Mailbag, incl: When is CEO remuneration too high? February 15, 2026

27:17And so I think it's always squishy, Brent, and there's no easy answer, right? So I'll talk through my thoughts and we'll all agree that we can't find a single easy answer. So I don't mind people being paid very well. I do think, and frankly, studies show, that unless your job is creating output in widgets, literal widgets, obviously, but they're not really a thing, but incentives above that actually tend not to correlate with improved performance, at least not much. And so you've got to ask yourself, would you want more money? Yes. Would the CEO ask for money? Yes. Do you have to pay that because that's the market rate?

27:52Maybe. Is it likely that, I mean, take Buffett, right? He's been paid 100 grand a year for the last 40 years. Does he work any harder if you pay him$10 million a year instead? No, because he's Buffett, right? He's going to do his thing. Would a decent, you know, would I work harder for double the pay? I mean, if you asked me to work longer for double the pay, I probably would if I got double the pay. But would my stock picks be any better? I'd like to think not. I don't think, you know. If you pay me half, would there be any worse? At some point, I'm going to say, well, stick your job. But, you know.

28:19So I do have a slight issue with the accepted wisdom that we all kind of think must be the case because incentives matter. And they matter a lot. But do they change or improve performance? And so I do think at some point, hey, profit doubled. You get a lot of money. Would the profit have doubled if there was no incentive in play at all? Possibly. I'll give you a heads up. I don't know. I can't remember what the case was when you were at the full ram. we used to get bonuses at the full yearly bonuses and they got did away with them because they just the research doesn't support any need for it so they end up changing our salary we got a bit of a bump up in salary and there's got bonuses like we're incentivizing the wrong things just do your job if you're good at your job and you paid reasonably well that's that's it so i kind of i don't have a problem with it being tied to it but i do wonder as a shareholder and shareholder's capital is precious how much am i paying you to do the job and how much incentive do you need to do the job versus what everyone else is getting and what you want and we kind of think incentives matter and so we have to do that stuff so i'm and that's a really unpopular view mostly among people who want incentives and bonuses for their work i get it um but the the i think i'm gonna say it's daniel pink and i might be completely butchering that so i don't know if it is daniel pink or not but the research basically says unless you are if you're if you're paid per per you know um i don't know uh machine you build then it matters a lot because you'll build more machines if you pay per machine you build so if you're if you're a peace worker incentives matter a lot if you're a knowledge worker or your work doesn't have specific outputs i mean i make a stock pick every month but the stuff i do on a daily basis i research companies i write stuff i talk you know um the research says i will my work will be no different if i'm incentivized or not at least at a global level so i do think invest shelves pay too much to executives because the returns aren't linked to the payment themselves you can say you double profit therefore you're going to pay out, that's fine.

30:05But you can't say you double the profit because you're getting an incentive. And in fact, the data is otherwise. So I probably flugged that dead horse. I don't mind it. Again, it's not the quantum to RAM's point. It's not the dollar value. It's whether it should be necessary and whether it is necessary or whether the shelves are wasting their money on the false apprehension that it is necessary. So that's that. Almost all incentive programs are also terrible. So RAM's kind of broad point. they incentivize things that can be done as Ram has already said really easily and simply and even if not deliberately they can lead to worse outcomes I'll just talk about incentives you may not need a million dollars to do a good job but if I offer a million dollars to do a particular thing will you do it?

30:45you bet you will so is it likely to build long term value or actually detract from long term value? good question right? imagine cancelling a bank CEO's bonuses on this year's profit and then say run the business as well as you can do they spend a little bit more money on compliance and systems? Probably. Do they treat people a little bit better because they're not trying to get the incentive? Probably. So maybe the results are worse than otherwise might be the case if they weren't incentivized. That's also true because you've got to be careful what you incentivize. What gets measured gets done, as they say.

31:15So almost all incentives are bad. Dollar value, no. Almost all incentives are bad because very few companies incentivize long-term value creation in any real way. They talk about it. Oh, earnings per share is value creation. No, it's not. Growing profits, value creation. Well, maybe, but maybe not. How much debt are you taking? is what's a balance sheet look like. I can't think of a good incentive. I know I tell a lie. It was a pioneer credit based in WA, debt collector of all things. They have a shared pool across their entire executive teams. They're all incentivized to work together. And from memory, I think the metric, I could be giving him too much credit.

31:49When I spoke to the bloke, I can't remember his name. I should have, I'm sorry, apologies on Friday. You apologize to one of your CEOs, I'll do the same. I spoke to a bloke who was a CEO who shared how they did it. and it was a very, very sensible incentive scheme. Outside that, I can't tell you another company whose incentives I've seen, it doesn't mean they don't exist, that I feel like is actually the way I would set the incentive. Oh, yeah. So they're incentivizing the wrong things. So every incentive program is wrong, Brent. The longer term, the better. The more shareholder focused, the better.

32:20But dollar values, not really. The question for you is, do you believe that money is being well spent? does it reflect well on the board and the directors who are making, setting these payments and setting these incentives? Be wary of incentives that incentivise short-termism over long-termism. I think that's far more useful than looking at the dollar value or how much they get. I just want to make one point of clarification here as well. So Paul Wilson, David Kirk, who effectively run Bailador, they themselves, so it's a bit of an interesting structure there. So when I sort of say they get paid very well, they actually waived their director fees last year and stuff, but it's sort of the fees paid to the management firm for running their portfolio.

33:11And by the way, they're absolutely in line with what is standard in the industry. But the comment has been made and others have pointed out primarily on straw man, and I think people are valid in this view. It's just like, gosh, particularly when some of their bigger holdings are publicly listed, it's like, I don't need to pay someone 1.7 % management fee to buy and hold something that I could buy and hold myself, right? So there is a certain amount of – there's an outperformance fee and there's just a flat management fee and people will have their views on that. But I did want to walk back that statement a little bit in case those guys were listening as well, not just sort of, ah, you're being paid too much.

33:47I'm not saying that for a second, but it is, and you are aligned, right? They only get the performance fee, I think, if the portfolio compounds it above 8%, 9 % or something per annum. And again, absolutely industry standard. But it's good money when you're doing a good job. And I guess that's the alignment, right? So there's nuance to all of this and it's partly just backside covering, but it's also, there's just nuance to these kinds of things as well. And they have both of them turned away money that they were absolutely legally entitled to and credit where it's due. Yep. No, that's absolutely fair.

