Richard Werner Exposes the Evils of the Fed & the Link Between Banking, War, and the CIA

Uh, you're one of the best-known economists in the world, most significant. But you have a story that I think that I didn't know. And let me just summarize what I understand of it, and then I'm just going to turn over to you to tell the whole story.

So, it's, um, the 1990s. You're living in Japan, a consultant to the Bank of Japan. You speak Japanese. And in 2001, you publish a book about the, uh, banking system in Japan, um, in Japanese. It's not published in English. It was only published in Japanese and Japan. And that book about the central bank of Japan and and explaining why the country is in this protracted recession becomes number one in Japan, um, which is kind of amazing, even in Japan, beating Harry Potter. Um, and then your life changes completely. I think this is one of the more significant stories that I hadn't heard. 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.

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Right. Well, it's a bit of a detective story. I was, uh, you know, working, um, on the book and doing the research for the book, which really was the greater part of the 1990s. There's a lot of work that's gone into this. By the way, the name of the book is Princes of the Yen. Princes of the Yen. Um, and, yeah, it's not so easily available, but I can mention that later.

Um, I was trying to solve some puzzles. You know, I was, I'd come to Japan. I'd learned Japanese. And I was, you know, an economist. I'd studied economics at the LSE. I was at Oxford working on my graduate work and doctorate in economics. And Japan was actually really posing some major puzzles that the world couldn't explain and economics couldn't explain. All the the world-famous experts could not explain. And for some reason, I decided, okay, I want to solve all these puzzles.

Um, when really digging into it, uh, it transpired that maybe I've bitten off a bit more than I can chew. All the experts were shaking their heads and telling me, you know, "Oh, give up. You have to change your topic. You, you know, there's no there's no solution to this and you will never find out."

So, one of the puzzles was— Yeah, I was about to ask, what was the puzzle?

Well, there's several, but one was, uh, a concrete puzzle. I was just doing an internship at Deutsche Bank, uh, in Tokyo at the peak of this fantastic stock market bubble. Well, it wasn't called a bubble at the time. You know, there's 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. You know, it's only afterwards when, um, they sort of point out, "Oh, well, okay, that was a bubble."

So, in this bull market of Japanese, uh, you know, the stock market, 1989, and there were there were some problems with the official story, um, and actually they led to they led me to conclude also that the stock market was a bubble and it's going to crash and it's going to take the banking system with it. That's what I then, once I found the answers, uh, that's what I then concluded.

So, '91, I was, uh, one of the first to very loudly and clearly state, there's a discussion paper I published at Oxford having come back, that, um, we should be very cautious about Japan. The international strategists were saying, "Oh, the Bank of Japan is raising interest rates, is stimulating the economy. Stock market has come down, but, you know, growth is 6, 7% and the market has become cheap. Buy Japanese stocks." That's what they were always saying, "Buy Japanese stocks."

I concluded in '91, based on this research that's, you know, answers to some of these puzzles, that Japanese banks were likely to go bankrupt. And you see, you have to remember that in those days, in 19, 1991, the top 20 banks in the world were Japanese. Okay. And the 21st century was going to be the Japanese century. Japan was, you know, in the '80s, buying up everything left, right, and center. Capital flows flooding the world, buying Rockefeller Center, Palm Beach, golf courses, Hawaii, California, investments in Britain, you know, you name it.

Um, 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." That's what I concluded in '91 in this discussion paper. And, um, and of course, it it took a lot of investors by surprise what happened in the following years when, to me, it was very clear, um, that this had to happen, although there were policy responses that could prevent the worst, which I then also proposed.

So, I proposed a new monetary policy concept that I called quantitative easing, uh, which has been used and and abused and distorted and has been quite popular with central banks, but we'll come to that. So, but back to your question, so what, what were the puzzles in the late '80s which led me to all these other things?

Well, one was Japanese capital flows. They were extraordinary. The scale was unprecedented in modern history, but also not just the scale was so massive. It just was against all the economic theories. Now, the main theories about capital flows concern again, interest rates and interest rate differentials, and Japanese money was flowing in the opposite direction. Then Japanese investors were also losing money because the yen was rising. So, it was actually a losing trade to then invest abroad. And so no economic model could explain it, and that was the task I set myself.

So, then I was going around talking to all, um, experts. I was only a student, you know. I was, this is my first piece of research. I just graduated as an undergraduate from the London School of Economics, but I had been thrust into these sort of, uh, positions and and opportunity. And, yeah, I I took the challenge. And the response was, "Give up. You know, there's you can't find an answer."

But I also then spent a lot of time with practitioners and in actually investors that were investing abroad and and looked at the, um, you know, the institutional investors, life insurance companies, and major international investors. And then I was searching for a link to the other phenomenon which was pretty crazy and economists couldn't explain, and that was land prices in Japan.

So, in '89, Japanese land prices had reached such stratospheric proportions that if you took the central Tokyo, was particularly of course the big cities, but the central Tokyo, uh, land price to value something like the Imperial Palace Garden, which is a public park. I mean, it's nice, it's large, but it's not, you know, on the scale of things, not that large. So, if you valued that at standard central Tokyo market prices and then exchange rates, it would be the same market value as all the real estate in the entire state of California, including Los Angeles, San Francisco, you name it. And that is the correct response. You got to laugh. I mean, or cry. I mean, this is ridiculous. This is totally ridiculous.

Now, my idea was that, okay, there's got to be a link. We've got these two crazy phenomena. One is these absolutely nonsensical land prices in Japan. And the other one is Japanese capital flows, just Japanese money seemingly fleeing the country, buying up the world. Well, if I was a landowner and, you know, these are the land prices, I would say, "Well, let's quickly buy some land outside Japan. Oh, yes. Or something else, anything outside Japan before people realize that the land price is overpriced, the yen is overpriced, you know, and so on." Right.

So, in a sense, the intuition was there. There had to be a link, and I was convinced of that. And so I was going around in, you know, in those days, it's pre-internet. So I had to literally, you know, how do you do academic research pre-internet? You had to go to the library, get all the journals, indices on topics, your topic indices, keywords, and then physically go through various journals and journals and, you know, 20 years ago, 30 years ago. So I spent months doing that. I was looking for some kind of economic model or paper that linked capital flows and real estate because, you know, I thought, well, there is a link. And there wasn't. There wasn't. And I wasn't looking just on Japan. It could be any country, right? I mean, you should be able to use the same analytical framework then for from another country. But there wasn't. I couldn't find anything.

So, the time, the clock was ticking. And actually, I was a bit in trouble because at the time I was the first, uh, foreign research fellow at the Japanese government's, uh, development bank, the Development Bank of Japan. I was the first Shimomura Fellow. If you're interested, we can talk about this Mr. Shimomura because he's a bit of another secret. You know, they didn't tell me, like, "Okay, why is there a prize for him and who was he?" It's like almost a state secret.

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Anyway, so, um, and they gave me six months. And I'd sort of rashly chosen this topic as my research topic and I'll write a paper on that, and that was my job. And they treated me so well. Um, you know, I mean, they treat foreigners very well anywhere in Japan, but I was I was the first Shimomura Fellow, the first foreigner, and I was invited to all their events and all the clubs and circles, learning baseball, which for a European is kind of unusual activity with the other, uh, staff and, you know, Japanese calligraphy. They gave me this huge apartment in central Tokyo, which is part of this Shimomura Fellowship. And I felt like a bit of a fraud because I can't deliver my part of this deal because there seems no solution. All the experts, there was one capital flow expert in Tokyo at the Nomura Research Institute. I knew some people there and they were saying, "No, that's you can't find an answer to this." And no, so "give up" was the story.

And well, I needed a miraculous intervention. And actually, you know, I, um, I got my miracle, um, and I got the the, um, I got the solution. If we have time, I can come back to that and explain how this happened. But let me just, um, give the answer first. So, I, I, I knew the solution.

Um, now, actually, before then, there was somebody saying, "Oh, there is a solution. Um, there's a, uh, there's an American scholar who'd come to Japan. His name is Professor Jeffrey Sachs." Um, and his, his, I think PhD in that seat about four days ago. Oh, excellent. Right. Oh, I sent him the paper actually recently saying, "Hey, do you remember this?" You know, um, and so people were telling me in Japan, "Oh, there's this American, uh, and his collaborator, I think Peter Boone. They had written about this topic and they had actually posed the same hypothesis that there's a link between, uh, land prices and capital flows." So, go, they were at MIT, the Ministry of International Trade and Industry, slightly renamed it now, was a famous ministry, supporting the economy and trade. And go there, you know, it's pre-internet, so they will have the physical discussion paper that they produced on this topic.

So, I went there, asked around, and, "Oh, yeah, yeah, yeah, we had Professor Sachs. Okay." And there was the paper. So, I went back to my research institute at the Development Bank and same idea, which is fine because I was just a young researcher. Just slightly modify that and I'm okay. You know, I don't need to discover the, rediscover the wheel or come up with a great insight. But then I came to that sort of main part and conclusion, and therefore, we conclude there is no link between real estate, you know, land market and, uh, and, and capital flows. What? So, you know, at that point, I was really in trouble and I needed divine intervention, um, because, you know, humanly, it was impossible to make this link. And all the experts were saying there's no link. But there was a link. And when I understood that, I knew exactly what data to get.

Now, what, what Professor Sachs and, and Peter Boon were arguing was, um, that, you see, how if you're a Japanese landowner, you own this super expensive real estate, and now you you figure out, "It's probably better if I buy half of California, let's say," which they did. Um, so, let's do it. They were arguing, "Well, they would have to sell the land now. Who's going to buy Japanese land?" And it was true that foreigners were not buying Japanese land. It was totally overpriced. No foreigner would buy Japanese land. So, only other Japanese would buy it. Oh, but that means the money stays in Japan, and that means there's no link. That was their argument. You see?

But I realized that's not how it works. Because I'd spoken to a lot of practitioners, that's not how it works. And the solution is, and it's the solution to many other puzzles in economics, to essentially almost all the big puzzles. And there's many in macroeconomics. Macroeconomics is has not been successful for 200 years. I've noticed exactly. It's been a failure for 200 years. No progress. That's actually official. There was a, there's a study in the, um, um, what's it called? Um, Journal of Economic Perspectives, which is, you know, it's quite a highly ranked journal, in 2019 by two Stanford University professors about progress in economics. And they they mention that, "Oh, sadly, we haven't had any progress in macroeconomics for at least a century." Okay.

Um, so, um, and why is that? So, the solution to all this and why economics has made no progress is bank credit. Now, bank credit, and actually, you should say, fully bank credit creation. This is a concept that's been a taboo or a secret, uh, in economics. Banking has been frozen out of economics for a long time. Uh, there's no banks in economic models and theories. And that's of course also why they don't work. Because in reality, if you ask some ordinary people in in the business district of a of any town, they will tell you, you know, what's important in the economy? They will mention banks. Um, yes. But ask an economist, an academic research economist, and they will not mention banks. Well, ask any person, "Who do you owe money to?" "The bank." "Some of the bank." Exactly.

Well, the reason is that the, the economists follow this theory that banks are just financial intermediaries. They just, you know, gather deposits here, do their analysis, credit, uh, you know, analysis, analysis, you know, risk assessment, and, and all that, and then they allocate the funds and invest. Okay. They just take a percentage. They're a pass. So, so they're intermediaries. Yes. But that's wrong. That's not what they are. That's it's one theory of banking, and it's still the one that's still dominant. All the textbooks and the leading journals, they still use that. But actually, if you look into it, you realize there's three theories of banking.

A second theory, slightly older, that was dominant until the 1960s, so-called fractional reserve theory. And you, you may have heard this fractional reserve, uh, banking. What is that? Well, this theory says, and this part is similar. Each bank is a financial intermediary. It just collects deposits and then does the analysis, lends out the money. But in aggregate, as banks interact, there's money creation. Oh, and that's where students should have picked up money creation. They even talk about a money multiplier. What? That's the second theory.

Now, there's a third theory, and that one had been made out to be a wacky conspiracy theory. Oh, but it is the one that was more or less quite widely known until about a century ago. And that's the credit creation theory of banking. And this one says banks are not financial intermediaries. Banks are special. They have a unique power that no other player in the economy has, and that is the power to create money. And actually, that theory had been called all sorts of names, like, "Oh, this is cookie people," and, you know, "cranks," can said in his General Theory or was the Treatise on Money, you know, "these are the cranks who talk about the banks creating money."

I think the average person believes the right, the ability to create money is reserved for governments alone. That's absolutely correct. In fact, I did a survey with my students in Frankfurt in 2011. My, my audience was getting larger when I was teaching at Goethe University Frankfurt. It was only sort of for a few years, substitute professor, optional courses. So, first one was only 50 students, but next one was already 150. In the end, it was 450. Everyone is there also from politics and law and so. I thought, "Oh, this is a great audience. Listen, guys, let's let's use these numbers. Let's do a survey." So, I sent them out, you know, because you've got so many people, then if if everyone does 10 questionnaires, you know, you're talking big numbers. So, we did a survey of central Frankfurt. And the one of the questions asked was just this question: "Who do you think creates and allocates the majority of the money supply in the economy?" And to make it easier, here's multiple choice answers: "The government, the central bank, um, the financial markets, uh, the banks, um, and so on," you know, give a few options, or or savings, you know, which is another economic theory.

And the answer was just as you said, and you know, you spoke the facts. 84% responded either the government or the central bank are the ones that create and allocate the majority of the money supply. Because that's common sense. You know, it's something very important that clearly affects everything and everyone. It should be in the hands of the government. It's what people feel. But it's not true. That's not how it works. And so, what is the answer?

Well, of these three theories of banking, which one is correct? Well, what's the scientific thing to do is to do an empirical test. That's what a scientist would do. Well, it turns out I was the first to do an empirical test of the three theories of banking. Empiricism in economics. I didn't know that that happened. Exactly. You ran experiments and replicated them. I thought that was exactly—

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Well, you know, you can do empirical tests. The replication is debated whether you can always replicate, but certainly you can test. You can do tests, and we can certainly control for certain things, and that's what I did. And I thought it's crazy that, you know, you had for over a century this debate between these three theories, but nobody had actually done the scientific thing: "Let's find out. Let's just test with the data and observation which of the theories is in line with the data and which is rejected by the data."

Now, to do this, I had I needed a bank that would cooperate. And my plan was, "Well, I'm going to take out a bank loan, and we're going to watch inside the box, inside the banking's accounting, the bank's accounting system, uh, their, um, you know, how are they accounting for this, and what transactions are taking place when I take out my loan?" You know, the, the intermediation theory says deposits get lent out. The fractional reserve theory says that the bank needs to have excess reserves at the central bank, and that's then used for the new loan. Yes. And the credit creation theory, you know, what it says? It says when you get a loan, no money is transferred to your—is transferred away from anyone somewhere else, and you just credited new money out of nothing. That is not transferred away anywhere inside or outside the bank, which seems, you know, quite sort of extreme, like magic. In fact, one uses the convention is to use Latin for this: the money is created ex nihilo, out of nothing.

