We Study Billionaires - The Investor’s Podcast Network - TIP276: The Euro & Its Impact On European Banking w/ Thomas Mayer (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we're talking about the euro and its impact on the European economy. To help us cover this incredibly complex and robust topic, we have Dr. Thomas Meyer, who's the founder and managing director of the Flosbach von Storick Research Institute. Dr. Meyer's experience in finance is quite impressive. He was formerly the chief economist at Deutsche Bank. He's worked at Goldman Sachs and the IMF and the Institute for the World Economy. So without further delay, here's our conversation with Dr. Thomas Meyer.

Starting point is 00:00:32 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to today's show. I'm your host, Stick Broderson, and as always, I'm here with my co-host, Preston Pesh. As we said there in the introduction, we are very excited to be here with Thomas Meyer. Thomas, thank you so much for being with us here today. Good question.

Starting point is 00:01:11 So today's topic is the Euro, and I don't think we can find any better guest than you, Thomas, to help educating our audience and us. Now, Thomas, I think it's hard to fully understand the Euro without first talking about the history of Europe and the two World War. So let's go back in history, and could you please talk to us about what led up to the creation of the European Economic Community that we today in a slightly different form know as the European Union. Yes, as you say, I think we have to go back to World War I, because I think this was a

Starting point is 00:01:52 trauma that affected Europe. The war itself, of course, that ended the old times when it brought the new world, but it It was not only the war who turned out to be a drama for Europe. It was also the end of the war. The Treaty of Versailles was an old-fashioned peace treaty that put the winners into a superior position and made the losers pay as far as they could from the war damage. There was clearly the losers were the guilty ones and the winners were the ones who were dictating the term. It was understandable from the time, but...

Starting point is 00:02:33 its effect were not very good. Because it pays the way for a lot of resentment on the part of the losers, Germany in particular, which opened the door to a new nationalist feeling. And then when you go further on in time and you look at the depression, the early 1930s,

Starting point is 00:02:57 where the economy turned down, where there was a lot of unemployment, this facilitated or pays, the way of the Nazi regime to its ascendancy. So, Nazis began World War II and they're defeated, fortunately. But this time around, the Allies, and in particular the French, the Americans, and also the British thought that it was not a good idea to repeat the policy after World War I. The Treaty of the Tsai should not be repeated, because everyone understood. that this spread a new war.

Starting point is 00:03:36 So it was primarily French exile politicians. Some of them living in Washington, D.C., Robert Marshallon, that fought a year, one to two years, before the end of the war on how to deal with the defeated Germany. And they came up with the idea that it would be much, much better for the future to bind Germany into a security structure. This idea and the help of the Americans and the British then allowed the post-war post-World War II politicians

Starting point is 00:04:11 to build this platform for Europe, which was supposed to end war ever after. The idea was to reconcile Germany, especially with France, but also with the other allies, and to bring it in to a European community. It is no coincidence that the European community started with coal and steel. It began as a coal and steel community. These two economic sectors were put under common rule of the members of these communities,

Starting point is 00:04:48 notably France and other European. Why coal and steel? Because back then, coal and steel were important resources for waging war. Also, no coincidence that it then progressed to a European common agricultural policy. Also interesting, agriculture. Agriculture, you need food to wage war. In your home country, you can't rely on imports, of course, because your adversary may cut you off. And from then on, it progressed.

Starting point is 00:05:20 We progressed a European economic community that brought the countries closer together, but also provided the members a significant economic boost. It was for everyone a big plus to be in there. Initially, the British did not join, some others neither, but because it was a very big success, also the British came in in the 1970s. And out of the European economic community evolved the European Union, which was, again, a bit broader. It was no longer just the economic community, but there were also further areas of common structures added to it. In this process of adding common structures to it, we created first a European exchange rate mechanism where the exchange rate were tied to each other. And out of that, it was European monetary union with the euro. Another project that came out of this, getting closer together and going over the original

Starting point is 00:06:30 structure of the European economic community was a single European market, truly singular markets for goods and services, which was quite a revolution when you think of it, to be able to have services delivered in another country. which basically meant that the country where the services are delivered has to accept the regulatory framework of the country where the services originates. So, mutual recognition of regulatory frameworks was involved in that. And then, of course, we have the so-called Schengen area. Schengen is a small village at the Dutch border.

