
02:40:52.980
encouraged to borrow from abroad when it's it's a scam because who are the foreign lenders getting
02:40:59.140
the money from they created out of nothing the foreign banks create out nothing which is something
02:41:03.020
but the argument is the vert you know the we virtuous people have just saved a lot of money
02:41:07.740
well we know the savings rate is pretty low in the u.s it's not negative so but yes there's still
02:41:13.280
that's the argument they use so it's a trick because developing countries can have their own banking
02:41:17.080
system based on many small local banks they will have growth and prosperity and you don't need
02:41:22.400
foreign money because actually foreign money never enters the borrowing country so it's always a
02:41:28.660
trick it's one of the rules of banking you know let's say there's a developing country let's say
02:41:32.800
south africa yeah and they're they they they're told oh we need we need money we don't have enough
02:41:38.600
savings we need the savings from abroad okay we'll take a loan from barclays in london for half a
02:41:43.560
billion pounds okay they tell us that's what we need okay well where does barclays get this half a billion
02:41:51.500
pounds worth of money from it creates it out of nothing credit creation through the banks
02:41:55.480
um now that south african finance ministry says well actually we want to use this money in south
02:42:01.980
africa so barclays send over the money oh you mean you want south african rand uh yeah yeah sure
02:42:09.280
well we can arrange for that there'll be some costs you know and fx and whatever fees but we're happy to
02:42:15.100
do it so what happens next is barclays calls around south african banks and one of them may be a
02:42:24.060
subsidiary of barclays it doesn't matter but south african authorized licensed south african banks you
02:42:29.680
see why because they're the ones that have their accounts in south african rand
02:42:33.960
barclays can't create south african rand um so and they will ask for a quote we want to sell pound
02:42:41.800
and buy south african rand what happens next the south african bank will create that money out of
02:42:48.440
nothing which is something south african banks could have done without the round trip abroad which
02:42:53.980
indebts the country and usually you debt for equity swap or you can't pay your debt well we own you now
02:42:59.400
we own your assets exactly right and that's been the trick so it's been a terrible system to
02:43:05.760
keep growth low prevent countries from developing and even industrialized countries you know we're
02:43:13.040
also victims here it's not as if oh the the rich countries they're exploiting the poor that's not
02:43:17.180
exactly true because we're also being exploited in the rich countries and the middle class is being
02:43:20.800
exploited and it's being drained off of of wealth we could have prosperity and abundance this is what
02:43:27.040
people need to realize everywhere in the world we can have peace and abundance but we must address
02:43:32.960
the financial system the banking system and the best system is when you decentralize the power
02:43:38.560
as lord acton said a long time ago in britain power corrupts and absolute power corrupts absolutely
02:43:46.540
when you are this powerful central planner central banker power creates temptations and human nature
02:43:54.660
tells us and history tells us most people can't handle this these temptations and that's when you get the
02:44:00.200
abuse and in the end it's all about maximizing that power for the central uh central forces and of
02:44:06.100
course so what we need to do is create many small local banks also in the u.s in every country in the
02:44:10.880
world we should create state banks state sovereign banks as they have in in north dakota because
02:44:17.900
there's only one state-owned um sovereign bank uh in the united states in in north dakota as a result
02:44:25.040
because that basically protects the local chartered banks it's it's so it's they're not so dependent on
02:44:31.560
the federal reserve or on on the fdic and and therefore they can make sure that these banks
02:44:37.820
stay in business and thrive and therefore the economy and the small firms will thrive and therefore job
02:44:43.120
creation will thrive we need more of that particularly in this day and age where the central planners
02:44:47.560
want to do the opposite they don't want these many small banks they want to force them to
02:44:51.520
to merge and the biggest club they have they're wielding now to to get rid of the small banks is
02:44:58.200
actually the introduction of central bank digital currencies and since you ask about the next 10
02:45:03.180
years ahead we have to talk about it because that's definitely top of their agenda to introduce central
02:45:11.040
bank digital currencies now what is that how does that fit in well first of all again it's it's marketed
02:45:16.000
in a very devious way they're telling us oh it's the digital aspect that's new
02:45:20.440
we used to have cash paper that's old-fashioned now we need digital central bank money well hang on
02:45:25.160
we've been using digital money for many decades of course and there's no problem really it works
02:45:31.080
yeah maybe some fees could be lower but you know for that we need more competition not less
02:45:36.220
competition so um so what's the problem what's actually new you know we've been using bdc
02:45:42.160
bank digital currency for for half a century almost yeah so that's not new what is new about cbdc
02:45:51.360
was the c central the centralization it's about centralizing things central banks are about to break
02:45:58.880
