Trump vs. The Fed: Sabotage, Showdown, or Economic Revolution?

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0:50David McWilliams: Coming up on the podcast, it's all about money, monetary economics, It's the rate of interest and Donald Trump deposing Jay Powell at the head of the Fed. Is this an act of economic sabotage, unprecedented? Or is it simply calling the bluff of a bunch of bullshitters in good suits who have been spinning yarns from central banks' citadels for the last 40 years? Join us in a couple of minutes. To understand the economy, you have to understand human nature. This podcast is powered by Acast.

1:31David McWilliams: How are you doing there? It is time for the podcast and we have a full, full podcast for you today. We're going to focus... As opposed to an empty one? Well, that's a fairly fair point. I was just saying it's a busy podcast, John. Right, okay. We have a busy podcast today. That's fine. Lovely to see you. Yes, indeed, aren't you? It's great to see you again. Anyway, we have a very busy podcast we're going to be talking all about the significance of the movement in the States by Donald Trump to try and oust the Fed's J. Powell by way of a criminal investigation, what that means for the dollar, what that means for interest rates, but also is this part of the playbook of authoritarian leaders going all the way back to Nero, John.

2:19David McWilliams: We're going to go back to Nero, fiddling while Rome burned, all that good stuff. Excellent. But how have you been ahead? I've been good. I've been good. Busy, busy week. Like a busy podcast. Like a busy podcast. But actually, you've been a bit busy, I see. Yeah. You've been on other podcasts. How could you? I know. You feel slighted to you. I do. You feel I'm cheating on you. I'm cheating on you. No, I was on a wonderful American podcast, which was recorded before Christmas in California. A podcast called The Armchair Expert. Oh, yeah. That's good. Dax Shepard. Yeah. It's 30 million downloads a month, John.

2:56Jesus.

2:56David McWilliams: Now that's a proper podcast. We're only Mickey Mouse in comparison. But it was on the book. But I will say something. I have done loads of interviews on the book, as you know. But this was by far and away the best prepared presenter. And Dax Shepard... But he actually read the book. He'd actually read it, but he'd read bits of it. He'd actually taken notes. But he was incredibly well prepared. He is an actor. He is a podcaster. and it's just quite funny because you know sometimes you go on you know finance shows and you expect them to be very well prepared it's really well prepared it was really nice it was in it was in california it's kind of sunny hollywood hills all that sort of stuff but that was great and we talked for about an hour and a half yeah if you want to see it it's the armchair expert podcast just google it yeah but no i thought it was it was a great interview it was really really really nice chat one of those kind of very long form american chats went all over the place yeah Himself and his co-host, Monica.

3:48David McWilliams: So it's Dax and Monica and the Armchair expert. It was really good. Yeah, it was great. And that was out this week. Excellent. Yeah, and you were also on Al Jaze. Well, you've got to be on Al Jaze, John. You see, I knew you'd love it. You go from Doha to California, spanning the globe. What was the Al Jaze thing? Al Jaze was on, we're going to talk about now, the significance of Donald Trump. And I've always found Al Jazeera to be, it's a good station to go on and it's a good station to listen to. I found quite interesting. So yeah, no. A lot of ex-BBC people. We were from the Middle East all the way to the Pacific Coast, John.

4:23That's a global footprint. That's you. Global footprint, your carbon footprint.

4:28David McWilliams: Speaking of carbon footprints, I've even been watching the greatest scrap at the moment has been Elon Musk and Michael O 'Leary. Yeah, what is that? So Michael O 'Leary went on. Michael O 'Leary's been doing a number of quite high-profile interviews at the moment. Is he looking for a new gig? is he looking for somebody to buy Ryanair? Oh, I'd say so. And so he's having to go at Musk. He's called him Musk and Egypt. He's goading Musk. And then Musk has responded by saying he'll buy Ryanair. Right? So Musk said, who is this guy? Who is this guy? And so he said, it's the chief executive of a big Irish, obviously Musk knows who he is, this airline.

5:03David McWilliams: And so somebody just said, and Musk said, yeah, he's a terrible idiot and a terrible idiot. He called me an idiot. I called him an idiot. And then somebody says, why don't you just buy Ryanair? and he says, I think I might. Oh God. Muscare. John, you'll never take it. Muscare. Be flown by Grok or something. Yeah, exactly. Exactly. Exactly. But the biggest news, John. Go on. Is that today, our brilliant, brilliant researcher, Eliza Notaro, has got married. So she has. Congratulations, Eliza. Yeah, herself and Declan. Herself and Declan. I wonder if she's going to call Mrs. Cahill now. Doesn't sound quite as exotic as Eliza Notaro.

5:38David McWilliams: In my own book. But anyway, Big, big shout out to our wonderful researcher. All these podcasts, all endeavours have a behind the scenes team. We have a team of one, which is Eliza. And she is fantastic. And she got married today. So congratulations to herself and Declan. And where are we going to kick off, John? Well, OK. So talking about the Fed and this ongoing battle between Trump and Jay Powell. And we've spoken about it before. But I want to get into it a bit more because this is unprecedented, this kind of battle. But here's the thing. And here's my question for you. Okay. Keeping an open mind.

