The World Is Addicted to Easy Money with Chris Leonard

Will Page: Welcome to Bubble Trouble, conversations between the economist and author Will Page, that's myself, and the independent analyst, Richard Kramer, where we lay out some inconvenient truths about how the financial markets really work. We've made quantitative easing easy-ish to understand, thanks to our past guest, Michael McMahone, from Oxford University. Now we need to infiltrate institutions that do their easing, the central banks. And who better to do that with than award-winning New York Times journalist and author of the aptly titled best-selling book, Lords of Easy Money, Mr. Christopher Leonard. More in a moment.

Will Page here, with a special request for you, our valued Bubble Trouble listener. First off, thank you for listening. Every time we put out an episode, we are so excited to see you enjoying them, and I would like to ask for you to help grow the show. We'd like to ask you to tell one person about Bubble Trouble who you think would enjoy the show. Perhaps you write a tweet or send a text or an email or just post about this episode. It doesn't matter. It just helps. Just tell one person and your work is done. Myself and Richard would be so grateful. Thank you.

Christopher, welcome back to this podcast. We are very grateful to get you on. I think first things first, we need to get the introductions to yourself, your background, your work, but really important, where can our listeners find you?

Christopher Leo...: Well, I have a website, christopherleonard.biz, which, you know, has all the books and articles I've written, and my contact information. So that's probably a good place.

Will Page: [laughs] That's exactly that it says on the tin. A little bit about your background, please.

Christopher Leo...: Yeah, so I'm a business journalist based in the United States. I've, uh, worked for various outlets and published in different places, and I write books and magazine articles now. And I'd say that my central preoccupation as a writer is American power and the sort of system of power within our country. Particularly looking at big corporations and government, and the way those two interplay with each other. I did a book about the meat industry in America, how monopolistic it is and how few companies dominate it. Then I did a book about Koch Industries, K-O-C-H, the Koch Brothers-

Will Page: Mm-hmm [affirmative].

Christopher Leo...: ... Company.

Will Page: Yep.

Christopher Leo...: Kind of a profile of corporate power, with a real focus on income inequality, and this big question as to why, you know, in America, we can have economic growth for 10 years, but the gains are really captured by a tiny group of people. And- and that's why I wrote the book about the Koch Brothers. But as I was sort of finishing reporting that, I got really interested in the Central Bank and the Federal Reserve, primarily starting with that same question of, you know, income inequality. I think the Central Bank actually plays a under reported role in stoking income inequality. So that's sort of my bag, and- and how I came to be obsessed with quantitative easing.

Will Page: Fantastic, and I noticed one of the quotes supporting your latest book was Bethany McLean, who did my very favorite documentary, uh, The Smartest Guys in the Room. It was great to see her comment on your book as well.

Christopher Leo...: That was epic. I... Bethany McLean's amazing. I mean, she broke the Enron story, and yeah. I love that book and movie too.

Will Page: And a small- a small footnote to that, Andy Fastow is a listener to our podcast, and I'm hoping, praying, crossing my fingers and toes, we will get the great man on.

Christopher Leo...: Here's to hoping. I'll tune in.

Richard Kramer: So if I could start off with a few questions. I mean, I enjoyed reading your book. I've just finished it, and I loved how it was really about anchoring on these sort of incremental decisions, and almost astonishingly, avoiding dissent instead of embracing it in the one place you would hope to think that there was real debate. And- and obviously, that's led to the longterm inequality you've talked about. And equally it was clearly a story of sort of man swimming against the tide. But I guess, as an opening question, if you were Tom... And I wanna can- pronounce this right. Hoening. Uh, if you were him, and- and you had to go back and change one thing that you knew 10 years later, you were gonna end up with this terrible income inequality by- through quantitative easing, what would- what would that one thing do? What could he have done differently, that might have stopped this decade of- of free money?

