We Study Billionaires - The Investor’s Podcast Network - TIP 032 : The Balance Sheet Recession and Quantitative Easing Trap (Investing Podcast)

Starting point is 00:00:00 This is episode 32 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. All right, how's everybody doing out there?

Starting point is 00:00:29 This is Preston Fish, and I'm your host for the Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And today we've got an episode for you where we're doing another book. And the book that we decided to read this time is called The Escape from Balance Sheet Recession and the Quantitative Easing Trap, a Hazardous Road for the World Economy. And this was written by Richard Koo. For anybody that is a macroeconomics person, they probably have heard of Richard Koo because he had another book called The Holy Girl of Macro Economics. that came out probably about three or four years before this book. And that book, and maybe it was earlier than that.

Starting point is 00:01:08 I'm not too sure. But it was definitely a few years before this new book that came out here in 2015. And Richard Koo is really known for his analysis on the Japan economy. For anybody that listens to us, knows that we talk about Japan from time to time, about from 1990, clear up to about 2010, the Japanese economy, specifically their stock market, had lost over 75% of its value during that time period. So if you went from 1990 to 2010, you would have saw their stock market go down through a cyclic pattern. But over that 20-year period, it had lost 75% of its value.

Starting point is 00:01:46 During the last five years, it's gone up just a little bit, but not very much. It's still in a very depressed position. And if you know anything about their debt over there, their total debt to GDP is like 500%. and it's like astronomically high. So Richard Koo got his start, really kind of writing a book that described why that happened. And what's really interesting is this book here, this one that he just finished writing here at the beginning of 2015, this book called The Escape from Balance Sheet Recession and the Quantitative Easing Trap.

Starting point is 00:02:17 This book really talks about what's happening in the United States and how it's comparable to where Japan was back in the 1990s and what they were going through. And so it was just really kind of a fascinating read to see that parallel in that comparison. So Qoo actually was an advisor. I don't really remember what his role was, but he was an advisor to the New York Fed in the United States. And so one of the people that endorsed this book was Larry Summers, who we had talked about on a previous episode. He's the former secretary of the Treasury for the United States. He's a president of Harvard.

Starting point is 00:02:52 He's at Harvard right now. And he wrote an endorsement for this book. Stick ahead and read that endorsement for everybody. Richard Koo has been a pioneer in recasting macroeconomics for the current era of financial crisis and potential deflation. Agree or disagree, his work deserves close study in the next decade in industrial world is going to be better than the last. Yeah. So the thing that's really kind of grabs your attention with that is that this book requires close study. And for anybody that's, you know, pays.

Starting point is 00:03:24 He's very close attention to macroeconomics. Larry Summers is probably one of the best economists in the entire world. I think that people that are running the Fed are definitely listening to what he has to say. I know whenever we were listening to Davos conversation in Switzerland this past year, Larry Summers was one of the key people to be talking. So for him to say that this book requires close attention really kind of piques my interest and Stig's interest. And it's definitely something that I think people should pay close attention to. Go ahead, Stig.

Starting point is 00:03:53 Yeah, and what I found was really funny is that Richard Koo, he's making a lot of different comments about the people he's meeting. And one of the people he's talking about is actually in our summer. So he's actually saying, well, Summers wasn't really thinking back in 2008, but then he finally came back to his census in 2009 and suggested the right thing for the Americans to do. So, I mean, having an endorsement for someone, he's actually, he's actually, you know, talking. about it like that. I mean, that's, that's, that's, that's a really a big thing, I guess. Well, I think it says a lot about, uh, Larry Summers being able to change his mind and his opinion after seeing some different thoughts out there. And I really think that Richard Koo has this right. And so we'll get into some of those thoughts right now. So, um, the book kind of

Starting point is 00:04:40 starts off describing what is a balance sheet recession. Um, because that's the term that he has basically come up with that he had used on his previous book whenever he was describing what was happening in Japan. And so he also used. uses it again here. And so what he's really saying a balance sheet recession is, and Stig and I have kind of talked about the mechanics of this in some of the previous episodes, but what's really happening is that you have a downturn in the economy, and what you really got going on is you have all the asset prices, specifically houses and buildings and corporate headquarters, those types of assets, those lose a significant amount of value. So it's on the tail of

Starting point is 00:05:23 end of a housing bubble or a real estate bubble. And what happens is those lose so much value. And so people are in debt. And it's hard for them to fix that problem. So let's just take an example here in United States. Let's say you bought a house for $300,000. And back in 2007, 2006 time frame, if you bought at that price point and then you went through the recession in 2008, 2009, you might have lost almost, you know, know, 40% of the value on that house. So if you had a $300,000 house, next thing you know, it might be worth only $250,000 or somewhere around in there. And so that's really hard for a person to recover from that. It might even be down in some locations like Las Vegas and Miami, a couple places that got hit really hard. It might have gone clear down to like $200,000. So for a family that would have just taking out a loan to buy that house and maybe they didn't