6:23Very unlike you. Trump wants to keep interest rates or he wants to reduce interest rates to 1 % because, as he says, it will juice the economy and reduce US borrowing costs by hundreds of billions.

6:41David McWilliams: what's wrong with that nothing at face value oh okay nothing right on thanks for listening we're going off to mckenna's for a few scoops no an actual fact the podcast today is going to be in two parts john right one part is going to be the shock horror i can't believe you're debasing the currency i'm going to give you a historical lesson on all the other great debasers which trump is one so that's going to be a shock horror official orthodox economics worldview yeah right then i'm going to take the rather unorthodox view and I'm going to let the listener make up their mind and say, actually, what's wrong with this?

7:12Central banking dependence, is it actually a total shimmer? Has it been something that we go on about? But in fact, the real facts on the ground suggest that nobody cares, right? So we're going to talk about that because speaking as a former

7:27David McWilliams: central banker, John, you know, there is a huge amount of RS Wipery associated with central banking, right? A huge amount of, we know what's going on, the high priests, right? I think the problem with central banks around the world is they sometimes have that terrible combination of arrogance and incompetence together, which is the worst combination. So they feel they're doing a great job because they're judging themselves on their own metrics. But in fact, there's a great book, I think we interviewed a guy called The Lords of Easy Money about a year ago, about how central bankers have led to massive inequality.

8:04David McWilliams: So we'll talk about that in a second. It's a podcast of two parts, John. One is, oh my good God, he did this. The second one is, who gives a shit? Yes, okay. But it is interesting though that now that you talk about central bankers, that I see that all of the heads of central banks around the world were rowing in behind Jay Powell and supporting him and stuff. Exactly. Which is kind of bizarre. It is kind of bizarre. It suggests that there is a, you know, people would call it a sort of a mafia of central banks. I prefer to call it a conclave. It's like the Vatican, right? There's white smoke. And somebody.

8:40David McWilliams: Cardinal of the bank. Cardinal of the bank, you know. And somebody, as in your mate, Donny Jay, has basically done a Martin Luther and says, I don't believe you guys. Yeah. Come and have a go if you think you're hard enough, right? and the conclave has sat down in Rome or the financial equivalent of Rome and they've come up with this riposte, you know, from central bankers across the world. Okay, ostensibly, if you could keep the rate of interest at 1%, which is what Donny wants, you could say, well, what's the problem? The dilemma is the rate of interest is one of the most important prices in the economy.

9:22and for our purposes today see it as it is many things in fact i just think i've always believed the rate of interest is an encyclopedia not a price okay right you're gonna have to explain that one so the reason the rate of interest is an encyclopedia is full of information the rate of interest tells you about risk it tells you about time it tells you about finance it tells you about savers, it tells you about depositors. It is in effect an encyclopedia of knowledge that you would otherwise have to go and get and acquire.

9:58David McWilliams: So for example, if I say to you, John, I lend you money at 5%, but the 5 % is saying lots of things. So it's saying, I think John is a good bet, not a particularly good bet, because if the rate of interest is prevailing at three and I'm charging you five. Why am I charging you five? Because I'm a little bit worried about your character as an individual. What sort of debtor are you? Are you somebody who's likely to default? Are you somebody who's likely to change the terms of engagement? Are you somebody who, if I give you money, I can't give it to somebody else, the opportunity cost of lending.

10:36Right. So I might have to charge you a little bit more. And then they say, okay, the 5%, it's over three years. So what's that telling me? It's telling me that I've got a vision in my head of the stability of the economy for the next three years, which will be covered by the 5 % rate of return. So what I'm thinking is, therefore, the rate of inflation is going to be quite low. The rate of general interest is going to be quite low. Geopolitical shocks are going to be quite modest. There is going to be no World War III. Think about it. Think about all the information in that one price. That's what I'm saying.

11:08That's the encyclopedic nature. And this is what the people in the Fed, including Jay Powell, are doing on a daily basis. They're just pulling in all this information, crunching numbers, and then coming up with like... A rate of interest. Yeah. Like who was a deep thought who came up with the answer to life, the universe and everything was 42. So Jay Powell is a little bit like deep thought. Only you can bring in... Okay, if you know what John was referring to there, number 42, hit us up on Twitter at David Mac W.

11:43David McWilliams: Okay, what was John talking about when he said 42, right? I don't know what I'm talking about most of the time. That makes a pair of us. Okay, so back to the idea. There is an image that central bankers want to sell, which is that they are sitting in these august citadels of financial power, crunching numbers. I can tell you that is not the case. Oh. Right? Oh, okay. They're largely drinking cups of tea and reading the FT in the Wall Street Journal. And Marietta biscuits. And Marietta biscuits and talking to each other about the very thing. So the rate of interest is not formulated in central banks, right?

12:18The rate of interest comes from the market. And this is why Donny J has a problem.