Christopher Leo...: What a great question. And, you know, for the listeners, what we're talking about here is this leadership committee at the United States Federal Reserve. So our central bank was built in a way, like all central banks, frankly, that kind of insulated it from voters, and from democratic pressures. And the whole idea there, a- as you kind of alluded to. I think the whole idea is that the leadership committee of the central bank can engage in real, deep debate, and then make decisions that are focused on the longterm health of the economy. Not just kind of short-term decision making that's driven by the next election. I mean, that- that was a whole idea why we insulated the central bank from voters. And that's why the leaders at the Fed are not elected democratically.

So you're asking me about this leader at the Fed named Thomas Hoening. He was the president of the Federal reserve Regional Bank, and then he had a seat on this very important policy-making committee. And as you said, he really dissented, in the year 2010. And that was a pivotal, critical year. Not just for the United States Federal Reserve, but for central banking around the world. 2010 is when the Fed really went on a new path. The Fed started an era of experimentation. I'd say experimentation with money printing. Now, your listeners know the Fed doesn't print money. You know, that's printed at the Treasury Department, but the Fed, and all central banks create new currency out of thin air. That's their superpower.

So the Fed decides in 2010 that it is gonna use this superpower of creating new dollars out of thin air to drive the American economy. And this guy, Tom Hoening, was really the lone dissenter who voted against it and said, "Folks, if you do this, you're gonna be trapping yourself in this policy of extraordinary money printing. You're going to benefit the richest of the rich Americans and the biggest of the big banks, and you're gonna create massive asset bubbles," per the title of this who, "... that'll make the economic system more fragile."

That's a heck of a long intro to get to your question, which is, like, what would he have done differently, if he could change one thing? And- and I'll be honest, when you ask me that. You know, the guy had a voting seat on this committee, and he voted no. He voted his conscience. He voted what he thought was the best thing to do. He lost. He voted no eight times at eight different meetings. He lost... I think all of the votes were 11 against one. And I can't... I- I can't think of... Look, my honest answer is, I don't know what he could have done differently. You know, the first part of the book is sort of this story of this doomed campaign to stop this. And you know, short of being the Chairman of the Federal Reserve, who would have had a lot more decision-making power, I think given his position, he did everything he could do. And- and if he could have differently, I guess it would have been to be the Chairman of the Fed, instead of a voting member.`

Richard Kramer: So, the reason I'm teeing this up is because I want to get a second question or point, which is, can we talk about some of the conflicts of interest inherent in who owns and who's behind the Fed, and- and who benefits from it? We had Kurt Andersen, who was the author of Evil Geniuses-

Christopher Leo...: Yeah.

Richard Kramer: ... on, uh, as- as a guest just recently, and you know, we were talking about, as you studied, the Koch Brothers. And we've talked, and I compared his book to Jane Meyer, Dirty Money, uh-

Christopher Leo...: Mm-hmm [affirmative].

Richard Kramer: Is there a cultural conflict at the Fed or a conflict of interest in how- how much they don't... aren't really bothered by the fact that their policies might be creating, in the short term, which I think in your book, you brought out. In the short term, they knew it would create asset bubbles and inequality. But they felt it would work out in the long run.

Christopher Leo...: Mm-hmm [affirmative].

Richard Kramer: Do you think that- that- that those conflicts of interest are sort of inherent in the institution, that they're naturally going to be favoring, uh, a very unequal outcome.

Christopher Leo...: I mean, yes. [laughs] That- that's exactly right. And- and if I could, maybe one way to get at that is to back up to 1913, when the Fed Reserve was formed. There was political pressure in America to create a central bank. We tried to do it twice. We chartered a national bank, and then revoked a charter. There's always been this kind of skepticism i- in America of that sort of centralized power. But when it really came to charter the Federal Reserve for the final time in 1913, it was a group of bankers who got together to kind of build the architecture for the central bank. And they did it famously at a resort off the coach of Georgia called Jekyll Island.

And the Fed was built in the specific way, so that it would not displace the private banking system on Wall Street. That was one of the key structures. And so the Fed is built, kind of, you could say, within Wall Street or behind Wall Street, in the sense that, when the Fed creates new dollars, it doesn't make those dollars appear in the checking account of ordinary Americans or even necessarily in the treasury of the United States government. The Fed creates new dollars by- by structure, writ, and mandate. This is how the Fed makes money. It creates it inside the reserve accounts of 24 select institutions on Wall Street called primary dealers.