34:26And they're good guys, by the way, doing the right thing, trying to grow their business. Yeah, as I said, I think we over-incentivize. because I think good people will do the right thing regardless of the incentives. Maybe that's too polyamorous or too generous, but I think it's likely true. And the person who only does the right thing for the incentive is probably someone you want to be careful of because you better bloody get the incentives right if that's the point. If that's how they're working, if that's what they are in for, that's okay. Just know that you're actively looking for that person, recruiting that person and managing that person.

34:59If you don't get the incentives set right, they get them anyway. Careful what you wish for and careful what you get. Thanks, Brent. Great questions, mate. Just a quick shout out too. I mean, they've grown that portfolio at a pretty decent rate, you know. And if you look at all the companies in their portfolio, collectively, they grew their revenue at 42 % or something in the last year. I'm just looking at their results now, right? Like, you know, this is hard stuff, right? So, as I said at the very beginning, it'd be one thing if you weren't running a portfolio very well. But, you know, could it be better?

35:28Yeah. Could it be worse? Hell yeah. Right? And it can always be better, too. So, that's not even fair. Anyway. No, that's fair. Good question, Brayton. and thanks for the convoys. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

35:46Hey, this one's from Owen. Hi, Scott and Ram. I've been listening to your show for a while now and I've really appreciated your perspective on all things investing, finance, politics and at the risk of setting Ram off on a tangent, crypto. My email comes after I listen. Daddy, crypto. I knew you were going to do that. I thought I kept talking and I thought you'd get away with it, but no. did you see by the way you did I always just sent him off well done mate thank you very much sorry Owen this is on you just before I came on air I was just doom scrolling on Twitter and I saw a tweet from the official Motley Fool account right and it said most but not all crypto is pure trash and I thought ooh that's interesting yeah well you know so Tom Gardner our CEO famously bought some Bitcoin years ago for the the company's balance sheet.

36:34You'd be well up on that too. I'm trying to find the tweet. How long did you go? Today. There you go. Most of the crypto trash. There you go. 58 replies. I wonder what their replies were. I can imagine. It's all Bitcoin, not crypto. I bet. Yeah. Well, Bitcoin only. Everything else is a money pit scam, something coin. True. All or nothing more than digital fairy dust. Specifically, liquidity sinks to prevent real commodity price from exploding. Apparently, that's a conspiracy. All this trash, full stop. Price target, zero. Yes, let's move on. Keep riding that horse. All but one is trash. Guess which one from Sean Walters.

37:08There you go. All right. Sorry, I had to add that in there. It warmed the cockles of my heart. I know that Tom has done that before, but it is smart cookies at the Motley Fool. That's all I'll say. I completely agree. Hi, boss. Sorry, let's get on with Owen's question. My email comes after I listened to the powerful speech by Canadian Prime Minister Mark Carney. Smart guy, really doing a good job, I think. at the World Economic Forum. His message was that the rules-based order and global institutions that have prevailed since World War II are not just transitioning, but rupturing. He also said that pretending we are still in a rules-based order is no longer possible for middle-power countries like Australia.

37:49These rules have enabled Australia to flourish and specialise in industries that we are more competitive in, such as mining, at the expense of industries such as manufacturing. I've heard you in a number of episodes support the specialisation of our economy as it makes us richer as a nation, as this has been the truth for the last 80 years. My question to you is whether the current disruption to the rules-based order has changed your thoughts. As a nation, do we need to relook at our sovereign risks based on the changing global order? Are there any key industries or capabilities that you think we should look at rebuilding again?

38:23Interested in your thoughts? And as always, full on regards, Owen. Really thoughtful question, mate. Well worth looking at Mark Carney's speech. Interestingly enough, though, Owen, he talks a little bit about the rules by sort of breaking down, but talking about middle-order countries effectively banding together, middle-powered countries banding together. So it's kind of a block of sorts in that context. And it may or may not, let Ram answer first, but it may or may not be that we don't have to change the what and how necessarily to meet Mark Carney's prescription, or we could go back into rebuilding some of that capability.

39:00all right we'll keep going keep going my general approach Owen is that stockpiles beat tariffs and if we're worried about supply chains like during COVID we frankly should learn from that in the first place anyway before Trump did Trumpy things and we don't have enough PPE and drugs like well if we're really rich countries well this is the thing we learn nothing from we don't exactly but that was 50 years ago oh no wait no it was five years ago it'll never happen again you know what also is funny I'll say funny I had a catastrophically bad call in early 2020 when I went COVID's probably like SARS and MERS it's been around before it's annoying and deadly but it'll be reasonably limited I was dead wrong but then of course every time there's a respiratory illness that gets diagnosed anywhere in the world I think it was India last week the week before I was like oh let's give me the next COVID and I'm not going to say it's not going to be because I've made that mistake but equally it's kind of The exceptions prove the rule.

40:00So look, Owen, I would stockpile as a national security decision, if that's what we thought we needed to do, rather than try to recreate, re-engineer, and by definition, subsidize permanently those things that we can't do competitively. And can I just very quickly say, if we're going to have a strategic stockpile, can we not have it on the other side of the planet? Call me, you know, a bit of a, you know, grumble bum. But it's like our strategic petroleum reserve is in the US. Just in case the supply chains get blocked, we can then... I know we can't because it's over there. Wait, no. Is that great?

40:42I love that. But I'm sure when, like, you know, poo gets real, they'll just ship it over. That's right. Oh, yeah. It'll be fine. We'll just ask nicely because it's ours. It's over there. We just want to cut. Can we do the other thing with our gold reserve? He's like, oh, yeah, we're Australian's got gold reserves. Yeah, of course we do. Brilliant. Oh, they're in London. What? No, I will say. You hope that the angst of the palms can be relied on, but it's an interesting decision. So, yes, I would do it onshore to be very clear around. Good, thank you. Again, it should be assumed. That seems like a necessary starting point, right?