this old contract this deal between the banks and the central bank the deal was central banks supposed
02:46:05.760
to be specialized to stand behind the banks back them up when needed but not replace the banks
02:46:14.640
and that's also why we need now state level sovereign banks because they will stand behind
02:46:20.560
the banks in their state and the federal reserve has failed in standing behind banks and doesn't
02:46:25.200
back banks even silicon valley bank you know they only injected liquidity after it was bust and changed
02:46:30.320
ownership well that's kind of funny isn't it and the fed now system meant that more money left the
02:46:37.280
silicon valley bank in one day than ever before in history from from any bank giving a blood transfusion
02:46:42.720
to a corpse well it yeah it was exactly it was afterwards so um cbdc is the central banks opening accounts
02:46:51.840
for the general public at the central bank which means that you just need to create the next banking crisis
02:46:57.440
and the central banks are very good at doing that and all the money will leave the banks the banking
02:47:01.840
system will shut down and it will all be in the central bank and we have hey presto we've gone backwards
02:47:07.920
china moved from the soviet mono banking system to thousands of small local banks and thrived
02:47:15.360
you know doubling national income every four and a half years for 40 years becoming the most powerful
02:47:21.120
economic power you know in such a short time actually faster than germany america before in history
02:47:26.160
uh and lifting more people out of poverty than anywhere else before in history
02:47:31.840
but we are moving in the opposite direction our central planners in europe in brussels and
02:47:36.720
and at the ecb they are killing banks and they want to now introduce cbdc's which means they want to
02:47:42.160
move to central planning and the same you know as any country in the us at the moment the fed is saying
02:47:47.520
fortunately no we we're not going to do this but of course they're studying it and they're preparing for it
02:47:52.160
it so when the time is right you know i'm sure they'll wheel it out because central bankers
02:47:58.000
they're human they're tempted by the temptations of power they already have so much power de facto
02:48:03.520
no accountability i mean when are central banks held to account for their actions no you can't audit
02:48:08.400
them you can't really know what they're doing and they think just giving a speech in parliament
02:48:12.080
or some committee we're being questioned you know that's good enough that's accountability
02:48:16.000
no it's like you you wanted to have two percent inflation now we have 10 inflation uh shouldn't
02:48:21.680
you lose your job oh no that never happens i don't think it's ever happened exactly so um
02:48:28.880
so we need to oppose the introduction of cbdc's and of course it's it's not just that what i mentioned
02:48:35.360
it's much worse because it's a programmable control tool of course and um the programmability
02:48:42.720
is really scary instant compliance and they have they have said this you know central bankers have
02:48:47.680
said this that they can then write the rules and they have the technology to enforce those rules
02:48:54.800
and that's what's going to happen with cbdc so it's not really money it's potential money
02:48:58.800
you have to apply may i please use it to buy x y say oh sorry you know your carbon footprint has
02:49:03.680
been used up or whatever the excuse may be you're outside the 15 minutes or you criticize the central
02:49:08.560
banks or you've been a critic criticizing central banks very sinister so so that final question if
02:49:15.840
people have made it this far into this remarkable interview and want to learn more
02:49:22.400
about this topic so much has been written about central banking so little of it bears any resembles
02:49:28.960
to what you just said you're thinking about it in a very different way it sounds to me like a much
02:49:33.040
more accurate way what uh where do people go to to learn more on this topic i think the best
02:49:38.320
is to get also my very up-to-date shorter reports and analysis on particular markets just now i
02:49:44.640
finished one on the bond markets um is my sub stack which is our werner dot sub stack dot com
02:49:53.200
um and there's a small monthly fee of i think nine dollars or something like that um and otherwise get
02:49:59.920
my book princess of the yen um also i have a prince of the yen at quantum publishers dot com
02:50:07.280
that's where you get it cheaply it's on amazon sometimes they have horrendous prices and it's
02:50:12.800
or in many countries not available strangely um and otherwise i'm uh sort of growing my youtube channel
02:50:21.280
werner economics how many languages do you speak well fluently and able to give lectures and presentations
02:50:28.000
is uh is three only so german english and japanese three yeah um i've i i can partly get by in in french
02:50:36.160
and i did latin in school and my chinese is is very passive and only you know the writing from japanese the chinese
02:50:45.120
characters which you use in japanese um but you can write in japanese yes yes yeah although it's time
02:50:52.800
consuming you know um but yeah interesting well i love those chinese characters there's lots of
02:50:59.280
truth and information in there because they're they're like messages from 5000 years ago how people
02:51:04.560
thought and how they lived it's all in the chinese characters professor i can't thank you enough for
02:51:11.920
this i hope you'll come back i'd love to thank you very much thanks for having me thank you very much