Okay, headline. When the Fed creates money, it has to create that money inside the banking system on Wall Street, inside the reserve accounts of the primary dealers. Let's fast forward to 2010, to get at your question. When the Fed tries to drive economic growth by printing money, which is exactly what quantitative easing is. It's a jobs program. It's the feds saying, "We are gonna get in there and boost economic growth by creating new money in Wall Street to push the banking system to extend new loans, buy assets." That is going to, by necessity, mechanically, be definition, it benefits the people who own assets in the United States. And 10% of the wealthiest people in the United States own 65% of all the assets. The bottom half of all wage earners in the United States own only about five or 7% of all assets.

So by definition, the Fed, when it does these policies... And the Fed knew this, as you said. They're gonna drive up asset prices and enrich the very rich, so yes, that conflict is there from the very beginning. But then, there's this other layer to it, which is that the people the Fed listens to. The- the advisors who are talking to the Fed Chairman Jay Powell sometimes 10 times a day, are people like Larry Fink, who runs the biggest hedge fund in the world, Black Rock. And the people who run JP Morgan. The people who run Goldman Sachs. They're the people in the Fed's ear every day. And- and they're driving the agenda in a very real way.

The Fed is very focused on driving up asset prices, like stocks, bonds, real estate, and when the markets start to fall, and the stock market starts to fall, that's when the Fed steps in to save it. So I mean, if there's anybody who bullies around the Federal Reserve, it's not the President and the White House, it's the traders on Wall Street.

Will Page: Going back to your earlier remarks about central bank independence. Say we go from the early 1900s to 1997, two things happen. One, I started studying economics at university in Glasgow, and two, Labour got into power in the UK, and they made the central bank independent. And I remember those lectures back then. Central bank independence was sold to you like Kool-Aid. This will solve all problems. I want to probe two areas about the independence of central banks. One, the original sell from making a central bank independent are not democratically accountable, as it would end the boom/bust political cycles of the economy.

And then, two, they were given targets, and in the UK, the target was a 2% in- inflation rate. Not an exchange rate target, not an economic growth target, not a jobs target, just a 2% inflation target. Nobody has justified 2% in history. It was just, that's the number. So if that was then and this is now, I kind of wanted to ask a reflective question of, what's the score card in central bank independence? It was the holy grail of monetary economics back then. Where do you see the argument for central bank independence today, given we've seen a lot of boom/bust, and given we've seen a lot of targets being broken?

Christopher Leo...: God, such a great question. Um, have you read, speaking of the- the central bank in England, have you read, uh, Unelected Power by Paul Tucker?

Will Page: No, but Paul Tucker is outspoken. He is outspoken, so I want to read that book. Amazon's just got itself a sale. [laughs]

Christopher Leo...: Yeah, it's- it's a great book. It's written. I- i- it's dense. It gets into the nitty gritty. And it's a great contemplation on this very issue you're talking about, which is, there is a good rationale for making a central bank independent. And it's the kind of independent agency rationale, which is exactly what you just said. We can help escape the boom/bust cycle, in the sense that somebody whose independent... If you have an independent committee, they're not running for reelection in two or four years, or what have you, and they can think on a longterm basis. So they can think more longterm, and they can also do things that are unpopular. That was, you know, the [crosstalk 00:13:24]-

Will Page: Yeah.

Christopher Leo...: ... the driving theory is sometimes the Fed has to hurt the economy in the short-term to solve longterm problems. And- and you know, you pointed to the inflation target. That's probably the key- key thing everybody looks at.

Richard Kramer: That was Volcker in the late '70s, early '80s.

Christopher Leo...: So in the late '70s, early '80s, inflation was raging, even in England and the United States. It was, uh, rising, really double digits, and the... in- in the US, the federal government did everything it could to stop inflation. Nothing worked. Price controls, import controls, wage control. Nothing worked. The Chairman of the Fed, Paul Volcker, comes in, hikes interest rates. And I guess your listeners probably know all this stuff, so I don't need to walk through it. But, like, Paul Volcker hikes rates to 20%. Kills inflation, and kills the economy.