Starting point is 00:07:10 That village was decided to have passport-free travel among the countries that belong to this agreement. So we progressed from the two wars that tore Europe apart. World War I, World War I, World War II, where the events that basically removed Europe from its earlier position as the global leading power. So the lessons from these two wars was to never ever have war in Europe again and to come closer together economically and also politically.

Starting point is 00:07:50 So, Thomas, let's talk about the monetary union. The euro was established by the provisions in the 1992 Maastricht Treaty and adopted by the first 11 member countries in 1999. What was the original goal of adopting the euro? Good question. As early, I think it was 1949, there was a famous French politician, and Sharke Rolf, who was advising Charles de Gaulle, and he said

Starting point is 00:08:16 Europe will be made for its money or it will not be made. So the idea to have a common money as an instrument for bringing Europe closer together actually played along all the time

Starting point is 00:08:32 as the politicians thought that this would be a very big leap in bringing the European people together. There were efforts. already much earlier in the early 1970s. There was a plan to build a common currency. It was called Wormner Plan.

Starting point is 00:08:51 This was a Luxembourg Prime Minister who initiated this or who oversaw the construction of this plan. It was very concrete already, but then the collapse of the Bretton Wood system, people will remember the solution of the link of the dollar to gold in 1971 by the Dixon administration later on collapse of the Bretton Wood system and the introduction of a floating exchange rate system in 1973, around 73, 4, that finished this plan, which had been built basically into the Bretton Wood system of fixed by the trustable exchange rate. So out of that came then this exchange rate mechanism, I already mentioned, also took a while

Starting point is 00:09:36 to develop that. And then it progressed from there, further on to the European monetary unit. It was primarily a political project to bring together European unification. Added onto that, were also economic thoughts. There was the argument that when we bring the economies closer together in a single market for goods and services, it would be much better to have a business. common money. There would be more advantage for having this common market if you also have a common money. There were arguments about reduce exchange costs and so forth. After all, we have to keep in mind that there are many small states in Europe which in the past all had their own money and then you cross-border, you had to exchange and so forth. But I would think that

Starting point is 00:10:31 these economic ideas were kind of add-on. The real thing was political. So, continuing on that, Thomas, on our show, we primarily have talked about the U.S. dollar, which is, you know, the main currency for international transactions. Now, how would you best explain the euro in comparison to the U.S. dollar, how they're similar and how they're very different? The dollar is, of course, the currency of a sovereign nation. I say this without thinking much about. but it's important to recollect or to think about that currency of a sovereign nation is very different from a common currency or single currency for several sovereign nations.

Starting point is 00:11:20 So why is that? Let's go back a step and explain for a moment how our money is created, how it comes into existence. I mean, we all carry around dollar bills or euro bills in our pockets. And we think that we would put these bills on deposit at a bank, and they would be there, and the bank would perhaps lend them out and collect them back. But our bank money, what we have in the bank, would basically be a full reflection of the bank notes issued by the central bank, which is, of course, an institution of this state. So that's wrong. It's not how it works.

Starting point is 00:12:02 In our present monetary system, the bank money, the money that they have an account at the bank is created through credit extension. So when you or I go to the bank, ask for a credit, the bank will look at whether we are credit worthy. They say yes, we sign a credit contract. The bank puts in its balance sheet a claim on you and me. So credit was extended. What do they do next? They do not go out and now collect dollar bills or euro bills in order to fund this credit. No, they create the money as a book entry.

Starting point is 00:12:42 They write then on their liability side of the balance sheet. Here is the money for this person who took out the credit. So what our bank money is, the money we have on a bank account, is basically a private liability, a liability created by the bank through a deposit whole retire. Now, the bank, of course, has the right given to it by the state. This is why they need a license, the banking license, to promise that they will exchange this bank money they created, This private liability always anytime one-to-one into the official currency, so into dollars or euro. That's a promise they make, but it's also a promise they cannot always hold.

Starting point is 00:13:39 When the credit turns sour, the bank gets a problem because the money they created with the credit may also turn sour. unless the government guarantees this money and the central bank helps in guaranteeing this money. So this is why in the US we started out, basically with banks back at that time taking gold and easy notes. And later on, as the banks were easily common notes, but not with any government or central bank guidance. If you too many, this created a banking crisis in 1908, which laid the foundation of the creation of the Federal Reserve.

Starting point is 00:14:27 And later on, Big Depression, 1930 to 33, they found out, the politicians found out that you also have to have a deposit insurance. So that if the bank disappears, the money doesn't disappear. This is why the Uruosan administration then created the FDIC, the fact. capital deposit insurance corporation. What I'm saying here is, in this money system in which we live, where lots of part of our money, namely the side deposits that we have in the banks are created by the banks and are private liability, but it is guaranteed that this private liability can be exchanged into the official currency in the system.