So, when it did the empirical test, uh, the conclusion was: the financial intermediation theory is rejected, and the fractional reserve theory is rejected. Banks create money out of nothing. By the way, you can look it up. It's the most downloaded paper of all Academia publications called, and it's open access.

So, can banks individually create money out of nothing? Any bank? Not just, to be clear, not just central banks. Any bank. In fact, that's the whole point. We're talking about normal banks. With central banks, it wouldn't be a surprise. But the Bank of Omaha can? Yes. Any bank creates money. When you take out a loan, the money that you're given as the borrower didn't previously exist. It is net new purchasing power that is being created and added to the money supply. And that's how the system works.

Now, to understand how the system works is a precondition for having good economic analysis and good policy recommendations. And that explains for, for over 100 years, macroeconomics has made no progress. They have no banks in there. They have no bank credit creation in there. You know, when the 2008 crisis happened, and the journalists, and I'm sure yourself also, um, you know, want to ask some experts, "Let's go to MIT, professor of economics, what's going on? Lehman Brothers gone, big banks are going bust, Bank of America in trouble, what's happening?" The honest answer of all the professors of economics would have been, "Well, I'm sorry, I can't answer that question." "Why not? You're the expert, aren't you? At MIT? Aren't you an economist?" You know, suddenly, "Well, why can't you answer?" "Well, we have no banks in our models. So, of course, I can't talk about banks." That would be a correct answer. Of course, they didn't give that answer. They're fudging it. They're pretending because they don't want the public to know. No one ever admits ignorance.

But may I ask, how, how, I'm, I'm not an economist. I'm interested, but I, I did not know until you just told me that banks play no role in economic models. No, they're not in there. So, when the 2008 crisis happened, the central banks were using the so-called DSGE models. This is a huge, complicated-sounding name, dynamic stochastic general equilibrium models, which sounds very sophisticated. There's some like super bright rocket scientists in there with complex models. Well, the whole thing is nonsense from start to finish. And it doesn't include any banks whatsoever. And it's built on really pretty crazy assumptions that are true perhaps on some remote planet in some very far away, um, solar system, certainly not in ours, and certainly nothing to do with planet Earth.

I just think, as a non-expert, the idea that banks would play no role, would not be included in an economic model, a macroeconomic model, seems insane because the experience of every person living in the world, um, includes banks. That's right. That's right. And the trick was to argue, "Well, we don't need them because, you see, they're just an intermediary. They're not really important." So, yes, they exist, and we all know there's anything, just go through one in here out there. There's no, there's no reason to include them. Oh, we include the bond market. Oh, and we include interest rates. So that's all we need.

By the way, that's the second big, um, myth I busted in economics. You know, this idea that interest rates drive the economy and they're the key variable. And of course, even today, I mean, every central banker, every market commentator, TV show investor, president, it's literally, it's a daily thing, it's mentioned, um, and it's, yeah, everyone's supposed to, is this presupposed knowledge that if we lower rates, this will stimulate the economy, if we raise rates, this will slow the economy. And it's been said in the last 50 years, I don't know how many thousand times by all these people.

Well, can I ask you, what's your guess? How many empirical, data-based, fact-based studies exist that demonstrate this? That actually demonstrate that, you know, "Look here's the data, yes, we lower rates, it leads to higher growth. We raise rates, it slows growth." I would assume none. Because I've never met anyone who doubts it. Like gravity. We just don't, you don't even need to test it. Of course, now we know it's true. Obvious, right? Now, yeah, it's so true. This is called an axiom, by the way. An axiom is something that is so true, we never have to check whether that is true. And if we and if we did check whether it's true, we'd find it's not true. But we wouldn't believe, we wouldn't believe the results because we know it's true. Yeah. Doesn't m—you can't disprove it. Yeah.

Well, in fact, this is, you've, you've described now the the methodology that of the dominant mainstream economics, which is the hypothetical, axiomatic, deductive methodology where you just, you you pose an axiom that you know to be true. So, you don't have to check whether it is true. And if you did check, it's not true, it would be the result. 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." And then you build your model on it. And that's the approach they use.

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: "Ladies and gentlemen, let's just for sake of argument assume these." "In this, oh, 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. We don't need to look at banking. It's totally uninteresting. Don't don't go there. Move on. Nothing to see here."

What you're saying is, um, I mean, I believe that there were a lot of people who just never thought that option three, your description of banks, the bank credit creation, could be, you know, a meaningful factor. They just never thought of it. 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.

Absolutely. Oh, certainly. Well, actually, so I've got two papers on this. One is "Can Banks Individually Create Money Out of Nothing?" The other one is called "A Lost Century in Economics" about these past 100 years. They must hate you. Your fellow economists, sorry to—must hate you.

And I do go through the the literature and the sort of history of economic thought, and there's some very curious things happening. So, for example, there's John Maynard Keynes. And and many people would say, well, he's certainly the most famous economist of the 20th century, certainly the one that who's quoted a lot, cited a lot, and had some policy influence and so on. Now, when you look at his writings with the the topic of credit creation, bank credit creation, his development is kind of curious. So, when he was young, he discovered it. 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 something like, "And, you know, look up my papers, then you'll see the exact quote," but he was writing like, "Oh, the banks actually adding to the money supply through their activities. That's a very important fact that changes everything. I will return to this later." You know, that sort of thing. It's something that will have to be examined further. That's very important.

Well, six years later, in his important book, Treatise on Money, two volumes, he had moved from the credit creation theory that he clearly had discovered in 1924 to the fractional reserve theory. He was saying, "Oh, banks are just intermediaries, but yes, in the system, the interaction is creating some money." Six years later, he published the famous General Theory. And in that General Theory, he'd moved on to the financial intermediation theory. Now, it is again the savers who need to save money and then deposited, and that is then lent out by the banks. There's no money creation at all. So, in other words, he progressed away—regressed. Exactly. Regressed. Thank you. So, with each successive theory, he obscured the role of the banks ever more.

Now, interestingly, um, his financial wealth increased, uh, proportionately, uh, and by the last stage, people have stayed this long in the convers— This is a really interesting, and you're a great explainer, by the way. It's almost like you came— Are you really an economist? You explain it so—

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Well, you see, in in the the last few years of his life, he had been, I mean, most people don't don't know this, but he had been appointed director of the Bank of England. And you have to realize, the Bank of England was 100% privately owned. And to be a director, you had to be a significant shareholder. And that is billionaire level nowadays. So, he was doing pretty well moving away from the truth step by step.

But you see, it's, it's, uh, it's similar with some other economists. I'll give you two more examples, actually three more examples, economists you will have heard of. One is Professor Ben Bernanke. Yes, I have heard of him. Now, he was, he was, you know, he was a good macroeconomist. Was it at Princeton and and Yale? Um, um, anyway, and he used to, you know, he did his research. He started out research on the Great Depression where he was beginning to realize, "Oh, banks were a factor." I mean, he didn't write this, but actually 10,000 banks were busted. I mean, it's, it's one of the saddest periods of US and world history.

You know, the Fed was created on the pretext, on the the main argument because there's lots of doubters who didn't want the Fed. It's very un-American was the general view. They were very sneaky to actually get the Fed, fed, and get the law passed. They they used some of the rules and how you can schedule a vote, and they me—they went for the most obscure procedure, which is easy to overlook that there's actually a vote. And the vote was on the, the vote was on the 23rd of December, and most congressmen actually weren't even aware, but in any case, they're already gone for Christmas. Yes. And so it was just the hardcore group of insiders, and they voted the creation of the Fed. That's how it was done.

But in terms of arguments in favor of establishing the Fed, the main argument is the lender of last resort function. And it's true that if you have a fantastic bank, very solid, strong, conservative, it's doing well, it's helping many small businesses, good bank. 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. That is true. Of course, there's policies against that that you could do. 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, bank, you know, reserves, or if needed, if they want cash, you know, they pro—the central bank provides the cash, uh, paper notes, and therefore this good bank will not go bust. And that is sort of convincing.

But when it came to that beginning of the Great Depression, what did the Fed do? It let more than 10,000 banks go bust 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. Now, in the 1920s, there was mechanization of agriculture, you know, tractors and so on. So, there's expensive equipment, and the banks were giving the loans, the farmers were taking the loans. Now, these banks were bust. Well, they were taken over and by big banks, bigger banks, and banks that were part of the Fed cartel. But to lose 10,000 banks is just such a setback for the economy. Unbelievable.

Now, you'd think, "Oh, good for the farmers, you know, at least they're out of these loans." No. When number one, when the banks went bust, there was no deposit insurance. These families, these farmers, small businesses, they all lost, and their personal savings, all that money they had in the bank was gone. That wasn't refunded. Okay. Number two, you think they'd be off off the hook from their their loans? No. The banks were then taken over, bought cheaply, and they still had to repay the loans, but they had nothing left, and they were destitute.

Wait, you lose your deposit, but keep your debt? Yes. That's how— That's a Federal Reserve policy. Of course, the Fed could have, you know, done it very differently. And so Roosevelt, in this, the man of the people, well, the the banking system, once you set up a central bank that's not controlled by the people, then, you know, you're in the hands of the, the central bank. The Federal Reserve Bank of New York is 100% privately owned, and that is really the center, um, where all the decisions are made. You've have the the Washington board of the Fed, but, you know, that's a political shop. Um, the actual central bank operations are all in New York, 100% privately owned, you know, so, um.

And that, you know, what happened in the 1930s is therefore these farmers became destitute. The land was the collateral for the loans they couldn't repay. They lost their land, they lost their their livelihoods. Some lucky ones became day laborers on the farms that they previously owned. The unlucky ones starved. There was starvation in the United States of America of honest farmers. And it's really such a, I mean, read The Grapes of Wrath, by John Steinbeck. Yes, I have. John Steinbeck, um, you know, these are better descriptions of economic reality than the economics textbooks where they tell you banks are financial intermediaries, so we don't need to talk about banks. That's that's for sure.

So, the central banks, when push comes to shove, they pursue the agenda of concentrating the banking system and reducing the number of banks, which increases the power of the central banks. But we were talking about this, the three theories of credit creation, and and so conclusion there was, I did the empirical test. Banks create money. They are therefore the most powerful economic player in the system because they're special. They have a license to print money, and the majority of the money supply is created by banks, and knowing that changes the analysis entirely.

Where does that power come from? How are they granted that power? Why can't I create money out of nothing? Oh, we should work together. You know, I wrote a paper with that title, "Why Can't I Create Money Out of Nothing?" Well, so when I when I published, "Can Banks Individually Create Money Out of Nothing?" I published at the same time another paper which is entitled "How Do Banks Create Money and Why Can Other Firms Not Do the Same?" Google it. It's also open access, which is exactly the question you'd ask, and it's very sensible. And that gets, it gets very curious.

Um, it has to do with accounting. And but I, I want really wanted to get to the the bottom of this accounting. If you look at the accounting, the difference is, you know, when a loan is granted, and of course, we can take a loan from a non-bank. I mean, there's, there's major non-bank financial institutions, and then companies can give you credit, and, you know, insurers give sometimes loans, and, you know, so why can't they do the same as the bank? And in order to, to, uh, find the answer, I realized one needs to break up this, uh, the accounting process into further steps because it's clear, if you compare the accounting, the bank balance sheet when they, when the bank lends, the bank balance sheet lengthens. You get, um, the loan as an asset. That's the same for everyone, no matter whether you're a bank or not. And on the liability side, the borrower is credited with the money.

Now, that's true only for banks. And non-banks, when they pay out a loan that they give you, they have to draw down something, some money holding on the asset side, so the balance sheet doesn't lengthen. So, I wanted to find out, okay, what is the thing that allows banks to do it this way? Yes. And it is what in in England, which is the, the home of banking, you know, the first modern bank is the Bank of England. And in the 17th century, all the banking rules and the laws concerning banking came essentially about in England. And in England, this is therefore most apparent. They call it the client money rule. And there's an equivalent in the US. In every country, there's slightly different names, but it means that if you have client money, then this money has to be kept off your books. You have to hold it in custody, like a custodian, and you have to put it in practice with a bank and say, "Well, that's the client account. That's not my money. You, I'm not claiming this." That would be fraudulent. Right? You have to be careful. You know, it can be a criminal offense.

So, everyone has to separate client money from their own funds, except banks. They're exempted from the client money rule. And that means when we put our money with a bank, it's on the bank balance sheet. And the bank is the keeper of the books. And if you're the keeper of the books, keeper the records, you can fiddle the records. You know, if you put money of a client into a bank, you can't tell the bank, "Oh, can you please just be a bit creative with the accounting?" It's not going to happen, right? But if you yourself, you know, you're the keeper of the record, you can be slightly creative.

So, what the bank does is the loan contract. Here's how it works. You're the borrower. I'm the bank. You want a loan, mortgage, anything. And the important thing is the contract that you have to sign, you know, in your own blood. You have to sign it. The loan contract, the agreement, the credit agreement, mortgage, whatever it may be. I mean, they're all more or less the same type of instrument. And actually, I should say this, economists classify banks as, they always say this when they mention banks, banks are, um, financial intermediaries. They're deposit-taking institutions that lend money, but because they're intermediaries only, we don't need to look at this. And then, you know, they they take deposits and they lend money.

Well, if you look at the legal, you know, situation, it's clear that this is not true. Banks don't take deposits, and banks don't lend money. And there's rulings in English courts. What is actually a bank deposit? Well, that is to confuse people. At law, there's no such thing as a bank deposit. It's simply a loan.

Well, hang on. A deposit is a loan? Yes. It's a loan we give to the bank. We give credit to the bank when we do what is called deposit our money. Yes. And that is the legal status. This is like the tables are turned. So, banks don't take deposits. We lend to them. And the deposit, a bank deposit at law, actually is not privileged.

But surely banks lend money. No, banks are in the business of purchasing securities. And when you sign that loan contract, that's an IOU, a debt instrument that you've issued, and the bank will buy it. That's what's happening now. And you can sell it. Well, exactly. You can sell it. And also, you will point out, "Oh, hang on, fine. These are details. This says I will get money. I'm borrowing money, so please give me the money. I don't care about the details." And the banker will say, they're careful. They will say, "You'll find this in your account with us." They may carelessly say, "We've transferred it to your account," which is incorrect because no transfer happens. Your account will be credited because the accounts payable liability arising from the loan contract is represented or misrepresented by the bank as another type of liability called customer deposit. And that is the trick you can only do when you're the keeper of the records. And that's only banks that can do that. Others have to keep it off their books, and they can't do this trick of switching the type of liability from, you know, um, accounts payable liability from the loan contract, present that, um, or misrepresented as, um, another type of liability called client deposit. That's how money is created.