Brutal economic downturn. Uh, employment hits 10% in the early '80s, a- and this is the kind of trade-off, Will, that you alluded to in the sense that an independent central bank can do what Paul Volcker did, and say, "If we... we got to stop inflation, because it's very destabilizing, very destructive. So we're gonna hike interest rates and create a recession." And- and- and Volcker's kind of looked back upon as this almost, kind of, like, Old Testament figure of, you know, the guy who did the hard thing. The guy who killed the economy to stop inflation.

So, gosh. Again, books are written about this. But in the modern era, we have a boom/bust cycle. We are back in the era-

Will Page: No.

Christopher Leo...: You- you agree, Will?

Will Page: Yeah, I know. This is the weird thing, is that sort of stuff was supposed to be in the past. [crosstalk 00:15:03].

Christopher Leo...: Exactly.

Will Page: But I'm seeing just as many boom/bust cycles now as before central banks were made independent. I don't get it.

Christopher Leo...: Well, and that was the whole reason we had the central bank, is we had these periodic banking panics in the US, that happened every few years. Culminated in 1907. Terrible bank panic. We are back there again, in an era of financial 100 year floods that happened, like, every eight years now.

Will Page: Yeah.

Christopher Leo...: [laughs]

Will Page: Yeah.

Christopher Leo...: And you're just sort of, like, "What's going on?"

Richard Kramer: You know, one of the wonderful things that- that I pulled out of your book was just the language and the division in that board of governors at the Fed, between those who like to speak as if, if you didn't have a PhD in economics from Yale or Princeton or Columbia, you were just... you had no- no right to even open your mouth. And the other governors who were, shall we say, somewhat more connected to t real world. And are some of these boom/bust cycles coming because we're just p- handing over the policy decisions to people who work in abstract theories and dense economic language, and they're divorced from the real impact of- of the decisions they're taking.

Christopher Leo...: Okay, I think that's a huge part of it. Obviously, I do, and I'd love to tell one anecdote along those lines. But that's a big part of it. These people are working abstract models, and again, there's not this, like, satisfying silver bullet answer to this, but without question, a huge part of it... Well, there's two parts. First of all, we've allowed banking regulation to be scaled back to a level where the actual banking system now looks a heck of a lot like it looked in the early 1900s structurally, with, like, you know, five giant banks being in so much control. Really, tons of regulatory capture.

After the Great Depression, Franklin Delano Roosevelt came in and broke up the big banks, nationalized the bad banks, and then put a- a leash on Wall Street with, like, the Glass-Steagall Act and creating the Securities and Exchange Commission. That's big structural reform. After '08-'09, we just simply recapitalized the banks, and then imposed this, like, 2,000 page set of rules upon them called, uh, Dodd Frank, that's really just irritates everybody, but doesn't change anything structurally. So that's one reason we have these periodic booms and busts.

And the second, i- it's sort of a policy decision. I talk about in the book, which is that these central banks decided that they're- they're gonna do exactly what Will just talked about. They're gonna focus on price inflation. But they're gonna not worry about asset price inflation. In other words, they're not gonna worry if they pump up the stock market to stratospheric highs. This is a conscious decision they made. And- and of course, when asset bubbles pump up, they explode. And so I think that helps explain it. But you know, Richard, your point of this whole system being driven by these sort of very high minded PhD economist technocrats, who frankly over complicate a lot of the language around what they do to make it sound like rocket science, when it's really not. It- it's- it's pretty powerful.

Richard Kramer: [laughs]

Christopher Leo...: There is one anecdote in the book, where this guy, who's a Fed official, who used to be a private e- This is what's so crazy. The- the people who come from the world of private equity and hedge funds, you know, the supposed monsters? They're the ones who talk about the reality of these policies. And this guy, uh, Former Dallas Fed President Richard Fisher was a former investment banker. And he was inside the Fed meetings. He's like, "You guys, we're just gonna be pumping up the stock market, and enriching the private equity firms and hedge funds," and Richard Fisher, "You know, I just got off the phone with the chief financial officer at Texas Instruments, and he says these 0% interest rates, he's just gonna use the cash to buy- do stock buy backs. He's not gonna create a single job.