Starting point is 00:06:19 have a lot down. And now the husband might get relocated somewhere else. And now they've got to sell that house for an enormous loss. That's what is causing a lot of the heartache for a family. Because now, let's say that the house did go down to $200,000. And let's say the family just had a modest 20% down on the house whenever they first bought it. So that person might have $40,000 in debt that they now have to pay off as they go and they're searching. for another house and now they've got a rent and it's just a it's like a compounding impact there and so when this happens across the entire country where everybody's got this enormous debt that they've got to try to pay down that's what he's referring to as a balance sheet recession because

Starting point is 00:07:05 even though that person can go out and now take a loan at zero percent which is where you were at and you know post the 2009 time frame you could go out and take a loan for zero percent but no one's doing it and the reason that they're not doing it is because a the banks aren't lending it to which is a completely different piece of this. The part that Richard Coo's trying to get at is people aren't taking out loans because they're still trying to pay down the loss that they had on these large, tangible assets from the last recession. Go ahead, stick.

Starting point is 00:07:34 Yeah, and other thing is really important for you guys out there to understand because, I mean, you might be thinking, so if he has $40,000 in debt, why is this is not a good thing that he's trying to pay off that debt? And it is, like, on an individual basis, it's, it's, fantastic that you want to repair your own balance sheet by paying off your debt. The problem is that one man's spending is another man's income, as readily is to say. So when the whole country is doing that at the same time, I mean, that's really the problem with the balance sheet possession. So there is no one to increase productivity or even just to maintain productivity in the

Starting point is 00:08:10 country because they're not spending anything, which again leads to more people getting unemployed, less money in the economy. And so we have this bad spiral all of a sudden. So that's really kind of the essence of this balance sheet recession that Coo's talking about is that you have an asset bubble. You have people that lost a lot of the value on very large purchases, like $100,000 type purchases. And so they're trying to repair that debt on their balance sheet, on their personal balance sheet, on their corporate balance sheet. This is on a private level and a business, you know, corporate level as well. And so they're trying to repair that. And until they actually do repair it, they're not going to take out more debt and they're not going to take out more risk in order to grow their business until they pay that down.

Starting point is 00:08:58 That's why you see these really low interest rates persist because no one's going out there in lending. In the United States during this last one, which I think is a little bit different than what happened in Japan, you had the Fed mandate to banks that they had to be very choosy with. who they're lending money to. And I think that that just kind of compounded the duration of these interest rates that we're seeing. So one of the things that I really want to talk about that Koo does a great job discussing is the difference between fiscal policy and monetary policy. So people hear those terms a lot and they might not necessarily understand what the difference between them really is. And I think a lot of people probably think that they're interchangeable, but they are not. So let's talk about fiscal policy. So fiscal policy is really

Starting point is 00:09:44 government spending. How is Congress spending the money, at least here in the States, Congress, how are they spending the money? And so if they're going out and they're doing public work type projects or they're building dams or they're doing things that are spending government dollars, that is referred to as fiscal policy. When you talk about monetary policy, that's talking about the reserve ratio. That's what the central banks are doing, specifically in the United States, that would be the Fed. What is the Fed doing to lower interest rates, to buyback bonds, and all that kind of stuff to spark the economy? And so those two things are got to really, and Ray Dalio talks about this in his video. They have to work hand in hand. They have to work

Starting point is 00:10:29 together. So when you're talking fiscal policy, that's Larry Summers whenever he used to work back at the Treasury. When you're talking monetary policy, that was Ben Bernacki during the 2008-2009 time frame, adjusting the money supply doing quantitative easing. and all that kind of stuff. Now, what Koo says in his book, and I think this is really the key point, is the difference between using fiscal policy versus monetary policy. Koo says that he doesn't think that monetary policy during a balance sheet recession really does too much.

Starting point is 00:11:00 And the reason that he says that is because it's kind of like this flash and a pan kind of scenario where it has a really big impact real close to the event whenever you do quantitative easing. But as soon as you do that, what happens is that you see a lot of that money leave the country and go worldwide with other countries that come in with investment and the money just kind of flows right out of the country. So you don't get a long-term impact of that whenever you're exercising monetary policy. Yeah. So what Koo is actually saying is that monetary policy under normal circumstances can solve problems. For instance, like cycles.

