The Sound Money episode. January 9, 2026

24:49It's in my hand. You could be the dodgiest. This is one of the memes you hear in the B word. Actually, again, it's been borrowed from antiquity, is that a good money is money for enemies. You should be able to go to the person that you hate most in the world and despise and wouldn't trust as far as you can throw them. Yep, yep. And you can participate in economic exchange because you might be a son of a bee. John, yep. And it's like, but your money I trust. And if I trust your money, we can actually interact for our mutual benefit. It is such a civilisational unlock. In fact, I'll go as far to say, it's not even controversial, But, you know, without money, we're still scratching around in the dirt in small tribes of people.

25:36It's that big a deal. I want to pick up something that you know and you're saying but people aren't necessarily hearing, and this is really important because this is how we get from gold to something else. Not Bitcoin, by the way, to something else. When you say money, you don't mean printed notes. No. You mean an agreed medium of exchange store of value, like originally a bit of gold and then eventually a stamped bit of gold. It's not money because it's called money. It's not money because it's got the Reserve Bank governor's signature on the note. There's no backing. It's money, anything, but money in general.

26:05The concept of money is not about the notes and coins you think are money. It's what we use as money, so it's our money. But broadly, the lowercase m money, if you like, or maybe it's capital, whichever way you want to look at it, is something that suits those needs. Used as money is money. Its use is its definition, right? So if I'm using it as a type of money, it is money. So when you say inventing money, you don't mean inventing central banks to print notes and coins. You mean the idea of the evolution of a common medium of exchange, store of value, all those things that can do the job of sitting between all those different trades and allowing for that sort of trustlessness and all that kind of stuff that comes with it.

26:42Thank you for making that point. And it leads to another really critical one as well is there is no backing. Yeah. What is gold backed by? Nothing. It's the backing. It backs itself. What's the beaver pellet backed by? Yep. Itself. When you say backed by itself, what you're saying is there's no higher power, there's no government standing behind or organisation king. It's the base layer. It's the base layer of the economy, right? And it's not even the fact that it does anything itself. It's that we all agree that it has the value that we're prepared to acknowledge and use it for. Yes. Gold intrinsically has – if we decide tomorrow that gold is crap, we don't want it anymore, there's nothing backing it either way.

27:20There's no person backing it, but there's also no one saying, well, it must be worth$4 ,000 an ounce. Yeah. It's worth zero if no one wants it anymore. Yeah. It's the shared communal understanding of its use for that purpose that makes the difference. And to your point about inventions and money, the other one is that, you know, if you read Sapiens, the stories we tell ourselves. Yeah. The fact that I know that gold is useful, in fact you know gold is useful, you don't know that it's useful. I don't know that it's useful, except if we both agree it is that it is. And that'll make you heads. And in fact, that's exactly all it is.

27:48And in fact, if I've just arrived on planet Earth because I was born, right, Right, and then I see that everyone in the culture is using it. I don't even, I mean, it's like. Do you want a shell? Do you want a yapstone? Yeah, I'm going to walk into the village square and go, you know what, everyone? I decree this to be money and everyone's going to go, yeah, thanks, bro, we're all using this. We're good, thanks. And so you are a forced adopter of the dominant monetary units, an incredibly sticky network. Now, I want to bring us forward to fit, and I know we're just going over things, and we can absolutely go back to them, Ram, and if I'm going too clear in the wrong direction, call me on it.

28:20We then go to, so money is backed by gold over time. In other words, money is gold, so to start with. Then it gets back. Now, money's been screwed with over multiple periods of time, and I want to jump over that. You're very welcome to go back to it. Well, we just very quickly do it. People would clip the coins, right? Or you would dilute them. Dilute the metal content or you reduce the amount of content. Well, because emperors got into trouble. This is going to resonate so much. I mean, this is, again, from thousands of years ago, but everyone's going to go, jeez, this sounds really familiar.

28:46Yeah. Empires, kings got over their skis. They were spending more than they were generating in taxes and then some bright sparks said, well, we could just make more money and if no one knows it or we do it very gradually, then actually we all of a sudden increase our purchasing power without having to tax, without having to dig more. It looks the same. You've got a certain amount of gold but you're spreading it further so you can create more coins. Instead of every coin having a gram of gold, or an ounce of gold for fun. Every coin's now got nine-tenths of an ounce of gold and some copper and tin and whatever.

29:22All of a sudden, you've got 100 ounces in total. You should be able to make 100 coins out of it. Yep. If every coin's only got nine-tenths of an ounce rather than a whole ounce, you've got 111 coins. Yeah, I didn't do anything. You created money. You created the perception of more money. And again, it depends whether is it genuine money or is it not? Well, the person in the village square who's paying for their fish that day doesn't know that. They're still getting paid 10 shekels a day for working. Yeah. In fact, there's more shekels out there and they're not getting their share of it means they're actually poorer overall, it dilutes the value of their money.

29:48We'll get back to that. We'll get to the Cantillon effect later. Yeah, that's a really interesting one. And that's kind of so, let's bring it forward to the modern day. So in the - Can I bridge it before you though? The reason that we do, we evolved from there, and this is where Lynn Alden's book, Broken Money, is so good at explaining, and there's a YouTube video version of it if you just want a half hour coverage of it, is that gold failed. So gold has all these great properties. Can I stop? Can I get back a little bit? This is hard, right? I know, I know. Because what I want to talk about a little bit quickly is what gold and printed money worked for and then why gold failed.

30:25Is that okay? Oh, sure. Okay. There's a bit in between the two. You can't get to why we have printed money, though, unless you understand why gold failed. Like why did we need paper money if gold worked so well? Well, so, okay, so let me explain something and then stop. Right. Right. So when we started to have printed money that wasn't based on the amount of gold in the coin, in theory, and for a long time, the money still, the money, let me be very clear, the currency, the notes, the coins. Well, I'll say notes because I don't confuse gold coins with fiat coins. So I'll say notes for now. The notes could be exchanged for the equivalent amount of gold at any point in time.

31:06So while we used currency, we used notes to make those trades, we're implicitly, because the government said it was the case until it wasn't, but they said it was the case and we all believed it was the case and we assumed it was the case, that the notes that we had still represented the same system. But instead of carrying around a gold coin worth$100, I carried on a$100 paper note that I could go to the bank at any point and say, this has been fun. I got paid by my boss to work for this week, so I got my$100 note. I'd like the hundred dollars worth of gold, please, because I really would prefer that.

31:37And I knew for the longest time, now, again, sequentially government screwed it up, and you're absolutely right, Ram, but just for the sake of the conversation. Actually, the banks, I won't even blame the governments on it, but, yeah, it doesn't matter, yeah. So over time, the movement in... So the confidence was, and this is where you talk about the gold standard, the idea was the notes were exchangeable for an equivalent amount of gold. And that meant there was... And that's why were notes invented originally? Now, assuming you're not a complete cynic, They were invented initially to be able to say, I don't need to carry the physical gold around.

32:07I can carry a representation of the gold. Yeah, bandits could steal your gold. They take your gold purse away from you, whatever. So it's far better for me to have a big vault in the middle of town with dudes with swords and spears on the outside of that saying we'll protect the gold. Here's a receipt. You present this to me. I will give you back your gold. So now I'm walking around with a piece of paper, right? So initially it started off, it was just like, well, it was me. It's like a check, right? Signed to me. So only I could kind of do that. And then so I would, rather than, oh, I want to buy something off Scott, I'm going to go to the vault, I'm going to get my gold back, and then I'm going to give it to Scott, and then Scott's going to take the gold back to the gold vault and he's going to get a receipt for that.

32:53You know what? Let's just cut to the chase. Just swap the receipts. I just swap the receipt, right? Yeah. You have a great summary thinking. And that's how it works. But then, and again, it's very natural, but what the, I want to use the term bank, they weren't banks properly as modern people would understand it, but these custodians made a very interesting observation, which is, do you know what? Hey, Scott, what? Have you ever noticed that like almost no one comes and collects the gold? Yeah, that is true. And even when they do - I know it's here, they don't want it very often. They don't want it very often.