Richard Kramer: [laughs]

Christopher Leo...: He's gonna do stock buy backs and borrow money. And- and Ben Bernanke, the- the Fed Chairman at the time, said to Richard Fisher, [laughs] he said, "I- I would like to remind you, we don't like to use anecdotal information at this table from people who don't have PhDs."

Will Page: Right, so in other words-

Richard Kramer: No.

Christopher Leo...: That's in- that's in the transcripts, and it's in the book. And so, like, in other words, the guy, the chief financial officer at Texas Instruments isn't smart enough to understand the model, so we won't listen to him.

Will Page: If- if I can bring part one to a closure. This has been fantastic. But I think what you've identified is, the problem with central bank independence is it allows economists to behave like economists, and the problem with the way the economists behave is this. When a consumer doesn't behave like their economic model, the economist bla- blames the consumer for being wrong.

Christopher Leo...: [laughs]

Will Page: We learned about how we got into this mess in part one. Back in part two in a moment to work out how we get out of this mess.

Will Page here, with a special request for you, our valued Bubble Trouble listener. First off, thank you for listening. Every time we put out an episode, we are so excited to see you enjoying them. Now we'd like to ask for you to help grow the show. We'd like to ask you to tell one person about Bubble Trouble who you think would enjoy the show. Perhaps you write a tweet or send a text or an email or just post about this episode. It doesn't really matter. It just helps. Just tell one person and your work is done. Myself and Richard would be so grateful. Thank you.

Back with part two of Bubble Trouble, with our special guest, Christopher Leonard, the author of the Lords of Easy Money. And we're infiltrating the people who do the quantitative easing, the central banks. Richard.

Richard Kramer: Chris, we've had a fascinating first half talking about the culture inside these institutions. Now I'd like to ask, has the world simply become addicted to capital being free? I mean, you have people who've been in the markets now a decade, and they've understood that you'd actually have to pay to borrow money. How do you recalibrate a world that's already reeling from so many external shocks and drowning in debt, and maybe, uh, the central bankers just realized that they've overplayed their hand. They've left- left things being too easy for too long.

Christopher Leo...: Yeah. So, I mean, to be glib, you don't recalibrate it easily. It doesn't happen smoothly. And so, let's put it into context a little bit the Federal Reserve in- in America is best known for controlling the short-term overnight interest rate. When you hear the Fed raises or lowers rates, it's for the short-term interest rate that the Fed can control. When you go back over previous decades in history, that interest rate, typically, you know, it would be in the range of, like, three to 6%. That rate had brushed up against zero briefly in the late '60s. It hit zero kind of, like, maybe for a day when you look back at the chart.

The Fed kept that rate at zero for seven years. Seven years. Okay? Between 2008, 2016, basically. And- and then it raised it to the sky-high level of 2.5%, and then boom, instantly, basically back to zero now. The best way I heard it described was by Thomas Hoening, who's again, the character you mention in the book. And- and he put it to me this way. You hold that rate at zero for seven years, uh, global economic ecosystem builds itself around that seven rate. Contracts are signed.

Will Page: Mm-hmm [affirmative].

Christopher Leo...: Assets are sold, assets are bought. You don't rearrange that system without having, you know, some people win, some people lose. Some structures fall, others are built. And so the Fed, you know, without question, I don't think it's controversial, the world is addicted to this easy money. And not to belabor it, but here's another way I would describe it. I talk about, in- in markets, risk is like a seesaw. On one end of the seesaw, you've got really safe investments, like treasury bills. On the other end of the seesaw, you've got really risky investments like corporate junk debt. Then there's this balance of risk. What the Fed did over 10 years was very intentionally move all the money from the safe end of the seesaw to the risky end.

Will Page: Wow.