Starting point is 00:11:40 If you bought on a cycle, you can use monetary policy. But my entire policy, as president is saying, is really not a long-term thing. And it's definitely not the solution when you have a balance sheet recession. More or less, fiscal policy is the only solution. And it's a very expensive solution because when the government starts to spend and clear the tax revenues, which is the main review, it's not like big because they have a problem in the society, then they will build up the total debt in the country. So no matter how you twist and turn this,

Starting point is 00:12:13 will be a price. And according to Koo, the least painful price, that should be fiscal policy. Yeah. So what's interesting then Koo is a strong proponent of using fiscal policy. So what he's saying, and it kind of goes back to the FDR model that they had in the Great Depression, where FDR was trying to increase the construction of roads and to really kind of improve the country by spending a lot of money and sparking the economy. And so Koo totally endorses that. When he looks at Japan, he says that's the biggest issue that they had for over a decade. All they thought that they could do was adjust the monetary policy, not spend any money on the fiscal side of the house.

Starting point is 00:12:57 And all the money was just basically flying out of the country into other markets around the world. So he's saying that in order for countries to solve this, they need to spend money on projects within the country. So let's take that as an example. Let's say that the United States decides to increase their military spending, we'll say. Okay. So that would be a form of fiscal policy, that they're going to spend more money on military, maybe building new military assets. So whenever they spend that money, that money is then given to an American company, and then that American company pays their American citizens that are working for them. And so the money just kind of stays more state-side and it dwells there longer, as you can see. Now, if they just adjust the reserve ratio and you can now borrow more money, you could have an outside country come in and borrow money within the U.S.

Starting point is 00:13:50 And then that money is being pushed outside of the country. So where this really gets interesting and this really gets challenging is every country around the world since 1971 when we came off the gold standard has been in a race to print more money through monetary policy. And so they're basically trying to devalue their currency in each country around the world in order to spark spending because that increases their GDP within their domestic country. And so that just adds a whole new variable to this that I think is really quite interesting where there's an incentive to just use monetary policy because in the short term, it's going to help that GDP get boosted and you're going to have spending because the currency is getting devalued in the country. And I really think that that kind of gets at the root of the global competition that's happening right now with this monetary policy versus fiscal policy debate that you're seeing. And it's a very complex problem, as you can see, as we're talking through this, it gets very complicated. But it's something that I think people really got to understand to be successful as they navigate these markets. Because if you don't understand it, I think there's a potential for you to really get caught up in the week.

Starting point is 00:15:06 and you're not seeing the overall big picture. And so that's where I really found this book very useful because Koo does a great job describing when you should use this, how you should use it, and basically the effects of using it, which not all the effects are really good. And we'll get into that as we go into some of the other chapters here. So let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

Starting point is 00:15:33 You've got long days of daylight, incredible food, floating sun. Sondas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency

Starting point is 00:16:04 collapse, using AI to expose human. human rights abuses and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck

Starting point is 00:16:45 because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today.

Starting point is 00:17:21 NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business.

Starting point is 00:17:56 And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide demystifying AI at net suite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify.

Starting point is 00:18:37 Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support.

Starting point is 00:19:10 Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So let's quickly just talk about a couple of the different countries that Koo mentions in the book. And that's really the U.S., Japan, and Europe.

Starting point is 00:19:43 So in the U.S., one of the things that Koo's biggest concern is, is the amount of quantitative easing that the U.S. used and what the long-term implications of that will be. So did quantitative easing solve the problem that we had from 2008, 2009? Absolutely. He thinks that it'll definitely work as far as stimulating the economy and getting it back into a position that is functioning. And I think if we didn't take some of the steps that we had in 2009, that we probably would have had something disastrous on our hands. But what Koo, which is a little bit scary, what Koo talks about is whenever you use this much QE, there can potentially be, and we don't really know because no one's ever done something like this before, there could potentially be a major side effect. to using so much quantitative easing. So in his book, he has a chart.

Starting point is 00:20:34 And in the chart, it shows how if you just let things run its natural course, how it goes down and how it'll come back out and the interest rates that are associated with that overall, you know, a 10 or 20 year period. And he would probably argue that that's probably more of what you saw over in Japan because they didn't quite manipulate things nearly as bad as what you saw in the U.S. But in the U.S., what he's showing with this chart is that his prediction is because we use so much quantitative easing that maybe during the next recession or the next pullback that you're going to see long-term interest rates really increase. And if you see that happen and you're still in this condition where you have this deflationary pressure, still putting pressure on the GDP within the United States, what that impact of long-term interest rates rising will have is that you are actually going to. have a very depressed position during the next recession. So that's his concern. He's wondering how that's going to impact us in the long term. And we really don't know. He doesn't really know

Starting point is 00:21:34 because this experiment has never been done before. I found it ironic at the Davos talk in Switzerland. That was the name of the basically the convention was how much longer can the experiment go? What was the, do you remember what the exact phrase was? It was something like that, Stig, correct? Yeah. Yeah, I can't remember. Yeah. But they didn't know, right. because it was something like, yeah, it was something like,

