0:00 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. 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,
0:48 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, [Applause] [Music] [Applause] [Music] 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
1:39 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, economist. I' 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,
2:28 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 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
3:16 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 is 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 ra is lowering interest rates is stimulating the economy stock market has come down but you know growth is 6 7% and
4:03 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, Petals Beach, golf course, 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
4:50 recession since the Great Depression. That's what I conclude 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
5:40 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
6:28 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
7:13 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
8:03 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 land owner 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
8:48 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 in 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.
9:36 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. But boy, there's a lot of lying and some of the worst deception surrounds your health. How come Washington never talks about the poison in your food supply? What about what's in your drugs? You have a right to know what goes into your mouth. And the more you know, the more distressing it is. That's why it's critical to seek out alternatives you can trust. Now, as an alternative to the garbage that you can pick up at any store, we strongly recommend RE Fountain from Peak. It's a clean electrolyte designed for rest. It's got triple BMAX magnesium and no sugar, no artificial sweeteners, no artificial flavors. Everything in it is real. And it's good because
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11:09 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 Shima fellow, the first foreigner, and I was invited to all their events and all the clubs and circles, learning baseball, which for European is kind of unusual activity with the other uh staff and, you know, Japanese calligraphy. They give 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 Namura 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,
12:00 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 Saxs. Um and his his I think PhD in that seat about 4 days ago. Oh, excellent. Right. Oh, I sent him the paper actually recently saying, "Hey,
12:48 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 Boon 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 mei the ministry of international trade and industry slightly renamed it now uh was famous ministry uh 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 saxs 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
13:36 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 Saxs and and Peter Boon were arguing was
14:21 um that you see how if you're a Japanese land owner, 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
15:12 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
15:58 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
16:45 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,
17:33 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
18:26 called all sorts of names like oh this is cookie people and you know cranks can said in his general theory or was the treaties 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 uh audience was getting larger when I was teaching at good university Frankfurt. It was only sort of for a few years substitute professor uh 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
19:16 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 uh 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, um people through their 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
20:03 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 and economics. I didn't know that that happened. Exactly. You ran experiments and replicated them. I thought that was exactly Here's a depressing but true statistic. Nearly half of American adults say they would suffer financial hardship within 6 months if they lost their
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21:36 if you don't have life insurance because it seems too complex, they are the answer. Your family's future could be guaranteed to a great extent with Policy Genius. Go to policygenius.com/tucker to compare free life insurance quotes from top companies. See how much you could save and to what extent you could protect your family. policygenius.com/tucker. [Music] Well, you know, you can do empirical test. 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
22:26 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 up my loan you know the the the intermediation theory says deposits get lent out the fraction 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
23:18 is created x nhi law out of nothing um 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 elia publications called and it's open 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
24:07 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 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 bast banks are going bast 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,
24:57 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 DSG 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
25:48 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
26:39 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 databased 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
27:25 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 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 aiomatic deductive methodology where you just you you pose an axum 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
28:15 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 aum 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
29:02 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, 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 the can banks individually create money out of nothing. The other one is called lost century in economics about these past 100 years. They must hate you. Your fellow economist 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 Kanes and and many people would say well he's
29:50 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
30:38 be examined further. That's very important. Well, six years later in his important book, Treaties 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
31:29 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, well, here's a story you probably haven't heard a lot about. The Chinese mafia is exploiting rural America to create a drug empire. This is not available on cable news. The network's not telling you about this, but it's totally real. Communist affiliated drug gangs destroying parts of the United States, the parts that Washington ignores, to sell drugs, laundering money, and building a black market network inside this country's most beautiful
32:14 but least served areas. We've got a brand new documentary on this. It's called High Crimes: The Chinese Mafia Takeover of Rural America. It's available now on tuckerclson.com. It's excellent. the purchase of churches and schools to aid the operation, the jerryrigging of power boxes to steal electricity, foreign pesticides, collusion with the Mexican cartels. It's it's unbelievable. By the way, one of the drug houses is like walking distance from my house. I didn't know that. It's a layered and fascinating story. Head to tucker carlson.com to watch now. We think you'll love it. 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.
33:01 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 economist you will have heard of. One is professor Ben Bernani. 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,
33:53 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 unAmerican 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
34:39 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, is 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
35:27 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
36:14 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 pharmacy, 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 it 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,
37:01 that's How does that work? 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 systems 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 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
37:47 was the collateral for the loans they couldn't repay they lost their land they lost their their livelihoods some lucky ones became day laborer 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 Roth by 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 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
38:33 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 uh 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
39:21 other firms not do the same? Google it is 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
40:11 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 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
41:02 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 slightly different name 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 and except banks. They're exempted from
41:51 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,
42:40 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,
43:30 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.
44:19 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
45:10 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 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
46:00 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 bank is lending to and for what purpose. And that is because it's money creation. If it was just an intermediary,
46:45 it wouldn't be so important because it's zero sum game. You now have money but somebody else is 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
47:31 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 I'll explain the mechanism. So there's three scenarios. When a bank creates credit, there's 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 um asset purchases
48:18 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 is not 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 uh 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
49:04 when banks lend for asset purchases like real estate purchases um 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
49:51 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 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
50:40 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 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
51:31 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. Ration markets are determined by the short side principle. Whichever quantity of demand and supply 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 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 then say after 5 years of banks doing that they then
52:18 for some reason maybe there's 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 crisis. 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 they're bust often. We have these recurring banking crises. But there's also ways to get out of it. I'll I'll come to that. But just before I want to tell you the other two scenarios. So when banks create credit for GDP
53:10 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
53:56 uh 202122 I had the data data from the Fed was out uh 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 it was shocking data um 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 uh 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
54:43 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 '7s, 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.
55:36 And it's a fascinating story because and we're sort of going off on the 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 Bretonwood 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,
56:23 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 late60s in France, because France wasn't part of NATO, it was not an occupied country. Uh 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.
57:12 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 ration 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 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 Pompy, there's Shelter Gold. They decided, well, hang on, we better get the gold because kind of it doesn't
58:01 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 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
58:47 cuz it's really heavy that stuff. and they wield it back to their ship. Um, but not long after u 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 convertability of the dollar into gold temporarily. Of course, you know, it's now what 51 years of 54 54 years. Yes. Crazy. Amazing. Um, did did the introduction, speaking of
59:39 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' I've got this story in there, Princes of the Yen. Also, uh it goes back to what happened several times
1:00:26 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
1:01:13 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 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 in a well not directly in a sense it was successful because the alchemist concluded mercury can be turned into gold. And we know with nuclear
1:02:00 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 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 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
1:02:50 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
1:03:37 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
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