41:14Why would you have to clarify you mean an onshore stockpile? It's like, well, that's why we'd have a stockpile. It's like saying when COVID, you know, went down, it's just like, don't worry, honey, I've got the family strategic toilet paper reserve. Brilliant. It's in Tasmania. And we're locked down. And I'm in Sydney. It's cool. I've got it. I've got it though. I own it. I've got the title. And the reason I say that, Owen, is because I am a firm belief. I'm not a national security expert. I'm not even an economic expert, but I've spent a lot of time thinking about it, reading about it and talking about it and learning from smarter people about it.

41:48I've subscribed to the chain being only as strong as its weakest link. So if we need to be self-sufficient, that's fine. but now I definitely should be self-sufficient in everything that you need to be self-sufficient in because as soon as you can't do one of those things I've talked about this before as soon as you can't do one of those things you can't do any of the things we can make 95 % of an iPhone okay can it work with the other 5 % no so you want to make 100 % of the iPhone or nothing right and so you've got to have all of the stuff you've got to make the silicon chips you've got to have the raw materials you've got to process smelt the metals that are required you have to have the satellites you have to have the we don't have our GPS satellites the Yanks turn the GPS off literally it's military satellites with GPS they turn those off tomorrow Google Maps is useless I hope you've got a Gregory's or a UBD or a Melway's in the back of the car because you're back to square one here people, welcome to 984 kids, let me tell you about it so unless you're solving everything it literally is the weakest link and that sounds too blase and I get it but I think it's true is this the logical conclusion about thinking I think, I think.

42:51And, you know, if we had a car manufacturing business, we could make tanks if we needed to. It's like, well, could we? I mean, we could fabricate them. Do we produce enough rubber for the tyres? Do we have enough rear-off for this? Right, right, right. So, honestly, mate, I absolutely hear the thought, and I get the intent, and I really get the instinct, and I have the same instinct of maybe we should have everything, maybe we should do all ourselves just in case. And then you kind of go, well, if we can't do everything ourselves, then trying to do everything ourselves is silly. and wearing an economic and social loss, economic because we'd be less well-off, social because maybe people individually who would be less well-off because we're going to force them to do low-wage, low-skill manufacturing jobs instead of high-wage, high-skill service jobs that they actually enjoy more.

43:34And by the way, no criticism of those doing manufacturing do it. And if you love it, go for it. But if we wanted to and we were good at it, we'd do it already and we'd still do it. So I think it makes sense to think that it would be a good idea. If the good idea can't be brought to fruition, don't do half the good idea. Don't dig half a hole. Don't be half pregnant. You're either self-sufficient or you're not. And if we made cars... No one's self-sufficient. Self-sufficiency is an illusion, honestly. So if we made cars, we could make tanks. We could make the shells of tanks. We probably couldn't do all the things you said, like the rubber.

44:03Okay, so let's not try and make tanks. If we can't make tanks, we can't make cars. We don't make cars. If we don't make cars, we're back to where we started from. What would we change and do that would make us better off? Are we safer if we can fabricate tanks? No. It feels like it, right? Well, because of course we could at least do that. Well, if you can't put tracks on them and you can't put electronics in them, you know, so. So it's 2025. Do you really think that we're fighting tank battles these days? I know that they're around and they play a role, but they are not the military hardware that has the same strategic value as they did in World War II.

44:34So what would I do? If you had a view that we had sovereign risk, I am going to probably earn Rams' ire here. if you had that view and you really thought that was true and the best people ever thought so you'd increase your military spending and you would stockpile things like uniforms and tanks and guns and ammunition and that's if we think we are at risk of being invaded then we should do that tomorrow right because and by the way military spending is always a complete waste until it's necessary in which case it's like insurance right i've said this before a little bit in the pod i'm not particularly um great student of world war ii but i'm a little bit of a student of world war ii and what we know is we underinvested for a decade and a half before World War II because we did World War I that was the Great War the war to end all wars and that was it and all of a sudden Germany and Japan popped up and went oh bugger we're not ready now I don't know what the next war looks like I don't know how we fight it I'm no near but if you think that's a risk then you militarily upskill slash build up and you stockpile more stuff so you've got the stuff you know if you need if you need the electronics you need the rubber tyres stockpile the rubber tyres massive big warehouse somewhere in the middle of Australia with a gazillion rubber ties just in case.

45:44If that's the considered view of the national security establishment and it's a well-formed view, then okay, fine. I can kind of get around that. I can't get around trying to create industries. That's if you can't do all of it, don't do any of it because anything you do lowers living standards by definition. And so there's just no value in doing so. Now, the Carney point, I'll get to you in a sec, Ram, sorry. The Carney point about the middle powers, it makes sense to have trading relationships. So what else would I do? I would absolutely be having trading relationships and diplomatic relationships with other countries to defray our concentration risk.

46:20When you talk about companies and competitive advantages, one of the things you look at is how concentrated are the suppliers and customers? If you're aligned on a single customer or a single supplier, you don't have the competitive advantage you think you have, right? You are in a world of hurt if something changes. So, yeah, would I be selling more stuff to Europe to try and mix up our international trade? Yes. Would I have purchase relationships with more than one supplier? Yeah, I'd probably have Boeing and Airbus. I don't think I'd just do one or the other. You know, we have a lot of iron ore going to China.

46:48We should maximize that. But in the meantime, what happens if that trading relationship falls over? There are some smart things you can do if you believe that the risk is real. And if you believe that it's prudent to pay some insurance premiums, not literal insurance, but, you know, metaphorical insurance premiums, to give us optionality should that happen, that makes a whole lot of sense. i wouldn't try and stand up industry i wouldn't try and subsidize companies or production i just don't see how that changes the end result of whatever you war game quite literally in this case but metaphorically war game um what industries do you have to have for that not to be a problem and if the answer is i can't do everything then there's no point trying to do anything other than make sure we have trading relationships that allow us to have that mix you might in a you know very very extreme case say well the only country in the world does this thing is china or the us or vietnam or new zealand and as a as a global community we should have probably a second or third country doing our thing that might make some sense and if if that coalition of the willing to george bush's famous phrase if carney and albo and i don't know starmer and whoever else want to get together and say hey between us all china's got the only x in the world or the x of the only y in the world could we find a way to do something else i could kind of see that making sense so in a case of single source of supply probably if there's multiple sources of supply i think we're wasting our time sorry ram over to you i mean i'd go back a step and i just i'd just say well why aren't we doing it already we're not doing because we're completely not competitive at it well what does that mean it just means that we can't do it as well or as cheap as as someone else so to actively, and if we can't do, if we can't make something as good as cheap, then probably no one's going to buy it.