So, the conclusion is, when you borrow money, the bank just writes the number in your account. And that's what I could empirically confirm because at the bank that I finally they found, which was happy to do this and let me look inside their books and their transactions and their system, and we had all the bankers there. So, we literally were watching what everyone is doing. The BBC was filming this, by the way. They haven't used the the actual footage yet, but they were there.

How long has it been? This was in 2014. We should we should turn this into a proper documentary. They've had it for 11 years and haven't aired it. Yes. No. Well, they're close to the City of London Corporation, which is the banker's state, a sovereign state inside the United Kingdom or outside the United Kingdom, you can even say, because the king is not allowed to enter without permission, so it's not part of his sovereign territory. And I guess maybe it wasn't considered convenient to air this documentary, but it's, it's on the record with the BBC.

So, we, when I did this empirical test, which is published in a peer-reviewed journal, so this is what happens. The banks create the money, and others can't do it because the banking license gives you this power to invent money. And so that's why it's very important to actually have the right type of banks in your country. Now, what type of banks would we want? And here's an important principle I need to explain. It's very, it's very important who a

The bank is lending to and for what purpose? And that is because it's money creation. If it was just an intermediary, it wouldn't be so important because it's a zero-sum game. You now have money, but somebody else has less. Plus minus zero. Not a big impact. If you use it more efficiently, maybe a small impact, but basically not a big impact. But if it's money creation, there will be an impact on all of us. Therefore, it's really a public privilege that the banks have to create money. And the question is, how should that be used? Now, hopefully, it's used, you know, in favor of the people. And it can be, you know, bank credit can be a marvelous engine of enormous economic growth, prosperity, and in fact, abundance. And that's one message I want to get across. We can have high sustainable economic growth, which is very stable and smooth, but very high, creating a lot of wealth for the majority of us, prosperity without inflation and without crisis. This can be done, but we're not getting it. No. Why? Why? Yeah. Why? And I'll explain the mechanism. So, there are three scenarios. When a bank creates credit, there are three possibilities.

What has been happening since the 1980s in most industrialized countries, most Western countries, is that banks, encouraged by the regulators, by the way, the BIS in Basel, bank regulation, international bank regulation, the Basel framework, they've been encouraging that the banks lend for unproductive asset purchases, for the purchase of ownership rights mostly in real estate, but it could also be financial assets, any type of asset. Now, that doesn't contribute to national income. It doesn't contribute to GDP. And if you look at the definition of GDP, it's not in there because, hang on, you're buying this asset, somebody else is selling it. Well, that doesn't add value. GDP is a value-added concept, so it's not in there. And that's real estate. Real estate itself is not a productive asset. Exactly. Well, the, you know, the transfer of the ownership in real estate, you know, that doesn't affect that shouldn't affect GDP, and that's why it's not in GDP. Of course, the, the real estate agent business is a business, and that is part of GDP, but that's, you know, that's just a fraction when we're talking about the actual full transaction of that's much larger, and that's not in GDP. So when banks lend for asset purchases like real estate purchases, financial asset purchases, because it's money creation, it has an impact. Now, what impact is that? Let's look at Japan, 1980s. The banks were doing what they were lending massively to people to buy property, real estate. If they were just financial intermediaries, it wouldn't be a big deal, but it's money creation. So actually, the banks are creating a lot of money, and they're pumping it into the real estate market. And now, you don't have to have studied economics to tell me what's going to happen with real estate prices. When all the banks are creating new money and they're pumping it into the real estate market through their real estate lending, what's going to happen is what's happening in the United States, where real estate becomes unaffordable. It's too. Exactly. You, it's, you know, it's just, it's not rocket science. Real estate prices are pushed up. This is true for all assets. So when banks lend a lot for financial assets, these the prices, the values of these financial assets will be pushed up. But it's a Ponzi scheme because it works only as long as the banks continue to create more credit for others to join the game and buy these assets. And the moment the music stops, the banks don't increase credit for asset purchases, then asset prices won't rise anymore. Because with this, I found when I discovered this, I found the causal factor behind the land price rises. And I tested it, and it's true. It's the real estate lending explains the real estate price movement very nicely. And and that's of course that's has many consequences.

So, I, big picture, I think what you're, please correct me, but I think what you're saying is that most of us assume prices are set by markets, which is a product of supply and demand. A lot of people want something, it becomes a lot more valuable, um, relative to its abundance. You're saying that actually prices are determined by banks. Yes. And actually, it's more than that, because your question implies you, you're still, you know, we're all influenced by what's mainstream. And your question is about prices, and then of course, the price of money, the interest rate, and that is what we're being taught. Think about prices is all about prices. The economy, equilibrium, markets, demand, supply, prices, quantities are much more important, and that's because there's no equilibrium. That's one of these other ridiculous assumptions. They just assume equilibrium. There's never been any evidence of any equilibrium. So markets are rationed. Rationed markets are determined by the short side principle. Whichever quantity of demand and supply is smaller, that's the common denominator that determines outcomes. It's quantities. And what's the most important quantity in the whole system? The quantity of money. And where does it come from? Created by banks. And then it's important what is the money being used for. So when, so I told you one of the three scenarios. So I found when banks create credit for asset purchases, you get asset inflation. That, by the way, will always lead to a banking crisis when it's large enough. Because once, say, after five years of banks doing that, they then, for some reason, maybe there's a central bank, other external shock, they stop increasing credit for asset purchases. These asset prices collapse, but they're the collateral for the loans. And because bank equity is very small, 10%, and you've pushed up asset prices by 300, 400%. If from the peak, they fall by, say, 20%, the banking system is bust. And that's why we have banking crises. And that's of course also what happened in Japan in the '90s. Once you analyze this and you understand credit creation, what banks really do, they create money, they create this Ponzi scheme, then it's very easy to forecast, okay, the banking system is bust. And they, you know, they're bust often. We have these recurring banking crises. But there's also ways to get out of it. I'll come to that. But just before, I want to tell you the other two scenarios.

So, when banks create credit for GDP transactions, for the real economy, it will affect GDP growth because asset prices, asset transactions are not part of GDP. So that bank, these bank loans don't even contribute to national income. Uh, you know, the real estate lending and asset lending. But when banks lend to the economy, to the real economy, we have two possibilities. Number one, if banks lend for consumption, consumer loans, what happens is these consumers now have suddenly purchasing power, and of course, they're taking out the loan to spend. That's why it's called a consumer loan. So we get more consumer spending. But have we increased the quantity of goods and services in the system? No. So this creates inflation. So bank credit for consumption is inflationary, and that's what we had, of course, 2021, '22. I had the data. Data from the Fed was out already in 2020, so I was one of the first to warn very accurately. This was in in May 2020 on my Twitter, sending out messages, well, based on this data, we have to expect significant inflation 18 months down the road, which is exactly what happened. Nothing to do with the war in Ukraine. Nothing whatsoever. Nothing to do with, you know, oil prices, gas prices, and all that. Uh, supply shock. By the way, when you go back to the '70s, it's the same. They told us, "Oh, that was an oil shock. The inflation that was shock, war of 1973, that OPEC shut down production." I mean, that's that's the story. I mean, I vaguely I remember adults talking about it, but look, I know, and and all the media coverage is very consistent on this, but the facts already don't add up. Because when did the oil price quadruple from 3 to 12? That was in January 1974. When did this? There were two bouts of inflation in the '70s, you know, early and late of the decade. So, in this first bout of inflation, when did inflation peak? Well, in Germany, in June 1973. June 1973. When did oil prices go up? In January '74. Something wrong with that story. That's not cause or effect. In fact, when you look at bank credit creation and central bank policies, quantity of credit policies, they created it from '71 onwards. '71, '72, ballooning credit creation in the US, in Germany, in Japan. And it's a fascinating story because, and we're sort of going off on a tangent, but it's it's another amazing story because, um, and it's a very relevant one because what happened was, I mean, this this goes back to before President Nixon detached the dollar from gold, which is a very, um, euphemistic way of putting it. Before America defaulted on its international obligations, August 1971, we had the Bretton Woods system from 1944, where the dollar was linked to gold, and all the central banks participating could at any time switch US dollars, dollar balances in their accounts with the Fed into gold. That was the system. Of course, you weren't sort of encouraged to do it, but it was possible. Now, all the currencies were in a fixed exchange rate to the US dollar, and the US, as some people had warned, were beginning to take advantage of the system. The Fed was creating a lot of dollars. The banking system was creating a lot of dollars. They were exported at the fixed exchange rate. You were printing dollars and buying up the world. And by the late '60s, in France, because France wasn't part of NATO, it was not an occupied country, um, the French were speaking up. Germany was being keeping quiet. Yeah. And Japan was keeping quiet. You know, they've got the US, US military bases in their countries. But the French were speaking up for all of us. And they said, "Well, hang on. You're just printing dollars and buying up French companies and French real estate. Are you slightly abusing the system? Is this how it's meant to be?" And and it just continued. So then the French literally sent, well, first they said to the Fed, "Okay, we're going to change these dollars into gold." And initially, Fed rationed. Oh, well, certainly it's not a problem. You know, it's all above board, very transparent. We will, okay, how much, how much you want to switch? Just say the number. Okay, this much, fine. We will now switch it with this gold from our gold reserves into your account with us, your account. In other words, it's just another bank transaction. Okay, you know, this is your gold now. Of course, we'll keep it. It's very safe with us. You know, we'll keep it in custody. So, step number two was then when the French decided, you know, there's Pompidou, there's de Gaulle, they decided, well, hang on, we better get the gold because, kind of, it doesn't really change much if they just switch the name, the label of the account, who's holding the gold, you know. So, and they literally sent their Navy battleships to Manhattan. They docked in Manhattan, and they, you know, captain and his sailors walked to the Federal Reserve Bank of New York and they took out the gold. Now, this they couldn't allow the Americans couldn't allow to happen too often. No. No. And it was kept low profile, but, you know, it was beginning to become a story, and if others followed. So then August 1971, President Richard, the French get the gold. They got some gold. Yeah. This is this really happened. This did happen. They sent their ships. They walked to the Federal Reserve in from their dock in Manhattan. They got the gold. I guess they had some trolley because it's really heavy, that stuff, and they wheeled it back to their ship. Um, but not long after, the Treasury, the Fed, and the Treasury advised President Nixon, look, you you better make an announcement. What announcement? Well, that, uh, we have to protect the dollar from speculators. That's what he announced. We're we're going to strengthen the dollar by protecting it against speculation by severing the. Now, how did you say? We're we're temp. Oh, I love this. We're temporarily suspending the convertibility of the dollar into gold, temporarily. Of course, you know, it's now 51 years, 54, 54 years. Yes. Crazy. Amazing.

Um, did the introduction, speaking of gold, of fiat currency into the West, did it make all of this possible? Like, could a bank create money if it wasn't fiat money? Banks have always created money. If you go back into the history of banking, it's always been about money creation. That is the secret of banking. And that's also why it's been kept secret until my paper proving it. But how do you do that if you can't print something worthless and call it valuable if it's tied to a commodity whose price is set by people you can't control? Yeah, but that's just marketing. That is just, you know, to build the credibility. It's a, it's a marketing tool. I mean, it goes back to, in, in my books, you know, I've got this story in there, Princes of the Yen. Also, uh, it goes back to what happened several times throughout history. And a good example is when it happened again in England in the 16th and 17th century. Um, I mean, in China from the 10th century, they had paper money, which is a smart system, especially because the government was creating the money, as Western people, the public thinks is happening with us, but it's not, right? So, what, what was the difference? So, well, the Chinese had paper money. In Europe, the rulers, the governments, the princes and principalities thought gold is money. So, what do you do when you're the government and gold is money? Well, you try to create some gold. Well, certainly in Europe, and particularly in Germany, where there were 355 principalities as part of the Holy Roman Empire of German Nation, each one of them had a court alchemist, given a lot of R&D money to create gold, turn any other base metal or mercury, whatever, into gold, which is why, of course, in Germany, in Germany, it became leading in chemistry because of that massive overinvestment, uh, in what, you know, alchemy, what was early chemistry, but yeah, but But it never succeeded. So, BASF is actually a sort of product over time of the of alchemy, of course. That's why in Germany, you had so much knowledge and and, you know, in in chemistry, it was the, yeah, alchemy. Um, I mean, did it work? Was there, was alchemy ever successful in a, well, not directly. In a sense, it was successful because the alchemists concluded mercury can be turned into gold. And we know with nuclear physics, this is true. It's just so expensive. Today, we can do it, but it's just pointless. It's too expensive. So, just, you know, better buy some gold to dig for some gold. So also, um, Newton, who's a famous physicist from England, he was very interested in alchemy, and he wrote a lot on alchemy. Um, and then the Bank of England was created, and Newton was very interested in that. Um, because basically, the Bank of England was alchemy at work. You're creating money out of nothing, but not through the actual, you know, physical alchemy process. It is the credit creation alchemy, because banks create money out of nothing. But it's, it's a trick. So, what happened is this, when gold is money, and people think we need gold for transactions. One thing was the governments investing in, you know, creating gold, but, you know, that was of limited success. Now, the reality is, though, that people don't want for that transaction to carry gold around because it's dangerous. I mean, even today, if you go around New York City, Manhattan, you don't really want to walk around with too much visible gold hanging around you. You know, it's kind of in London, you wouldn't want to do it. And that's 21st century. So imagine, you know, 15th, 16th century, 17th century, you don't really want to do that. Bandits on the roads. No, not a good idea. So, what do you do? Well, you put your money, your gold, where it's safe. Turns out there's some professions that were working with gold. And therefore, they had safe places. They had their own little private security team, private army to to watch their safe with the gold. And these are the goldsmiths. You know, they make gold jewelry for the the king and the aristocrats and the rich people. And so people started to deposit their gold with the goldsmith. Obviously, you need evidence. Like, what if something happens to the goldsmith and his son taking over the business denies that that's your gold? So clearly, you need some receipt. Okay. So that was the convention. They got a little fee for safeguarding the gold. Fine. Everyone's happy. But the next step is this. Let's say I'm, you know, in the province, um, somewhere in Hampshire in England, and we're neighbors, and we agree, I'm I'm buying this plot of land from you, and we agree on the price, and okay, how much gold? Fine. So, what are we going to do next? Well, I've got the gold with a goldsmith in London, you know. Okay, I I will go and get the gold. By the way, what are you going to do with the gold? Because if you're not going to keep it here, then it's kind of dangerous. Like I'm risking my life going to get the gold, bring it here, and then you bring it back to the goldsmith. We might as well leave it in the goldsmith, and I give you my deposit receipt. And that's what happened. So the the receipts of deposited gold, of deposited money, became the first paper money in Europe. Gold certificates. Yes. Exactly. That's how it works. Now, so the goldsmiths of course realize what's happening. Oh, nobody's coming to pick up the gold. That's kind of convenient. And because, and this this already explains the secrecy that suddenly then engulfed the whole thing, because people also realize, well, the goldsmiths have the money. They have the gold. And if you suddenly you get into trouble or you lose your job, you you need money. Where do you go? Well, the goldsmiths have money. So people came there begging for money and asking for loans. Here's where the secrecy comes in. Until around 350 years ago, in almost all European countries, it was illegal to lend at interest. Of course, that's Christianity, Christian rules. You know, the Bible was against interest, and interest was everywhere forbidden. So the goldsmith would say, "Oh, well, yeah, maybe I can lend you some money, but we have to keep this very secret because, you know, of course I'm going to charge you interest." Yeah, I'll pay interest. Yeah. Yeah, we'll keep it secret. And this is what happened. Now, so the goldsmiths realize we can lend out this gold that everyone is depositing with us, some of it, particularly the one that's like bullion in a standardized size and whatever, uh, we can lend out. Nobody will realize, uh, and we keep it secret. Everyone is sworn to secrecy because, you know, we're doing something illegal here with the interest. We're charging interest. That's, by the way, how the bond market was was created, because it's pretending not to charge interest. Um, you know, discount bonds, um, where you have no coupon. You come and and you want to borrow money. Okay, I'll give you I'll give you 90 and you pay back 100, you know, which is the bond calculation of the, uh, that is the interest really. But anyway, so all these tricks came about because of the prohibition, um, of of interest. But the goldsmiths then realized next, well, hang on, maybe we we don't even need to lend the gold. And of course, like every guild, any trade association that we're meeting regularly, they're talking shop and, you know, how do we deal this with this issue? Of course, we don't want to lend out too much gold, we might get into trouble. Also, we need to collaborate. If some goldsmith suddenly needs more gold, we have to help each other, otherwise everything will come up, and we'll all get arrested for lending at interest, you know. So they were sworn to secrecy. And one goldsmith, probably the first one to have this idea, said, hang on, guys, I've got an idea. We don't need to lend out gold. I'll show you. So next, there's always this guy coming every Monday morning. Okay. So let's wait. He's coming probably in 20 minutes. Always wants to borrow money. I've turned him down. I'll lend him money to show you. So he comes around. Oh, please. Oh, you know, dear goldsmith, I need to borrow this money. All right. Today, I've decided I'll lend lend it to you. Here's the standard contract. You know, all the small print, the interest. Uh, your daughters will be sold in slavery if you can't repay. You know, it's a standard practice and all that. Small print. Don't worry about it. Yeah, I know. Okay, it's fine. Just one more thing before I give you the gold. Okay, we said 300 grams of gold. Here it is. I will, you know, you sign there. I sign, and I I lend it to you. But I want you to deposit the gold immediately with me. Well, I need the gold. I need the money. Yeah, but you get the deposit receipt. And Oh, yes, of course. Yeah, that's all I need. I need the receipt. Get it? So, what happened was the goldsmith loan contract signed, and the goldsmith buying that loan contract, that's an asset on the balance sheet, hands out the 300 grams of gold. Now you see it, now you don't. You've deposited it. Here's your deposit receipt. It's all very transparent. And with double-entry accounting, which was created for banking to hide the truth of banking, it looks all very transparent because you can't see the money creation at first sight in double-entry accounting. So, why is all it's all correct? He, the borrower, deposited the money. Didn't you see it? Just deposited it? Ah, but it is still fraudulent. It's fraud. And you can prove this because did this person, the borrower, when they walked to the goldsmith, did they have gold with them? No. But they're leaving the goldsmith with a document that confirms they've deposited gold. Well, how did that happen? And also, secondly, if you measure the amount of gold at the goldsmith, did that increase? No. So that's fraud. Now, that's also modern banking. That's how it came about historically. That's that's an amazing, and that was your your question there. You know, how did this come about? This is how it came about.