Starting point is 00:15:10 You need a central bank to manage the system and you need a government to provide insurance. Now look at the euro. We have a central bank, the European Central Bank. So this ECB can manage the money. But we have many governments and no common deposit insurance. Each government guarantees in its own jurisdiction to ensure the deposits up to at least 100,000 euros. But this insurance is as valuable as the. financial capacity of this government. Now you can say a government can never go bankrupt

Starting point is 00:15:51 because usually or in the US, this government has a central bank and when push comes to shove, the central bank brings money for this government, not so in the euro area. Look at Greece. The Greeks found out that the money they had on the bank couldn't get it out of the country because the banks were bankrupt in 2010 and the government as well. So you could see that in the Greek case that having one money for several states creates big problems. Right now, we can say that we have a cash union. So the Eurobank notes that the ECB issues signed as like a IOU signed. by the ECB president.

Starting point is 00:16:45 So far, Mr. Draghi, and now Madame Lagarde, who will sign the note. These notes are common credit quality all around. One institution, same institution, issue these notes. But when it comes to the bank money, because you do not have a common insurance, the bank money, the money on deposit, is as good as the bank and the government backing the bank.

Starting point is 00:17:10 And this is a very different credit quality. You have your money in account in Germany. You don't have strong banks, but you have a government, which is financially pretty strong. So people feel that this is safe. However, when you have your money on a Greek bank, the Greek banks are also not strong, but on top of it, they have a government which financially is also weak. So these are two different assets, completely different. of different quality. Normally, when things are fine, that's not so much of a problem. We have now

Starting point is 00:17:47 interest rates in Greece that are not that much above those in Germany. But when we have economic tensions, let's say we go into a recession, companies get into difficulties, some of them cannot repay their credit. It is well possible that we see again that the bank money created by by the banks through credit extension becomes very different. And we cannot exchange this anymore, as happened during the Greek crisis, for instance. To sum up, the euro is really half-baked when you compare it to the dollar. The dollar, you have banknotes that are equal credit quality, and you have bank accounts that are being made of equal quality through the FDIC,

Starting point is 00:18:34 a federal organization. In the euro, we are half-baked. We only have the bank notes of the same credit quality, but the bank accounts are of very different quality. 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. You've got long days of daylight, incredible food, floating saunas 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.

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Starting point is 00:23:03 It has not made it stronger. When we think again of how the banking system interacts with the government and the central bank, I call this a private, public partnership of money production. The central bank is the manager of the money production. The government is the guarantor. If something goes wrong, the government will step in. It sets also the rules for everybody. And the banks are the producers.

Starting point is 00:23:35 We have these three elements working together. But as we discussed already, in the euro area, the allocation of responsibilities is diffuse. That is why the banks are operating in different areas of. quality. If you're operating in a jurisdiction with a strong government, you are better off than when you're operating in jurisdiction with a weak government financially becoming or financially strong. So in that sense, we have a fragmented banking system. And we also have banks that have very different degrees of safety. So I would say we have not been able, to move forward, integrate the banking market, and an unintegrated banking market, a banking

Starting point is 00:24:29 market where the banks participated in the market are handicapped by the setup of the system is, in my view, a weaker banking market and a national banking market where everyone knows the rules. Thomas, many people outside of Europe think of Europe as being divided, if they think of Europe as being divided, more into Europe. and west, and perhaps that's primarily due to historical reasons. But for you and other economists starting the euro, very often you think of the euro zone as north and south.

Starting point is 00:25:05 And in between, there's very little trust. So the north thinks of the south as irresponsible and untrustworthy. And I'd just like to apologize to all our listeners in southern Europe. This comes from perhaps Thomas sitting in Germany. I'm sitting here in Denmark in Northern Europe. And the South looks at the north and feels it's being unfairly treated. And you can probably put some more colorful verbs on that too. Could you please elaborate on the lack of trust between the Euro members

Starting point is 00:25:39 and how it continues to poison the relationship between the different areas? That is a key issue. a really, really important issue that it's not feature at all when we talked about creating of European monetary union. It's a cultural divide.

