The Interview - Professor Richard Werner joins Hugh Hendry - More Power To The Princes
Jul 12, 2020
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Professor Richard Werner joins Hugh Hendry to explore credit creation, asset bubbles, and the role of central banks. They analyze the Bank of Japan's credit expansion, discuss the Fed and ECB's actions during the global crisis, and predict a potential bank nationalization. They criticize the undemocratic nature of the ECB and discuss the future leaders of the global monetary order.
Credit creation plays a fundamental role in inflating asset bubbles and can wreck whole economies.
The European Central Bank (ECB) bears a closer resemblance to the Reichsbank than to the Bundesbank.
Bank credit should be channeled towards productive investments to prevent crises and wealth inequality.
A decentralized banking system with many small banks is essential for economic growth and support of small firms.
Deep dives
The importance of time in financial success
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Richard Werner's insight into the Princess of the Yen
Richard Werner, the author of the Princess of the Yen, discusses his book and its impact in the financial markets. He shares his personal experiences and interactions with various individuals and organizations involved in the documentary based on his book. The documentary explores the inner workings of central banks and exposes the secrets of money creation.
Central banking power and manipulation
The podcast delves into the power and manipulation employed by central banks, particularly in Japan. It highlights the role of bank credit creation and its effects on asset prices and the overall economy. It also reinforces the importance of using bank credit for productive purposes rather than fueling asset bubbles.
The consequences of unsustainability and the need for reform
The discussion points out the potential consequences of pursuing unsustainable economic models driven by excessive bank credit creation. It emphasizes the need for reforms and a change in ideology to ensure that bank credit is channeled towards productive investments that contribute to sustainable growth. Failure to adjust such models may lead to crises, wealth inequality, and public discontent.
The Central Bank's Role in Addressing Banking Crises
The speaker emphasizes that during a banking crisis, central banks can remove bad debts from bank balance sheets at zero cost to taxpayers by purchasing them at face value. This action enables banks to create credit for productive purposes, helping to prevent the crisis from turning into a recession. However, the speaker notes that regulators should impose conditions, such as lending for productive purposes, when bailing out banks. The danger is that the trend towards centralization and de facto nationalization of economies, which has been accelerated by recent crises, may undermine the independent role of central banks and lead to the Sovietization of the banking system.
The Importance of a Diverse Banking System for Economic Growth
The speaker highlights the importance of a diverse banking system for economic growth, drawing examples from Japan, the Soviet Union, China, the United States, and Germany. He argues that a decentralized banking system with many small banks is essential for small firms and productive investment. Japan's economic success post-World War II was attributed to its decentralized banking system and a high number of banks. In contrast, the Soviet Union's centralized system, with only one bank, failed to support small firms. China's shift towards decentralization and the establishment of thousands of banks contributed to its high growth. The decline in the number of banks in the US and Europe, combined with regulatory pressures, may lead to a concentration of power and limited opportunities for small firms.
Analyzing Quantitative Easing and Negative Interest Rates
The speaker discusses quantitative easing (QE) and negative interest rates in relation to their impact on banks and economic growth. He acknowledges that QE, when done properly, helps banks by removing bad debts from their balance sheets and allowing them to create credit. However, he emphasizes that current QE practices, dominated by high-powered money expansion, are inadequate in stimulating economic growth. The speaker argues that negative interest rates and a flat yield curve harm banks and promote the concentration of power in central banks. He suggests that a positive yield curve and higher interest rates are necessary for banks' profitability and economic growth.
Professor Richard Werner joins Hugh Hendry, founder and former CIO of Eclectica Asset Management, for a deep-dive into the world of central banking. They explore the process of credit creation and examine the fundamental role it plays in inflating asset bubbles, the popping of which can wreck whole economies but can be very good for central bankers. They analyze the Bank of Japan's (BOJ) remarkable record of credit expansion, including its use of lending quotas, through the lens of Werner’' renowned book, "Princes of the Yen," which was a number one bestseller in Japan. They also look at the ongoing efforts of the Fed and the European Central Bank (ECB) to provide liquidity during this unprecedented global crisis at all costs, particularly debt monetization and quantitative easing (a term Werner himself coined), which Werner suggests could lead to a widespread bank nationalization – or a "Sovietization" of the banking sector, as he says. Werner argues that the ECB is undemocratic and that it bears a closer similarity to the Reichsbank (1876 – 1945) than it does to the Bundesbank (1957-present). Hendry and Werner conclude their lengthy discussion by looking forward: they scrutinize the current and future monarchs of the global monetary order, who are no longer princes but who may be on their way to becoming kings. Hugh Hendry can be found on Twitter at @hendry_hugh and on Instagram at hughhendryofficial.