Starting point is 00:21:57 let's end this experiment. So you saw a very similar theme with the way Koo was approaching this is I think that he's very optimistic in the near term with how the US handled things. But I think his concern is really what's going to happen next

Starting point is 00:22:13 and what's going to be the implications of us using so much quantitative easing and the long-term impact of that. Whenever you look at Japan, you can see, that Japan is maybe on the verge of actually coming out of this, but the real problem, and he doesn't, I don't think he really addresses this well in the book. I could be wrong. I want to hear Stig's opinion, but I don't think that he addressed it really well on how in the world

Starting point is 00:22:36 do they solve this massive amount of debt to GDP that they're sitting on. Like, he talks about how it was such a great thing for the way that they basically emerged out of this. It wasn't really pretty. He does lay out a lot of the issues that they had as far as using monetary policy for too long and not using fiscal policy and stuff like that. But he doesn't really lay out the path forward other than it's going to take them 50 years to potentially reduce their debt burden at this point. So that was one of the parts that's an issue I had with the book. But Stig, I want to hear your thoughts on that one. Yeah. So that was also something that, you know, real puzzled me because I've been looking at the same charge as you, I guess. And, you know, the debt in Japan is

Starting point is 00:23:16 just enormous. So, you know, imagine living in a country where they would be looking at the U.S. and thinking, oh my God, if we only had as little as debt to GDP as they had in the U.S. That's not a good country to live in, I guess. Well, that's what I found really kind of crazy about in the book was he's really pushing this fiscal spending piece in order to solve the problem. But in order to use fiscal spending, the government has to take on an enormous amount of debt. So it's like, okay, so what's the next step after that? How does the country then reduce their enormous debt burden without keeping interest rates at like nothing forever? Yeah, I was actually looking for the same paragraph as you, I guess.

Starting point is 00:24:00 So this is what we should do now. And he's saying, you know, just a real small paragraph that the solution is probably to have our economy grow faster. Because if economy grows faster, that's a way of paying our debt. But to me, it's just really, really hard to see how you can grow the Japanese economy. me at that speed when we're actually paying off this debt. I guess that was a mind-mainting issue. And one thing he keeps saying is that what we did really good in Japan was really to do this whole fiscal policy thing where the worst example is the US after the Great Depression.

Starting point is 00:24:36 So he's saying back then you actually saw GDP drop of 33%, which is a lot of course. And you didn't see that in Japan, actually, you didn't see that at all. And that was because right when the crisis hit, they start spending. so much money. You start spending so much money that you didn't see a drop in the GDP. The gap that you saw because people stopped spending and companies stopped investing, that was completely filled by the government. The owner problem is that they just need to incur debt actually to pay for that. It's funny that what you said there, Stig, because you said that in order for them to get out of it, they got to spark the economy, have these big years where they have, you know,

Starting point is 00:25:14 10% GDP growth. And you're exactly right. That'll get. get you out of it. But the question, the thing that amazes me is that's what puts you back in it again. I think that's the reason we're in the position we are today is because we had enormous amount of debt back during the Second World War. And so they adjusted the money multiplier and they created fake growth. Okay. It was it was growth. Everyone during the time for those 30 years would probably say, oh yeah, that was real growth. But it wasn't real growth. It was an adjustment in the amount of money that was in the system because they changed the money multiplier. Okay. And so that's what put us in the position where we had to come down because you had

Starting point is 00:25:52 afflation going out of control. And we had a whole episode where we talked about this. But I think you're right. I think that's how you get out of it. But by getting out of it, you're actually setting yourself up for the next one. And that's where, you know, I, I guess as I look towards the next, you know, large cyclic bubble, I don't necessarily see that happening because I feel like by the time something like that would happen, you're going to have this total meshing of the world economies. And I think that you're going to see it's just going to be a different landscape. It's just going to be completely different than what we saw in the last 100 years. But that's a whole other discussion. That's not something the coup even talks about in the book.

Starting point is 00:26:30 So we'll probably get off this tangent and move on to the next thing. We briefly touched on this. When he talks about this idea of weakening your local currency, your domestic currency, in order to spark growth within your country. So let's talk about it. about this because we've brought it up in passing a few times, but let's just talk about the mechanics of this more in detail. So a lot of people have probably heard, well, the strong dollar is really going to have a poor impact on U.S. companies here in the start of 2015. That's one of the themes that you constantly hear. And so I think for a lot of people, they might hear, well, isn't a strong dollar really good for the U.S.?

