The Breakdown - How the World Stopped Producing Enough Money, Feat. Emil Kalinowski

Episode Date: November 7, 2020

Emil Kalinowski is the host of “Making Sense/Eurodollar University” collaborations with Jeff Snider.  In this illuminating conversation, he and NLW discuss: How the global monetary order changed over the last 50 years The exact moment the world demonstrated it had too little money Why bitcoin and MMT are competing to shape the next generation of monetary thinking  Why a big crash is coming, but we’ll be better on the other side

The monetary order malfunctioned, but was not completely disabled. It didn't crash. And it's just been sputtering along. And what does that mean? It means that there's not enough money growth in the world ever since 2007. You can even pin it to a single day. You can say that starting on August 9th, 2007, the world stopped producing enough money for the economy to expand at a rate that we expect.

that we have gotten used to for decades, for generations. And that has been the problem. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The Breakdown is sponsored by Crypto.com and nexo.io, and produced and distributed by CoinDest. Welcome back to The Breakdown.

It is Friday, November 6th, and today my guest is Amil Kalinowski. Amil is a macro expert. He's the host of Making Sense and Eurodollar University where he talks with Jeff Snyder about the big picture economic issues facing the world. He has one of the best Twitter bios I've ever seen, which really sets up a lot of our conversation. It's helping you understand how the 2007 malfunction in the monetary system and its continuing disorder affects finance, economy, politics, and society. We're here now in this post-election reality, and what I'm interested in is the big picture discussions about what's going to happen,

what's going to have to happen, regardless of who wins this election or many, many to come. So without any further ado, let's dive in. All right, Emil, it is wonderful to have you on the show. How are you doing? I'm doing fabulous now that I'm on this show, Nathaniel, I really appreciate it. I'm excited. Listen, I have been, first and foremost, I mentioned this in my intro as well, but I've been loving all of the content that you've been putting out. Well, Jeff Snyder and I, he works for Alhambra investments. He was on your show a little bit earlier this year.

And we have a show, a weekly show where we discuss what's happening in the global economy. Big deal, right? Everyone's got that show. That's every podcast. The thing is that Jeff, I think, is the best at what he does. he understands the creation and destruction of money better than anyone. And he's been writing for well over a decade publicly. And bottom line, I believe he's got the unifying thesis that explains the last 13 years.

So my role is to sort of translate it into English. I love it. Well, so this is actually the way that I wanted to have you introduce yourself to some of my listeners. I'm actually going to use your Twitter bio. So your Twitter bio is helping you understand how the 2007 malfunction of the monetary system and its continuing disorder affects finance, economy, politics, and society. So what is the primer on how you see that malfunction, I guess? Like, you know, today is going to be an interesting, meaty, kind of ponderous conversation, I imagine.

So let's start right in the deep end. Well, I've brought my floaties. So I have no problem jumping into the deep end. The deep end, I suppose, is that the monetary order malfunctioned, but was not completely disabled. It didn't crash. And it's just been sputtering along. And what does that mean? It means that there's not enough money growth in the world ever since 2007.

And you can even pin it to a single day. You can say that starting on August 9, 2007, the world. stop producing enough money for the economy to expand at a rate that we expect that we have gotten used to for decades, for generations. And that has been the problem. Imagine if you were expecting a certain amount of money, you conducted your life and your business at that expectation, and all of a sudden, you had to do with X percent less. Let's then go into the genesis or cause for that. Maybe take on the specific date that you mentioned. What happened on that date? What caused this malfunction?

This is everything, basically. It's that on August 9th, 2007, the second largest bank in Europe at the time, B&P Paribah announced via a very nondescript press report. release, that it was having difficulty valuing three of its hedge funds. It had something to do with mortgage-backed securities, and these were money market funds, and that they would suspend valuing them for the rest of, well, for some undetermined period until they could figure out how to price these things. And that set off a chain reaction that, and the world changed thereafter because the monetary order runs not on central banks but on private banks. Private banks create the vast majority of money that the global economy runs on. We call it credit,

but credit has transformed itself into this money-like object or phenomenon that permeates the entire economy. And if private banks do not create, create enough of it, then the world starts to sputter, no matter how much money central banks create. Because they're simply not capable of creating the right kind of money, distributing it, and eventually, with enough time, the end users realize that it's best not to take on this credit at this time during these difficult times. So on August 9, 2007, PNB, Paraba announced we're having troubles and everyone realized that what they were doing at that time, what they were counting on as money, the mortgage-backed securities, they were treating it as money.