Starting point is 00:26:01 A battle of ideas. What does it mean? It means that the different ideas of the role of money and the organization of the economy. Simply speaking,

Starting point is 00:26:15 there is a preference on the German side. And in that sense, the German side spends a bit for the Nordic side. There's a preference for hard money and rules. What does it mean? Rules, market economy, property rights, rule of law. And the role of the government is not to manage the economy, but to make sure that the rules are being obeyed.

Starting point is 00:26:41 Money, hard money, produced by an institution whose only focus is price the not employment, not price stability, kind of an intelligent gold mine. That's the Nordic, or you could also say the German view. There's the other one, the French or the southern view. In the southern view, the government has a much stronger role in managing the economy. Moreover, money is an instrument of economic policy, of government policy. So you use money or you use monetary policy to achieve certain economic objectives. This can range from stabilizing the business cycle to funding important project of the government

Starting point is 00:27:36 so that the central bank funds government activities. So these two ideas, these two philosophies are clashing. Interestingly, I cannot remember that there was any talk of that when the Euro was created. That is the key issue that they haven't resolved. When you look at the master treaties, this is the predecessor of the European treaties, regulating monetary union. When you look at this master treaty, which is now the European treaty, you will find many fudgeets. they couldn't agree on a certain position.

Starting point is 00:28:18 So they touched it. For instance, there is a rule that governments must not be bailed out by other governments or the central bank when they're in difficulties. That's a rule. On the other hand, they are also opening somewhere else in the treaty where a government in trouble can get support from other governments. As we saw the Euro crisis evolved from 2009, when the Greeks first confessed that they had a problem with their statistics, from 2009 onward until its peak in 2012, when we look for this, there was a shift of the structure, of the system of EMU,

Starting point is 00:29:11 originally more on the German side towards the French side, or you could call it from the Nordic side, towards the southern side. The euro was sliding from east to west, as they simply disregarded or broke, as Madame Lagarde said, or broke rules to save the euro. And it peaked in the sentence of the ECB President Draghi in June, I think it was June, 2012, when he said, we shall do whatever it takes to save the euro. He added on within our mandate. But most people remembered and most people heard, they said, we shall do whatever it takes. And this disagreement of whether rules should reign or discretion should reign. This disagreement remains with us. So keeping that in mind, which countries do you think benefit from the euro versus the countries that don't?

Starting point is 00:30:22 Yeah, this is a question that you would answer differently from each country's vantage point. If you are an Italian, you will see it's the German to benefit most from the euro. If you would be a German, you would say it's Italian who benefit most from the euro. If you are French, it would say that it's largely, again, the Germans who benefit from the euro. If you are Danish, perhaps you would say the Greeks benefited a lot from the euro or the Italians. So the countries indebted twice that. The Nordic countries, they look primarily at the potential liabilities that they're accumulating by having given credit to the other countries,

Starting point is 00:31:07 especially in the south, notably Greece, but also Spain, Portugal, then the smaller one, Cyprus. But the Nordic ones are thinking that they are kind of keeping the structure up. They are footing the bill, and as far as Greece is concerned, they don't really expect to get their money back. So they say it's the other who benefit. Then when you are in the southern country, you will see that the Nordic countries haven't given their money for free. They have imposed conditions, what you had to do.

Starting point is 00:31:45 You had to follow the rules of a program that was managed by the IMF incorporation with the European Commission and the European Central Bank. Your own sovereignty was infringed. Other people, bureaucrats would come in and tell you. your elected government, what it has to do. So you feel that the euro is largely benefiting the others. And many of the others say the euro is basically an instrument to cement German hegemony in Europe. It's a very contentious question of which I think you cannot really answer it objectively. Economists have tried to come up with SB. from whether a common currency is economically a good thing or a bad thing.

Starting point is 00:32:37 Most interestingly, the UK administration and the totally glare conducted every year test whether the euro is good or bad, because they have said that they might get in when they find out that it's good. And the test is always inconclusive. It's a very subjective issue. I guess it largely boils down. to your judgment, whether you think that advancing the euro is a good idea to keeping Europe together, or that you fear that advancing the euro may actually push Europe more apart?

Starting point is 00:33:19 Let's talk more about the euro. You made some very interesting research about how you see the future of the euro, and I'll definitely make sure to link to all of that in the show notes for the overall. audience to look more into. Thomas, you made the argument that digitalization of the euro could, if not save, then make the monetary union stronger and make it resilient for the future. Now, could you please elaborate on what needs to happen before we can digitalize the euro and why it would work? Yeah, we discussed the basically two-tier money union that we have. We have a cash union, but we do not have a bank money union.