48:31So if no one's going to buy it, how is the thing viable? In other words, how are we going to pay the wages of the workers? How are we going to buy the raw materials? How are we going to make the money to reinvest in the factory? Like it just, it doesn't make any sense, except people love to go wave their hand and go government. It's like, well, where does government get its money from? And, you know, and if you think printing the money is going to solve the problem. It's not. So you touched on it really well. Basically, yeah, we could do it. But it, and again, it's, I've got to move the focus past some wonkish economic term.

49:04It's not like I'm all about cheering growth for the sake of growth. No, we're just poorer. And what I mean by that is like, we're all, we've got less abundance. We've got less choice. We're working harder to get the same thing. I don't, I don't want to do that. I don't call me crazy. I don't want to do that. I something that might not ever come. And to your point, if it did come, we're only 95 % of the way there at best anyway. And so it doesn't actually solve anything. So stockpiles, building a stockpile is an incredibly sensible thing if you're at the household level, the business level, or the sovereign level.

49:40And I'm not talking about bomb shelter kind of stuff, but your bank account is a strategic stockpile. You have spent less than you have the capacity to spend because you are stockpiling some of your previous work and energy because you know, if I've got half a brain in your head, that, you know, stuff happens. You know, maybe you'll lose your job tomorrow or maybe, you know, any number of millions of things that happen. So we stockpile, right? And this was one of these lessons of COVID that's instantly forgotten. which was, you know, supply chain optimization was taken to such an extreme that one little kink brought the whole thing to a collapse.

50:26Now, if there had been a little bit of quote unquote, you know, lazy balance sheets and, you know, slower stock turnover in certain inventory lines and, you know, like, yes, I know that if we want to take a pure financial lens that we are being a little bit inefficient. But that inefficiency when done strategically is a good thing because I don't want something that is going to run beautifully and hum just, you know, ever so perfectly. But, you know, I hit a speed bump and the whole thing collapses. Do I want something perhaps not, you know, go back to the Ferraris or the Lambos that we're talking about at the beginning?

51:05I mean, I've never driven one, but I'm told, I'm told they're very finicky, right? They will absolutely crush our Hyundai on the racetrack. But I probably could drive my Hyundai for far longer before it needs a service or anything else. And when it comes to the economy, we need to optimize for resilience much more than turnover efficiency. It's this whole stock versus flow conversation. And the final point I just make here, it's just that it sets a bar that's unrealistic to ever achieve. Even if we did decide that government needs to build these industries, the implicit assumption is that they can do it well.

51:53Which, again, history is just like full of examples. Like, no, it's really probably not going to do a lot of these things well. And again, that just leads us to be poorer. So the sad reality is this. The sad reality is this, is that, you know, in a world where the rules-based order breaks down, everyone's poorer. Every single person is poorer. It is in our mutual interest to cooperate and work together. Power-hungry old men at the top of a lot of these power structures don't seem to care or get that, you know, and that, you know, screw them. but for the rest of us, I think it's a really apparent kind of thing.

52:39Like, you know, a hut out in the middle of the woods isn't as good as a community of people who cooperate. It's not as good as a city with, you know, strong property rights and rule of law where people can cooperate. It's not as good as a country. You know, it's like these things actually, like you get these wonderful economies of scale and the more cooperation that you have in the higher level of trust, it is such a boon for humanity that it is something that I would be very, very, rather than trying to sort of stimulate some manufacturing industry, I would be putting my efforts towards doing everything I can on a diplomatic front to sort of maintain, to maintain this social order.

53:17And if Trump, and let's just call it, I've got to be vague about this, if Trump wants to continue to be an idiot and isolate America, then okay, fine, if you must, I think you'll be shooting yourselves in the foot and we're all going to suffer along with it. But I think there'll be in a lot of countries' self-interest to form other alliances and treaties and band together. Not because of Kumbaya, but because it's actually in your selfish interest and my selfish interest to kind of do that. My enemy's enemy is my friend, right? Absolutely. Absolutely. But a lot of the things being suggested are just really, A, you're not going to be effective and just going to waste a whole bunch of time and resources and we're just all going to be poor and it's a very silly thing to do.

54:00yeah um i mean to some degree military spending is what you just talked about it's it's it's wasteful until it's necessary and there's this there's i as i said if we can't do it better than somebody else but the other but the somebody else is someone we can't rely on then having a second source would be justified in my mind and if that costs us some money to maintain that i guess so be it so that's right that's your view yes but wrinkle but the wrinkle in that would be can I not have a government bureaucracy standing up that commercial operation and doing I would far prefer to create necessary incentives be they in the form of grants or tax breaks those kinds of things that would help stimulate private enterprise to do it.

54:44I completely agree with that. I wouldn't have government do it either but I'm saying I mean can you imagine Australian government designed and built and manufactured car can you think you know these are the same people who design the NDIS, right? I did not want them making smartphones and cars, right? Yeah, it would be pretty funny. Hey, let's move on to a question from Howard, a statement from Howard, who's going to take a key student of history as you are around. He's going to dispute your view of history just for fun. Hi, team. Love the show. Love the banter. Love the rants. After listening to the Pod Machine episode, the other Sound Money episode, early on, Ram made a heavy illusion that the US had never paid off its debt.

55:23They have actually done so before. The U.S. has had central banks resembling a reserve bank prior to the Federal Reserve, but never while fully paying off its national debt. The only instance in the U.S. paying off its entire national debt occurred in 1835 under President Andrew Jackson, after the second bank of the U.S. had lost its federal charter and was no longer functioning as the central bank. So there you go. I didn't know that. That's true. That is true. If I said never, I probably sort of meant in recent years. 190 years is close enough to never for our purposes, but Howard's also right.