So, how, um, did central banking come about? What is the, in layman's terms, difference between a bank and a central bank? It's just it's the bank of the other banks. Um, and they, that's how they came about. But it's the, the bigger banks and the bigger bank owners getting together. Well, really, we should have for stability, and if there's a crisis, we should have our own sort of maybe government sanctioned or somehow being given the halo of the government, um, we should have this bank of banks because then we have no more problem. Bob's your uncle, you know, if you get into trouble, well, that bank with government authority can then also create money, but it's different. And it has the government authority, and then we'll never go bust. And that's how central banks were created, and they were all created originally privately owned. And of course, to own a central bank is kind of useful, isn't it? Kind of profitable.

How do, um, let me ask a very dumb question. Oh, by the way, yes, actually Tucker, I always tell my students there's no such thing as a silly question. And you have to do me a favor for the sake of the audience. Pretend you know nothing about economics because you must ask very simple questions because you see, in finance, in particular, there's this, this, um, macho idea, never to admit you said it earlier, the experts never admit ignorance. So they will never ask like when they don't understand something, and that's how in financial markets, you get some very major mistakes because what a derivative is, what they don't want to admit that actually they don't understand. Yeah, for example, these, you know, credit derivatives, sliced and diced, um, mortgages, credit strategy. So anyway, so there's no, no silly question. Well, I'm actually a little bit more ignorant than I realized that I was before our conversation. Um, how does a bank get so rich? You said it's it's just the course of things that when you are a part owner of a central bank, you're going to wind up extremely rich. How, how does a banker get rich? Um, well, I mean, the, the money creation, uh, creates money for the bank through the return on the equity. So that's, in a way, it's a traditional way. It's just that it's because of this privilege that you're creating money that it's much easier than other companies to have that return. And particularly if you're a, that's for a normal bank, but if you're a central bank, then it's almost unavoidable that it's extremely profitable. So, in principle, banks get their return from the the difference between the interest they pay on deposits and the interest they earn on their lending. But the key thing is that for the actual lending, they're not really giving up intrinsic resources because they're creating new money. So it's actually easy for them to earn this fake. But, but it is, you know, it's, there's technicalities, and you have to do it properly. It doesn't mean, you know, you can be careless, and sometimes when they are careless, it blows up, and we have banking problems, you know, and banking crisis. But the, the, the regular banking crisis are mainly when banks create credit for asset purchases, and that's what creates these boom-bust cycles. In the UK, bank credit, I mean, 85% of bank credit is for asset purchases, and so you get these asset boom-bust cycles, banking crisis in regular intervals. In some other countries, I haven't mentioned the third scenario. No. So, bank credit for asset purchases, no good. It's not, uh, sustainable. It's not productive. Credit creation for consumption is it's for the real economy, but it's for consumption. Therefore, it's inflationary. It's also no good. It's not sustainable. The third possibility is the redeeming feature of banking. And that's why we can turn banking into a very positive, very powerful positive force for creating prosperity and abundance. Namely, when banks create credit for productive business investment, for the investment in the production of goods and services, implementing new technologies, uh, implementing new ideas, it's actually the driving factor for growth and prosperity. When banking supports entrepreneurs that implement new things, and that's when you get very high economic growth without inflation, without asset inflation. And so, really, what we should do is bank credit creation should be mainly only for business investment. But this, this is not what regulators do. Regulators now have not just hundreds, they have thousands of rules for banks, and banking is the most regulated industry on the planet. Most of them are useless. They don't achieve the goal of preventing banking crisis. For that, we, we can scrap all these rules. We just need one rule: that banks should only be allowed to create credit if it contributes to, um, to national income through business investment. If banks focus on that, you get very steep economic growth. That is, by the way, the solution to the puzzle of how some countries have had the most amazing economic growth, taking off like a rocket. You know, this is another measure of success of macroeconomics is how many countries, you know, we've had this macroeconomics, development economics for 100, 200 years, mainstream economics coming from English classical economics, neoclassical is more or less the same, and the IMF and the World Bank have implemented this now globally since, you know, since 1945, developing countries forced to more or less carrot and stick, you know, to implement these policies that are considered orthodox, deregulated, liberalized, privatize, and allow foreign investment to come in, and, you know, follow the orthodoxy, then interest rate policies. So, how many countries using this IMF World Bank approach to economic development have actually succeeded and have developed? You know, we've had 80 years of that. So it's, you know, it's enough time to actually say, okay, let's take stock. It's a longitudinal study. Yeah. Yeah. So, how many countries have decisively moved from developing country status to developed country status as a result of these policies? Well, there isn't one. None. What about Haiti? Well, is that an industrialized? No. Um, no. That's so what I thought you going to say. What about China, for example, India? What about Well, you see, we do have some countries that have developed. The ones you can count them on on five fingers of one hand, the countries that in the 20th century and perhaps early 21st century included have moved decisively from developing country to developed country status, namely, and in that sequence, Japan, Korea, Singapore, Taiwan, and China. Now, with China, if you want to quibble, some because it's such a huge country, some parts of it have not yet made that transition, but, you know, key parts of China have actually, and, and so I think we can include China in this list. In fact, China is is the best example of how this was was achieved. They all achieved in the same way. Japan was the first in the Japanese model, which is also what I found in my long research on Japan, and which is described in detail in the book Princes of the Yen. You know, what is this high growth system? It's a magic system for having high growth and prosperity. Well, China is the best example because they, most of the time in the postwar era, they didn't follow this model. Under Mao, it was Soviet Stalinist planned economy. Um, and of course, also looking at banks, how many banks did they have? One. The central bank, the People's Bank of China. Okay. Now, after Mao died, there's some to and fro, but then a new leader came to power, Deng Xiaoping, in November 1978. Deng, and he was a smart guy, and he gave a speech very early on, it's the first speech where he was, you know, rising to power, and he said that, I mean, I'm paraphrasing, essentially he said, let's forget about all this ideological stuff. He had to be careful, obviously, because there were still hardcore Maoists, it's probably in the room, but let's not talk about ideology. Why don't we focus on what delivers growth and prosperity? Essentially, what he's saying, you know, it's a famous expression, it's like, doesn't matter the color of the cat, whether it's a red cat or a black cat, is what he should have said. As long as it catches the mice, it's a good cat. Yes. And he was talking about the economy. You know, it doesn't matter what we call the system as long as it delivers and achieves what we want, which is high growth, prosperity, which of course strengthens China. So, everyone wants that. Let's do it. That's what he was saying. Now, and he was switching from ideology to practical empirical work. And he had, there's another expression, learn truth from facts. You know, where you get these four Chinese characters, yes, proverbs made up of four characters. So, seek truth from facts. That's the empirical methodology, not ideology, which dominates economics. So, it was pretty, uh, radical for China. It remains revolutionary for Western economics, where they still have ideology dominating it. Essentially, their Western, uh, type of Mao's Little Red Book is still dominating things in economics. Where's the Chinese decided, okay, we we've done that cultural revolution, a great leap forward, which was a great leap backward. I mean, this all seems to be happening now in Europe, you know, all this ideology and de-industrialization, which is what they tried and didn't really work. Wasn't really good. So, let's look at empirical facts, what works. Now, he had a neighboring country that was 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, and he knew, I think his, because a lot of when I was, I was in Japan for 12 years, and, um, when I was a student initially, you realize the large majority, the biggest majority of, um, foreigners in Japan is Chinese. There's many Chinese, and the Chi, the, you know, among the students, so many Chinese students. So they know Japan well. There's generations, generations, they've studied in Japan, speak Japanese very fluently, have 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 to foreigners. I mean, kind to everyone, but, you know, very friendly and kind people. They have this additional charming feature that they want to tell you the truth. But culturally, in Japan, there's this interesting thing, and you, when you go to Japan and you read some book about Japanese culture, what are the difference? Usually, it's mentioned, oh, in Japan, there's two truths. Two truths. What is that? Yes. The official truth and the real truth. Yeah. Well, that's true everywhere, isn't it? But in Japan, it's culturally recognized. And so what happened to me a lot of time when I was in formal meetings during the day, trying to ask questions about, you know, how does this work with this foreign investment, real estate transaction, bank credit, they would give me answers, and several times on the way out, one of the group speaking to me would say, Richard, that was of course the official story. Well, let's meet for dinner, I'll tell you the real story. You know, the official story is called tatemae, which means the facade, the front, the outside, the outer appearance. And the true, uh, truth is is honne, the the real intrinsic truth. And this happened many times because Japanese people want to tell you the truth. And because it's recognized that what you hear in official meetings, government announcements, or even business meetings during the day, that's, you know, that's just the official narrative, but it's not true. There's a gap. And that's by the way also why they have to work such long hours because there's a rule that after 6:00, it's off the record, and you can speak the truth in informal settings for dinner and so on. So there's an honest part of the day. Yes. But in fact, that's so important, as you can imagine. That's why they work so long. You know, they have to, because that's finally, I would show up at 5:30 just to like get it out of the way. So I'm sure Deng Xiaoping knew about that, and I I checked the records. They did have some banquets, some dinners with sake and mai flowing, and that's when they tell you the truth. And he did ask the question. He said, I have come, you know, here's the Chinese leader coming to Japan. These countries were at war, the second, second World War, and it was it was not just making peace, it was literally he was saying, thank you for for receiving me. I have come to you to seek the elixir of high economic growth. He was alluding to this legend that both the Chinese people know and the Japanese people know, namely that there's this legend, there was an ancient scholar, one of the sages with a long beard and the flowing gowns from China going to Japan seeking the elixir of life, which is a bit like the, you know, philosopher's stone, the alchemy, you know, which, you know, is probably the link to money creation. But anyway, and it's a famous story. Now, he didn't find the elixir of life in Japan, but, you know, this Chinese scholar seeking it. So he was alluding to that when he used that expression, everyone knows, and, you know, of course, the Japanese know that their culture, that the writing, you know, there's so much is from China. Actually, there is a close relationship, you know, and I think both people's actually quite appreciate each other. It's usually, I must say, you know, it's it's like foreign policy neocons from the US who want these countries to be apart. It's like Germany and Russia must be apart. But anyway, um, so, um, and he told him that, you know, what the how the Japanese reacted when he said, I've come to you to to ask you, what is the secret of high economic growth, the elixir of high growth? They told him. Now, what did they tell him? Well, it's not recorded. You know, there's no transcript of this of this dinner. Um, but we do know what he did after that. And I can imagine the conversation. Probably the first question, and these were all senior people from the Ministry of Finance, Bank of Japan, um, bank leaders. Um, I can imagine they will have asked, okay, so how many banks do you have in China? With your, I don't know, at the time maybe 5, 600 million people, already a multiple of Japan, um, and of course now beyond a billion. But so, how many banks do you have? Oh, one. You think with one bank deciding the creation allocation of money, you can get prosperity for everyone? Think again. You need to have many, many banks. You need small local banks.