Starting point is 00:34:05 And we also touched upon the very high debt that some of the countries have Italy, more than 135% of GDP. Greece, a very large number. I remember correctly, we are now touching 180% of GDP. Even France has something like touching now 100% of GDP. So we have highly indebted countries,

Starting point is 00:34:30 and we have a two-tier monetary union where only the cash is really of the same quality within the entire monetary union. Now, what we should do is we have to deal with two things. We have to make these countries financially stronger. And secondly, we have to overcome the difference between cash and bank money. Let's talk about the second first. Basically, you can overcome the bank and cash money if you require for every bank money that belongs to you and me, that every euro in the bank is being backed by one euro of bank reserves in the ECB's account. So if I have a euro on a bank account, the bank has one euro to back this in the ECB's account. We do this to have a safe deposit.

Starting point is 00:35:28 Safe deposit means even if the bank disappears, the euro that I have in this account will continue to exist because it's counterpart in the ECB's account. So that would be the first step, create a safe deposit. How do you do this? Interestingly, the central banks have shown how it can be done through quantitative easing. They have done quantitative easing for other purposes, but it shows how it can go.

Starting point is 00:36:00 When a central bank buys a bond, then it asks the commercial bank to look for the bond, or if it had on its balance sheet, to sell this bond to the central bank. The central bank hates with central bank money for this bond, and the bank gets the central bank money in its account. and it pays the bond holder to acquire this bond by creating for this bond holder bank money. So bond holder gives the money to the bank, gets bank money in return, and the bank gives the bond to the central bank and gets reserve money in return. And in the end, the central bank has the bond as an asset,

Starting point is 00:36:50 the reserve money as a liability, the bank has the reserve money as an asset, the bank has reserved money as an asset, and if side deposit the bank money as a liability. The side deposit, the euro and deposit that we have created this way is all the way covered, basically, to the central bank. Presently in QE, we don't link them together. So you cannot, if you have a euro on a bank, you cannot say this euro on the bank is one-to-one back by a euro deposited on the central bank.

Starting point is 00:37:21 That's not the case, but you can do this. Remember what I said. It's being created by the central bank buying bonds. So what could the central bank do to help the government? It could buy government bonds. It already did buy government bonds. It can buy more government bonds. Take these government bonds out of the market.

Starting point is 00:37:44 Keep them as a stock as a cover for the reserve money that it issued. which backs the bank money that the banks have created to acquire the bond. Then you have a side deposit and you have taken government debt out of the market. This is actually something economists have long talked about. A group of preeminent American economists, including such big names as Irving Fisher and Frank Knight and others, In 1933, we have proposed this to the Roosevelt administration. Hussweil decided not to do it for many reasons.

Starting point is 00:38:30 Let's leave that out. We could talk long about it. But that's a plan that has been developed and has been around, an idea that has been around for a long time. Now, as I said, it's an old idea. But you can actually now go one step further. you can now say why have this bank money still being managed by the banks because it's covered one to one by reserve money. Why not take the bank money and the reserve money that goes with it to the liability on the bankings balance sheet and asset on the banking's balance sheet or push it now on to the central bank.

Starting point is 00:39:11 He would say, oh God, everyone having an account with the central bank, how big would that central bank have to be? I mean, they would have miles and miles of offices to deal with the count holders. Here comes in digitalization. You don't need this. If you make reserve money in electronic form tradable via blockchain, then you can have peer-to-peer payments or money transfers, via blockchain without any administration built around it. So you could actually, by digitizing the euro, you could actually create the equivalent

Starting point is 00:39:52 of the paper money euro in cyberspace. The two would be complementary. So you could take a cyberspace, a digital euro if you want, that you can trade via blockchain from person to person without having to hand it over personally, you can take the digital euro and let's say exchange it at the central bank against a paper euro if you want.

Starting point is 00:40:18 With that, you would have ended the role of the bank as the agents for cashless payments. This is, by the way, how they came into existence making cashless payments possible. But you don't need them when you deal with crypto money, when you can trade money on a blockchain. So you end this and you let them now deal in the future with taking in savings deposits and lending them on to creditors.