They realized, wow, this is no longer money good. And what we saw was a stampede down from the higher levels of money down, this narrowing funnel, an inverted pyramid of money towards more secure money. And ever since then, we've just not been able to create as much. You know, the perception, obviously, is of a central bank order that has just revved up, you know, ever since the great financial crisis and certainly this year to sort of an insane amount of money printing. This is obviously kind of different than the story that you're telling. And obviously, this is one of the things that we talked about when Jeff was on the show is the flood myth. But I guess how should people reconcile or think about the contrast on the one. hand of, I guess what you might kind of colloquially sum up as the money printer go Burmeme

on the one hand with this contention that the world stopped producing enough money at this point 13 years ago. They can look up at the night sky and use that as an analogy. You look up and what do you see? You see the stars, the gases, the asteroids, the planets. That's the central bank money. That's the publicity campaign. That's the money printer go bur. But you look again and what do you really see? What is the overwhelming item that is up in the night sky? It's the darkness. It's the dark matter. It's the dark energy. And in the monetary order that we currently inhabit, that dark money, that dark shadow is the private bank. network that we don't have the best data on. We don't know what sort of bilateral deals are being

done right now between J.P. Morgan and Goldman Sachs to fund a cross-currency basis swap to Japan so that some Japanese bank Mitsubishi can then lend it into China. That is unavailable to us real-time. Meanwhile, it's happening around the world by financial institutions of all. Some are banks, some are hedge funds, some are insurance companies, any sort of financial institution, and they're creating liabilities, assets that they're then translating into credit-like instruments that then filter out into the broader economy as money. That is so hard to track, and that's why Jeff refers to it as shadow money. I guess the point is it's so much bigger than what the central banks do.

It's so much bigger. And this isn't just Jeff and I. It's monetary authorities during the 50s, 60s, 70s, and 80s, we're saying what is happening in this offshore, off the radar monetary system, off balance sheet. What is happening? It is a gigantic money-creating system that is larger, many times larger, and beyond the control of any central authority. That's what was being said in the 60s and 70s by members of the Federal Reserve, leaders of other central banks. And it was just allowed to grow because it was convenient at that time. And all you have to do, if you don't believe that this might be true, is just look at private bank balance sheets. They have shrunk or stagnated since 2007. So has our global economy. Meanwhile, the central bank balance sheets, they've exploded.

And yet the global economy has not roared forward like you would think it has, should have. What is the disconnect? Why was, I guess that, what was the disconnect? Why could there be or how could there be such an expansion of central bank balance sheets without it finding its way or impacting these shadow markets at all? And even taking kind of this line about it not being able to impact them, what are the things that actually could shift the system in a way that was better net net for the economy? It's a matter of risk versus return for the private banking network and private enterprise, wanting to take on credit. I know I keep referring to this as money, and who would not want to take money if it's given to him. But it's not really money like the money we think of in our billfold.

No, it's credit. And so you're going to have to pay it back if you are private enterprise. And right now, for the last, let's say, 13 years, the global economy has stagnated. Not only has it stagnated, but there have been periodic shocks. In fact, Jeff and I maintain that there have been four since 2007-2008. The European sovereign debt crisis was the second. Then there was an emerging market currency crisis during 2014 through 2016, most famously in China and the disappearance of their reserves.

And then in 2018, we began the fourth crisis. So it's fool me once, full me twice, full me thrice, full me thrice, and private enterprise sees this as too risky to take on credit. At the same time, the private banking network believes the same. They went through a terrible crisis in 2008. It was a once in four generations crisis. And then you know what happened? It happened again just four years later in Europe, another once in four.

generations crisis. And then again, in East Asia. And here we go a fourth time. So it's a matter of knowing that the monetary order is unsettled and, frankly, that they cannot turn to their central bankers for support. These banks know that they're out there on their own. There's no backstop. What has or how has what we've seen this year? in 2020 helped either kind of confirm some of these ideas or challenge them. That's a good question. And I'm buying time. I'm juggling.

Juggling. Do you have any ideas specifically? Yeah. I mean, I guess it's like what, you know, what would, based on taking this perspective, what would we have expected to see in the wake of sort of the central bank apparatus revving up in the wake of lockdown? and is that what we've seen, I guess, you know? And maybe it's too early to really wrap our heads around that.