Starting point is 00:27:13 Like, that's what I think people would naturally think. But the problem with that is that when you have a stronger dollar, it's very expensive for countries outside of the U.S. to be able to buy products from the United States. And so when that happens, your exports are going to be, they're going to get hurt. And you're not going to be able to make as much money because you're not going to be exporting nearly as much as you would if the dollar was really weak. And so how countries, and countries have been at this for decades at this point, like I said earlier, back to 1971 when we came off. the gold standard. You didn't have the currency pegged to anything. When the currency's not pegged to anything, you can manipulate that currency at will simply by increasing the amount of money in your system. So whenever you saw the massive amount of quantitative easing back in 2009,

Starting point is 00:28:04 you saw, and clear actually till recently, there's been an enormous amount of QE, and I don't think people really realize this. There was more QE done, I think, through 2013 and 14, than there was done during 2009. And I don't think anybody knows that. And I think that that's one of the main reasons why you saw the stock market continued to soars because you had this massive amount of QE that was actually happening. And by then in the news, no one was really paying any attention to it. When you go back and you look at the Fed's balance sheet and you look at how they're managing this, it was an enormous amount of money between 2013 and 2014. And so what that does is that devalues the currency that devalues the dollar. You get an influx of investment coming from outside the country,

Starting point is 00:28:49 buying up goods and services. And so you have this race amongst different countries. Whenever we played that interview with Larry Summers a while back, that was one of the things that he was talking about. He gave the analogy that when one person in the audience stands up, they're going to see better. But whenever everybody in the audience stands up all at the same time, nobody sees any better and all of your legs start hurting. And this is what he was referring to in that comment was that whenever you're up and now they're doing quantitative easing. So everybody's doing this quantitative easing and we're all in a race to devalue

Starting point is 00:29:25 our currency. And the overall impact is everyone's standing up and everyone's legs hurting and we're not seeing any better. And it's just it's, it's this compounding issue that you're seeing around the world. And I think that you're, you're seeing a lot of people start to talk about it right now. And it's going to be very concerning to see how this actually plays out in the long term. What's the long term implications of everybody standing up and not seeing any better? And that's where we've got some major concerns.

Starting point is 00:29:56 Go ahead, stay. Now, President, I thought a lot about this. And to all of you out there, the reason why we're really into this is also because we're reading a new book, which is called a currency war. Because just really briefly about that is, as Preston is saying, you know, you can look at this as a war because everyone has an interest in serving their own interests. And I think that's really the problem here because if your goods are cheaper, then you can grow your economy through your exports. So that would be like the immediate benefits of doing this. But the problem is that even though we can't predict what is going to happen, because we can never do that with the currency more.

Starting point is 00:30:33 What we can predict is that in the end, everyone will be worse off. So, and I think that's really what's really frightening me, and that's why I really don't like the direction we're going in, is that, you know, I don't know if this would be, in the short run, would be good for the US, on the short run, be good for the Eurozone. I don't think they know that myself, but I know that in the long run, if we continue to devalue a currency, to benefit our own population and not thinking about the outside world, I know it's going in bad because that would completely destabilize the financial system, which serves no one really. Well, it's going to be funny whenever we do the review of currency wars because we've pretty much talked about all the major themes already in this podcast. So that's going to be a really short episode, stick. Yeah, it's probably true. All right. So, yeah, that'll be a 10-minute episode that week, but we'll try our best to make sure we find all the things that we missed.

Starting point is 00:31:31 So the last thing that we're going to talk about in this episode is really the European situation because when you look at Europe, it's in a completely different situation than Japan or the U.S. Simply because you have a conflict of interest in that setup. You've got countries like Germany that are being very responsible with the way that they spend their money. And then in the same organization, the EU, you have Greece and you have Spain and you have Italy and you have these countries that are just spending at will. And so there's an enormous conflict of interest between the countries that are in that group or in that European Union. And so that's where Koo in his book he talks about this. And I don't really think that he lays out a good solution at all other than there's a major issue with this setup. And I don't see it ending well as kind of the way I took it.

Starting point is 00:32:27 Did you read it any differently, Stig? Yeah, he had some interesting suggestions for solutions. He was saying that, again, that the solution might be fiscal policy. So what the problem is in Europe is that we all have all these different economies and we have all these different interests. and have all these different interests. And what he's suggesting is that you should have a EU panel of experts that are able and have the authority to authorize a financial stimulus package if a country is really close to bankruptcy, for instance, like Greece.

Starting point is 00:33:03 So you have like a central panel that has the authority to spend as much money as required in a very short amount of time really to save that country. and, you know, I really like this argument. I didn't like it because I thought it was realistic because I don't think it's realistic at all. Neither do I. I think that's a terrible recommendation, but go ahead. I'm sorry. I really like this recommendation because it's really a classical professor in economics argument.