33:28So we could issue more paper receipts than we have in gold. And look, we do that to an egregious degree the gig's up, right? But to a certain degree, we effectively can create money out of thin air. It was a very interesting epiphany for those people. I was like, huh, maybe we should just try a little bit, right? Now, can I explain how that works? for people who are wondering, and this has its parallels with modern banking. It didn't actually start this way. Of course it has parallels, but yes. Right. It didn't start this way specifically, but to make it modern, to give people a sense of it, this is what happens when our banks lend money.

34:10So I deposit my$100 in the bank. I'm entitled to get that back, right, at some point. The bank's not going to get it back for a while. And they say, well, hang on, I can take Scott's$100. I can give it to Andrew to buy a house. Now, if Scott wants it back, I don't have it because I gave it to Andrew to buy the house. But what I know is Andrew's going to pay me back over 30 years, plus more than that. And as long as he pays me back at a rate that's greater than the rate which Scott wants access to his money, then we can make money doing that. And for one-on-one person, that's really risky. If you've got 1 ,000, 10 ,000, 100 ,000 million customers doing that, there's a very good chance that Scott might want his money today, but Andrew doesn't want it for five years.

34:46And you don't want it for 25 years. In the meantime, someone else has deposited money. In fact, the money that you lent me, I'd probably turn around and put it back in the bank anyway because I need someone to look after it. Exactly. And then Henry borrows money. And so they are taking a calculated risk based on their expectation of how quickly I want my money and how quickly you'll pay back the money you borrowed and they want to make money in the meantime. And it's not even necessarily in and of itself a – they're not trying to be dodgy. It's a recognition that there is simply a case of I don't want the money for a while and I'm happy to get a little bit of interest to keep the money there so that I'm incentivised to leave the money there.

35:23And the bank can charge a little bit more to Andrew to borrow that money to buy his house. And he's going to pay it back because it's a good risk. And so at one level, before it gets completely screwed up, at one level it's like that seems perfect. No, I think it's the original sin. It's a core fraud. I mean, would you like the ability to... Was it delivered on day one though, do you think? Was it fraudulent on day one or was it a recognition? It doesn't really matter. I wouldn't have gone that far. Muslim or Christian or any of the great faiths, they all saw usury as a great sin. And that was very much born out of the practical experience of what happened in ancient times.

35:59Because think about it this way. Think about you've got the power to, because when you're doing that, when you're issuing more receipts than there is gold, and those receipts are being used as money in the society. This is an organic emergent thing that happens over a long period of time. You are effectively creating money. It's like, okay, right? Now, you can say it's a victimless crime, except you're charging money on that interest. So I'm going to create money out of nothing by, you know, ex nihilo, as you would say in Latin, and then I'm going to charge interest on that.

36:38So you're getting real money, money that previously existed, in exchange for something that you just created. That's a pretty good deal. Now, if you don't think that that's morally objectionable, then why can't I do it? Well, the banks are so noble and they've only got the broader economies. Like, bull S. Like, that's just, it's why counterfeiting is illegal. Anyway, we are jumping way ahead here because this is... So can we get back to when Fiat leaves the gold standard? Because I think this is the next logical step in terms of explaining where we get to. Right. Is that okay? And then we can come back to some of the – because I think the plot of history is not – we're not going to do it justice.

37:21You will do a better job than I will. But I just want to give our listeners a sense of where we get to, where we get to, and what has kind of happened. Yes. Then we can start talking about why we've moved away. So you mentioned – so perfectly sound money is there's never any more of it. Yep. Functional sound money or hard money for the longest time was, well, we'll peg it to something that is reasonably scarce and doesn't grow particularly quickly because it's just physically difficult to make it grow. And that requires no trust in another human being. Yep. Right. So we feel really good about that.

37:47And then we say, okay, we've got that gold. We know it's going to increase a little bit, and that kind of sucks, but it's not that much. It's not a big deal, and it's the best we can do anyway. So we say, right, and let's have print some notes that you can be redeemed for that gold because that kind of makes sense. Now, the government screwed with the exchange rate between year dot and 1971 anyway, but I'll skip over that a little bit. So they absolutely screwed with it. There was at one point a gold and a silver standard. At one point, they arbitrarily said, no, the$100 is going to be redeemed for five ounces of gold instead of$10 now.

38:13Sorry, guys, suck it up. But so there were manipulations right through. Yeah. But we got to, but ostensibly at least, and probably, you know, ostensibly at least, post-World War II, II or I? Bretton Woods, when was that? One. I can't remember. One, thank you. No, no, no. Well, yeah, sorry, that was after World War II. Yes. So between I and II, things get a bit messy. Well, even, I mean, World War I, there was a consequence there of - Sorry, between the beginning of World War I, I mean, but yes, you're right. Yes. I mean, again, this is not new. Right, right, right. What's very, a very quick tangent is that you can, this is too neat and clean and tidy to be true, but there is the collapse of any great empire always had an economic dimension to it.

38:58And it usually started for people just living beyond their means, governments and the empire living beyond its means, and trying to fix that by printing money. Whenever you start down that road, it's like trying to cure depression with heroin. It works great. It works great for a while, right? But it's exactly the same thing. And so I just, yeah, there's a fascinating history of the 20th century and what's happened there. But I'm just making a point, actually, you can go back to year. Right, totally. Yes, yes. So we actually try to work out how we get to 71. So effectively, governments start printing more money.

39:33They issue some IOUs during World War I. We're at World War II. The governments kind of agree, look, we'll standardise all this stuff against gold. The Yanks can hold the gold. And again, details are as important. The Bretton Woods, I'll do it very quickly. The Bretton Woods, actually, the rise of Nazism was directly attributable to the Weimar Republic and the collapse of the currency there. And then Hitler decided to blame that all on the Jews, et cetera, et cetera, and we know what happened. And when you say caused by it, we need to be careful. We're not saying that. It was the public response to the tragedy that was created.

40:04No, no, no, that's what I'm saying. So there was the German economy went to absolute crap. Yep, because they tried to print their way out of their problems. out of that kind of misery comes someone who says, I will fix all your problems and that's right exactly. A socialist and a populist. Yes, right. I just want to make the point it wasn't directly. Yeah. The way I probably didn't, yeah, I just want to make that point. It was, by no means justified or some sense, did Hitler have to rise because of that? No. It created these circumstances that a populist may and in the event did and the circumstances were atrocious.

40:34Okay. So that all happened. It's a fascinating history and it's why it's so relevant today. today. But anyway, so what they did, Europe was in ruins. It was a smoldering pile of rubble after World War II. And they got together in Bretton Woods and they sort of said, hey, how are we going to do all of this? And so the very short version is the US, I tell you what, we will back our money, the US greenback with gold. And then all of you guys can pin your currency to our currency. That's how they sort of kicked off as the world reserve currency there. Marshall planned the whole lot of stuff. They needed the American money anyway, because they wanted to rebuild themselves.

41:15By the way, socially it worked beautifully, but the circumstances that were also created by it, we're still feeling today. It worked to the extent that it did because it was, and again, these corruptions don't happen overnight. These corruptions happen slowly, slowly, gradually, gradually, but But it worked really well in the beginning because it was tied to gold indirectly. So there might have been the franc in Europe tied to the dollar, but that was tied to gold. Yes. And so it just kept the bastards honest. And that's the whole – what does gold do? That's what gold does. It keeps everyone honest because you can't click your fingers and produce an ounce of it without doing a huge amount of work.

41:56It feels good, right? So if the Americans are pegging their currency to that, we know that's stable, therefore no problem. picking out currency to the American dollar. It all feels like a pretty good solution for as long as the - It was a great solution. Now, what happened? What happened? This is really interesting. Again, the preamble that we were just on before is entirely relevant here because this is where Fort Knox came from, by the way. That's where all the gold was. Interesting that they were going to do an audit on that, but that just sort of slipped by. That's interesting. Anyway, it doesn't really matter.