But, you know, it's at the risk of confirmation bias, that's kind of the question is, did the flood myth perpetuate itself? Certainly the narrative of the flood was there. Did it play out the same way that it has in the past in terms of, you know, this sort of central bank impotence? I suppose it has in the sense that a lot of support was provided. not to tread water, but to create a recovery. And the recovery, it's not clear to me whether the recovery was as a result of central

bank actions or just the idea that there may be a reopening, a reopening boom. But since then, despite all the activity, the economy is settling down and not doing so well. I would think it's inflecting back down. I think the best place to turn to would be to bond yields, not to listen to what I'm saying. Where are bond yields? They really haven't moved too much, have there, despite all this support that's being provided. Yes, they came off the bottom, but they haven't moved for months in the United States. In Europe, they're heading lower.

And then these are safety instruments. Gold is heading up as a, I think, a safety instrument, not a fear of inflation. And so I would say that the case is still not closed, but because we've seen three of these events happen before, it's following the same path of shock, not just a shock out of nowhere, by the way. It was, we saw this coming. The disorder was in progress since 2018. So many economic accounts show that there was a slowing since 2018, heading into recession. Europe may have already been in recession as we began the year.

And then a shock came along. There was a banana peel, but don't worry, something was going to come along to throw the global economy down. And now they provided the support. There's a consideration. Might this work? Maybe, but no, no, we don't believe so. And so we seem to be slowing down again ever since July. It's, I mean, it is one of the things that makes it such a difficult phenomenon in terms of confirming or, or contradicting different theories is just how continuously volatile and not done this thing has been.

You know, even the language that we use is so misplaced sometimes, right? Like the language of recovery ceases to make sense, certainly at this point. At the time of recording, I think I just saw that France was going. back into a lockdown until December 1st, which is the sort of biggest scale of its type. So you have this whole, you know, this language of recovery and you have this language of stimulus, but really it wasn't stimulus, you know. And it's just interesting how these terms are almost misleading in a way when it comes to trying to reconcile and make sense of all this.

If Jeff will forgive me for cribbing his thesis here, The central banking monetary policy relies on expectations. So to your point, it was very positive language regarding recovery, V-shaped recovery, stimulus, activity. Why are these positive words used? Because there's hope that there's going to be this self-reinforcing rebound. If you believe there's going to be a recovery, you'll act on it. It wasn't always this way. Before the 1980s in the United States and before the 1970s in Britain, monetary policy was based on money supply. You provide more supply of money to the economy to get it going,

to stimulate it. But in the 1970s in Britain, 1980s in America, the central banks gave up on measuring, monitoring, defining, and distributing money. supply because it had grown beyond their definition, beyond their ability to identify it. And so they hoped that they would be able to move money supply by moving interest rates and by expectations policy. And that worked in a sense because everyone believed it was working, you know, the private banks were creating money. Economy was expanding. Globalization was in place. But since 2007, the private enterprise and private banks need more than just words. They need actual competence. And it's been 13 years.

And I don't see anything that you could describe as a recovery from where we were, what trajectory we were on in 2007. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and sell. Spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education.

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that we just build up one bubble, deflate it somewhat, but not enough, and build up on it again, and build up on it again. That makes sense. I agree. But it's just something that we've gotten used to since for like four generations. There are three generations or so. We've gotten used to a certain rate of growth. And now that it's absent, there's a social consequence to pay for it.

Somebody's got to pay for it. Because people have gotten used to a certain level of lifestyle, a certain level of expansion. And if it hasn't been taking place for, let's say, 13 years, they've gotten more upset, angrier, and that's being expressed in the polls. I saw it first in Europe in the 2014 European parliamentary elections when many outsiders, radicals, populists first gained wide victories over in Europe. I believe the BBC called it an earthquake. And then, of course, 2015, 16 in the United States. But even since then, we've seen populists win or come near power throughout South America, across Europe.

And I think it all has to do with the fact that people are unhappy with the level of economic activity, even if it was bubbly, right? It was bubbly, but it's been generations of it, and we've gotten used to it. And now we want answers. I think one of the things that has been clearly visualized and exacerbated in the context of recovery or whatever you want to call it is just how divided it is in terms of who gets to participate. And I think you just look at the housing market and this sort of mass wave of rental issues that seem to be coming down the pipeline compared to, best ever, you know, growth of housing prices that show so such a contradiction that I think reinforces some of those feelings of have and have-nots and sort of just stratification that's occurring. Well, this is standard fair for this moment in history. We are experiencing

wealth inequality, income inequality, as have previous generations. when they had reached the end of their social contract. And it makes sense. The societies we live in all naturally tend toward inequality, even the ones that are equal, like in the Scandinavian countries. I read a wonderful book, The Great Leveler. It was a tour through human history and civilization. And you just saw it always.