Christopher Leo...: And the Fed did that by pulling down yields on safe assets, pulling down what you could earn in a 10-year treasury, et cetera. Okay, fine. But now, if the Fed is gonna rearrange the order and start raising rates from zero to even 2.5%, while at the same time maybe drawing out some of the cash that's injected into the system, that's money's gonna go from one end of the seesaw, from the risky end back to the safe end. I- in other words, you are necessarily going to see prices correct out their in the markets. To use your vernacular, like, bubbles are gonna pop. There's just no getting around it.

And so we're in this position today where we've had a decade of not just easy money, hyper easy money. Zero percent interest, coupled with new money creation through quantitative easing, and there's simply no way to move back into an environment with higher interest rates without having massive volatility in the markets. So, yeah, we're addicted to it, and it's gonna be very hard to move out of it. And that's one of the reasons people argued we shouldn't have done this kind of policy in the first place.

Richard Kramer: And- and I think... I'll- I'll ha- throw it over to Will in a second, but if I take from that, and I step back and try to understand all what we would call spec tech, speculative technology. And include in that NFTs and crypto currency, and all the- the stocks that have been floated on the market with $50 billion evaluations, but no revenue. All of that, when I think about your seesaw analogy, is just jumping on one end of the seesaw. Because there's no point hanging out and watching a zero in your bank account every year-

Christopher Leo...: Bingo.

Richard Kramer: ... on the other end.

Will Page: The music's playing. You got to dance.

Richard Kramer: We're back to Chuck Prince, and, uh, uh, prior to the global financial crisis, saying that the music is playing, and we've got to get up and dance. And that seesaw analogy really frames a lot of what we've seen just explode onto the market in the last three or four years as new asset classes.

Christopher Leo...: Like specs? I don't know if you have those-

Richard Kramer: We did a Bubble Trouble on specs. Absolutely like specs. But I think of it as spec tech. Anything that's- that's sort of speculative technology-

Christopher Leo...: Yep.

Richard Kramer: When you talk about a metaverse, where is it? Who... You know, what does it involve? Well, it's completely speculative. When you talk about NFTs or- or cryptocurrency, technology has spun new asset classes that are attracting investment, attracting capital, because the other end of the seesaw looks so damn boring.

Christopher Leo...: And, 100% agree. Here's what really bugs me, is that when you read the financial press, like the Bloomberg and the Wall Street Journal and Financial Times, fantastic outlets, really great.

Richard Kramer: Mm-hmm [affirmative].

Christopher Leo...: But they talk about this in the sense of- of what you're talking about, uh, the search for yield, is what, you know, you can't get any yield saving money, so you're pushing money into stocks, and you're pumping up these asset prices for things like bitcoin and Tesla stock. And what I'm saying is, it sorta- it's acknowledged in the financial world that these prices are only so high-

Richard Kramer: Mm-hmm [affirmative].

Christopher Leo...: ... because of the so-called-

Richard Kramer: Sure.

Christopher Leo...: ... Tina effect, or there is no alternative. Right. And it's- it's on shaky foundation. And again, this brings you back to this terrible position where we are today where- where the Fed... When they start to raise rates, it'll change this whole risk equation, and we're just gonna see market volatility. Which is a fancy way of ca- hedging my bets. We're gonna say market prices fall. Like, the tech valuations don't make any sense. I'm not sorry. I'm not, like, an investment advisor, and- and the thing is, these- this bubble could continue to inflate for years. I don't know. But at the end of the day, these prices have been driven up by the central banks. That's just beyond question.

Richard Kramer: And it's clearly not just tech valuations. There's... it's real estate, it's all sort of other asset prices as well. But Will, why don't I throw it over to you for a minute?

Will Page: Yeah, you gave us the acronym TINA, and there is no alternative. I got to say, that is so passe. That is so 2021, Chris.

Christopher Leo...: [laughs]

Will Page: My good friend, Richard Kramer's, got a far better one for 2022. It's called FOFO, Fear of Finding Out. We'll come back to that later in the podcast. I got two questions. First one is on impotence and Viagra. Uh, if you bear with me for a second, but just-

Christopher Leo...: I'm- i'm intrigued.