You haven't even finished your explanation of the meeting between Deng Xiaoping and the Japanese leadership. And you you've just here's what I think you're saying or about to say, that the pro, one of the problems with China's economy was that one bank could never efficiently allocate credit, which is the driver of the economy. You've made that case, I think, really, um, powerfully. And so you said what you really need are smaller banks because they can more precisely allocate credit to different parts of the country that have different needs. And, um, and if you don't have that, you have like stagnation and inefficiency and like death. And that kind of describes what's happening in the United States. I'm sorry to ask you to pause. That's that is that what you're saying? Am I following this? Yes. No, you're not just following. Yeah, that's exactly the next point. Um, in fact, I did a study on the US with my collaborator, former PhD student of mine. Um, because America still has just about the largest number of banks in the world. Um, although the the number used to be a multiple. Yes, the Fed killed 10,000 banks in the '30s. It killed 10,000 banks, almost 15,000 banks in the post-war era. Central banks want to consolidate and reduce the number of banks, but the more banks the better, uh, for an economy, for the country, for the middle class. What we found in the study is we looked at what is the link between the, uh, the size of the bank and the size of the borrower, and then, you know, um, and what we found, I mean, it's it makes common sense, but it wasn't really demonstrated properly in the, uh, in the research by others yet. It's a simple fact in banking. Big banks want to do big deals with big customers. Makes sense. That's how they earn big money. Who lends to small firms? Only small banks. Now, why are small firms important? They are the biggest employer. Small and medium-sized enterprises employ 65, 70% of everyone in every country in the world. In some countries, it's 70, 80% of employment. You know, in when you study finance, and I'm teaching finance in some at several universities, you know, um, basically, um, they focus on companies that issue stocks and shares. Well, that's such a minority. 99.9% of companies don't issue and publicly trade stocks. They're not listed in the stock exchange. They are small firms. Where do they get money from? Small firms, you know, 99% of the companies are small and medium-sized enterprises. They get their money from, I mean, internal money, friends and family, yes, but external money is only from banks. Now, which banks? If you have an economy that's mostly dominated by large banks, extreme case is the UK, five big banks dominate, you know, the the banking system, 85% of deposits with five banks, the big five. Then because because they want to do big deals, they don't lend to small firms. Small firms don't get money. Then that means only big cities survive. Yes. Everything becomes concentrated. Now, Germany. But it's reflected in demographic trends. It's reflected in wealth allocation. Exactly. So, because this is a trend, like when I was born, 1969, like there was a lot of wealth in Grand Rapids, Michigan. There was a lot of wealth in Des Moines, Iowa. There was Portland, Oregon. I mean, there were, it was more diffuse because there were more banks, more local banks. Everything is affected, even fertility, because if everyone, you know, has to move to the big cities where property is more expensive, smaller apartments, small dwellings, you know, can't have another child, you know, so many things in in society are actually affected directly by this trend. And this trend has been driven very hard by the central banks. They want to reduce the number of banks. Sometimes it's official, like the ECB. We think Europe is overbanked. There's too many banks. And the ECB is the youngest major central bank, only founded around 2000, and it's already managed to kill 6,000 banks in Europe. Wow. Well done. Uh, so it's very sad. Now, Germany in Europe used to be the country with by far the largest number of banks, and still is the one with the largest number of banks. But in the last 20 years, under ECB pressure, through their, uh, policies of reducing banks' profit margins, you know, zero interest, negative interest rate policy, and then this overregulation made life so hard for small banks. They had no choice but to merge. That was the goal, and that was achieved. So the number of small banks goes down, and that means banks lend less for productive business investment. The best way to make sure that banks create credit for the best of these three scenarios, you know, to make sure they don't lend for real estate or for consumption, but mainly for productive business investment, is to have many, many small banks that lend locally to small firms. And that was the system in Germany. But it's been under threat. Um, but it also, you know, while Germany was doing well until a few years ago, um, Germany produced the largest number of hidden champions. Do you know what these are? These are special small firms that, that's why hidden, because basically we don't know the names of all these small firms. They may be dominant in their market niche, but, you know, they're so small, we don't know the names. And, uh, you can look internationally, where are these hidden champions champion? Because they have top 1, 2, 3 market share, gold, silver, bronze, like a champion in the Olympics. That's where this concept comes from. And if you look internationally, Germany had by far the largest number of hidden champions of any country in the world, much more than China, Japan, even the US. And it's because of this extremely decentralized banking system with all these thousands of small local community banks. But by now, the numbers already dropped a lot in the last, particularly under the ECB, last 20 years. Um, but that explains why Germany in the past did 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 strong economy because there were so many small banks, local banks, community.

So, let's put it in political terms. I'm starting, I'm not a genius. This is taking me a while to figure this out, but it does seem like there's a direct connection between the way credit is allocated and by whom, and your political system. So, a totalitarian system has a smaller number of institutions providing credit because they can control the country more, and therefore a smaller number of beneficiaries of the system. Exactly. Exactly. So the fewer sources of bank credit you have, the more centralized your society is, the more control there is in a smaller number of hands, the less democratic your country is. Exactly. That's exactly it. And of course, this is also what immediately Deng Xiaoping realized speaking to the Japanese because they told him, well, it's all about banking. Banks create credit, and credit is needed for growth because what is growth? Growth means more transactions this year than last year. That means more money is changing hands for transactions this year than last year. That's in our system only possible if there's been more credit because that is the money supply expansion. And of course, then it depends what, where's the credit going? Is it going for asset purchases? That's no good. Asset inflation. Consumption, that creates because you're blowing my mind. So, I mean, again, I've spent my whole life imagining that the M's, you know, that's what they want you to be, M1, M2, and all that, um, that the Federal Reserve was, you know, the source of the money supply, just the the Fed, but it's all banks. Of course, it's true that the central banks are powerful, but they're powerful through their control of the banking system, and they have power over the banks. Um, and, you know, those who control these central banks is is a small number of insiders, you know, historically, you know, probably some big banking dynasties and so on. Um, and of course, they exert the power. They they reduce the power of everyone else, all these other banks. And the central banks can manipulate banks, for example, to lend more for unproductive, unsustainable asset purchases, create the boom-bust cycles. That's what my my book, Princes of

The Yen, shows that the Bank of Japan created the asset bubble of the 1980s on purpose. And I could even show that it was intentional. And it's, it's demonstrated in several dimensions of proof, both eyewitness accounts, the data, um, the um anecdotal evidence, um, you know, it's all there.

Um, essentially, they've, the Bank of Japan has admitted that was the goal. Why would they want to do that? In order to have what follows, a massive long recession. I didn't expect it to be a 20-year recession. I mean, that's pretty brutal and and crazy. Um, but that's what they wanted. Why did they want it? In order to blow up the successful system. Japan was far too successful. It had to be destroyed, just like the German economy and others in the past.

Who wanted it destroyed and why? Well, you know, if you, if you go back to, um, Japan's relationships with other countries in the world in the 60s and 70s, particularly '70s and then early 80s, it became clear the one country that was most unhappy about Japan was the United States of America. They had one political initiative after another to try to force the Japanese to change their economic system. Yeah. Slow down. Structural Impediment Initiative. This, that, and the other. No, no, this is unfair. Whether you must change all your business practices. Now, officially, in terms of the economics, the argument was always, we want to help you become a, a stronger economy. Are you sure?

Um, and, and, you know, that's, it didn't work politically. So the central bank was used essentially as a traitor to blow up the system. It's the same in the Asian crisis, you know, with the Asian crisis. Um, I was sent, I was at the time at the, officially, um, at the Asian Development Bank, and I was sent as an official representative to the government and central bank of Thailand to analyze what's going on with this Asian crisis and what are the right policies. And it so quickly emerged the same mechanism, the same goals as in Japan. This was to destroy the success, blow up the system, create a crash, create a crisis, then, and then also IMF forcing them to open up to foreign investment. And because there was so much strong growth and prosperity, but the Western, um, big, um, owners and banks didn't have any ownership in this. And the Asian crisis and Japan crisis, Korean crisis was a way to force it open, and then the West could buy it up very cheaply.

So you think that the Japanese recession was created, well, by the Bank of Japan, but with the encouragement of the West in order to slow down? Yes. The US and particularly the Fed. Yeah. Absolutely. And that's what I show in my book. There's, there's no doubt about it, and there's no, there's been no contrary evidence, um, or that anything in my book was incorrect.

So, you write this book, published only in Japanese, at least at first, and it, as I said at the outset, rockets to the top of the bestseller list in Japan, beating Harry Potter, which is amazing. And then what happens? Yes. What happened next? Well, why haven't I read this book? And why is it not on our bestseller list? Well, yeah, it, um, what happened next was, of course, in Japan, I was constantly being interviewed. I was in the, by the daily press, by the weekly magazines, by the monthly magazines. I was given, uh, monthly columns. I was writing for years every month in the Japanese Economist and the Japanese Newsweek. I was on their television. There's some big Japanese. Yeah, it's all in Japanese. There were some big live shows. Your Japanese is good enough to do to explain economics on TV. I wonder how many of our viewers will know what you're saying. Um, that's impressive. Um, and so, but it was all in Japanese, you know, so it was, you know, in the media, there was somewhere you could see there's some pressure being applied. Some high-profile live Sunday, uh, TV shows like cancelled on the day, and then the, you know, the senior executives inviting me around, embarrassed to try to explain. And, you know, the Japanese love the truth, so they would, they did tell me the truth. Well, sorry. You know, we, it wasn't, we had no choice. You see, our advertisers, you know, the advertising revenue is very important, and it was one of the, it was our biggest advertiser, and told us Richard Verma can't be on this show. So, you mean a company like Toyota, Canon, or something? Yeah. I can't say the name, but a company like that. Well, hang on. They have nothing against me. I have nothing against them. Why would they say that? Yeah, of course it's not them. And they also said that they have nothing against you, you know, and I'm, you know, we're all really sorry about this, but, you know, is their bank saying that that they have to say this? But hang on, I don't, I don't even criticize the banks because I show that it was the central. Well, yeah. You see, the, the bank had to say that because the central bank asked to do so. So that's the chain of command, you know. And so then I was cancelled in that show, or some magazine editions even. There was one, it was one of the top, um, weekly magazines I was interviewed in that, you know, it was very proper and formal. They came with several, uh, photographers and recorded. I checked the script, you know, they, everything was a big deal. And they even then sent me the actual copy of the magazine, but there was no article of me. It was like last minute. They even forgot to take me off the distribution list. Um, so I called, "Thanks for sending this, but where's the article? Where's the interview?" And they explained, "Well, we, yeah, we had to kill it because of pressure."

So, um, so that happened on the one hand, but, you know, still, I mean, I would say more than half of the time I, you know, my interviews got through. I thought at the time, well, it's pretty controlled. I now realize with hindsight that was pretty open because once I went to the UK, it was like fully controlled, and, you know, I did not have this media access anymore. But it was only in Japanese. So one day I got a call from a, a Reuters journalist from Reuters. This and this name, British guy on the phone, apparently. And he mentions my book. Oh, so I thought, oh, that's impressive because it's all in Japanese, and usually, you know, the foreign journalists, they don't speak Japanese. So I was quite curious. So, and I expected, you know, he wants to interview me on the book. And then he said, "Oh, no, no, it's, um, no, sorry. It's, this is a, it's about your book, but it's a personal matter." Really? Personal matter? Yes. I, I'm calling, it's a private matter. Um, I want, I want you to to help my wife. Right. Well, I'm, I'm confused. Can you explain? Well, you see, her job is to translate your book. Well, hang on. This book has been translated. It's a great translation, and I helped with it. The publisher, we sat together. We, you know, we're really, uh, uh, word-smithing every sentence to make sure it's got the right. New York. I wrote it in English. Yes. But it's, it's a, it's a very good translation. What do you mean her job is to translate my book? Yes. Her job is to translate it back into English. She's given a very tight deadline. And, you know, if you give us the manuscript, the original English, then she's done with her job. Excuse me, what? You know, I own all the language rights. I've sent it to some American publishers. I'm still waiting for the result. This is like a pirated translation. I'm sorry. I mean, I'd love to help you and your wife, but I can't do this against my own interest. So, I had to decline.

Now, he did say where she worked, and it was one of the major. I don't want to say it. I don't want them to get in trouble, even after, even though it's 20, 24 years ago. But it was one of the major places in Japan, uh, that are more considered, um, official, where you, where you also think, well, hang on, why do they need to read, need to read this in English? Because the Japanese people are quite happy if something is in Japanese, they will only read the Japanese. You know, you've got a choice. Nobody will say, "Okay, I'll read the English." So it was clear there's somebody outside Japan who wants to read. But who could use one of the major, was considered government institutions, as a translation bureau?

Well, the puzzle was solved a few months later when somebody came to visit me from America, uh, from Washington, head of one of the think tanks and economy. I'd met him before, he knows me, you know, he's doing Japan. He wanted 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 and, and first thing he says, "Richard, great book you wrote in Japan, Princes of the Yen." Well, hang on, you don't read Japanese. No, of course not. No, I don't. But, you know, the translation is circulating in Washington. And, and then, um, and then, you know, uh, a few months later, I got the call from the US embassy. It was, you know, clearly a Japanese lady working there. Very polite, as you'd expect. Professor WA, um, we have a request from the US State Department. It's like, okay. Um, there is a, there's a senior person from the State Department who wants to arrange a meeting with you. Uh, well, I guess that's in Washington. I have no plans to go to Washington at the moment. Sorry. No, he's coming to Tokyo to see you. So, I thought, okay, let's, um, meet in a public place as opposed to a dog alley. Um, and sure enough, um, when we met, the main message was, you know, the CIA is watching you. That was the message. That was the main message. It's like, there was no, there's no quizzing or trying to manipulate me or get me out, you know. It's just the CIA is watching now what you're doing. They weren't trying to learn from you. They were trying to tell you something. No, no. Actually, somebody suggested when I told him the story that that also was my opportunity to ask for something like, you know, be president of one of the Federal Reserve banks in the US as part of the deal to stop talking about credit creation. Actually, it reminds me I need to, uh, finish another story I started. You know, I told you about Keynes moving away from the truth. I want to pause and savor this for a moment. So you publish this book in Japan in Japanese explaining the Japanese recession, and within a few months, you get a visit from the CIA. Yeah. Yeah. Well, I'd spilled the beans on what is the most powerful mechanism for both economic growth and prosperity or arranging for the boom-bust cycles. And of course, this is something that's been happening across the globe in the last 200 years, uh, quite a lot. And I was mentioning names, and I did, okay, I need to tell you to finish that before we come back to the, uh, to Ben Bernanke and colleagues. Um, I, after that visit, all the US publishers sent back their polite letters turning down my book. I mean, imagine this is a book that was the number one bestseller in Japan. It did have a chapter in it on the US. There was a link. I had a chapter on Asia, the Asian crisis. Same story. And I had a chapter on my encounter with Alan Greenspan, and based on that encounter and some analysis, I concluded, and that was in that chapter, that actually the Federal Reserve is on track, and Alan Greenspan was still, um, hitting it at the time, um, was on track to create the biggest asset bubble in history, and they will do likely the same as in Japan, and it will be a crisis. It is, it will be a bust. But because it's America, it's going to be a global financial crisis. That was in my book in the, it's published in the original Japanese in 2001. Um, now, there's, I then found one publisher that has a, I don't want to mention their name, it's a very good name, um, and they have international offices, global, uh, excellent pop reputation, and their US, um, operation is quite independent, has editorial independence. And I met to, I sent the whole manuscript to the CEO of, of the, you know, their US side, and they have excellent distribution in the US. And then I, I went to New York and I called him and said, "I happen to go through New York, can we meet?" "Of course." Um, we met, um, in the Four Seasons. The first thing he said when he saw me is, "Richard, thanks for sending me your book. I read your book. It's the best business book I've ever read." That's what he said. "Of course, we'll publish it." So, that's how the lunch started. And I thought, well, this is good. This is starting good. I better immunize him a little bit on the what's going to happen next. People will approach him, and I experienced this in Japan. They will say that this is a dangerous book. That phrase was used by some particular journalist working at the New York Times, but probably also rather, you know, in the mockingbird style, perhaps working for some of the agencies. Um, they did some, um, some sort of, uh, activism against my book because I wanted a, a book launch on the Japanese book for the foreigners and the foreign journalists in Japan at the Foreign Correspondents Club, and the head of the Foreign Correspondents told me that these US journalists were really trying to block that. Anyway, so I told him, you know, they will say this is dangerous. And he was just laughing it off. You know, nobody can stop me. I have total editorial, uh, independence, and this is a brilliant book. It was bestselling Japan. Are you kidding me? Of course, we'll publish this.