Starting point is 00:33:34 Like, you know, he would assume, so say that we have all these governments, they would, you know, put down a completely objective panel and they would have. have backed by everyone in the union to do exactly what is needed related to his models. So, I mean, from a somewhat theoretical point of view, it might make sense. But the problem is that we still have to pay off the debt. And the EU has to agree on this. And I think that, you know, that advice is something that just works in theory. You had no whatsoever chance to work in real life. Yeah. I totally agree. It seems like a very good academic, solution that will never work.

Starting point is 00:34:16 So, you know, I think that the discussion for what's happening over in Europe is something that is going to be very interesting to pay close attention to. And I think that as we're looking at what's going to be the catalyst for the next crash or what's going to spark the interest of people to maybe start selling the market short and taking their money out, I think that when you look at Europe, I think that that has a very strong potential to be that catalyst as you look around and you see what's going to fall apart first. And I really see the Europe situation potentially being that catalyst.

Starting point is 00:34:53 But it's hard. It's very hard to say. Who knows what's going to be the catalyst? But I guess if I was a betting person, that's probably where I'd place my bet. So we had one more economy to discuss in the book. And that was really the sixth chapter, which is China's economic challenges. And the thing that Koo really highlights here is that he thinks. thinks that China is in a position to continue to do fairly well into the future, but his main

Starting point is 00:35:15 concern is the housing bubble that he feels could potentially pop over there. I know I've seen, there was a TV show. Maybe it was like Dateline or I forget what, which show was. We'll dig it up, but we'll try to find it and we'll put the video in the show notes if we can find it. But there was a video where they showed entire cities in China that were made that, were built and nobody was living in any of the buildings. So one of the things that they're doing over in China is they're just placing all their money, all the people over there investing in real estate. And so there's an enormous bubble of real estate.

Starting point is 00:35:55 Now, I also heard that some of those cities had been filled. I don't know how they could possibly do that in such a short amount of time. Their economy is nothing like here in the United States. And to be quite honest with you, I haven't really studied the Chinese economy very much. but I do find it highly fascinating and something that would be really interesting to research more. Stig, go ahead. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

Starting point is 00:36:22 Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across

Starting point is 00:36:51 more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin,

Starting point is 00:37:37 gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts, and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway

Starting point is 00:38:14 to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years.

Starting point is 00:39:02 Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right.

Starting point is 00:39:38 Back to the show. What I'm really find fascinating about the Chinese government is that it is extremely flexible and flexible. Please let me elaborate on this. So when they had this problem, I think it was a bank in 2008. You know, what they did was they were spending so much money. And for instance, you know, as president was saying, they were building cities for apparently no use, but they were spending as much as 17% of GDP.

Starting point is 00:40:06 I mean, that's a lot of money. So if you're thinking that the US, you know, did a lot of big stuff in 2009, which they did, you know, this was more than three times as much compared to the GDP they did in China. And they just, you know, did it almost overnight. And Risa Q, he also jokes about saying that this was probably the only country in World War fiscal policy worked faster than monetary policy. Because, you know, it's so easy to agree on because they won't have one party, right? And they don't have to think about what the population is saying.

Starting point is 00:40:35 So, you know, this is definitely not my way of saying that communism is good or the one-party system is good. But Risi Koo, he's really remarking that, you know, it's really flexible and flexible in China because things can go so fast, even though it's such a huge country. They would just say, well, we need to do this. And they have just run a huge deficit one year and then they would just go back to normal. That's quite an amazing to observe. What I think is really interesting about that is you think about that enormous investment that they had made relative to the debt that they took on and it was in a fiscal manner. So all those dollars and all that money and all that infrastructure is still sitting in China. It's not like they just printed some more money and then it immediately flew outside the country to places like the U.S. or Europe or wherever.

Starting point is 00:41:23 So I think that coup is really bringing up that point in talking about it. it in a manner to demonstrate how fiscal policy could potentially have a better long-term impact than what a lot of the Western countries are doing with their monetary policy and it being short-lived. And I need to say one thing. I know it sounds a bit geeky, but I really enjoy that he kept referring to whether or not the governments in those respective regions have read his book or not. You know, he really wasn't shy about telling that.

Starting point is 00:41:54 Yes. And then he said, yeah, I definitely know that some really smart people. in China read my book and giving good criticism that. And for instance, about Ben Kenanke and said, you know, so I'm sitting and chatting with Ben and, you know, I considered sure to give him a signed copy of my book, but then Ben said, you know, I don't need another one. And Kuhl then refers to his own thoughts saying, yeah, but I'm not sure Ben really understood my book, really.

Starting point is 00:42:21 There was a, well, I will admit, there was a lot of times in this book where I was ready to throw it across the room because his ego was just reeking out of this thing. But you had to agree. Correct, Stig? I mean, you wouldn't have brought up that point if you don't agree. No, it was just so much fun. And he was basically saying between the lines that the reason why things are so, that things are so bad in Europe is because no one has read his book.