42:26They realised that, hmm, when I say they, I mean, the American Banking Association essentially realised that exactly what the original moneylenders in Mesopotamia realised, which was, oh, we can actually issue more paper notes than there is gold because no one ever checks and no one ever gets it. And so slowly, slowly, it's all started to get a little bit out of whack. And I've told the story before on the podcast where the French went, I'm calling BS, guys. I want my money back. Charles de Gaulle sent a warship into New York harbour with crates of US dollars, said we would like to, as per our agreement, allies, we would like to exchange that back for gold.

43:10And Nixon went, no. Actually, we're temporarily suspending the convertibility of US dollars into gold. Why? Because currency speculators. That was the reason given, you know. I was like, we have to stop it. And don't worry, it's only temporary. and don't worry, it's still backed. And this is where this nonsense comes from. Again, not to get into it, but it's like, well, what's it backed by? It all comes from this. Because Nixon went, don't worry, it's not backed by gold, but it's backed by the full faith and what's the phrase? The full faith and strength of the US economy. It's backed by violence, if you really want to draw.

43:48It's backed by the threat of violence. We've got a really big army and navy and that's why it's backed by. Faith and credit was the phrase. Thank you. I couldn't get it looked up. Yes. But that's where it all came from. Trust is probably good for it. Oh, what happened after that? Gosh, there was a really, what was that period of really excessive inflation in the 70s? I wonder if that's related. Probably not relevant. Probably not relevant. But the point is, and I'm sorry, I don't want to distract you here. But the point is, again, for the one billionth time in history, we did the exact same thing, which was we de-pegged from gold.

44:23We did it in a sly roundabout way until someone called BS and then we switched off it. And since 1971, so in that 54-year period, we have been running an entirely fiat-based system. So for the first time in human history, this is why people think, oh, we've always done it. This was like, no, this is really, really new. We have a system which is backed purely on the faith and credit we have in the issuing body, which is ultimately the – well, it's actually commercial banks and central banks as a backstop. It's the first time that's ever happened. And we're kind of – and what we've realised – and actually over this period, you've needed to justify this, right?

45:11So a whole body of economics has cropped up largely to support this viewpoint. point. We can get into the arguments as to why Keynesians essentially will argue that this is a really good thing that banks can do this. Maybe we should talk about the actual mechanics of where money comes from. But I just really want to make the point that where you're going to here, we sort of started out with this problem, a harder money sort of solved that for us. And that was repeatedly corrupted over time. Each time it led to a reset, it resetted back to a hard money standard and surprisingly life, prosperity, fairness and equality got a lot better after that until everyone forgot the lessons and we repeated the mistakes again.

45:49So that's probably a bookend for that part of the conversation, unless I've missed something. No, I think that's fair. I think I want to just unpack fear very quickly because I think we throw away the term fear. Fear effectively just means government decree. By decree. It's another Latin term. Right, exactly. But it's by, you know, decision made by an authorised body that this will now be a thing. And fiat doesn't just mean currency, by the way. Government fiat is any sort of government decision, decree on anything. We call it fiat currency because it's currency by decree, which is kind of why we get to.

46:22And I just want to pick up your point. You're absolutely right. But the echo is, for the first time in history, we're not bothering to even pretend to peg it to something, I guess is my point. So in the part, it wasn't, this is not the first time we've moved off. you made the plot again, off a hard-earned money standard. They diluted the gold for a while. It was pretense. If there's anything positive and there's not much about the current system, at least they're not pretending. At least they're not saying, no, no, no, true. No, honestly, yeah, okay, the dollar's a bit smaller than it used to be, but it's still a dollar.

46:52There's still some gold. We're still pretending. The pretending is that they do not abuse that power. And there's no implication. Yes, and there's no implication to it. That's the great lie of our time. I'm giving them credit credit, but at least they're not pretending there's some link to gold that somehow there wasn't as they kept diluting those coins. Yeah. And that, I hope, is the kind of the full-ish story. So the sound money, the hard money is where it's linked to something that stops value being – we call it a debasement too, which also – we've got to go with better, less jargony terms for this sort of stuff.

47:24Effectively, printing more money is debasement. Dilution. And it's dilution. And it's the example I gave before about the app stones, right? You've got 100 of the app stones, you throw 100 in there, All of a sudden you've got the same resources, but twice as many stones. What happens? Everything ends up costing twice as many stones if then no more value was created. Dude, the highest people of government don't understand that very simple concept, who think that you can just create money, throw it at it, and then that will fix the problem. I said to you that quote the other day, that if printing money solved poverty, printing diplomas would solve stupidity.

47:53It's a great line. It's a great line, but because it's like, ha, ha, ha. Just because some institution gives you a piece of paper saying that Scott now has a doctorate in monetary mechanics. It doesn't mean anything, right? Now, you start by saying, well, hang on, who would care? If there's a resource of yap, and I'll keep using these now because it's fun and easy. If there's a resource of yap, there's five cows, two houses, three coconuts, and again, it sounds like I'm being dismissive. The value, right? There was 100 suns, now there's 200 suns. Okay, well, everyone knows that, so all you do is you just adjust the price and everyone gets on because the resource is the same and there's now more currency, but you just adjust for that and you're fine.

48:26And that's actually true in as much as it's true. The problem is the 100 stones that are bought aren't shared across the population either equally by person or in the same proportion as the stones they already own. It's not like the chief had 25 stones. He now gets another 25. And I was the peasant who had half stones. Well, I get another half stone. I get a full stone. And it's not like they say, well, there's 100 people there, 100 new stones. Everyone gets a stone each. And I'm not going down the conspiracy line. You may want to, Ram. I'm not going to. It's not a conspiracy. It's just fact. But, yeah, go for it.

48:53And I'm not trying to say, therefore, there's bad guys or good guys. There probably are. I'm simply making the point that you add the extra 100 stones in YAP, whoever ends up with those extra stones, it changes their ability to buy the assets that are available because I don't get an extra stone. And by the way, everything's now twice as expensive. So I've got one stone. Well, can I draw you back? Actually, it's not at this point. So don't forget, no one else knows this, right? So there was, I believe, a French economist who coined the term 150 years ago or something called the Cantillon effect.

49:28His name was Cantillon. And it basically sort of said it's when you first, you rock up on the island of Yap and you've got a big giant Yap stone there. No one knows that that didn't previously exist. All they know is that you've rocked into the village with this massive amount of money and you said, I want to buy all this. You've now got a claim on all of these real world resources that actually, I mean, that's ultimately where the value resides. And you've said, I would like to buy it all. Now, the person who has got the cow or the chicken or the coconut that wants to sell it to you doesn't know that you created it, right?

50:02And they just assume. And so... You're throwing as many stones in the back pocket. You can buy more stuff with it for a while. So you're going exactly the right direction. I just wanted to make the point that there's a temporal dimension to this where at this exact moment, no one knows that the prices haven't adjusted, right? But then... All you've done is give some people more purchasing power than they had previously without any impact on prices. Here you go. Fantastic. Oh, great. So the fishmonger guy, I'm happy to accept that for the current price. This is brilliant. Now that I've got extra money.

50:32I'm going to sell more fish for a while. Yeah, I'm going to go, I'm going to turn around, I'm going to buy some coconuts and maybe I'll get a bigger house because business has been really good. This person from another island has rocked up and every day my inventory is sold up. Things are, business is booming, baby. So I'm going to buy a house with it. And then the person who sold the house gets the money and it trickles through. Don't start thinking about slow down economics, you know, but it does. It flows through the economy. Yes, yes. And then it's the last person really in that chain. By the time that everyone has not like transparently understood the mechanism, they just know that there just seems to be money that's easier to come by, prices have adjusted as a result of this because now we all rock up to buy our fish for our evening meal and it's like I've only got so much fish and now everyone's got more money.