you would see inequality increase until a new social contract was implemented that reset the society and its relationship to government and which parts of society would share in the economic growth. And we've simply reached that point where the old order, the one that was implemented after the Second World War, no longer makes sense to anybody. and we are struggling and fighting to get to that new order that's on the other side of all this stress that we're going through. Do you think that is the implicit subtext of the U.S. election? And is it even bigger than that? Is it the subtext of basically all elections now? Yes, I believe it is. And it happens to, it doesn't always have to be that way, but the Second World War put

the planet on the same social, economic, political cycle. We all ended a terrible crisis at approximately the same time. And if there are any fans out there that have read the fourth turning by Neil Howe and William Strauss, then, you know, it takes roughly about four generations before the old order just doesn't make sense. And for those of you who haven't read it or that's okay. Perhaps you've seen Game of Thrones and the same thesis applies there. It's winter is coming and winter is not a season. It's, it's a, it could be an age or for people that perhaps are fans of Asimov, if you've read the foundation series, these are Harry Seldon crises. My personal favorite is the Kipling poem, the return of the gods of the copybook headings.

essentially we have come to the end of our era, of our age, of our social contract. And because Second World War put us all in that same timeline, we're all arriving there roughly at about the same time. And thus, it's why we see disorder not just in the United States, but in Brazil, in Chile, in Britain, everywhere. Let's zoom from there to the world after the election. Regardless of who wins, there's going to be some pretty fundamental economic issues that the president and all of us are going to have to face. What do you see as the central economic challenges for the next set of U.S. leadership?

I think there are two, and it's not clear to me how much control they actually will have over this, other than to prepare for a moment where they kind of, will be able to leap out of the crisis. But there are two. The first one is that this is only the seventh de-globalization of the past 200 years. And those previous six led to terrible financial crises. Within three to five years of de-globalization, in those previous six, 30 to 50 percent of countries were defaulting on their sovereign debt. Financial crises affected between 20 and 80% of global GDP. So we are in that moment of de-globalization. And the next three years are going to be stressful from that perspective.

At the same time, the United States and the whole world is experiencing only its third worldwide depression of the last 150 years. So you have two titanic problems. They're a coincidence. they're related, and how can the leaders of the United States deal with this? It's going to be overwhelming. It's going to be overwhelming, but the first thing that they could do perhaps would be to acknowledge that we are in a depression, one that began in 2007, and that de-globalization is a natural cycle, just as globalization, and to attempt to deal with it as a population.

to denying it or ignoring it. Being up front and frank with the population that difficult economic days are ahead, but that if we unify, there will come a moment where we will be able to break out of this. Of course, what that unifying moment typically is, is a terrible crisis. I thought that perhaps the coronavirus would be that moment, but no, it's only divided countries even further. What do you think about the prospect for different economic ideologies competing for allegiance? Because one of the things that's interesting is the rise of sort of ideas like MMT. I love the idea of MMT in the sense that it is something relatively new, that someone is proposing an idea that's radical,

that is proposing a change to the way we do, I don't know, business to put it simply, as opposed to what we're currently doing, which is increasing quantitative easing, offering a few more dollars in the stimulus check, perhaps buying some bonds. This is just tinkering. It's rearranging the deck chairs on the Titanic. It's simply playing the music, the same music, louder. What needs to be proposed is something radically different, radically different that fits the crisis, a depression, a de-globalization.

And I was listening to Professor Kelton recently on the Macro Voices podcast with Eric Townsend. I thought it was a fabulous interview. I disagreed with Kelton's thesis. ideas and assumptions here and there, but I was happy to hear somebody proposing something radical, something new. And maybe I'm going to write her in on my ballot as a candidate. I think we need more of that. We need more courageous leaders willing to rock the boat, propose new ideas. I think it's interesting. I think that it's been fascinating. to kind of be from the vantage point of the Bitcoin community and watching some of these

discussions play out and watching the rise of MMT because in a weird way, you know, Bitcoin's approach to things and MMT are sort of the, this fascinating yin and yang of the yearning that you're describing, which is for something that is, has an actual vision for the future. And you can agree with it or you can disagree with it. but at least it's articulating something that's based in the sort of observable reality of the system not working now, as opposed to, to your point, this incessant sort of iterating and tinkering that doesn't really get anywhere. That's a wonderful point, Nathaniel.