Starting point is 00:42:47 I mean, come on. How can you say that? Oh, I know. It was kind of funny. It was, and so I will say this, it was a very good book. I think that he was exactly right with a lot of his recommendations, but there was times when it got a little obnoxious with his ego and his writing. But we'll leave that out. We won't talk about that anymore.

Starting point is 00:43:06 In general, this was a fantastic book. And I think for anybody who's trying to increase their knowledge of macroeconomics and really kind of understand where things are going, potentially, and where things came from, and you're really using Japan as a model for understanding what's happening in the U.S., what's happening over in Europe. this is a very good book and I think that it's going to help you a lot as you're trying to understand this. So we liked it in general. There was parts that got a little repetitive, but other than that, I thought it was pretty good. Okay, so this is a point in the show when we play a question from our audience, and this question comes from Dave Chen. Hey, President Stig, just wanted to start off by saying thank you to you guys for all you do. Truly, the information is great.

Starting point is 00:43:51 I only started listening to the podcast two to three weeks ago, and I'm caught up all your shows and I visited all your websites and bookmark everything I could. Literally, I have YouTube playlist of Monish Pabrai and Ray Dalio queued up. Preston, I just want to let you know that I grew up in the Pittsburgh area as well and studied mechanical engineering and I really started getting into investing a few months ago. And I thought, man, I'm just like this guy, except he's a whole lot better at investing than I am. So I actually have two questions for you guys. You guys provide a great bunch of suggestions for books on investing and becoming success.

Starting point is 00:44:25 but you often state that it's important to have a foundation and finance and accounting. Do you have any good recommendations on what the best way to build that knowledge is, whether it be books, forums, or videos, etc.? My second question is because I work in the oil industry. With the current low oil prices, and that fuel and energy is typically an expense for most companies, such as airlines, do you think that the low oil prices are further stimulating the economy and increasing our economic inflation? Thank you.

Starting point is 00:44:55 All I got to say is go Steelers, baby. Hey, Dave, great to have your question. Awesome to know that you're from Pittsburgh. I was flattered by your comments. I don't know if I'm a good investor. I just have a lot of mistakes and experience from learning from all those mistakes. So you bring up some really good points. I'm going to address the second one.

Starting point is 00:45:15 And then Stig can maybe talk about the first one because it's at the top of my head here. And I really want to say something. I totally agree with you. I think that these low oil prices are absolutely. stimulating the economy. I think that it's almost like a form of QE in itself, that it's actually making things persist and maybe stay in this better environment a little bit longer. So my concern is if these oil prices start to come up, which I could see that happening within a year. You're already seeing the number of rigs decreasing. That's usually your first indicator.

Starting point is 00:45:50 and then as the supply pulls back and your demand stays persistent, you're going to see that the prices do come up. And I think whenever you see the prices come up, the impact might not be immediate, but as it persists for a few months, I think that you could see that have a really detrimental impact to the economy, especially if the dollar persists in being very strong. So Stig, I'm going to throw it over to you for Dave's first question.

Starting point is 00:46:16 Yes, so I have a few recommendations. I really admire that you want to dig into accounting. I think that's really a hurdle that very few people are actually taking. But I have two books I really like to recommend. And the first one is reading financial reports for dummies. And they are really sorry if you discouraged about the title. But I think that's really a great book. And I would suggest that book to everyone interested in investing.

Starting point is 00:46:44 Because what I think this book does is that it's really good for getting the right perspective as a stock investor. So what should we be looking for when you're looking at financial statements? And I think this book is really good at filtering out the noise compared to a lot of the other books that are out there. At least, at least that's my experience. So for instance, leaders you would go and give you an example of a company that has, you know, a spike in revenue, but then shows, well, that's because they're selling out on credit. So that might be a red flag for you. So there's a lot of good tips for the stock investor. And the second book, is a step-by-step guide to understanding and creating financial reports.

Starting point is 00:47:23 And that's a book by Thomas Edelson. We will ensure to have all the books in the show notes. But I think what's really good about that, and when you look at that book as a stock investor, you might be thinking, you know, I really don't learn how to read financial statements. I actually think you do because what that is doing is step-by-step, as the title is saying,

Starting point is 00:47:42 is really telling you how does the different financial statements work together. So what actually happens when you are selling something in the company? How to read that of financial statements? And I think because it's so simple, it's very simple. I think everyone can really resonate with that book. So I'm going to piggyback off of that stick because for me, my level of understanding of how the accounting plumbing is how I like to refer to it occurs. My knowledge of that increased 10-fold whenever I started my own company.