51:22What do you do? It's not even that. It's not that you've got more money. You raise the prices because that's what prices do. They transmit the relative scarcity and they mediate the supply-demand dynamic that is there. And it's like there's a lot more demand. There's still only the same amount of fish that I catch every day. Prices go up. Can I double on that? Because it's not that everyone's got more money. The fishmonger doesn't say, I think Josh got more money in his back pocket and I'm going to charge you more. What do you realise is he sells all his fish by 9 o 'clock in the morning. Yeah, that never used to happen.

51:50And so he's like, well, hang on, I'm selling them all already and I'm out of stock by the afternoon, I've only got 100 fish to sell, if there's that much demand from them to go so quickly, I can actually put my price for$100 a fish to$120 a fish. Greedy capitalist bugger. Because the guy in the morning, some of the people who bought in the morning$100 are like, well, I'm not going to pay$120. You're like, well, that's okay. Someone's going to come this afternoon and they'll pay$120. So I think I sell all my fish as I used to, but now my fish are 20 % more expensive than they were. This is actually the beauty of the whole damn thing, right?

52:18And again, it's just so easy. Oh, greedy. It's like, no, no, no. He is reacting to a very, you know, now we know the source of demand is artificial. Let's put that aside. We say it's the beauty of it. It's a beautiful only when it happens naturally based on only normal supply and demand, not those sort of exogenous, here's extra money being printed, knock yourselves out. Which is really cutting to the chase here, right? Right. It is a beautiful process in the sense that it is individual and it is iterative. Yes. The process still works beautifully to deal with the circumstances. I just want to separate the beauty of the price-changing mechanism from the circumstance it creates.

52:55I don't want to lump all that together as beautiful. What you're saying is the way prices respond to demand and supply is beautiful because it does allow us to efficiently allocate resources. I mean that literally. It is intellectually beautiful. You see the pictures Andrew's got in this wall at home, all these beautiful pictures of equations. Man, it's why I'm sitting here in an air-conditioned room living like a god, right? Yeah. Because what that means is that the fishmonger, no, there's no architect. There's no controlling body, quote unquote, managing the economy. He just knows that everyone wants my fish and they've got the means to pay for it.

53:30I'm going to put my price up because there's just not enough fish for everyone, right? But why is that a thing of beauty? Because that now signals to everyone else, again, without any architect, without any control, it's like, huh. You know, I'm spending all my days chopping down these trees to try and sell firewood. no one's buying it. This guy over here is making a fortune selling fish. Hmm. Hmm. I wonder, you know what? I'm going to change trades and I'm going to become a fisherman now. And I'm going to become a fisherman. I'm going to put more fish onto the market. What? I'm going to increase supply and that's going to correct it.

54:01Now, this is Adam Smith's invisible hand, right? This is the economy adapting to the revealed preferences of individuals. People want more fish than they want firewood in my example. And by prices responding to that demand spike, it has incentivized less firewood production and more fish production. And then that will normalize. Then we reach a new state of equilibrium. But let's stand back and look at what's happened here. Is it a greedy fishmonger who's screwing people over? Or are we unknowingly collaborating at a meta kind of scale to determine where our very, very limited and finite time and energy is directed.

54:47And once that is all settled, it's like, actually, now everyone's got enough fish. Price of fish has come back down. This is a hard concept for the modern human. Do you understand what? Prices go down? Yeah, prices go down because more supply has come onto the market. So once you go through - Or you're better doing it or other things, productivity improves, all that good stuff. We think in static terms, You've got to think in dynamic terms. So everyone focuses on the period of change and, oh, putting up the prices and this, like, no, it's a very necessary mechanism. At the other end of that, we have re-architected the economy, again, entirely organically in an emergent fashion in a manner which satisfies our collective preferences in an almost perfect way, as perfect a way as can be done.

55:32Yes, yes. Without that, what has happened? Here's Scott chopping down all these trees. his inventory's going by the day. Dude, we've got enough wood. We don't need any. Stop chopping down the bloody trees. We don't need any more wood. By the way, none of us have enough fish to eat on. Well, you can't change prices. That would be wrong. And it's like, okay, so now I need a central poobah to go, I decree that the people of the village shall now become fishermen. And what a great idea. except I'm now relying on a fallible, greedy, short-sighted, unethical, i.e. a human being to make these decisions and understand what people want and to collaborate and coordinate everyone around that or we can just let prices do their thing.

56:19So a bit of a tangent onto the beauty of free market capitalism, but, and that's a loaded term too, people go, oh, but, but, but. Anyway, let's come back to that. But the point is when we have introduced new money into the system, Sorry, long arc. To come back to your example here. Yep. None of us know that because, again, we're all acting in an organic, emergent way. All I know is everyone wants more fish and they now have the capacity to buy more fish. So now prices are going to change but not in a way that's really trying to best coordinate our economic energies. And as that trickles through, it's not just prices changing at the source of real demand.

56:59it's actually trickling and flowing through the economy in a way that all prices increase. And so, again, let's say that that was a one-off event. Scott arrives on the island with his giant yapstone, changes the money supply, you fast forward a year or two and we've all normalised again. The amount we have to work collectively, the resources we've got collectively, nothing has changed except the price of everything has gone up.

57:29free newsletter at fool.com.au forward slash listener.

57:36I think from that perspective, that's where I want to then go to the end result, right? So because price is moving is fine. As you say, more fish, less wood, more wood, less fish. More than fine. Necessary. But then let's go to the, so you talk about the temporal, the dynamic. Let's go to the end result where there's now those 200 stones in the app in circulation. Yep. Right. So the continued effect has rolled through. Oh, sorry. So we never finished that point. Continuum effect just means the person closest to the money spigot is the one that benefits because they get to spend the money before it has flowed through the economy and before there's been a general widespread increase in prices.

58:10Correct, correct. So if you're a billionaire today and you get a big loan from them, we'll get into monetary mechanics in a minute, let's face it, next episode, you know, that person is spending money before the inflationary impulse has flowed through the economy. So it's all good and well to say, well, don't worry, your wages will eventually catch up. It's just, it's fundamentally unfair because we are giving a systemic advantage to the person who happened to get the money first. Right, whether it's the person who brings the stones to the island or the people who print the money or whatever it is, there is opportunity.

58:46Well, just to follow that, close the loop here, because I just said, well, actually, a year later, everything's the same except prices have adjusted. A lot of people will go, yeah, well, so what's the problem? That's where we'll get to it. Go for it. Oh, sorry, mate. No, please, no. Well, that's exactly the bloody problem. To your example, if everyone's money supply increased at the same rate at the same time, I agree. It's just an accounting issue. It's like one shekel, two shekels, I don't care. It doesn't make any difference. It's all just a made-up number, right? But where the problem is is when you get it first and I don't get it.

59:20That is so fundamentally unfair. And who gets the money last? The poor person gets the money last, right? Because they have to work for their money. They don't get free, new, freshly created money from the bank, right? And, again, I'm skipping ahead a bit here. I mostly agree. I think there's two things. For me, it's not – first is important on the way through. The other thing, though, is there is a permanence to the way that changes when it comes to the store of value because, frankly, if the poor people are by a government mechanism or market mechanism, If prices go up 5 % and the wage goes up 5%, they are still no worse off, right?

59:58If that happens in concert at the same time, absolutely. But when does that happen? Why am I getting a 5 % pay rise? But it was a year later. You're worse for a year. I mean, it's not great, but it's not the world's worst problem, right? So here you go, Scott. I'm going to erode the value of your savings and the value of your labour just for a year and it'll catch up. Savings is different. We're talking about earnings right now. So I want to separate it. Yes, it's connected. I want to separate it. That's my very clear point. Okay, sorry. Let me do that. No, you're right. So now, if you're worse off for a year, that sucks, right?