55:57So there you go. That was actually, it's a fascinating era of US history. It was more of a free banking era. And there was a proper incentive mechanism in place to, okay, we had the fractional reserve shenanigans that were going on, but the bank bore the risk. If everyone turned up and said, I want my money, and they go out of business and everyone would lose their jobs and all the investors and all the depositors are wiped out. It's actually one of the reasons why central banks were sort of argued for. The moral hazard that everyone missed was being, so you're saying we can do all of this stuff and have no consequences?

56:32That's the kind of thing that's kind of where we've led to today. But you can also make, and that was back in the gold standard days too. So it was a fascinating time. And again, it's always the story as old as time. It was just slowly but surely banks just made that very insightful observation. It's like, you know, everyone keeps depositing their gold, but hardly anyone asks for it back. And what they're more interested in is just this paper receipt that gives the claim to the gold. You know what? I reckon we could probably issue more receipts than there is gold. No one would even know. It was actually exactly true, except for very occasionally when people lose confidence.

57:11Again, it always comes back to trust and confidence. And everyone goes, and sometimes these things would start on rumours alone. Silicon Valley Bank, let's not go back 190 years. That bank was actually functionally solvent until it was sort of called. Yes, totally. You know? And it was only the run. Actually, the run is what causes the problem rather than vice versa. Right. You know? And it's, oh, man, there is so much to be said about all of that, but I won't say anything more. Thank you, Howard. You're absolutely right. Monetary history is fascinating. In the early days of the US colonies and states, they've experimented with this stuff.

57:53We've seen it. The Germans did a lot of this kind of stuff too. Even today, it's unheard of for an Australian perspective. We've got like four mega banks and a bunch of nothings. They've got lots and lots and lots of regional banks. Anyway, I'm going to go off on a tear here as well. but hyper hyper concentrated oligopolies in commercial entities that are backstopped by governments through implicit guarantees do not lead to a robust system in my humble opinion. I'm shocked.

58:30Facts be facts, my friend. It's one of those things. If that's a jaded view, it's only one that's absolutely... I'm not saying you're jaded. I'm just saying I had a sense that might be your opinion. We've had this conversation. Yeah, we have. No, I'm just trying to be fair. Hey, question from someone who says, hello, gents, please call me Jenny. And you know what's weird? When someone says, I'm like, and by the way, she signed up, thanks, Jenny, and Jenny's in inverted commas. And all I can wonder is, I wonder what her real name is. Bruce. It's Bruce. On the internet, everyone's a dog. Well, she says female questioner, long-time listener.

59:06So I'm going to assume she's at least, if she is Bruce, I'm going to assume she's a female Bruce. Female questioner, long-time listener, says Jenny. Just saying, obviously this podcast from the start as inspiration to keep me on the financial right track, but I've also been doing the best I can for a lot of years. Good on you. Thanks for listening. Bit of a slap for me. I'm roughly the same age as Scott, so I'm not apologising or kissing anything. Fair, Jenny, fair. That's fair, that's fair. I'm recently retired. dad. As apparently often happens, it falls to the oldest daughter to take care of a parent with ill health.

59:40I'm sorry to hear about your parent, Jenny. I'm also the only sibling who can support myself financially without working. Just me, no partner, no kids. I won't give you too much personal information as I know there is no personal advice. Thank you. So here's my question. I've got a lot of life left in me, says Jenny. I have properties with about 50 % equity for each one, good but not great super for my age and I own my own home. I have very reasonable expenses but my concern is both interest rates and inflation. People say that high interest rates of the 90s can't come back. I've heard Rams say it too.

1:00:15But if inflation really gets out of control isn't that exactly the first maybe only lever for the Reserve Bank? If not what could the Reserve and the government actually do to control the economy? Aren't we now at the whim of Trump's economic moves? I would just like an idea, as someone who is now dependent on inflation and interest rates staying reasonable, I think that saying it won't happen about higher inflation or higher rates is not a real response anymore. Thanks, Jenny. So you said high interest rates can't come back. Ram, defend yourself, sir. Justify that blanket statement. Well, first I'm going to put my sights on Jenny and say, I mean, so selfish of her.

1:00:58Like, she is now, her decisions have meant that GDP is going to be that much lower, right? So that just, unforgivable. You wrecked the economy, Jenny. You wrecked the economy. You wrecked the economy. You're not working. You're an economic unit. What's wrong with you? Yeah, I mean, unless you're getting paid from your elderly parents there, this is a non-economic, and of course I'm being silly here, but this is how we - I was going to say, just in case this is being read on transcript, let me say very quickly, for the transcript, There's a lot of sarcasm there. That's all sarcasm. Just so everyone's clear on the transcript, don't write in yet.

1:01:29Just, okay, now keep going. I mean, we've got a similar story in our family as well. And I think only no one can really comprehend the emotional stress and just plain old hard work of being a caregiver. You've got no idea. It is a thing, right? And not only is it an incredible personal sacrifice, it's a massive financial sacrifice. And so I just have the utmost respect for people that do that. And, yeah, good on you. It's the same exact argument can be made with single stay-at-home mums or dads, right? It's just sort of like you're not earning an income, you're not contributing. It's like, well, just because something isn't paid for and therefore not captured in statistics doesn't mean it's not valuable.

1:02:22This is so far off the track. But it's just like this is the Keynesian mindset, you know. It's just sort of like, but, you know, anyway, we actually live in a world where I would say when our kids were younger, it was probably at least half of the mother's group who were working because they wanted to work, not because there was an economic rationalisation to do so, but everything that they made after tax went on childcare. But the economy was bigger. Isn't it dumb? It's so dumb, right? Right? It's so, and it's not dumb if that's where I just, I like working and that's what I want to do when I seek value.

1:02:56I'm not having a value judgment on it. I'm just sort of saying the way the iconocrats tend to look at these things is like you've gone from, yeah, the stereotypical housewife who's not doing anything to, you know, someone in the power suit, you know, kicking goals and whatever. And it's like, and the economy's up and spending's up and it's just, it's a nonsense. Yeah, if you're a tech and care of your kid at home, you're not adding to GDP. if you pay for someone to look after your kid, you're adding to GDP. Yeah. And neither is better or worse to make your own decision and not making a value judgment or just saying that.

1:03:26They get counted differently. Unless you're a mainstream economist and then there is very much a difference, right? And that's how stupid it is. So I say all of that.