So, two weeks later, I was back in Tokyo. Email from this guy. "Dear Richard, it's great to meet you in New York. I love your book. Unfortunately, we can't publish it." He, I guess he also got a visit from, from the CIA. Was it ever published in the US? Yes.

So then I was, I was getting to be honest, a little bit frustrated because I wanted the message out, and it was already more than a year that I couldn't find a publisher for a book that's a bestseller. So I thought, okay, what, what is it that in the US they're particularly upset about? And I concluded it must be that chapter with Alan Greenspan, and I need to now tell you the background of that and what happened when I met Alan Greenspan. You see, my first article after, you know, after I published this, uh, paper in, in Japan for the Development Bank of Japan, "Solving the Puzzle of Capital Flows," was "Credit Creation was the Answer." And, you know, it's still the only paper to explain Japanese capital flows with credit creation for asset purchases, explains capital flows, and also this huge outflow and the collapse. It's published, then it takes years with these academic journals, published in 1994, "Land Prices in the Japanese Asset Bubble and, and, and Capital Flows." And, um, so that I had sent to The Economist at the time because I'd also, I'd taken the next step because I realized this is so powerful. I can explain capital, but I realized with this, I can explain almost everything. I can explain Japanese GDP growth, and that worked. I can explain, you know, the ups and downs of, of the business cycle. Uh, I'm now expecting a credit crunch and a banking crisis. So, because I linked it into a macro model, there is one, um, a very simple macro model that links money in the economy, which is quite famous throughout modern economics in the last 3, 400 years, actually, so-called the so-called quantity equation. MV equals PY. PY is prices times, for some reason they use Y for real GDP, real income, because the I had been used for investment by Keynes already then, used Y for income, real income times prices is nominal GDP. So really we're saying money M times a constant velocity equals nominal GDP. That's what it says. So there's a direct link between money supply and GDP. But the relationship broke down because velocity wasn't constant and it was all over the place. And that's when monetarism failed in the 80s and people thought it's not working. But what I realized was that that equation is wrong. It's a special case. And because it's basically wrong on two counts. Number one is it assumes that all money creation is used for GDP transactions. But what about credit creation? Money creation used for asset purchases. Yeah. It's just which, of course, since the 80s has has ballooned, and that explains the velocity decline. You see, that explains it. So I realized we have to have two equations. One is the money going into GDP, the real economy, and money going into asset markets. And I did that, and it worked.

Well, how could I do that? Milton Friedman himself at once said, "Oh, I wish we could divide money into its use." Well, we can if we understand the money creation process, which is credit creation. The credit data, you can disaggregate. Credit for the real economy, credit for asset purchase. And that's what I did. So I call it the quantity theory of disaggregated credit. It's really the general quantity theory because it turns out the ancient MV=PY is a special case. I've got the general case, which is credit as money, and divide it into the two flows. Money for the real economy, money for asset prices. Anyway, so that's what I, what I did at the time. I sent this to The Economist. They wrote a brilliant write-up, a whole page on my, on my work. This was the economics editor at the time. And because this is pre-internet, now anyone who wanted to read this, I, it was in the public domain. I'd give presented this at various conferences, economic royal society, economic conference, and an Asia-Pacific conference. Anyway, but people had to write to me. Who wrote to me? It was the Bank of England, Ross Charles, JP Morgan, and, oh, the Fed. Now, they were like, there was a fax, there was a phone call at at Oxford where I was in the Institute of Economic Statistics, and it was like urgent. Everyone's telling the Fed, the senior people from the Fed, they need the paper. We need it yesterday. So, okay. And I, I sent it to all of them. Um, I never heard back from anyone, but they were all clearly curious about because, you know, in the write-up, the keywords "credit creation" were mentioned, and, you know, my whole approach was mentioned. And the author, who's a good economist, Clive Crook, you know, he wrote, "You will hear more about this." Or perhaps he expected it to spread faster. He perhaps underestimated the resistance against the truth spilling out. He may be at some other, I think he's still writing, maybe for Forbes, or I, I can't remember. Yeah. Anyway, so, um, there was this write-up. I sent it out, and then the Fed had wanted to see it. So later, when I was actually also thanks to that write-up, I got job offers from various investment banks to be their chief economist in Tokyo. I was interviewing with Goldman Sachs. Had an offer from Swiss Bank Corporation to be head of research. And then Jardine Fleming offered me that job as chief economist, which I thought, that's not bad, you know, for my young age of, what was it, 25 years old? So I took that, went to Tokyo, because they gave me the leeway to implement my credit creation model. And so I quickly rose to being one of the top economists in the various surveys, Institutional Investor survey, Grant survey, top three economist on Japan, because my forecasts worked. If you look, if you use credit creation, it works, you know, you can forecast what's happening, what's going to happen. Um, and, um, but so they sent, and, and, you know, these these firms send you around the world. You sing and dance for the institutional investors, you're on the sell side, presenting, and, you know, you get some really tough questions. It's a good way to, um, to get feedback and get critiques of your theories and models. So they've been pretty much, you know, tested against a lot of resistance. And when I was, and of course, you go to places where there's money, so New York, Boston was also part of the itinerary as you're going around the world. But I managed to arrange an afternoon in Washington, and then I, I went to see the Fed, and the senior economist at the time wanted the paper. We had a good meeting, and so I asked him at the end, "So, you know, who was that senior, senior board member you had mentioned wanted to read my paper?" "Oh, that was Alan, of course." "Oh, okay. Alan Greenspan." "Great." So it made my day. And then another two years later, there was the annual, you know, bi-annual meeting of the IMF and the World Bank is outside Washington. It's somewhere in the world, and happened to be in Hong Kong. So my investment bank, the Asian headquarters was in Hong Kong. So they had a big dinner with all the big cheese people there, and I managed to get myself to come over from Tokyo. And there was Alan Greenspan. Usually crowds around him, you know, all the top guys, you know, finance ministers, central bank governors, everyone there. And at that moment, the crowds had receded. Okay, my chance. I'll go and talk to Alan Greenspan. Introduce myself. And I had prepared this chat-up line, which I then immediately used. "May I, excuse me, may I introduce myself? My name is Richard Verner. I believe you've read some of my research." Of course, you'd expect, this is four years later, you'd expect him to say, uh, "Your research, like, what was that about? Tell me more." Which is sort of what I was expecting. You know what he said? "Richard Verner, credit creation, the paper on Japan." "Yeah, I read it twice in The Economist, and then the actual paper." It's like four years later. And I'm like, "Uh, would you venture to comment on my paper?" Next surprise, you know what he says? "Can't remember." Turns around and walks away. Hang on. It's just proven that he remembers every single detail of this, but he clearly didn't want to talk to me. So, that was, that was kind of scary. And so when I got back to Tokyo, we had the system called Reuters 3000. You know, it's all sort of pre-internet or very early stages. So I looked up Greenspan's publications, his speeches, anything written, anything uttered by him, because, you know, he said it, "Richard Verner, credit creation," the keywords. So you know when and how and how often has he used credit creation in his, and he, you know, he was central bank, um, chairman of the board of governors for what, 18 years? So, you know, and, you know, he's been prolific in his, in his utterings and speeches and publications. You know how many times he's used credit creation? I did this keyword search. Zero. Never. Now, of course, I knew through this encounter that he knew extremely well why this is so important, so powerful. He knew this very well. That was very clear. But he was playing ball. This is a taboo. He's never used it. And I thought, ah, there can't be, there must be something. I kept searching, and then I discovered there's a book, um, edited by Ian Rand, and he wrote a chapter in it in 1967, when he was not yet at the Fed. And it's about, oh, credit creation, and how gold is a much better way to run the system, because once you give central banks this much power, they will create too much credit. He basically, when you read it, he criticized the Fed for creating the, um, the asset bubble of the 1920s in the US, and then the Great Depression in the 1930s, which was the Fed's job. They did that, and it wasn't an accident. And of course, the Bank of Japan was doing the same thing in Japan. So I realized, wow, this is how it works. He then was offered a job at the Fed, but he was, he was basically told never to talk about this again. And the same is true. Now, back to Ben Bernanke. He started to work on credit when he wrote about the Great Depression. And, you know, there's some papers, but he hadn't discovered the credit creation aspect like banks create money out of nothing. He'd never written about that. And, but, you know, he's more and more writing like, "Oh, we need to look more at credit and banks. Why do we drop out banks? We need to understand what's happening there." This sort of thing, you know, that was his work until 1993. This is already after my first paper was out. And I think the Fed decided, we need a counterargument now. And there was this paper by Bernanke with a headline, "Credit Creation and the Macroeconomy." Wow, that's like, wow, this is what I'm talking about. So I read it, and, you know, what he says? "Oh, credit creation is the financial intermediation of banks gathering deposits and then lending them out." He's defined it away. There was no credit creation. And then he also writes, "Oh, I used to write a lot about bank credit, but it's not so important. Mea culpa, even in a footnote, I was wrong writing about bank credit. It's not so important." And where was this thing published? Federal Reserve. Federal Reserve publication. That's where his career started. And his career then took off, and he became chairman of the board of governors of the Fed. But he would never talk about it.

Now, when he did use the knowledge was when he copied my quantitative easing. And I must mention this because, of course, you know, I said earlier, once you create this asset bubble, you get a banking crisis. But it doesn't need to be a 20-year recession. It doesn't need to be a 10-year recession as a result. It doesn't even need to be a one-year recession. You can have an immediate recovery, and you can get rid of the non-performing assets in the banking system just like that, at zero cost to society. So whenever they say, "Oh, we need to use fiscal money. We need to have national debt now based on this bank, bailing out the banks, and now we need austerity. All the ordinary people need to, you know, tighten their belts now." This is all a lie. We don't need any of that. It's just an accounting problem. And the central bank has the tools to legally just change the accounting such that there's no more problem. Namely, and this is my original proposal. I published this in the Nikkei Kin'yu Shimbun, the main, um, newspaper, financial newspaper, daily, uh, highly respected, big article, 2nd of September 1995, headline, "We Can Have a Recovery and High Growth Through Quantitative Easing," which was my proposal. I explained, I explained bank credit creation. So the first thing is, you know, we have to boost bank credit creation for the real economy. And here's how to do it. And I have, basically, there's three things the government can do. So, you know, simplistically calling it just QE1 is the first thing. QE2, second type, and then the third measure. QE1 is for the central bank. When you have a bust banking system with all these non-performing loans, the central bank just buys them up, of course, at face value, as if they were still valued at 100, at par. And the banks clearly will be very happy about this. Their balance sheet will be very strong. They will be more liquid than ever in their whole history. You've solved the banking crisis. There's no more banking crisis. Now, you could say, "Well, hang on. Aren't we just shifting the problem to the central bank?" Well, no, because the central bank doesn't have to mark to market. You can just forget about these holdings. But hang on. Isn't the central bank now creating money? Aren't we paying for this through inflation and a weaker currency? No, because it doesn't create money because money creation is when the banking system creates credit and injects it into the non-banking system. But this isn't a transaction within the banking system between the banks and the central bank. The central bank buying non-performing assets from banks. It doesn't create money at all. It just cleans up the bank balance sheets at zero cost to society. There's no need to use tax money. And why not do that? Exactly.

Well, whenever, now listen to this. Whenever the central banks don't want a banking crisis to turn into a major thing and recession, that's when they do it. I give you two examples. August 1914, the United Kingdom of Great Britain and Ireland declared war on Germany and her allies, which meant Austro-Hungarian Empire, Ottoman Empire. Okay, so that's how the First World War started. Britain declared war, just like with the Second World War. Um, the trouble was, on, I think the next day, the Treasury, the Bank of England, and the government got visitors from the British banks, and they said, maybe clutching some balance sheets and documents, uh, "Sorry, uh, you've declared war. We're bust." Well, how did that happen? The British banks were bust. Not all of them, but quite a lot of them. Well, London was the number one financial center for everything. So even for bills of trade, bills of exchange, and financial settlement between Ottoman Empire and Hungary, often it would go through London. London was the place, and, and of course, often also pound denominated, that was the most liquid international currency, you know. And because now all these countries, these are major countries, Germany, Ottoman, Austria-Hungary, they're now considered enemy countries. All the paper held by British banks were deemed non-performing because irredeemable enemy. First, how do you get the money? Exactly. So, and it was large enough for the banks to be bust, because capital is not high in banking, 10% or less. So you quickly reach that point where your equity is wiped out, and you're bust. Now, because Britain had just declared war on all these countries, was it a good moment to have a prolonged banking crisis, recession, economic depression? No. So this was a situation where the central bankers did not want this to turn into a big thing. And so what did they do? My QE1, the Bank of England just bought those up at face value. They had also another policy where the Treasury issued paper money, actually, because they felt, we need to somehow protect the credibility. So we'll, we'll have this measure as well. So people look at the Treasury, they don't look at the Bank of England buying these assets at face value. But anyway, that was the key thing. Second example. And, and so, yeah, the problem is gone. No banking crisis.