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Starting point is 00:44:12 We've seen innovation in all fields and money is no different, especially right now. You know, you can go back to the Samarian barley money 5,000 years ago, or you can look at what's happening right now. And progressive economists would argue that it's only a question of when the euro becomes digital. while many economists argue that it will never happen. What do you think the timeline is for the digitization of the euro and which steps are feasible in the current political climate? Yes. Of course, I come here from a certain position. And so please forgive me if I say that this pronouncement,

Starting point is 00:44:50 a digital money will never come. It reminds me a bit of the pronouncement that the horse will always be the primary means of transportation and cars are only a short-lived idea that they'll soon go away. No, I think digital money will come. It is like paper money that was invented in China and was brought in the 17th century to Europe, and the paper money took over and simply pushed out the network-based money, because it was easier to handle. And I think we have to look at digital money as a money revolution, like paper money.

Starting point is 00:45:27 And so I forgive me that I think the authorities or whoever will not be able to forbid it. You can't forbid it. It's there. You can't unenvent the blockchain. The bigger question that I see is how the money system will run in the digital area. Presently, I think every central bank, no, that's too much. But most central banks, and they include, of course, the Federal Reserve, the People's Bank of China, the Swedish Rigsbank, which always by the the way is a money pioneer. They were the first to bring paper money to Europe. The Bank of

Starting point is 00:46:02 England, even the ECB, even ECB, they all presently work on digital money. The BIS, Bank for International Settlement, this is the bank of the central banks, has created a working group led by Mr. Quarry presently still an ECB governing council member, but soon just the head of this group. So they are heading this group. So we shall see digital money. No, that. about it and digital central bank money. But the bigger question is, is the digital central bank money just like the paper mode and it does not replace the bank money? You could think of that. You could leave the bank money as it is in place. Bank money are created for credit extension by the banks with all the problems associated, but serving certain purposes, and have, instead of

Starting point is 00:46:57 the paper bank note just a digital money, but not change the system. It would be one way to go about it. I can understand that when the existing system works well, this may be the way to go. It's probably the way the U.S. will go or whoever. But in the euro, we have a special situation. I think the euro, as it is set up, is not working because in this system of credit money, where we create the bank money through credit extension, this does not function when we'll have many sovereign nations using the same money

Starting point is 00:47:34 and not actually being able to agree on how to ensure this because the North feels that it's paying for the South and so on and so forth. For that particular money, I think digitalization offers change of the system. it is almost like going from the combustion engine to the electric engine. So my bottom line on this is, digital central bank money will come, but whether it will come together with the change of the credit money system into 100% money, this is our early Fisher called this, 100% money. That's another question.

Starting point is 00:48:15 But in my view, it would be a good opportunity to put the euro on a firm footing and avoid its eventual collapse, which could well happen in the next severe recession. I think you bring up a really good point, and the euro in the current structure is just not that fit for competing with the other major currencies. I definitely think you have a good point there. Let's talk slightly more operational. Let's say that it will be implemented. We will have a digital currency in this scenario. How would that impact the best, and banks in the euro area? Yes. Actually, I think if you're a consumer and you're not interested in all these things, I think you will not find much different.

Starting point is 00:49:04 You will probably still pay with probably not with the bank card, but with your mobile phone or smartphone. Or if you don't like this, you can still get your paper notes out of a cash machine. So the uninterested average person doesn't have to worry what is driving the payment app that she or he has on a smart road. It's more for what is going on behind it. It's kind of like if you're driving a car, right, you drive and you will not necessarily, when you're sort of going along with, should say when you're riding in the car. You will not necessarily find that much of the difference whether it's electric or whether it is.

Starting point is 00:49:50 It is a combustion engine. When you drive it, then you do not just have a ride. You may feel it. So for the rider, it is not such a big deal. But when you drive it, then you're sort of feeling with it, it's very different. Actors have a different role. I take the banks. As we said, the banks presently create money by extending credit.

Starting point is 00:50:12 In such a system, as I have sketched it, the banks would not create money. It would be the central bank that would do it only. central bank that would do it. The banks not. The banks would collect existing money and lend the existing money on to borrowers who could use it to whatever purpose, fund an investment, whatever, fund your house, construction or purchase or whatever. But it would not create it. The money would always be used for one thing. So if I give it up, do not use it as for consumption, I save it, I give it up, I give it to someone else, to put it in my bank, and the bank can give it to someone who invests with it,

Starting point is 00:50:57 uses it to pay construction workers or whatever, and the construction workers put it in the bank and to forth. That's different from the situation today, because it can create money for double-use of real resources. If I go to the bank, take out a credit, get the money in my account, I spend it, I engage construction, workers, but no one else may have faith at all. So we create claims in multiple numbers, claims on the same real risk laws. So banks, as I said, they would collect the existing money

Starting point is 00:51:34 and lend it on. It would be, they would be more like crowd fund. That's with one different. They have an equity cushion, equity position, and this cushion would work like a first loss insurance. So let's say a bank has 10% equity of its balance. The first 10% of it, the first 10% percent of the law are insured. Once the equity is gone, the bank is bankrupt, you have the assets as the creditor of the bank. So that's the all of the banks. So all of the government. First of all, the government will actually get a big boost on the fiscal, on a debt position. As I mentioned before, when you take this government bonds as a cover for the outstanding money, you can reduce the outstanding government debt because this cover is permanent.