1:00:29You eventually made whole, okay, well, there's a temporal problem there we should fix. If that was all the problem there was, that'd be kind of like inconvenient and annoying and should be fixed. And unfair. Right? But if it's a year, okay, well, it sucks. And it genuinely sucks. I'm not glossing over for a second. But if you made whole, it's like, well, screw you, but at least I'm no worse off, right? Yeah. Although I would just say, could I be the person who gets it first and you're the person who gets it last? Because if it doesn't matter, then you're probably pretty cool with that, right? Right.

1:00:56Oh, you're not cool with that. That's really not you. Obviously, it makes a difference. And any mainstream economist who makes the other argument is either an idiot or being disingenuous. 100%. Sorry. What I want to get to, though, is you mentioned the savings. That's, for me, the most important and most egregious part of this. Because let's say in a perfectly magical world, wages do increase at the same rate as prices. Okay? They won't, but for the fun of it, let's say they did. Even in that circumstance, right, I've got my stone. My stone, my yapstone is my stone. I've got one yapstone. It's in the borobial back pocket.

1:01:32It's a massive stone, but let's say my pockets are large. And also, how did you get that stone? By working, right? So you have stored your very real time and energy in this stone, right? So it's not like something that, okay, I've just got this thing and now it's going to be worth it. It was like I worked my backside off for that. So I just don't make that point because it's not something abstract thing. The way you got it matters. You may have inherited it. You may have inherited it. Well, if someone in your lineage has given time and energy towards that and then they have decided to give it to you, right?

1:02:03It's like it's not for someone else to decide to steal. Sure. What I want to do is the maths though. And this is important. Otherwise I'm taking your kids' pocket money and you're going to be cool with it. And there's a shares kind of implication here, right? Or at least an analogy. So I've got my yapstone. I've got it through working for it, as you say, it's in the back pocket, it's buried in the backyard. Whatever I'm doing with the yapstone, the big, massive things are not. There's small ones as well. Well, true. There's the coffee stones and there's the house stones. And then what happens, my one yapstone I've worked hard for, I've saved, I've inherited, however I've got it, I've got my yapstone now.

1:02:37And that used to be worth 1 % of the country's wealth because we had 100 of them and I got one of them. Exactly. And all the things on the island, I have 1 % of that wealth. Now, all of a sudden, what happens, I say all of a sudden, you're right, there's a timing dimension, but let's say I fell asleep, who's the bloke who fell asleep for 100 years? I want to say Rapunzel. Rapunzel's the bloke. Sleeping Beauty? No, the bloke. Doesn't matter. I'll think of it later or Google it. You can Google it. And I wake up X years later and I've missed the entire Cantillon effect. I've been asleep. I haven't noticed anything.

1:03:07And I wake up and my job actually still now pays me double. So I'm feeling okay about that because I get two fractions of a Yapsad. I got either one fraction of a Yapsad. That's a win too. but my one yapstone only now buys me in total half of what it used to because all the price arisen to allow for the fact the number of yapstones has doubled and so the sheep that was what was i'm going to get my let's just get to that somewhere the sheep was a tenth of the yapstone now it's a fifth of the yapstone the cow was half a yapstone now it's a full yapstone the house was two yapstones now it's four yapstones why because the number of resources hasn't changed on the island and so overall now not everything increases by the same amount but that tends to more often than not roughly so everything's now twice as expensive and so i've gone well my labors luckily i kept up maybe it was a year later at andrew's point i'm not dismissing that at all but you know let's say it was it wasn't i was asleep who cares my wealth now only buys me half of what it used to and this is the example you'll see in plenty of places where you say what's the value of an australian dollar from 1960 today and you will know the numbers off the top of your head around it's like four cents or something it was a dollar in 1960 it's now four sense or whatever the numbers end up looking like.

1:04:44I had it on mute. gap or a permanent gap if it never increases as quickly. There's people who haven't got a pay rise that matched inflation because the jobs they do have not risen in societal value over that period of time. Have you seen the charts recently flowing around between the growth in Australian house prices versus the growth in Australian wages? CPI has got problems with it, but I mean, I love that chart because it articulates exactly what you're talking about. Because I think out of all the things that we desire in this world, shelter and security is, you know, it's Maslow's hierarchy of needs, right?

1:05:18It's like food, shelter, it kind of matters, right? So, you know, I don't really care that my plasma screened 40-inch TV has gotten a little bit cheaper. What I care about is if I can live. And if you look at it on that basis, like they have absolutely, not only have they, wages have increased, sure, have they increased at the rate of housing? Not even close. Correct. And by the way, that has to be the case if house prices are going to increase any faster than wages, which one of us says doubles in 10 years, you're wages a double every 10 years. Perfectly sustainable. Things are moving further and further away.

1:05:46Perfectly sustainable. Let's not get in the house. So I think I'm kind of done on the sound money kind of story because I think we've taken an hour to do it, but I think it's a really important thing to think about why or what. And, again, we get too jargony. Sound money, hard money, it feels like a thing and it feels like a thing over there and it's just a description. And also it has a political. Yeah, true. This is what bugs me about it because when you start talking about sound money, people, it is a philosophy that is more thoroughly embraced by the right, for want of a better term. But I would say we understand as the right today, either the Liberals here in Australia or the Republicans, they are not sound money ever because they are spending like drunken sailors.

1:06:29It's, you know, there's really, there's no distinguishing. But at least historically it's more associated with a more conservative, more dare I say libertarian viewpoint on it and I know that put me off initially I know it puts a lot of people I talk to off but I just want to really just drive this point that that like sound money is beyond politics to my mind but you could be a hardcore socialist and believe in in believe in sound money so I don't I don't want to I I find that that unfair association does the argument a disservice. I just want to make that point. So don't, don't let, because I'm a lefty in a lot of ways in my, in my core.

1:07:13And, and if you let that ideology distract you from what we're trying to say, I think you're going to miss the point. So I just make that. Very quick tangent to the modern monetary theory stuff is almost pure ideology in the other direction for all the reasons, which is just, we could have everything we want. If we just change the way we think about money, if we just print it whenever we want to, we'll use tax to control it. And by the way, I don't want to get in the NMT conversation. We had it a year ago. It's kind of gone off the radar. Funnily enough, because inflation took off when people printed money, it was like, huh, maybe it doesn't work as well in practice as you think it does.

1:07:43And like we've said a million times about communist utopia, great in theory, right? It doesn't work in practice. And so you're right. There is very much a political angle to this. I want to finish-ish, or at least because I expected another episode. Dude, we haven't even... I've got my bullet points here. This episode, I mean, this episode. I thought we would spend 15 minutes on this, but then what was I thinking? Right. I'm happy to keep going. I'm just trying to, I'm trying to, I want to get back to this. Because you talked already about the implication we want to talk about. I think that's probably the next stage of the conversation.

1:08:14What I want to do, if we can, this will take 10 or 15 minutes anyway. So as I finish, I can get to the end of this part of this episode. We'll probably do it. We will do a second episode, right? That's probably clear at the beginning. It's definitely clear an hour and seven minutes here. So I'm not trying to shut down the whole conversation, just kind of wrap this section up a little bit. And by doing so, I'm going to open an entirely new can of worms and try and explain that. So there's the sound money thing, which kind of explains what governments have done. Right. Now, there's two, in my opinion, or you may disagree because I'm more optimistic, you're more cynical than I am, and you're probably right.

1:08:43I'm probably just living in the clouds. There's two arguments as to why or how we abandon sound money. One is just craven self-interest from politicians, governments, rulers, leaders, kings, you know, tribrates. Power corrupts. Absolute power corrupts absolutely. And there's no more form of absolute power than the ability to conjure money out of thin air. Nicely put. The other one, though, and I am going to be trying to be a little bit positive, at least in terms of the economic schools of thought. So we've talked before about Keynesian economics. John Maynard Keynes is a bloke it's named after.