1:03:39Yes, so the flawed understanding of monetary mainstream mechanics is that when inflation gets out of control, it's because people are spending too much. And if people are spending too much, you've got to disincentivize them to do that. And to do that, you lift up interest rates. It makes credit more expensive. It gives you a higher return on your savings. It stops you spending because, dear listener, you're buying too much bread and milk and that's why inflation is going up. And again, for the transcript, sarcasm alone. It's all ridiculous. Now, there are certain, I mean, like a lot of mistruths, there's nuggets of truth to it.

1:04:22So like in certain situations and in isolation, there is actually pretty much a one-to-one correlation with that. But the world that we inhabit is far, far, far, far, far more complex than that. And one of the factors that would, to my very strong opinion, and I could 100 % be wrong, but never stop me from having a strong opinion, is that when push comes to shove, they do not have the ability to significantly raise interest rates without collapsing the whole economy. There is so much debt in this country at various levels, and particularly at the household level, where if you do that, then you automatically force people to sell a bunch of assets.

1:05:05They crash. Those assets are collateral for other people's loans. Not only that, there's industries built around all of these things. Everything falls in a heap. And so let me give the slow clap for the Keynesian economists at the central bank. It's like you solved inflation. You just made unemployment jump to 25 % and crushed everyone's savings. So, you know, crushed half the country's wealth. So that's why I don't think it's likely that we'll see a material. I've got to be careful on this. People misinterpret. Absolutely. I would not be surprised at all. We see one, maybe two more interest rate rises.

1:05:44But it just gets to a point. We're not going back to 17 % that we saw in the 70s. The maths doesn't math at that point. And it's as simple as that. It's as simple as that. And so you've got, what do you do? You've got three choices. It's always come back to the same thing. You can let it run hot and we just deal with a bunch of inflation, which slowly inflates away all of the debt and that kind of corrects things at the expense of making everyone's lives a lot harder. You can default on the debt and that's not a great thing. You can grow yourself out of the debt, which is the Hail Mary that everyone's sort of hoping on.

1:06:24But what else can you do there, right? Like it's sort of, look, there is some, when it comes to trying to predict the madness of crowds and what, you know, flawed human beings, which we all are, are going to do. But whenever I have an investment theory that just rests on the laws of mathematics, it's just I feel pretty good about those ones because, you know, you just, you can't make one plus one equal three no matter how much you try. And we're drowning in debt. We're continuing to deficit spend our way into oblivion. You know, what else is going to happen? and prices are going to keep going up.

1:07:03And the big thing, of course, is that they can't say it out loud. You can't say it. I mean, if I was them, I wouldn't say it out loud because then the whole gig's up, right? Like, listen, we can't actually do anything without crushing the economy. So you have to maintain plausibility. You have to maintain legitimacy. You have to make people feel as though that we're going to do it. It's almost like the threat is worse than the, or is sufficient in place in lieu of the action itself. We'll, don't you do that. You spend too much. We're going to put interest rates up. And actually, it's not entirely silly because it can have an impact if everyone thinks interest rates are going to go up, right?

1:07:40But they will blink when push comes to shove at a point, at a point. Where is that line in the sand? I've got no idea. But things break very quickly. The very fact that in this country, the entire nation stops every six weeks when there's an RBA meeting, and we have a quarter 25 basis point adjustment to the official cash rate and there are like you know front page news you know that tells you everything you need to know right like in any sane world that is relegated to page nine right and it's like maybe in the business section of the paper the fact that that we are also obsessed of this and the fact that you have all of these stories of people like right on the edge and if i have this i'm i'm living on the street it's like well okay what about at a two percent increase not a 200 basis point increase how does that look to you you know like tell me i'm wrong man like i think you're right although so i'm going to agree with you but from a very different direction we end up in the same place so hopefully jenny that gives you a sense that either we're both wrong or or there's some sort of uh some sort of value in us agreeing both wrong but for different reasons exactly exactly yeah let's let's let's go from the macro to the micro so you kind of implied this ramble you can't talk about as a macro levels.

1:08:54I'm going to say the same thing, but just from a micro, so just so you know I'm not disagreeing with what you're saying or even trying to restate it without knowing. Think about an individual household. And I'm going to make up some numbers because I don't have data in front of me because we don't do much research, as you know. Let's say you bought a house in 1989 for a quarter of a million dollars. And let's say that house now 30... So we're buying a mansion on Sydney Harbour? Cool. Continue. 35 years later, that house is selling for$2 million. bucks. No, probably a million bucks. I'm trying to keep it reasonable to give the example.

1:09:28So now the debt is four times the size of the debt you took out 30 odd years ago. In 1990 or 91, whatever it was that rates hit 70 % for a small period of time, the impact was that the increase in debt repayment took a heap of money out of the economy, caused a recession, and probably stopped inflation getting worse. So that's kind of what we saw. And why 17 %? Because the Reserve Bank at the time took the view that that was the level at which consumption would sufficiently fall. So fast forward now to today with the million dollar house, and your income's probably gone up, but let's not overcomplicate it.

1:10:09The dollar value of the impact they had in 1991 needed to be 17 % because the loan value was reasonably small. I mean, big at the time and still big, but relative just today, reasonably small. Today, if you had to take that same amount of money out of the economy, what do you have to do? Well, your house price is four times the size it was. So you only need to increase rates by a quarter of the amount to pull out the same amount of dollars out of the economy. I hope that's kind of following. It's not exact. I'm talking very directionally. No one factored me on the math. It's roughly that, right?

1:10:39So what am I saying? I'm saying the reserve move rates by seven or eight, nine percentage points to have a to have a given level of impact. Today, they need to move to rates by 1.5 % or 2 % that have the same dollar impact. Does that make sense, Ram? Am I making that clear? Yeah, yeah, yeah. And so, Jenny, my personal view is, by definition then, they don't need to get rates anywhere near what they used to be because of the amount of debt we're carrying. Now, Ram mentioned that from a macro perspective, but you're absolutely right. At a household level, because of the size of the debt, the size of the repayments, putting rates up by 2 percentage points is going to take as much money out of my pocket as it would have been when I went to 17 % in 1990.