May I ask you, since you brought up the First World War, and we're on the cusp of a war right now, potentially a global war, what is the view of war, uh, by the banks? Like, what do the banks think of it? You've described the banks as the single greatest, um, control mechanism of human behavior in a society. I think particularly the central banks, because they have the, the bigger the bank, the more the power, but their power extends beyond just like their relations with other banks. Their power like determines a lot of what happens in your country. Yeah. And they're not under the control of voters, right? So it's an extra-democratic institution which happens to be the most powerful, which is like crazy. I'd love to know how that happened. But how do they feel about war?

Well, central banking and warfare are very closely linked. The, as I said, I mean, the, the modern, um, major bank, the first modern major bank and central bank was the Bank of England, of course. And in the very, um, act, law, act of parliament, the law founding it, it says this, um, institution and mechanism, because they, they didn't want resistance, they don't mention Bank of England, what we're doing here is establishing the bank. They kept that secret. We, we're doing a mechanism, a new mechanism by these investors to raise and lend a lot of money to the government, namely by establishing a company. We'll be allowed to establish a company, that's the Bank of England, in order for what? In order to wage war. It was in order to make war. So they're closely linked. And of course, if you look at its founding document, it says that in the, in exactly the act of parliament establishing the Bank of England, it said the purpose is to make war. Do you know why the Federal Reserve was established? And there was a rush to establish for 1914, the year the First World War started, exactly, destroyed Europe. And again, it was done with subterfuge. I mean, you know, the gathering everyone, yes, on the 23rd of December, 1913, uh, when nobody was there, uh, and then also introducing income tax. That's also the Bank of England. It was established together in the same act, um, calling for establishing new taxes. Why? Because when, when you have these central banks, privately owned central banks, established, is basically this trick where these entrepreneurs persuade the government, "Oh, you don't want to make, you know, you don't want to issue money. Issuing money, we'll issue money for you." What, that's what they're essentially saying without being so direct about it, but that's what they want to persuade governments to give up the power to create money themselves. "We'll do it for you, uh, and we'll lend you the money." Um, and henceforth, well, how do we get our money back? Well, we love to lend to the government because you can raise taxes. And that's why taxes were introduced. The federal income tax didn't exist before the creation of the Fed. It's also created, nice. You couldn't have one without the other. Well, whenever a central bank is created, they introduce new taxes one way or another. Yes. And the central bank of the United States, the Fed, was created during, right before the war. I mean, yes. Right before the war, months before the war.

What was the role of the central banks during that war? The most important war in the last thousand years. Yeah. Well, it was, it was really at the pinnacle of the war economy. There's no doubt about that. It's very clear. And the same is true, of course, for the other side. And now, from 1917, the US and Germany were at war, which is very sad. A lot of Americans of German descent and Germans didn't really want to be at war with Germany, but that's what happened. So, we've got these two countries at war. Sad. The soldiers dying in the trenches, and their economies organized as war economies. At the pinnacle of the war economies are the central banks. So, who were the key players in the German central bank, the Reichsbank, which was 100% privately owned? Was somebody called Max Warburg, or Max Warburg, you might say in English? And who was at the pinnacle, in fact, was a founder, um, of the Federal Reserve? And who was the key person there? Was somebody called Paul Warburg, Paul Warburg, his brother. But of course, the soldiers have to kill each other, and these two countries are. The head of the German central bank and the head of the American central bank were run by brothers during a war between the US and Germany. Yes. Now, I have to qualify. They weren't the formal governors, but they were the key people. Did anyone notice this? Well, some people did. I mean, probably encouraged. I mean, with Paul Warburg, it was obvious because until 1911, he was a German citizen. He'd only just come over for that purpose to set up the Fed, and he was speaking, I mean, half German, basically, when he spoke English. So, you know, um, it wasn't, I mean, if you were looking for some details, you'd quickly find this.

How did the, the brothers do during the war? Were they destroyed? Were their fortunes taken away? Oh, no, no, no. Of course, um, Max Warburg stayed in power at the, at the Reichsbank. He was the one who, who signed off on Hitler's proposed head of the central bank, even in the 1930s. It was also Max Warburg. Still, they were those. I can't believe brothers were at. Absolutely. Yeah. Yeah. Those banks. Yes. And of course, I don't want to just, you know, pinpoint the Warburg family, but, you know, I mean, there's other families, and there's many families. There's JP Morgan, you know, and they're of various backgrounds and, and, you know, uh, ethnic backgrounds and whatever, but it, the principle is, we, we do have, um, that it's an inside game. Well, yeah, bankers, particularly those that are close to central banks, and maybe are private owners of these central banks. And the Reichsbank was 100% privately owned. And, you know, when I mentioned Keynes, you know, when he became a director, he must have been an owner of this privately owned central bank because they have these rules. If you're a leading person, well, you must be a leading shareholder. You know, that's how it works.

So now I just want to give you the other example of, of, you know, to prove this point that you don't need to have a crisis and a recession even when the banks are bust, because the second key example is 1945. Japan, even Japan. So the Bank of Japan knew very well how to get out of these problems, because in 1945, it was much worse. The banks were 100% busted. They were lending to the government East Asian Greater Prosperity Bonds, basically war bonds of a country just defeated. You know, you could trade them in the flea market for almost nothing. And secondly, um, forced munition, uh, loans to, you know, the, the military industry, um, most of which was also bankrupt or was not even in Japan any longer, because the, the country of Japan shrank a lot right after '45. The whole of Manchuria, no longer under Japanese influence. Taiwan and Korea were intrinsic parts of Japan until 1945 for half a century. You know, Philippines, Vietnam, of course, these were added, um, you know, during the Second World War, but, you know, Korea and Taiwan were already for 50 years were part of Japan, 1905. Um, exactly. So, um, so these banks were bust because all these loans had no value. It's like 100% non-performing loans. What do you do? Is 1945 a good moment to have a big banking crisis and long recession? No. Because they had bigger problems. You know, the most cities were devastated by these incendiary bombs and the carpet bombing of civilians, also like in Germany. So then you don't want a banking crisis and recession. What do you do? Well, you don't need to have one. This central bank buys the non-performing assets at face value, and the problem is solved. And that's what they did. So you can't tell me the Bank of Japan didn't know what to do. That's QE1.

Now, I was quite convinced that even if, in, you know, say, I proposed this in 1995, even if at that time the Bank of Japan were to buy all these non-performing assets, most people at the time were still saying, "Oh, it's not so big a problem, these non-performing assets." Richard Verner always talking about. I was quite clear that they would rise to 25% of all bank assets as non-performing, because you just look in the 80s, what was, you know, the real estate lending, how much did it increase, and you got the numbers, and that turned out to be a very correct, uh, estimate. So I was convinced that even if the Bank of Japan just wiped that clean by buying it up at face value, you would still not get a recovery in bank credit, but you need that for an economic recovery, because the loan officers are shell-shocked to see what happened. And, you know, it's human nature, and even if you get bailed out, you're not going to immediately increase lending. So I came up with this proposal on how the central bank can force banks to increase credit, which, you know, we can call QE2. So QE1 is the central bank buys non-performing assets from banks. Okay. QE2 is the central bank buys performing assets from non-banks. And I gave the example in my report at the time for for investors. I wrote, "Well, the central bank needs, needs just to buy real estate in Tokyo, because all this is going to turn into non-performing assets, dud loans, and the, the real estate is the collateral. The central bank should buy it up, the loans, the real estate, therefore coming with it, and turn it into parks, because we don't have enough park space in central Tokyo. It's not such a green city as it could be." And that is a very simple thing to do, which improves quality of life, but also it creates money. It forces banks to create credit. Why is that? It's because normally, let's say here's a property owner, they don't have an account with the central bank. So, when the central bank buys their land, they will tell the central bank, "Well, please pay me." Okay, what's your bank account number? Okay, they give the central bank his, you know, their bank account number. What happens next on the balance sheets is the central bank instructs the bank to pay this client of the bank. And because this is between the central bank and the bank, this is unusual, right? Um, the bank gets reserves from the central bank on the asset side, and it must now credit the account of this customer with those deposits, which is deposit creation. That is the credit creation, as we discussed earlier. That's how the central bank can always force banks to push up bank credit. Now, for, and then you get a massive, within six months, you get a massive economic recovery. There's just no way around that, because Japan was in deflation. The economy is shrinking. Credit was shrinking, negative credit growth. It was really bad for many, many years. And so this proposal would have solved the problem. I, I actually contacted in Greece later after the European sovereign debt crisis, and Greek credit creation was negative. Same game, always. Spain, credit negative. Huge recession. Um, vast youth unemployment, 50% youth economy population, and the human cost of this is in the human cost, and the, you know, the young generation, basically their future wiped out, you know, no job prospect. So I, I went to Greece to speak to the Treasury, and, because there, even when the central bank is not playing ball, the ECB was clearly trying to create this problem, it was not trying to help. There's something the government can do, that's the third form of of QE without the central bank, Treasury QE, which is again something we have to look at in the US. I think there'll be Treasury QE as well. This is where, you know, if you look at the bond markets with this crisis, the bond yields jumped in Greece, you know, double digit, 50%, 60%. Spain approaching 7%, which was quite crisis level. Ireland, double digit, 20%. Why would they even issue bonds? And I told all these question, "Don't issue bonds. What is the interest rate borrowing from banks in your country?" "Oh, it's only 4%." Yeah. Right. And when you borrow from banks, unlike the bond market, you're creating credit directly. But you're in a shrinking economy. Credit creation is shrinking. That's the solution. That's the third way you can reflate the economy. Now, they all refused to do it. Not because it's, it wasn't possible. It was legal. I checked with an expert on ECB law. It's perfectly legal. They could have done it. That's where the political power comes in. They were, um, essentially scared into not trying these policies. The Bank of Japan for years said, "Oh, no, we can't do this. QE1, QE2, we can't do it." It's like, "No, no, no." Well, came 2020, March 2020, they all suddenly could do it. And that's the next surprise. So what happened actually in March 2020 was the Federal Reserve implemented QE2. And I should also add in 2008, so actually Bernanke, you know, he implemented my QE1. He made actually a speech at that time in January 2009 saying, "Well, I'm not doing the what the Bank of Japan had done." Because they used my expression QE, but they were faking it. They were just buying performing assets from banks, which doesn't really do anything. You have to buy non-performing assets from banks, or performing assets from non-banks, that works. Exactly. But the banks, Japan didn't do that. But Bernanke did in 2008. That's why the US recovered first from the global financial crisis, even though it started in the US, it's because he, he borrowed my proposal of, uh, purchasing the non-performing assets from banks. He didn't credit me. When he gave this country is a bank bailout. Yeah. Yes. But who pays for it? You see, it shouldn't be the taxpayer. It should be those who messed up. That's the Federal Reserve. So, they should pay for it. And they did. So, that was fair. That's to to tackle the moral hazard problem. Those who mess up have to pay up, which is, uh, one of the