Will Page: [laughs] We've had 10 years of inflation being above the base rate and the repo rate of interest. And the gap, even if interest rates go up, is getting wider. Inflation is going up faster than interest rates. And we're taught at university of the Phillips curve and the relationship between inflation and employment, and how a central bank can affect that. Are central banks effectively impotent dealing with real world economies? We've talked about the financial world issues very eloquently. But in terms of how you get inflation down, how do you get employment back up?

Well, you have this delta between inflation being a lot more high than interest rates today. Can central banks do anything, or are they impotent? What's the Viagra solution?

Christopher Leo...: Well, the Viagra solution is to sort of, in- in my personal view, is to wake up and realize central banks were not built to be jobs programs. They were not built to drive economic growth. The central bank, well, this is so interesting, because we could talk about the so-called, uh, dual mandate in the United States.

Will Page: Mm-hmm [affirmative].

Christopher Leo...: Of the Fed needs to maintain a certain level of unemployment. What- what do they call that? Maximum employment. They need to keep the unemployment rate low, and they need to cap inflation. I personally think the dual mandate is a total mirage, and- and not real. Um, and I can talk about what I think that. But the central banks are created to manage currency. They create and manage the currency. We created the Fed to create the United States dollar. And then the central banks, at least in the US, were built to be the lender of last resort to stop bank panics. They were supposed to lend- print money and lend it to the banks in the case of a panic, to short circuit bank panics.

That's so different from where we are today, in the sense that, you know, when the COVID crash hit in 2020, our central bank was purchasing corporate junk debt, the loans to mid-size businesses. We're counting on these central banks to do a job they weren't built to do. They- they were not built to drive economic growth. Governments do that, through this very difficult process of taxing and spending, uh, finding the right balance of regulation versus allowing markets to run with room of regulation.

So my- my take on your question is that the central banks weren't do that job. All they can do is- is basically print money. Does that make sense? I... So it's... Tragically, it's really up to governments to do the job. And if you're conservative, you'd think a government would do that by getting out of the way and having wildly deregulatory low-tax policies. If you're liberal, you think they need to have a, you know, robust safety net regulation, uh, or Keynesian spending approach. But regardless of what your theory, it's really up to physical or government authorities.

Will Page: Interesting. I feel you really summed up beautifully, which is central banks are given a job that they weren't intended to set out to do. I think that nails it for me. Now, the second question could be a whole different podcast. I'm thinking aloud. I want to ask the bitcoin block chain question. There's a [inaudible 00:30:33] question, which is even more fascinating. But whilst this could be a whole new podcast, we need to get you to Smoke Signals and wrap up this one. Just very quickly, do you see an element in the block chain, bitcoin, [Satoshi 00:30:46] developments, where people are sticking it to the man. They're fed up with central banks, and they want a different system. Or is the motivation behind this something different?

Christopher Leo...: Okay. God.

Richard Kramer: [laughs]

Christopher Leo...: I'm gonna have to come back for another podcast.

Will Page: You're in. You're in.

Christopher Leo...: [crosstalk 00:31:01]. Money needs discipline. And- and here's what I mean. We re- had the gold standard, where we tied the value of currency to a metal. And that doesn't really work that well, so we got rid of it. And we created these central banks that tried to create these committees that, you know, where wisdom of the committee would sort of substitute for the gold standard. It hasn't worked well. And the thing about bitcoin is it disciplines money through algorithm. Like, you can't fight the algorithm of bitcoin. There will only be so much bitcoin, and it can be only unlocked through... I'm not an expert, but, like, this puzzle solving process of mining bitcoin that I understand. I think that's why people are so attracted to it. It's like a new kind of gold standard of sound money because o- of its inherent mathematical limits.

Whereas we see these central banks, frankly, it's hard to argue against... These central banks are engaged in politi- of- of printing money in this way to drive growth, and people- certain people lose faith in the discipline over that currency. What bums me out about bitcoin is the TINA effect, if you will, or the fact that so much money is rushing into bitcoin as an investment asset, that it seems unsafe to me. The price is just going way up and way back and people are jumping into it, 'cause the momentum is on its way up. Which will destabilize its value.

Richard Kramer: Yeah.

Will Page: And when the bubble pops, is there a Venn diagram here where there's enough bitcoin activity integrated into the real economy, where if things go south, it brings the real economy south with it?