1:11:21And that difference, if you follow the math through, is why not only would the RBA crash the economy in doing so, and Ram's point was they wouldn't do that because they want to crash the economy. It's absolutely true. I don't think they'd even need to think about it because the impact they would have on the way to that level means they could stop early because they'd have the desired effect. If you want to take... Now, Chris Richardson, great economist, good guy. I'll hate him on The Good Oil if you want to have a listen. he wrote or was quoted as saying a quarter of a percentage point now is the equivalent of seven and a half to ten billion dollars of government spending reduction he was arguing for government spending reduction a whole different question different topic but just because the number is available to us let's call it 10 because it's easy if a quarter of a point takes 10 billion dollars out of the economy in 1990 to take out that much you probably would have to put rates up by two percent to take 10 billion dollars out of the economy in other words in inflation adjusted terms No, I'm just keeping it simple.

1:12:13So the point broadly is if you want to dampen demand by X dollars, because I've got so much debt, which is your point, Ram, you don't need to raise rates as much to have the same dollar impact. So there's no need to go to 17 % because, frankly, you kill the economy at 8%, let alone the 3.85 we are now. But you wouldn't need to because you're going to have that much impact with smaller moves. It's a levered question. It's the straw that broke the camel's back, you know? Yes, yes. Put a piece of straw in a camel's back, doesn't notice it. But at a point, it does become the tipping point where it's like, yes, actually, it's everything.

1:12:45And that's a good point because we're carrying more straw already. Yeah. So, and that's, I mean, it's bad for other reasons. The point is, you only have to add a few pieces of straw to get to that point. But it's not even the tipping point. It's like, when you've added two pieces, if three pieces is too much, when you get to two, the camel's already, oh, we've done what we had to do. We don't have to go any further now. In the past, you had to add 25 pieces of straw because there was less straw in his back. So that idea, That's why rates won't go anywhere near 17. I mean, they don't need to because, Jenny, I hope that's clear.

1:13:14I need to probably think about how to explain it better. But essentially, we're so leveraged now, a small interest rate movement does what a big movement used to do, and so they just don't need to go that far. Everyone in the country has borrowed$100 at 20%. Not a big deal. I'll come up with$20 to pay the interest bill at the end of the year. Everyone in the country has got$1 million. Do that exercise again. What? What, I have to now come up with$200 ,000 to pay the bill? But even if you've got$200 ,000, if it goes up another couple of percent, you go from 20 to 28, you're like, well, I can do that.

1:13:45If you go from 200 to 280, that's where you don't need to. You can say, well, actually, if you have the same dollar, this is a great example, Ram. So let's say rates,$100, you pay 20 bucks, it's 20%, right? It goes at 25%. Okay, well, now I've got to pay an extra$5. That sucks, but it's not that much more. I can manage that. These days, if you want to take$5 out of the economy and you got a million dollar loan, you raise interest rates from 20 % to 20.5 % have the same impact because you pull the same dollar value out. So that's kind of the idea. So yeah, nice example. Thank you. Yeah, yeah. I mean, it's so, oh man, history.

1:14:23It's right there. It's right there. Anyone who wants to look at it, right? It's sort of like we often talk about the high inflation of the 70s and what needed to be done with Volcker and putting interest rates up there. But no one ever talks about why it got there. Why was there an inflation problem? You know, very quickly, Nixon took us off the gold standard. Well, it was already a scam at that point. But, you know, he officially took us off the gold standard and then just money printing went wild at that point. We also had Arthur Burns, who was before Volcker, who just basically kept the interest rates artificially low for a very, very long period of time.

1:15:01So it pumped a lot of extra money into the economy. A lot of that extra money was being used to fund things like social welfare problems and wars. And again, let's not get into the debate and the merits of wars and that. But nevertheless, they are nonproductive uses of money. In other words, they don't offer a financial return. And again, people go, well, if you cease to exist as a country, there's a financial calculus there. But you know what I'm saying here? So lots and lots of extra money created, very, very loose monetary conditions. A lot of that money being spent on programs that didn't even pretend and not necessarily needed to pretend that they had any kind of return.

1:15:43And this was all being shot in the foot by yourself. The one bit of bad luck of that period was there was the oil shock as well, which saw energy price and energy as the base of the entire economy. So it was kind of the straw that really tipped things all over. And I kind of mentioned that one because it's an interesting bit of history. But then you think, okay, so what about today, Andrew? It was like, yep, printing money like nobody's business. Yep, spending it on all manner of, you know, boondoggles and unproductive assets. Loose, artificially suppressed costs of funds. We haven't had an oil crisis yet.

1:16:21But I mean, the point is, is it's like we are so fragile. Rather than sort of structuring to be anti-fragile, whether it's a pandemic, whether it's an oil shock, whether China has a go at Taiwan. Pick your favourite scenario here. It's kind of why I've sort of like been fascinated by all of this stuff because it's never going to repeat. But as Oscar Wilde apparently said, you know, it doesn't repeat, but it does rhyme. And there are lessons in all of that. The one difference, just to reiterate it to make sure it's clear in the distinction here, is that back at that point in time, the US had, what, 30%, 35 % debt to GDP?

1:17:02You know, they're 120 % now. And there's no modern economy that's ever really recovered from more than, I think, 100 % debt to GDP and ever sort of managed to sort of avoid any major debasement. But this time, maybe it's different this time. Can I drag you back from the tangent? Sorry. No, it's fine. Hey, so first thing is, we can't give personal advice anyway, as you well know. Secondly, I'm not going to give you any guarantees about what will or won't happen because no one knows and anything can happen. Could rates go 17? Yeah, I mean, I could. It's not likely the RBA would do it to the economy.

1:17:35It's not likely the RBA would need to do it to the economy, even in the worst case scenario. You asked about, if not, what could the government and reserve actually do to control the economy? I mean, there's tax and spend is the answer. And there's lots and lots and lots and lots of options. Are we now at the moment of Trump's economic moves? Yeah, to some extent, globally. You know, when the US needs Australia, catch the cold. If the US goes into a recession, we're stuffed. If, well, I say stuffed, we'll have a recession. It's fine. But, you know, people lose their jobs. It won't be much fun.