1:09:16He was a really smart guy and actually had some of his ideas that he took to things like Bretton Woods actually aren't what we consider Keynesian economics anymore, funnily enough, which is a whole different way. It's been co-opted and bastardised in all manner of ways. Yeah. And so I want to talk about, just very quickly, just to put the alternative, I'm a fan of Keynesian budget management, not of Keynesian monetary policy, to be really clear. I'm going to explain this very quickly. Yeah. Because it is the other side of the coin. You mentioned the sound money and the politics and the ideology.

1:09:44So I think we just do the non-sound money, the arguments against it or the arguments for something else. Yes. Then we can come back to the implications later. Before we do, I just want to make one very quick point, which is that this is not a black and white dichotomy. So there is, sound money is a platonic ideal up until a recent invention, which we promised we weren't going to talk about. I'll cut you off if you do. It's a platonic ideal, right? So even, it's something that there are degrees of hardness to our money. So we've often talked about why is it that Australia and the US and Western Europe are reasonably prosperous when they have pretty much on paper the same monetary theory, mechanics as Argentina or Lebanon or Egypt or places where we've had hyperinflationary kinds of periods.

1:10:32And I just make the point very quickly is because there are degrees of, for want of a better term, corruption. So hard money, you can't change the amount or the amount that's out there can change very slowly. At the other end of the spectrum, you've got Zimbabwe where you've got$1 billion notes in circulation. Money just goes vroomp and out it sort of goes, right? There is a huge, huge spectrum between all of that. And I set that up for you because people very rightly go, well, you know, I see the direction you guys are going in. Life seems pretty good. Right. You know, and it's like, yes. But you're talking about dynamic rather than point in time though.

1:11:14Yeah. So people like me will rail against sort of fiat money and the perversions that it has available. but it's kind of like being against alcohol. Let's choose something relatively tame. You know, it's sort of like, you know, I'm someone who enjoys a glass of wine on Saturday night when I go out for dinner. That is very different to I drink a four-litre cask of wine every day, right? And so, like, is alcohol bad? Well, the answer is it depends. How much are you abusing that substance? And that's the same with soft money, for want of a better term, or fiat money. It's like, is it awful? Well, and this is, I'm just trying to tee you up here.

1:11:53It's like, not necessarily if it's done right and the degree of abuse is minimal and well-directed. Thank you. That's lovely. It's a lovely set-up. So I'm going to start with Keynesian budget management because it kind of does then talk to Keynesianism and then, and there's always, you and I talk for any regular listeners, I am the idealist who says if this actually, a bit like a communist utopia, right? If we just did this thing and we actually did it properly, it would be really good. And you're right. You're right. And you're like, dude, they're not going to. You're also right. So that's where we go.

1:12:21It's a life view rather than anything else. So Keynesian budget management, most people are familiar with, at least conceptually. Now, we don't do it very well, again, to a very good point, which is, hey, here's the thing. In the economic bad years, when the economy is contracting, a government that had to only spend what it brought in would get a whole lot less tax revenues because companies would make less money, there'd be fewer people working, less foreign trade, all the things. prices might be lower so gst might be lower because uh we're not buying as much staff and so people are dropping prices to compete so government's looking this going man the money rivers turned to a trickle now if you're a small tax person you're thinking wow that's great but then let me go to the next step so what the government says is i've got less money here's the thing we're going to actually have to cancel pensions this year sorry guys we can't afford to pay that uh we're going to lay off half the staff uh i'm being extreme obviously um we are going to have to unfortunately furlough half the navy um and the army they're going to have to just you know sorry guys you know we're not going to pay you this year we might pay you next year apply for your jobs on January 1, June 1, July 1, because we haven't got the money.

1:13:21We've got to run a balanced budget and we're not getting enough revenue in and we just can't pay the bills. Most people would suggest that's not probably great. Also, by the way... Well, actually, compound the problem. Right. I was going to say, because if you keep those people in work, you minimise the compounding effects, the kind of the feedback loops, the exponentiality of something like this, potentially, right? Now, again, none of this is perfect. It's all directional. I'm not saying this is how the world works. I'm just saying, you know. So the flip side, of course, is let's say governments in good years have all this tax...

1:13:49Iron ore prices through the roof. Companies are making a squillion dollars. We've all got 10 % pay rise. This is bloody brilliant, right? So they go, fantastic. I've just got 50 % more revenue this year than I got last year. Last year we were in a recession. This year we're booming. I run a balanced budget, so I've got to spend it all. So I'm going to start up all these projects, all these infrastructure things, and I know there's... There's no better way to get re-elected than to give people stuff, do you? True. So I'm going to have to drag all the builders that were building houses. I'm going to pay them twice as much to build a bridge because I need the bridge built.

1:14:17I've got to spend the money. I've got to run a balanced budget, so I'm spending the money. I'm going to grab all those people and go and do that. I'm going to build monuments to myself because I like myself and I like to have stonemasons in work, and that gets rid of some of the money. And I'm going to go and throw massive parties. So what do you do? You spend all the money, non-productively in some cases. Other places productively, but you actually crowd out other stuff that we actually want. you'd reasonably look at that and say, that seems a little bit dumb. On both sides, that seems really counterproductive.

1:14:44So what do you do? Well, you say, well, I'll tell you what we'll do. We will continue, we will look across an economic cycle, imperfectly, but we'll do our best. And we'll say, here's the thing. Every seven or 10 years, we have a recession. And in a bad year, we're about, you know, we're going to run a$10 billion deficit. And the good year's going to be okay, but normally not great. So we'll run a$3 billion surplus during those years. I haven't done my maths properly, but effectively what we'll do is we'll use the automatic stabilisers. Demand will exceed supply some years, supply will exceed demand in other years.

1:15:14Governments are on budgets in some years, surplus in the others. Over time, those stabilisers will net out. We'll save some jobs. We'll also retards. We'll build new bridges when the builder's already working at third end of the dozen. We'll pull back the bridge construction. We'll just let that happen. We'll collect the extra taxes, put that aside. So guess what? When the rainy day comes, because it will, economy is a cyclical, we'll have the spare cash to go and spend. Now, this is a long lead up. So that's Keynesian budget management. I think there are very very few people who disagree at least conceptually with the idea of deficits and surpluses being in place for the reasons i gave them if they're not in place so the kind of factual the reverse is hey if they were in place we could still fund on welfare we keep the army in work and the good years we wouldn't build unnecessary statues we'd actually save the money instead right so that's kane's in budget management and and kane's and again not even indirectly yes but as you say it was bastardized then kind of thought well actually we could do the same with monetary policy we could for all the right reasons at least in theory at least in the short term we could say the economy kind of sucks right now if i printed some extra money added some demand to the economy again like a government running a deficit budget i'm taking less tax than i'm spending in expenses that's what a deficit budget is kane says again conceptually what if we just print some more dollars for all the reasons andrew said let's go and just stoke a bit of extra demand The fishmonger is actually not selling fish at the moment.

1:16:31So, you know, he used to sell 10 fish and he's got two fish left over every day. That's kind of crap because he can't feed his family and the fish are rotting and that seems like a bad idea. What if we could just kind of stimulate the economy a bit? What if we could give people some more money so they could buy those extra two fish? They'd have more fish. It wouldn't really cost us that much because only one year, only printing a little bit more money and that seems okay. And in fact, next year when things are okay, we just print a little bit less money and just restore the balance of the monetary amount, the monetary volume, the number of yapstones, right?

1:16:56We add a yapstone and we take the yapstone away in another year and just kind of help stabilise the economy. And conceptually, that sounds great. And it comes from a place of we don't want people to be able to work. And if we could just make pretty little bit of money to put people in work, that sounds like it would probably be something we should do because no one wants to say, to your point about short-term, long-term, in the short term, you know, I mean, there's a political self-interest. There's just the whole, I don't want Fred down the street and not have a job. If I could put a bit of money and Fred could keep his job, that feels like something worth doing.