Absolutely. MMT seems to want to centralize money creation, whereas the digital assets, Bitcoin, decentralized. and I love that these are radical new ideas, and they are very important to us being able to escape this depression. What do you make, and I don't know if you've spent any time with this, but something that you were saying earlier in terms of private settlement, private money creation, private credit creation. So J.P. Morgan just launched commercially their JPM coin,

which is sort of a settlement system. It's theoretically pegged to the U.S. dollar, redeemable for U.S. dollars, but they're effectively cutting out the traditional system for their massive amounts of kind of money movement that happens every day. And I just wondered if you had any thoughts on whether there's actually a technology dimension to some of these kind of issues that have been or that you've identified around the world producing enough money. I wouldn't be able to speak to the technology issue, but I can suggest that what J.P. Morgan is doing here is not too dissimilar to the way they create money now.

So it's a different technique, but I think the most important idea is J.P. Morgan has been creating money for a long time. that is not a Federal Reserve note. And they've been creating this money and the world economy runs on it. They are barred from creating Federal Reserve notes, but not from credit. And this coin is a new way of them creating a new kind of money that may be even more efficient,

that would be settled even quicker. And I think that's very interesting, hopeful, and I'm excited about where this may go. So it's after the election now. What do you think we need to be watching, paying attention to, from an economic perspective, over the course of the next, call it two or three months, between now and inauguration?

I don't think there's going to be much that would be able to cause the economy to rebound in any meaningful sense. People have been scarred, not just from this year, but a 13-year stagnation, doldrums. They'll be saving their money, and they'll be looking for something to offer a new vision, as you put it. And without that vision, without an agreement, a broad consensus that these are the new rules of the road, and this is how private enterprise can conduct business with an eye towards the future, it's very unlikely that the economy is going to be able to reflate in any meaningful sense.

To see if that is taking place, we could look to the various dollar indexes, and if the dollar indexes are decreasing in value, that means that money is becoming more freer, we could look to the bond markets, the sovereign bond markets, And if yields are rising, that would suggest that perhaps there's hope for a reflation. We could look to commodity prices also as if they're rising, that that may suggest that economic actors believe that purchasing these raw materials to invest in the futures is wise. So we would see a general rise in those prices, in yields and in commodities, decrease in the value of the dollar. but otherwise, it seems unlikely that economic actors are going to pursue this in such a short time period after the election.

They would have to see some real fundamental changes for anything meaningful to stick, I believe. What brings you optimism? A lot of what you've described on the show tonight is a real challenge. what makes you optimistic about the future, if anything? Well, if you remember during the second invasion of Normandy, William Cage turned to the Angel of Verdun and said, we've been through worse. And of course, I'm referring to The Edge of Tomorrow with Tom Cruise,

everyone's favorite movie. I love that movie. And that's the point of all those books I referenced earlier. We've been through worse. And we came out better for, for it. On the other side of this is going to be a unified nation, unified societies. They'll have emerged from the crucible knowing that they can accomplish anything now. They just went through something awful and they came out unified together. A new social contract will be in place

that will allow private enterprise to invest in the future because there is a tomorrow at that point, whereas today, there isn't it tomorrow because you don't know what the rules will be. And people will be happy again, looking forward, we'll be able to accomplish anything. So I'm very optimistic as soon as we get out of this depression. And that's what the lessons were of the previous depressions. Once we got out of them, it was a golden age thereafter. And I don't believe it'll be any different after this one because socioeconomic history is cyclical. We're heading towards the bottom now, but thereafter. It'll be some of the best

years of our lives. Well, on that note, I think it's a super positive and optimistic and grounded in history, which is great. Where can people find you if they want to talk more about this, think more about this, hear more about this? I am in the Cayman Islands, and if you go to the local bar, you'll find me right next to the rum. If you can't make it down here, then I recommend jumping on YouTube and searching for making sense or on Twitter at Emil Kowlenowski.

But I do prefer that first option. Love it. All right, Emil, well, thank you so much for hanging out tonight and look forward to having you back on and exploring where we are in the cycle. Nathaniel, you have a great show. I'm a big fan and continued success to you and bigger and better things in the future.

reflecting on that conversation with Amil, I think that we've lost the belief that we can recover sometimes. I feel like we've lost that optimism that Amil has and shows at the end of this conversation, that it doesn't matter how hard things get in the short term that we can make it through, that we have made it through. And when we did make it through big shifts in the economic guard, things got better again. And often things got better than we could have possibly a man. I think as strange as it sounds, that belief that we can recover from horror, from hardship,

is a prerequisite of actually going through the pain in some ways. I don't know how to get people to feel optimistic, but also willing to embrace the hardship along the way. It's a very difficult dance, but I'm glad that there are folks out there like Emil who are trying to thread that needle and share what they're learning along the way. go check out a meal on YouTube, go download their podcast. It's really, really good stuff. It's in the show notes. And until tomorrow, be safe and take care of each other. Peace.