1:18:02I don't know. If I wasn't working, I'd want leverage for what it's worth. Jenny, I'm not giving you advice. But I think if I was, you know, relying on my passive income to fund my costs, given the circumstances you're in, And regardless of my thoughts about interest rates and inflation, I don't think I would probably carry debt into that situation. But, you know, you know how much you're earning from your other investments. See, I'm a little bit different there. I mean, I think actually we're on the same page. No, we're on the same page in the sense that it really comes down to the confidence and stability of the income that you're able to generate.

1:18:38So if you're looking at these things, you've got extremely long-standing tenants that even if for whatever reason you were forced to cut rent, that it was still like, there are various scenarios. There's always a scenario where you blow up. But I'm just making the point, there's a spectrum along there. So if you have very reliable cash flows with a huge amount of buffer before things get prickly. So I'm of the view, it's sort of like, actually the other lesson from history is take on some debt because that gets inflated away. That's what the government's trying to do. It's like, oh, we've got a lot of debt.

1:19:07How do we get rid of it? It's inflated away. As long as you can service it, to your point. If you can't service it, you screw right so it's it's it's a game that you have to be extremely respectful and i'm not even yourself no partner no kid i don't know you do you jenny it's risk appetite i mean if i lose my job tomorrow my wife works um you know we'd find we'd find a way through we'd be fine i'd get another job at some point whatever if i was by myself and i was looking after a loved one and i had half of my you know uh equity portfolio in in debt i'd probably think twice about whether because again like everything when are you forced to sell you're forced to sell at the wrong times So if there is economic shock and you can't find the income to pay the debt, then you're selling to a buyer's market anyway because everyone's selling at the same time because everyone's going through the same problems.

1:19:54Debt's wonderful as long as you're not at someone else's mercy. So your point's valid, Ram. It depends on where you're at and what you're covering it with. Can I just make one? I'm going to be a little nitpicky as well. Jen, you said the phrase control the economy, And it's always triggering to me because I think it's the fatal conceit, as Hayek would call it, in the sense that to think that it is something to be controlled or managed. I really will die on this hill because I think it's an important point to make is that whenever you look at this thing as something that can be even comprehended and understood across all levels, it's literally 25 million people going about their lives, doing work for others and spending money.

1:20:41How can you possibly, as any one brain, comprehend all of that? You know, like you can't do it. How can you anticipate what these fickle, subjective monkeys are going to decide they want next month, let alone what's even going to be available for you to decide that you want? You know, what's going to be produced? You know, it's so impossibly diabolically complex. And I saw a great tweet the other day. It's like, I don't even know why this is a discussion. Like, we always say follow the science, except when it comes to economics. Like, no, we're not following the science. And the challenge was put out there.

1:21:14It's like, show me one example. Show me one example. of a widespread socialistic system that didn't end in tyranny and impoverishment. Like just one. Give me one. And people love to go, oh, Denmark and the Nordic countries. No, they're capitalist countries. They have very generous welfare states, but that welfare is paid for through the capitalistic endeavours. And so it's a very, you get very finicky about when people use stock codes. I'm like, why? What's the difference? Like, well, it's important because they're a business. It's not a stock ticker. And it rolls off the tongue so easily, and we all do it.

1:21:57I even mistakenly say it all the time too, which is like to even think that controlling the economy, it's like saying I'm going to control the weather. It doesn't make any sense. Absolutely, you can steer it. I get that. You can influence it. You can set conditions of that. But the hubris of thinking that you can control it, even with the best of intents, it's going to blow up in your face. And why do I say that with such conviction? Because it's literally happened every single time that someone's tried to control the economy. No, that's absolutely fair and fair to call it out. But they've got millions of dollars to influence the economy, should they choose.

1:22:36Whether they should or not, again, open question, we can argue about that. Yeah, that's it. They've got lots of, I mean, you know, you can tax and spend as much or as little as you want in whatever areas you want, targeting whichever section of the society you want for whatever purposes you need. It's why fiscal policy should be used rather than monetary more than it is because if you want to make a difference, do it with a scalpel, not a sledgehammer. Yes. And right to a sledgehammer. And I've said, let's go back to the AYA conversation. If you're going to use monetary policy, fine. If you've got to ignore fiscal policy in the process and government's doing that, you're causing harm.

1:23:07You're inflicting harm on people who don't deserve it and who are not the ones you would necessarily choose to help shoulder the burden if you were being realistic about policy setting. And that's just the key question. And even another little layer down on that too, it's like you can tax and you can spend, but unless you are spending on something that produces or makes something, it's a zero-sum game. Like, definitionally, it's a zero-sum game. Which is okay because we spend on defence and we spend on healthcare, but you've got to understand the implications of what you're doing. That's the key thing here.

1:23:37I'm not, it's like, oh, so you're, no, no, no, Everyone loves to do the whataboutism. No, listen to what I'm saying. Yeah, I'm just saying. It's like fact. I've said a million times, I'll say it again, I'm all for very effective welfare. But don't pretend that it's creating anything, right? And we must understand this idea that the government can control the economy, take money away from someone else, and then put that to productive use, which is going to generate far more than was put in. again it's just like very difficult to find examples of where that has worked and but but these things and these programs get waved in through money multiplier malarkey so yes but for every dollar the government spends it generates 1.5 dollars in economic output it's like does it though i mean maybe if you measure it myopically over a one fiscal year period and look purely just at wages but not an actual capital formation or value creation or any of these kinds of things that matter.

1:24:36I'm sorry, dude. I'm sorry. I'm going well off on all of these things, but I feel as though we... That's a point worth making, absolutely. These misunderstandings are at the very core of, not all, but a very large number of social issues that we're dealing with. And they muddy the solutions. They absolutely do. Hey, Matt, I reckon we've probably done our dash... Thanks for sending an hour and a half with us again on a Sunday morning or wherever you are. Don't forget, Straw Man's still open. If you listen to us on Sunday, check it out, strawman.com. You'll see what we've been talking about. You might possibly gain admission to the exclusive club that is Australia's premier online investment club, strawman.com.

1:25:13And then next week - Got to pass the initiation. Pass the initiation. God help us. You've got to make an impassioned case for sound money. Otherwise, you're out. You can't come in. I'll cut that out later, otherwise no one's going to join. Thank you. Please do. Until next Friday, fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. general advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.