1:17:21So we should probably do that. And that's kind of how it starts. And again, like you made the point, mate, if it was actually done properly, you may still disagree with or agree on ideological grounds, but in practical grounds, if there was 100 Yapsones one year, 101 the next year, 100 the year after, 99 the year after, back to 100, and it kind of helped, you might try and do that if you felt it was going to be useful. It's the bastardisations that you made the point about that are the problem. And so why am I raising all this? Because the alternative to our money is the fiat system that we have, the money by decree, the amount of money decided by central banks slash banks for other reasons we can get into where we haven't yet.

1:17:59That very idea, I'll let you jump in, mate. Sorry, I'm doing a bit of a ranty thing. That very idea of let's actually help some people do some things when we can without consequence or without meaningful consequence, it's a really nice idea. When it doesn't, when it's like have another yapstone and then when things improve, I'm not going to take the yapstones away because that might hurt people. I don't really want to do that. So there's 101 yapstones, there's 103 yapstones, and there's 103 for a few years because things are okay. There's 105 yap zones and then there's 107 yap zones, 112 yap zones, and then there's still 107 and maybe I'd take it to 106 one year, but then it's back to 110, then 115, then 100.

1:18:33And so what's happened and happening, and your very good point about the dollar losing 90 % of its value since the RBA was put in place, that is the bastardisation. Maybe if I'm less kind to Keynes, maybe it was always the design. If I'm more kind to Keynes, it's the bastardisation of the idea of using stimulus, fiscal and monetary, in this case monetary, for money printing. Monetary policy is affected with the price and amount of money. It's never called monetary money printing. It's quantitative easing or yield curve control or maybe we can do some reverse repo activities, some money market, open market money operations.

1:19:08Very complex. Don't you worry about your little pretty head about it. But it's all for an emergency and it's all to help you. And in the short term, maybe it works. I've made the comment about COVID before. Even the monetary printing, the sheer debt spending the government's engaged in, I know they're linked around, but just let me have this one for a sec. You know, spend some extra money. Yeah, if the Treasury forecast for 15 % unemployment were right, you bet we should have, in my view, you bet we should have spent the money. But then you say, if we leave that there, we might end up with too much inflation for the following five years, he says, at the end of 2025.

1:19:38And what? Right? And so it's not - It's almost like that is exactly what happened. Right. You can still argue ideologically that we shouldn't have done it. And that's a reasonable view. I disagree. It's a reasonable view. Because we're all better off from those activities. Well, it's not so much the – actually, it's the subsequent – it's not the kind of cover-up that gets you, as they say, right? So should we have done it? I think mostly – we got a bit wrong in a lot of areas, but mostly the intent and largely the quantum was roughly right. The issue was they're not taking off – you're putting a bit of heroin, right?

1:20:09It's like we'll give you some fentanyl to ease the pain. It's like, dude, I'm still on the fentanyl now. I'm addicted to this stuff. I was going to say another word. I didn't, thankfully. And, you know, give her a couple of days. I mean, I've been in a hospital. And we're going to give it to you even if you don't need it. Right. Well, we're not going to take it away. Some people need it because some people are in pain. So let's give you something to relieve the pain. So to your point, we're going to make sure that you're now addicted to it and you have to do it and it's actually not even addressing the issue.

1:20:35We're also going to give it to those that don't need it. And, in fact, except for them, the ramifications are okay because there's another mechanism over here that means that any of the perverse consequences of all that extra fentanyl actually more than offset by an increase in your livelihood and wellbeing elsewhere. Right. Can I draw a line? Sorry, you finished your point and I'll draw a line between that. Super quick. Hold me in 30 seconds. So we're talking about sound money. We're talking about it compared to an alternative. And this is the important one here is like anything in itself is okay.

1:21:05If we didn't actually have a problem, would we need to move back to what? If governments just simply didn't print money, it would effectively be sound money by result if not by intent. It would be a fiat. Right, exactly. Yes, right, exactly. But even if you didn't say I want, I think sound money is ideological what I have to have because I think capitalized capital M, sound money is important. You're just like, I've pretty much extra money then I took it high because I thought that was the right thing to do because I'm just balancing the economy. It's like a benevolent dictatorship. Right. It's a great idea to stop you moronic, like just impossible.

1:21:33Yes. So it doesn't need to be capitalized capital M, sound money by design, throw everything else out, it must be this thing. What I'm trying to do is show the, why is sound money versus what we have? that what we have is the problem. And it's that Keynesian bastardisation of add a little bit, take it away. No, no, no. Add a bit more, should we take that away? No, no, no. A bit more, should we take that away? Now, like surely now. No, no, no, keep going. And so it's that, because, you know, whenever you say here's an idea economically, and you made the point off air and I'll steal your thunder a bit, you're like, I shouldn't have to make the case for sound money without someone else making the case for money printing, right?

1:22:08It should at least be some sort of ideological. Why am I the crazy one here? No, no, no, you get to create money. It's like, whoa, back up there. Back up there, sunshine. No, no. Oh, we don't need to hear about what you're going to say. Because this is self-evidently fantastic. Right. Isn't that crazy? It's just literally two people. It's like a debate where you only hear one side wants to go make their case. I talk about the status quo effect all the time. Yeah. So you made this beautiful one off air. I am stealing your thunder, but I'll give you a quick note, which is just that idea of, you know, the sound money advocates are going to make their case.

1:22:39And there's no requirement or need for the non-sound money, either the current or to make the equivalent cash or at least debate each point and say good point, bad point, good point, bad point, or mine's better because of these reasons. And it's just life. It happens in every sphere of life. So I'm not even saying it's necessarily about monetary policy necessarily. And that's the reason I'm raised cadence in economics. Just when people say, sound money, okay, firstly, what the hell, why? We've kind of hopefully done a bit of that. Don't we have that already? It seems like you're explaining how money works, and that's in my mind, that is how money works.

1:23:09and you're telling me it's something different and wrong and almost evil in a way, and that just sounds wild to me. So I'm just going to, and by the way, all of the most powerful, influential people in our society, which is, you know, fair enough, a very rich society, tells me that this is absolutely necessary and good, and look at all of these crises that we fix because of this incredible power that we use very judiciously and responsibly. Is it necessary and good? And the word you didn't use that I want to put back in is best, is the implied but never stated, because they never accept there's an alternative.

1:23:41Yeah. Which is back to your point. I just want back to your point about why sell money. The conversation is what do we, why would sell money not be put in place? And the Keynesians conceptually have an argument to say, what if we could do even better than sell money by pushing and pulling, by putting and taking, you put some money on the credit card, you pay off the credit card the next year. That's a very perfectly decent way. Credit cards are probably a great example, right? Because we run ever higher credit card balances. With good intention, we say, I'll just fix the fridge. All right, well, no, I really want the jeans.

1:24:12Okay, now I need the new computer. And some people do the right thing and pay the credit card off. Governments don't. They say, you can have the jeans and the computer and the new dress and, and, and, and, and, and, and, and never requires to pay back the bill. All right, I'm stopping. You jump back in. Oh, there's no excellent points and you're 100 % right in theory. I guess what's interesting there is that point of incumbency. I made the point to you off there. Imagine if for whatever reason we lived in a hard money standard and there was this weird group of people on the internet who kind of said, hey, guys, I've got a pitch for you.

1:24:46Like, oh, yeah, hit me with it. So what we're going to do, right, is we're going to give private commercial banks the ability to create money. I'm listening. Go on. And they're going to decide where it goes and who it goes to. Mm-hmm. And if they lend it imprudently, we're also going to have this other backstop. We're going to call that a central bank and they're going to make them whole if whatever, you know, they get over their skis and they start lending. It's like, right. Oh, also the government is going to, not on an occasional basis, but literally every year without, well, the very rare exception, is going to spend far more than what it earns.