Christopher Leo...: So huge question. I have no- no clue. And- and that's why, when you asked, "Are they sticking it to man," I don't know, and unfortunately, you know, a lot of people might lose money on bitcoin 'cause of these... this sort of asset bubble element of it. But at the same time, I think there i- yeah, it's this- it's this broader thing of some peoples think bitcoin is the more disciplined, rational currency.

Richard Kramer: We need to move to the end section of our podcast, which is... where we do a bit of smoking. And, uh, we in- invite our guest to do a bit of smoking with us. We ask them for a couple of the smoke signals. A couple of the things that, in your time as a business journalist, and certainly digging in for the past few years, looking at the Fed, what are the kind of things that you say, "Uh-oh, I see some smoke over the horizon. There might be a raging fire over the next hill." Or some of the things that- that- that cause you to take a pause and be fearful when you hear people use language in a certain way, or- or drop certain phrases, or what are the kind of warning signs that you would tell your average person in the street to look out for when you look at the financial markets?

Christopher Leo...: So, I mean, first of all, this whole book is a giant smoke signal in my mind, where I'm saying, the Fed, through these policies, has put us in a terrible dilemma right now. And- and big part of the dilemma is the Fed can't, quote, "normalize" without creating a market crash. But, okay, all that aside, I'll tell you what I'm really obsessed with. And- and I'm sorry this is a little US-centric. But it does matter because the dollar is the global reserve currency, and I am fascinated with this huge infrastructure at the heart of the dollar, which is the United States government issuing, uh, just record amounts of debt to keep the doors open. We were issuing debt to o- run operations back in 2019, before COVID ever hit. When- when things were as good as they were gonna be, we were running in trillion dollars in deficits a year, and then we've got a Federal Reserve literally buying that debt from the United States government with new dollars that the Fed creates out of thin air. It's this weird circular system of monetizing debt that is at the heart of the world's global reserve currency.

So to me, as a US citizen, the thing that scares the heck out of me is the idea that global interest rates might start to rise outside of our control. On our debt or e- yeah, on our debt. On- on the 10-year treasury bond. When I see interest rates start to rise on the 10-year treasury bond, it really scares me because we are debt financing right now, and if cost goes up, it's gonna change so much of the reality of the American way of life. And I keep saying, like, there's a red line somewhere where US debt becomes more expensive because people don't want it any more, because we're issuing so much debt. Now, is that red line 10 years ago, 40 years away, two months away? It's, like, we don't know where that line is-

Will Page: [laughs]

Christopher Leo...: ... but we seem determined to find it in this country.

Will Page: [laughs]

Christopher Leo...: And that really worries me, because we have had such an easy ride on this debt for so many decades that I'd say uncontrolled increase in interest rates on the 10-year treasury worries the heck out of me. It turns my stomach when I see those rates rising.

Richard Kramer: Uh, I think the smoke signals in Lords of Easy Money, the outcome of 10 years of zero interest rate policy is one of these experiments that no PhD economist, granted a degree up until 2008, would ever have been passed by his committee for proposing this solution.

Will Page: Mm-hmm [affirmative].

Richard Kramer: And let's just see what happens to the world with a decade of free money.

Will Page: Mm-hmm [affirmative].

Richard Kramer: So with that, Chris, I wanna thank you, it's- it was- it's a fascinating read. It's a story of- of one man's swimming against the tide, and- and unfortunately, now being proven right. Uh, you've been a great guest. We'll have to have you back on because I think there's a lot more to talk about in this nexus of- of money printing and debt issuance and- and things that unfortunately fall straight in the- the remit of Bubble Trouble. So one again, thanks very much to Chris, and my host, Will Page, for another fascinating episode of Bubble Trouble.

Christopher Leo...: Thank you, great talk. Thank you.

Will Page: If you're new to Bubble Trouble, we hope that you will follow the show wherever you listen to your podcasts. Bubble Trouble is produced by Eric [Newson 00:37:12], [Jessie 00:37:12] Baker, and Julia [Nat 00:37:14] at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Until next time, I'm Will Page.