main problems in the United States. So, the last area I want to get, I mean, I, we could go on forever. This is like, you've totally overturned my primitive understanding of economics. Um, thank you. You're welcome. What, given your your record of presence in assessing, you know, where economies are going, you look at the United States. What's your 10-year projection for the US? Well, it depends on so many factors. Um, actually, before we come to that, can I just tie together some loose ends? We have to be very, very brief. So, on Greenspan, the reason why I'm talking about it is because we were saying, "Princes of the Yen," the publishers turning down the book. Uh, it wasn't published in English. And you see, I concluded at the time, how did I get this published by a, you know, good US publisher? It's probably that chapter where I write about Alan Greenspan, my encounter with credit creation. He said the words. So, he knows credit creation are his chapter. Um, and I concluded he's doing the same thing as the Bank of Japan. That's why he doesn't talk about it. It's secret. So, it's going to be a global financial crisis. That was my prediction. It's probably that chapter. So, I took it out. H, it's the last chapter. Send it to the next publisher, an academic publisher that they also had some books on Asia. I thought they could be interested. They immediately accepted it, and it was published without that chapter. Later, that publisher was bought up by a British publisher. I wrote to them, the new owner, "I want my copyright back." Oh, yeah, of course. They thought it's just some academic book. Okay, fine. I got it back. So, I've now republished it with quantumpublishers.com, including the long-lost last chapter. So, it's back in there, and one can get it. Um, that was on that one. On on Deng Xiaoping, so once he found out the secret, the elixir of high economic growth, he went back to China and what did he do? He founded thousands of banks, small banks, local banks, regional banks, provincial banks, village banks, savings banks, thousands. There's almost as many now in China as in America, almost 5,000 banks. And economic growth took off. And of course, their job was to lend to small firms. And the logic is very clear. If you compare the Soviet system that he had previously with one bank, that's maybe let's say there's five people at the board making the decision how much money to create and who to give it to. Well, the Japanese must have laughed at that and told him, "Look, why don't you have 5,000 banks, which is what we have now, almost in China, 5,000 banks with 35 branches each, with 30 loan officers each branch lending to small firms, checking millions, literally, of loan applicants, checking them, kicking the tires, does it make sense? Can this be repaid?" You know, then you have more than 5 million decision-makers. If you do the calculation, these loan officers is more than 5 million deciding how to create and allocate this money and who to give it to, and it will be used for productive purposes, business investment. So, which system is better? Those five guys at the central bank trying to do this for 600 million people, or the 5 million loan officers? And of course, I think Deng Xiaoping was smart enough to realize, okay, this is a no-brainer. We'll have these banks, and economic growth took off. China delivered double-digit economic growth for four decades. You know, when you have 15, 15% growth, then every four and a half years, you double national income. And that tells you we can all have prosperity. All we need is for bank credit creation to be mainly used for productive business investment, and it can be done, and has been done. All the high-growth economies have shown. We can have it in the US. We can have it in any European country. We can have it in any developing country. A lot of our credit creation has gone to asset purchases. Exactly. And boy, does it show. Exactly. Um, it's a, whether it's counted as inflation or not, it is inflationary. I mean, it just things are more expensive. Well, asset inflation, and then derivative from that, you get all sorts of other prices going up. So, um, given that, like, where does the US stand right now? Exactly. So, exactly. And it's good to contrast this to what is possible because the fact is, every country in the world can have high, sustainable, equitable economic growth without crisis and without inflation. And wouldn't any politician want to deliver that? You'd think, but, and I think they would actually like to deliver it, but they realize the steps to achieve that are just not allowed. And they, they quickly reach the limits of their power, and they get whispered. Which are not allowed? Which steps are not allowed and why? Well, to create many small banks. You know, our research on the US shows that even the small banks, as they merge, as they do naturally, as they do under central bank pressure to merge, and the number of banks goes down, as it has in the US dramatically. Yeah. Um, thousands have disappeared already. But even the small bank, and so then banks stop lending to the smallest firms. As they get bigger, they lend only to the bigger firms, and you already get less economic growth. And secondly, even the smallest banks, as they merge, you know, they, they reduce their lending to, to the smallest companies. So, we constantly need to create new banks, actually, just to stay at the same level of having money going to the small firms. And the small firms are the productive job creators. You know, give $500,000 to a large firm, it's not going to create jobs. Give it to a small firm, oh, there'll be three, four new jobs, you know. Exactly. And, and that's what people need to understand. So, we need a decentralized banking system, but that also gives power, purchasing power, and prosperity to the middle class, to local communities. And that's what the central planners don't like. Yeah. And so, it is actually a war against the middle class that's happening because it means autonomy. I mean, a country with a strong middle class is an independent-minded country because you've got self-reliant people in it. Exactly. A country that's rich and poor, very easy to control. That's the Latin American model. Um, exactly. And sadly, that seems to be where we're heading. So, with this background, back to your question, if you look at, you know, long-term historical charts, it's very sad how economic growth has been declining in the post-war era in the US, most European countries. Now, we're being told, oh, that's because of demography and, you know, aging societies, climate change, and, Exactly, climate change and the need, in fact, to lower growth because of the limits of growth. I quickly want to address that point because, you know, there are many people out there who seriously, you know, they have good intentions, and they think, well, hang on, Richard's talking about trying to have higher growth, but isn't that a bad thing? Isn't growth bad? Aren't we destroying the environment? Well, hang on. I am all for protecting the environment. I love nature. I think you love nature, and, and we, we want to protect the environment. Yes. But economic growth is not the problem. Absolutely not. It's not the enemy of the environment, of nature. No. And the quickest way to explain why is to actually to analyze what is economic growth. Well, ask a physicist who studies physics, what is economic growth? And they'll say, well, I don't know. It in physics, there is no growth. What are you talking about? You see, it's nothing tangible, and therefore there is no limit to economic growth. In physics, there's no growth. You can only transform energy from one state to another. Matter is neither created nor destroyed. Exactly. So, what is this economic? Well, it's economic growth. And where does it come from? Well, it's a statistical illusion created by statisticians. Now, I looked into the history of this. Sure enough, you hit on the same, you know, you find the same answers. So, when did this start? The way we calculate national income and GDP, I mean, it used to be GMPP. So, GNP and national income. What's the history of that? Where did it start? You know, it started just before the creation of the Bank of England. Why? Because the bankers were going to lend to England, and they wanted to figure out what is the ability to pay of these people in England. We need some statisticians to measure this, and that's what national income accounting was created for, and that also, yes, exactly, to assess the creditworthiness of the borrower. It's the ability to service national debt. Wow. And that explains the other puzzle, and actually, again, tying together loose ends here. You know, I told you that when we talked about how the interest theory is the main propaganda, you know, lower rates lead to higher growth, higher rates lead to lower growth. Well, and I told you there are zero studies showing that. There's no empirical evidence whatsoever for that. And so I did the first empirical study on that. It's published again, open access. You can look it up. It's called "Reconsidering Monetary Policy" and then something, "Interest Rates and Growth." And we know what we found is, together with a very good statistician from Korea. Um, and it's, it's, you know, it's state-of-the-art econometrics. So, you've got to do this properly because, and it took years to get this published because everyone hated this because I'm. What we found is that the relationship between interest rates and economic growth is the opposite of what they tell us. In two dimensions, it's the opposite. The correlation is supposed to be inverse, negative. Yes, of course. Low rates, high growth. And no one questions that. And the causation is supposed to be from interest rates to growth. Yes, interest rates are supposed to affect growth. Of course. Well, we found that both are not true, and it's the opposite. The correlation is positive, and the causation, as far as statistics can prove it, you know, Granger causality, statistical causality, is from growth to interest rates. So, instead of the official story, "low rates lead to high growth," the real true narrative is the hon, the real truth, as the Japanese would say, is "high growth leads to high rates. Low growth leads to low rates." It's the other way around. That's the true story. And now, actually, what we also found is, I'd found this much earlier already, that long-term interest rate, 10-year government bond yields, they follow GDP. I mean, sometimes coincidental, of course, but they, they don't lead GDP. Okay. And it's roughly always the same. And they're always puzzled about that. Why is, you know, 10-year government bond yields usually similar to nominal GDP growth? Which of course was therefore also why I was forecasting when I saw any inflation for '21, '22, you know, a huge bond market crash because rates will have to come up with such high nominal GDP growth due to inflation. Um, but why is it that bond yields usually very nicely track, in the US, very nicely track GDP growth? Why? And you see, it's the same answer. It's because what is GDP? It was created by the bankers to gauge the ability to service national debt. So, think in those terms. Now, you've created GDP to figure out how much can they pay. Yeah. Then, what is the interest rate you're going to charge? Well, you want to charge the maximum without blowing up the system, which is what? Well, it is the same as the economic growth rate because that is the income generation. If you charge too much, it becomes a debt trap. Your debt spirals out of control. And I'll mention that in a moment. And if you charge too little, that means below growth, you're leaving money on the table, which they don't want to do. So, that's explains it. You see, so to, to address the debt trap for a second, well, when interest rates are higher than the economic growth rate, which is your, you know, economic growth, national income growth is the ability to service and repay the debt. But if the debt rises faster, then you can never get out of it, right? And it compounds. It will spiral out of. That's what they did to developing countries. That's the IMF World Bank system to exploit developing countries because what the IMF and World Bank have done over the last 80 years is tell them based on this economics, which is true and very scientific, axiomatic, deductive, made-up equilibrium stuff, there's no equilibrium. Um, that's heresy, by the way, to suggest there's no equilibrium, but it's just ordinary. You need a food taster. Um, and so they, they're told, "Well, you need to deregulate, liberalize, privatize. Um, you want growth? Well, you need savings. Sorry. Oh, you don't have enough savings." Well, you, you need to get, you need to borrow foreign savings. The World Bank is willing to lend you some. The IMF will. They're claiming that the loans they're delivering from the West are the product of Western savings. Yes. Exactly. Exactly. And so, there's a moral cast to all of this. You certainly see it here, just blaming fat working-class people at Walmart for all of America's problems. Yeah. Yeah. Yeah. I mean, they, there is a sense in which they turn the culpability, the moral responsibility onto the victims of the scam. Yeah. It's your fault. Exactly. Exactly. And, and so these countries have been encouraged to borrow from abroad when it's, it's a scam because who are the foreign lenders getting the money from? They created it out of nothing. The foreign banks create it out of nothing, which is something. But the argument is the virtue, you know, the we virtuous people have just saved a lot of money. Well, we know the savings rate is pretty low in the US, if not negative. So, but yes, still, that's the argument they use. So, it's a trick because developing countries can have their own banking system based on many small local banks. They will have growth and prosperity, and you don't need foreign money because, actually, foreign money never enters the borrowing country. So, it's always a trick. It's one of the rules of banking. You know, let's say there's a developing country, let's say South Africa, and they're, they're told, "Oh, we need, we need money. We don't have enough savings. We need the savings from abroad." Okay, we'll take a loan from Barclays in London for half a billion pounds. Okay, they tell us that's what we need. Okay, well, where does Barclays get this half a billion pounds worth of money from? It creates it out of nothing, credit creation through the banks. Um, now, the South African Finance Ministry says, "Well, actually, we want to use this money in South Africa." Okay. So, Barclays, send over the money. Oh, you mean you want South African rand? Uh, yeah. Yeah, sure. Well, we can arrange for that. There'll be some costs, you know, and FX and whatever fees, but we're happy to do it. So, what happens next is Barclays calls around South African banks. One of them may be a subsidiary of Barclays, it doesn't matter, but South African authorized licensed South African banks. You see why? Because they're the ones that have their accounts in South African rand. Barclays can't create South African rand. Um, so, and they will ask for a quote. We want to sell pound and buy South African rand. What happens next? The South African bank will create that money out of nothing, which is something South African banks could have done without the round trip abroad, which indebts the country, and usually debt for equity swap, or you can't pay your debt. Well, we own you now. We own your assets. Exactly right. And that's been the trick. So, it's been a, a terrible system to, uh, keep growth low, prevent countries from developing. And even in industrialized countries, you know, we're also victims here. It's not as if, oh, the, the rich countries are exploiting the poor. That's not exactly true because we're also being exploited in the rich countries, and the middle class is being exploited, as being drained of, of wealth. We could have prosperity and abundance. This is what people need to realize. Everywhere in the world, we can have peace and abundance, but we must address the financial system, the banking system. And the best system is when you decentralize the power. As Lord Acton said a long time ago in Britain, "Power corrupts, and absolute power corrupts absolutely." When you are this powerful central planner, central banker, power creates temptations, and human nature tells us, and history tells us, most people can't handle these temptations, and that's when you get the abuse. And in the end, it's all about maximizing that power for the central, uh, central forces. And of course, so what we need to do is create many small local banks, also in the US, in every country in the world. We should create state banks, state sovereign banks, as they have in, in North Dakota, because there's only one state-owned, um, sovereign bank, uh, in the United States, in in North Dakota. As a result, because that basically protects the local chartered banks. It's so, it's they're not so dependent on the Federal Reserve or on, on the FDIC, and, and therefore they can make sure that these banks stay in business and thrive, and therefore the economy and the small firms will thrive, and therefore job creation will thrive. We need more of that, particularly in this day and age where the central planners want to do the opposite. They don't want these many small banks. They want to force them to to merge. And the biggest club they have they're wielding now to to get rid of the small banks is actually the introduction of central bank digital currencies. And since you ask about the next 10 years ahead, we have to talk about it because that's definitely top of their agenda to introduce central bank digital currencies. Now, what is that? How does that fit in? Well, first of all, again, it's, it's marketed in a very devious way. They're telling us, "Oh, it's the digital aspect that's new. We used to have cash, paper, that's old-fashioned. Now we need digital central bank money." Well, hang on. We've been using digital money for many decades, of course, and there's no problem really. It works. Yeah, maybe some fees could be lower, but, you know, for that we need more competition, not less competition. So, um, so what's the problem? What, what's actually new? You know, we've been using BDC, bank digital currency, for, for half a century almost. Yeah. So, that's not new. What is new about CBDC? What's the C, central, the centralization? It's about centralizing things. Central banks are about to break this old contract, this deal between the banks and the central bank. The deal was central banks supposed to be specialized to stand behind the banks, back them up when needed, but not replace the banks. And that's also why we need now state-level sovereign banks because they will stand behind the banks in their state, and the Federal Reserve has failed in standing behind banks and doesn't back banks. Even Silicon Valley Bank, you know, they only injected liquidity after it was bust and changed ownership. Oh, that's kind of funny, isn't it? And the FedNow system meant that more money left the Silicon Valley Bank in one day than ever before in history from from any bank. Giving a blood transfusion to a corpse. Well, it, yeah, it was, it exactly, it was afterwards. So, um, CBDC is the central banks opening accounts for the general public at the central bank, which means that you just need to create the next banking crisis. And the central banks are very good at doing that. And all the money will leave the banks. The banking system will shut down, and it will all be in the central bank. And we have, hey presto, we've gone backwards. China moved from the Soviet mono banking system to thousands of small local banks and thrived, you know, doubling national income every four and a half years for 40 years, becoming the most powerful economic power, you know, in such a short time, actually faster than Germany, America before in history, um, and lifting more people out of poverty than anywhere else before in history. But we are moving in the opposite direction. Our central planners in Europe, in Brussels, and, and at the ECB, they are killing banks, and they want to now introduce CBDCs, which means they want to move to central planning. And the same, you know, is any country in the US at the moment. The Fed is saying, fortunately, no, we, we're not going to do this, but of course, they're studying it, and they're preparing for it. So, when the time is right, you know, I'm, I'm sure they'll wheel it out because central bankers, they're human, they're tempted by the temptations of power they already have. So much power, de facto, no accountability. I mean, when are central banks held to account for actions? No, you can't audit them. You can't really know what they're doing. And they think just giving a speech in, in parliament or some committee where being questioned, you know, that's good enough. That's accountability. No, it's like, you, you wanted to have 2% inflation. Now we have 10% inflation. Uh, shouldn't you lose your job? Oh, no. That never happens. I don't think it's ever happened. Exactly. So, um, so we need to oppose the introduction of CBDCs. And of course, it's, it's not just that what I mentioned, it's much worse because it's a programmable control tool, of course, and, um, the programmability is really scary, instant compliance. And they have, they have said this, you know, central bankers have said this, that they can then write the rules, and they have the technology to enforce those rules, and that's what's going to happen with CBDC. So, it's not really money. It's potential money. You have to apply. "May I please use it to buy XYZ?" "Oh, sorry. You know, your carbon footprint has been used up," or whatever the excuse may be. You're outside the 15 minutes, or you criticize the central banks, or you've been a critic, criticizing central banks. Very sinister. So, so, final question. If people have made it this far into this remarkable interview and want to learn more about this topic, so much has been written about central banking. So little of it bears any resemblance to what you just said. You're thinking about it in a very different way. Sounds to me like a much more accurate way. What, uh, where do people go to to learn more on this topic? I think the best is to get also my very up-to-date shorter reports and analyses on particular markets. Just now I finished one on the bond markets. Is my Substack, which is rwer.substack.com. Um, and there's a small monthly fee of, I think, $9 or something like that. Um, and otherwise, get my book "Princes of the Yen." Um, also I have a "Prince of the Yen" at quantumpublishers.com. That's where you get it cheaply. It's on Amazon. Sometimes they have horrendous prices, and it's, or in many countries not available, strangely. Um, and otherwise, I'm, uh, sort of growing my YouTube channel, Wernner Economics. How many languages do you speak? Well, fluently and able to give lectures and presentations is, uh, is three only. So, German, English, and Japanese. Three. Yeah. Um, I've, I, I can partly get by in, in French, and I, I did Latin in school. My Chinese is, is very passive, and only, you know, the writing from Japanese, the Chinese characters which you use in Japanese. Yes. Yes. Yeah. Although it's time-consuming, you know. Um, but, yeah, interesting. Well, I love those Chinese characters. There's lots of truth and information in there because they're, they're like messages from 5,000 years ago. How people thought and how they lived. It's all in the Chinese characters. Professor, I can't thank you enough for this. I hope you'll come back. I'd love to. Thank you very much. Thanks for having me. Thank you very much. [Music] So, it turns out that YouTube is suppressing this show. On one level, that's not surprising. That's what they do. But on another level, it's shocking. With everything that's going on in the world right now, all the change taking place in our economy and our politics, with the wars we're on the cusp of fighting right now, Google has decided you should have less information rather than more. And that is totally wrong. It's immoral. What can you do about it? Well, we could whine about it. That's a waste of time. We're not in charge of Google. Or we could find a way around it. A way that you could actually get information that is true, not intentionally deceptive. The way to do that on YouTube, we think, is to subscribe to our channel. Subscribe. 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