1:25:29and when people stop lending money to it, we'll just print the money up. What do you reckon? No, everyone would be like, what drugs are you taking and can I have some? Because that sounds fantastic that if you can somehow make that a good thing, but I always make the analogy with like, you know, human sacrifice in trying to make it rain. There were civilizations for a long hundreds and hundreds of years who thought this was a great idea and it was always a good idea because that's what we've always done. The intransigence you get from just the status quo is really powerful. But you're right. It's like if you were actually to stand this up, and no one talks about it because it's just like it's invisible almost, not conspiratorially, it's just sort of like it's very hard.

1:26:20It's very easy to see the arsehole billionaire doing dumb stuff on social media. That's really easy to see, right? And it's very easy to see the crony capitalistic megacorp that is being completely unfair and unreasonable and extracting wealth and all that. So it's very easy to see that. To go five layers below that and look at the base layer of what actually is the money that we're using and how does it come into existence and what are the downstream consequences of that is very hard to do, right? But I guess this is why this conversation is so interesting and it's why this conversation and this, again, very old topics are resurfacing now because now there is sort of a chance for this to sort of, at least in theory, sort of happen.

1:27:04But they're not crazy ideas when you explore them in first principles. And I would say the burden of proof is very much on the incumbency to sort of say, no, no, no, this is a good idea. You did a really good job of actually explaining their thinking. And this is what's so pernicious. It's what's so almost evil about it because the argument, what is it, Churchill said never waste a good crisis, right? Yeah, yeah. Keynes' thinking came out of the Great Depression. Sorry, that's right. Yes, good point. That's good context. And it's like, whoa, what do we do? Well, we need to do this, right? And then it just, we now have the intellectual academic support.

1:27:45I don't need anyone to tell me that printing money is great for the person who's next to the money speaker. The cancel on effect is brilliant if that's me who's adjacent to that kind of stuff. But it's a very hard sell. Whoa, I've now got this super smart academic theory that I can roll out and justify it and I can do it in the name of the people and they will buy that. And you do that by the way that you've laid it out. Except the difference is that the way that you've laid it out, while absolutely rock solid is not what we observe anywhere on earth. In other words, to your point, when do we, we don't run structurally balanced deficits.

1:28:26Right. We don't. We have surpluses every now and again because commodity prices. When was the last time the US, the world's largest economy, had a surplus? Clinton, I think, from memory. And that was like a blip. Yeah. It feels like yesterday, probably 20 years ago now. Yeah, that's right. Well, no surprise why. It happened at the same time, or near the same time as we had some positives as well. It was a global kind of benefit to go, it's always a surprise. Huh, a surplus. What does that mean? Do we have those? What do we do with that? Yeah, right. And it lasted for half a second. So it's sort of like I feel as though that is something that is so fundamentally important and is glossed over.

1:28:59It's just sort of like, hey, this is why it's good. Okay, how come we don't do that? Oh, well, you know, it just hasn't been done properly. It's the old argument like communism would be great if it was administered properly. It's like, yeah, I agree, but it never is. So it's a defunct, it is a defunct argument. What we need to talk about is the mechanics. Maybe we'll save that for the next episode. Save the mechanics for the next episode. We're an hour and a half in. Yeah, because the natural question is, okay, you've talked about the difference of what hard money is. We've talked about why that kind of animal, we've only scratched the cell.

1:29:36I can talk for a long time on why this is very good. Well, maybe just very quickly. Just because, again. In podcast lane, very quickly means 15 minutes. You're clear about that, right? The analogy that I've settled on is building and construction, you know, and we all, every builder has the same thing on their tool belt and it's called a tape measure. And it really matters that everyone who's involved from the production of the lumber to laying of the foundation to putting the pipes in, like everyone knows what a meter is because if you don't have a consistent unit of measure, nothing kind of works here, right?

1:30:09And so why, just and again quickly, to flesh it out, why is a hard money good is because it is a standard that is unchangeable. We want prices to change in a way that reflects the perceived availability and demand of the products that we all want in society. Once you start distorting that via the introduction of money, and we only really glossed it with the cancel on effect and stuff, you interrupt and you pollute that mechanism and that leads to all kinds of, the Austrians call it malinvestment and economic distortion. And it's sort of like, it makes us collectively poorer than we otherwise would.

1:30:51But the reason that we accept it is because there are absolutely a pretty small group of people who immensely benefit from it. If you have someone with assets, this is wonderful for you because money, people are smart. Even if they don't understand the mechanics, Blind Freddy looks around and goes, wow, you know the dumbest thing I can do with the money that I've earned? Is put it under the mattress. That is dumb. You find me a financial analyst or a financial advisor that tell you it's a good idea. That is a really, really dumb idea. So we then seek all of these different ways to protect our purchasing power, which means we financialize everything, which means that when we create excess money, that money flows into asset prices because people are trying to find shelter from this horrible inflationary impulse that comes through.

1:31:40So as I say, when you're someone with money and you own a bunch of property, none of this seems like a problem to you because even though your groceries and your petrol and everything is going up, so are your assets. In fact, as people flock into these things and as people see, look, Australia's a great example. How do you get ahead? You buy an investment property. That's how you get ahead. I don't understand how that what's what break that down for me I don't need to look at the last 25 30 years anyone who bought a property anywhere on earth no matter what has done insanely well I'm gonna do that now the again the counterfactual is in in a system where that didn't happen it's like so how how else do I get ahead oh you got to create value for for society and your fellow human being so I've got to take risks start a business produce things that people want hopefully better things than what they have currently available.

1:32:32And that's how you create money. Well, otherwise you create value for your boss, you get paid well because you're doing something that's of value. Even if you, you know, it doesn't have to be an entrepreneurial thing. It's just like I am a really, really good floor sweeper or a toilet cleaner and there's people who need their toilet cleaned and I will exchange my time and energy to do that and they will pay and get both people in here. It's a wonderful kind of thing. But if I'm someone with money, think about my choice here. I could take all that risk, deal with all the bureaucracy and nightmarish regulations that are out there, start a business, very risky, most businesses fail, or I can just buy a stock portfolio and a bunch of houses.

1:33:11What do I create for society? Zip. But I drive prices higher, it feeds back on itself, it causes more distortion, gives rationale and the green light to create more money, which floods into the system, which helps a little bit for a tiny fraction until just that impulse floods through the system. And then asset prices go up more. It's like, I'm just going to sit on my backside and do nothing. And people wonder why there's a growing wealth divide. This is why there's a growing wealth divide, right? And so, look, we'll get into all of this later. And I think the next, where we'll start off with the next episode is just to talk to the mechanics of, because it is wrong to say that the central bank creates most of the money.

1:33:51That's not true. It's wrong to say government creates most of the money. It's the commercial banks. And how do they create? This is really important because once you understand the mechanism of how it's created, you then understand who is closest, what the money spigot is, who is closest to it, and what incentives derive from that. And when you pull on that thread and you wash it through, you start to get a very clear read on all of the, not all, it's a bit too much, it's too hyperbolic, but on a lot of the problems that we face in society today. I will do my very best to draw a line between those two things.

1:34:26And it's not about evil capitalists. It's not even about incompetent socialists. It's about us having a very bad monetary measure. And in just the same way that as a society, we're never going to build any great houses if no one can agree on what a metre is or a foot is. We're not going to build a great society if none of us can actually know what a dollar is and what it's worth. That's a lovely way to put a pin in this particular episode. Thank you for listening to the first of, I'm going to try and make it two episodes. It could be more. It really could. On Sound Money. I hope you've enjoyed it.

1:34:58I hope you've enjoyed a bit of a cook's tour through, a bit of history, a bit of monetary policy, a bit of the way the world financially at least works. I hope your head is spinning. If we've done our job, your head is spinning right now. Mine hasn't stopped spinning since I first started digging at this stuff. Go and look up the episodes in the meantime. We will come back on Sunday with a regular mailbag episode, but then next Friday, strap in for Sound Money Part 2. Until then, Fool on. Can't wait. Cheers.