Starting point is 00:52:19 permanently needed. Presently we have about 7 billion euros in bank money, side deposits. If you take this out and buy government bonds for this, you can actually review Euro area government debt ratio from 85% of GDP at present to less than 25% of GDP. And you can do this for every single country. Some would benefit more. Let's say the Italians would go down from 135 to 25.

Starting point is 00:52:47 the Germans would benefit less. They would go down from a little bit more than 60 to 25, but it could be generous in this regard because everyone would benefit. This would also allow the government now to engage in fiscal projects in a prudent way because they would have to take into account that they would not be bailed out anymore

Starting point is 00:53:10 because they could not have the banks create new money for them and they would not be able to force this European Central Bank in this new system to create digital money for them. So the governments would get relief, but also more room for freedom. And of course, the investors would be more like people presently in the capital market. They would either raise money on the capital market, existing money, or they could go to the banks where the banks would intermediate existing money to them. if there would be governments who cannot deal with this because they need money for fiscal purposes,

Starting point is 00:53:51 they could, in my view, issue tokens, token money to fund their expenses. Remember that the Greeks experimented with this as a parallel currency, a fiscal currency, and Italians are toying with the idea with so-called mini-bots, which are basically short-dated government debt issued as a currency. because it's without interest and with infinite maturity to fund government projects. So I wouldn't be here too rigid about it. Let's have the euro as a non-political money created solely for the benefit of the user, have the government do fiscal, pretty broaden policies and hopefully live within their means.

Starting point is 00:54:39 But if they don't, then they can issue their own money in parallel. to the euro, see whether this would get them any advantage. I doubt, but I wouldn't forbid it. So, Thomas, here on the show, we talk a lot about how various stocks will perform during the next recession, but I think there is an underappreciation of understanding how the main currencies will perform. So if we zoom out and sum up, some of the things we're learning here today together with you, how can the investor, whether that investor is situated in Europe, the US, or wherever that might be, how can they look at how the euro will be positioned for the next recession, giving everything we talked about in this interview?

Starting point is 00:55:27 Yes. Let me start with one caveat. What I'm saying is purely the view of an economist, and it is definitely no investment recommendation. I think as an economist that the next recession will put considerable strain on the banks and on the financial system. We know that we have higher debt now than we had before the last debt crisis that led to the great recession of 2007-2008, high debt. That would put a lot of stress on the banking system. We'll put a lot of stress in our existing money system. And in times of this, of such, stress. The weakest currencies are often the ones that suffer most. You could see this already in 2018, this is some of the emerging market country currencies taking it as the Fed was raising

Starting point is 00:56:25 rates. And I think when this downturn, we can see a flight to save places, the safe currency. Now within the existing money system, usually the dollar is such a currency. Sometimes the yen, people will fly out of the money system and fly to gold. We have already seen quite a bit of appreciation of the gold price. And I'm afraid when we have a serious recession, the biggest centrifugal forces will fall on the euro, as the euro is half baked. And it is conceivable that like in the euro crisis of 2010,

Starting point is 00:57:07 that some of the Eurobank money will no longer be convertible, i.e. people cannot use it to make payments cross-border. This is what the Greeks learned when the ECB stopped the excess of the Greek banks to its refinancing facility. The result was that if you have euros on deposit at a Greek bank, you couldn't transfer them abroad. What did you do? We're trying to get hold of your banknotes. We are going to the cash machine, try to get out your deposit money in the form of banknotes. Well, they also stopped that.

Starting point is 00:57:49 You have a strict limit imposed on how many bank knows, how much money in the form of banknotes you could take out. So, concern is during the next severe recession, we may see the Greek predicament. of 2010, perhaps multiply and being seen in other countries, people will then flee out of the euro as fast as they can, dollar, sold, maybe the haven, where they will go. Very, very interesting how you look at this. Thomas, thank you so much for coming here on the show. As a trained economist myself, I'm humbled by the wealth of knowledge that you bring to the show and how you explain the euro so well. Where can the audience look at the world to learn more about you and Flosbach-Ve-Storg Research Institute.