Starting point is 00:48:16 because I did my own accounting. I could have hired somebody to do that, but I specifically chose not to do that and to do it myself because it's amazing how well you learn something when you have to do it yourself. So here I am setting up my own balance sheet. Here I am, you know, taking things off of my balance sheet and moving it over to my income statement.

Starting point is 00:48:39 You know, when you're doing that process and you're understanding how it actually works because you're actually changing those accounts, your knowledge and your understanding of it will go tenfold. And so I'm not telling people to just go start their own business so that they can do their own accounting. But what I am saying is you're not going to fully understand it until you actually put it into practice.

Starting point is 00:48:59 You can read as many books as you want. But until you actually try to nugget out on a piece of paper with pencil, you're probably going to have a hard time being able to conceptualize how these things occur. And so that's what I'm really thinking. telling people to do is maybe set up a fictitious company, maybe make up a fake company and you would write it down on a piece of paper, hey, I just sold 10 barrels of hay, okay, maybe you're a farmer or whatever, and you'd write this down and you'd try to figure out, how would I do an accounts

Starting point is 00:49:33 payable? How would I do accounts receivable? How would that impact my income statement? Whenever you really start to get into it like that and you understand how you're charging these different accounts, your knowledge and your understanding of this is just going to go through the roof. And then whenever you look at a company like General Electric or Berkshire Hathaway or whatever, you're going to be able to look at those financial statements and it's going to be a real picture that makes sense and it's going to be telling you something. You're going to understand how a cash flow statement works. But until you actually get your hands dirty and start playing with this stuff, it's never going to jump off the page at you as it does for a person who does this

Starting point is 00:50:11 for a living or it really kind of understands it. So I know that's going to be hard and that's going to be difficult for people to implement. But for the person who does, you're going to have a tremendous benefit over anybody else out there because you're really going to fully understand what's actually going on. Yeah. And I don't think it's only about stock investing in any type of business, having really understanding about accounting and as a private person, say that you own your own house, really to understand how the balance sheet works, the income statements and so on.

Starting point is 00:50:39 I think that the knowledge is really invaluable. So I just have a quick remark about what you said about business understanding because the other two books that was really about, you know, the number crunching. And I definitely thought that when I was graduating, even though there was a degree in economics, I thought there was too much noise out there. So what I did was I found a fantastic website and it's completely free, by the way. It's called Buffett's FAQ. And I'm not saying that Buffett's, you know, Pund of You is the case.

Starting point is 00:51:09 correct one or shouldn't listen to other people. But I think it's really important again to fill out of the noise and just get one very knowledgeable person's perspective and learn from that. I think that probably did the trick for me. And then you can clearly expand later on from Warren Buffett and look in his point of view from different angles. But I think having a starting point, we have a lot of knowledge and really to fill out all the noise. I think that's really the situation where if you're just done out in investing. I totally agree with Stig. We'll have that link to that web page up on our show notes.

Starting point is 00:51:46 It's Buffett's FAQ, standing for Buffett's FACs. And what that person has done is they've gone and they've pulled from all the shareholder meetings. They've basically captured a ton of the quotes and a ton of the questions that he has already answered and put information out on. So it's consolidated in a very thoughtful manner. It's a place that I go frequently to look up different things. And Stig's exactly right.

Starting point is 00:52:10 Warren Buffett is a business genius. He understands what makes businesses work. A lot of people attribute him to a great stock picker, but I would really focus more on how he's been a great business leader more so than anything else. He is not a hedge fund manager. He's not a person who's just sitting there taking a bunch of people's money and picking stocks. He is running a business.

Starting point is 00:52:32 And that's what really separates him. That's why he can invest so else because he's a businessman. And I think that that's where. where everyone should start is you need to become a businessman first before you become a hardcore investor because I think you're just going to be much better at it if you understand the essence of business. All right, guys. So Dave, fantastic question. I'm totally pumped that you're from Pittsburgh, by the way. So we'll send you a free signed copy of our book, the Warren Buffett Accounting book. And hopefully that book will really help you out as well in addition to some of the

Starting point is 00:53:03 recommendations that we made. So great to have you on the show. And for anybody else out there, If you want to record a question and get it played on our show, go to Ask theInvesters.com, and you can record your question there. And if it gets played on the air, you get a free sign copy of our book. So great to have everybody with us. We have the best audience. You guys are so smart. Some of the questions we get, we have trouble even answering. So we just really appreciate that.

Starting point is 00:53:26 And we look forward to communicating with you guys in the future. So we'll see you guys next week. Thanks for listening to The Investors podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvesterspodcast.com. Submit your questions or request a guest appearance to the investors podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial

Starting point is 00:54:02 application.

We Study Billionaires - The Investor’s Podcast Network - TIP 032 : The Balance Sheet Recession and Quantitative Easing Trap (Investing Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.