Starting point is 00:58:38 Yes, we have a website. You can find it very easily if you put it into a search machine, Vlzbach-V-Stoyd Research Institute, or also you can type in www.ff-R-E-D-com. So this is fantastic stuff, Thomas. Thank you so much for making time for us. I know I thoroughly enjoyed this conversation. and learning from you. We'll be sure to have links in the show notes for anybody to click on

Starting point is 00:59:08 those and check out everything that you just talked about. Thank you so much. Thank you, sir. All right, so before we let you go, we would like to play a short clip from a new show, Millennial Investing, hosted by Robert Leonard. If you would like to get more content from the Investor's podcast network, and you just started to invest, millennial investing takes through all areas of investing from real estate, stock investing, how to invest in yourself, you name it. And in this short clip I'm going to play, the guest is Jason Moser, who you might know from the monthly fool. And the topic is stock picking. Enjoy. So in this part of the show,

Starting point is 00:59:47 I want to do something that we haven't been able to do yet. And I want to take a deep dive into an individual stock pick that you have. I want to walk the listeners through a full analysis of better understanding of how to analyze a company. Let's dive into that a little bit more. Which company were we going to be looking at today? Etsy, ticker is ETSY. So first thing, how did you find this company, you know, with thousands and thousands of companies available to invest in, how did this one make it onto your radar specifically? Yeah, you know, I remember the brand name Etsy from what it had started in the early, I guess, 2010 or 11 or something like that. And it just was something that I had seen. I remember when it went

Starting point is 01:00:27 public then I thought, oh, I just had noted that and gone public. But I have my younger daughter hit this stage at school where she was into making a lot of slime. It was like the stuff to do at school. Like, they're making like this craft slime with different colors and textures and selling it. And so she got into doing that. And I mean, you know, they were selling it. And so she asked about opening a couple of the slime store online. And so we went actually through the process on Etsy and doing that. And all along the way, I was thinking, man, this is really robust setup. And it got me just interested in at least what kind of business it was. And so then I went to work and I read through the 10K, you know, which is basically the annual report and just learn more about the actual business itself.

Starting point is 01:01:07 It's model. Like how does it make money? I think that's the key focus with any company, if you're going to take a look at it, is know how it makes its money. I mean, you'll see, I think, metrics on TV thrown out there all the time, PE ratio and whatnot. I mean, that's all fine, but doesn't really tell you about the business itself. So learning about how Etsy worked as a business then trying to figure out, okay, what kind of a market is there for this? How big of a market opportunity is this? And then the $50,000 question, as we've been asking with so many companies, is how do they survive Amazon? Because, I mean, Etsy is ultimately the business model. It's a very capital-like marketplace. You know, it's just a, it's a great network of people who sell their

Starting point is 01:01:46 goods, but the Etsy business itself, I mean, they don't carry any inventory. They don't own any really stuff, right? They're just connecting people. And so learning a little bit more about all of that, It got to the point where you could see it was a growing business with a big market opportunity. And, you know, when you have those capitalized businesses, they can make a lot of money along the way. It did seem like there were some concerns regarding leadership and I think Amazon as well. And I think that kept a lid on the stock for a while. I think the market wasn't very fond of it. But there's been a leadership change there back in 2017.

Starting point is 01:02:17 Josh Silverman, I believe his name is the CEO there now. And he's just, he's done a lot of things to grow this network, make it more valuable to the buyers and sellers that it uses. and that's showing through all of the metrics that they report core and core out. So you see a pretty good business that's growing with good leadership. Then you start thinking, all right, well, maybe that would make a good investment. And in this case, it's been a good one so far. We've still got some time to go. Okay, guys, so if you would like to listen to the rest of the episode with Jason Moser,

Starting point is 01:02:44 I make sure to link to the episode in the show notes. Or even better, make sure to subscribe to millennial investing by searching for the investors podcast network on Apple's podcast app, Spotify or whatever podcast app you're using. All right, so that was all the press and I had for this week's episode of The Amherstas Podcast. We see each other again next week. Thank you for listening to TIP. To access our show notes, courses or forums, go to theinvestorspodcast.com.

Starting point is 01:03:14 This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndicate. or recorcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP276: The Euro & Its Impact On European Banking w/ Thomas Mayer (Business Podcast)

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