12:23David McWilliams: So the rate of interest is the rate at which savers are prepared to borrow. Yeah. And lenders are prepared willingly to lend. Now, what Donny Jay wants to do is he wants to orchestrate what you call financial repression. He wants to push the rate of interest down to one, which will penalize the people who are lending, the lenders, because willingly they want the rate of interest to be at three. Right. And it's rewarding the debtors because as the rate of interest is forced down to one, the cost of debt falls. Now, why might that be a problem? The problem is it comes from a DNA stance. Donald J.

13:08Trump is a legendary debtor. He is a serial defaulter. So his bias has always been to penalize those who lend and to reward those who borrow. Now, in his head, he says, those who borrow are entrepreneurs, they're creating jobs, they're taking risks, all that sort of stuff. But the reason the rate of interest is so important, it is a willing price. It cannot be a managed price. Because if you push the rate of interest down too low, people will take all sorts of bets, which are not necessarily financially coherent. So what you'll see... Which we've seen before. Exactly. So Donny J wants an asset price bubble in the stock market.

13:53He wants a housing price bubble. He wants Americans who are in debt to be let off those debts in effect. He wants Americans who save to be penalized. But all of this is, in his own words, to juice the economy in order to have, either at the midterms or the presidential election, a significant economic tailwind behind him, which is low levels of unemployment, high levels of consumer confidence, and a general feel-good factor that gets him over the line. But as you've often said before, you know, when there's quantitative easing, which is pretty much the same thing. Yes. That, you know, the people who get rich are the people who own shit.

14:42David McWilliams: Yes, exactly. And so therefore, if he pursues this and is successful in this, that what he'll succeed in doing is elevating a certain group of people. But he'll create a much bigger disparity between the rich and the poor. And as long as the Democrats in America don't fight the election on that particular issue, he'll get away with it. Because what happens in America is they have this notion, as you know, that if there's a rich guy beside you, you too can be like him. Yeah, yeah, yeah. The more rich guys out there, the more Donnie Trump can say, here's the success. You just follow him. And the irony is that inequality hasn't really spurred on a left-wing movement in America.

15:32David McWilliams: It's created kind of resentment more than anything else. Yeah, yeah. And lots of people are saying, well, you're poor because you deserve to be poor. Because you haven't worked hard enough. Yeah. That guy, he worked hard. The American dream is real. It's a very strange disparity. So let's cut to the chase. What Donald Trump wants to do is he wants to be the guy who controls the money. And the independent Federal Reserve has been always about making sure that the guy who controls the money isn't elected. So he can't juice the economy. And this is why having these faceless technocratic economists like Jay Powell, although Jay Powell is a lawyer, he's not an economist, but they surround yes very much a lawyer lawyers have inveigled their way into economics you know Besant is a lawyer the the treasury guy these are not economists right some smug condescending guy oh look dear listener you should see the face the puss on Johnny Boy when I just him and Stephen Miller I lump in together another lawyer right this is the anti-lawyer no but lawyers have inveigled their way into economics because they have come through the financial system because most of the financial system, the back end of the financial system is not economics or trading, it's contracts.

16:52It's law, right? And so Besant comes from a defaulted debt background.

16:57David McWilliams: He was, after all, worked with George Soros. And so it was... He's supposed to be the enemy, isn't he? Now he's the enemy. But he was the man who made Besant rich. Let no good deed go unpunished, John. That is the rule of life. So what I'm saying is the Fed, the basic idea is that it's a better policy setup to have faceless technocratic bureaucrats trying to set the rate of interest and monetary policy in general than it is to have populist presidents or kings or mafiodons or whatever you want to call them. Right. So let's get into this then. Trump wants to be the great debaser. The great debaser.

17:39But like, let's go back in history a little bit. You spoke at the top about there were other great debasers throughout history. Who were they? What did they do? And what can we learn from them? Well, so everyone from Nero, John, to Henry VIII, to Lenin, to Hitler, these were all dictatorial, authoritarian figures. It's not a great club to be in, is it? It's not a great club. So these are all figures who want to control money, who prints it, how much of it's printed, and who gets to set the price of it. So if you look in history, what you find is that always there has been a weakness for big men leaders to control money.

18:18The reason is that money is a much stronger weapon than ideology, than religion, than even the army, because money is so potent. I mean, Nathan Rothschild said, you know, give me the guy who controls the money. I don't care about anyone else. Because the guy who controls the money controls the society. So Nero, the guy who fiddled while Rome burned,

18:40David McWilliams: was an amazing clipper, what they called. And a clipper was somebody who used to clip. So the coins were gold in the old days. And a clipper would clip little bits of gold off the coins to remint into new coins. And he would try to pull the wool over people's eyes. So that was Nero. The great debaser in the medieval ages was Henry VIII. Henry VIII was also a great clipper, right? And he was always trying to fight wars. So Henry VIII was a big, expansive Tudor monarch. Henry VIII started the settlements here, the settlement in Leish-Offaly and one in Munster as well, the plantations. So what do they need to do this?

19:20They needed money. And the easiest way to get money to pay the army was to debase the coin. And how did they do this? They did this typically by clipping or reminting. So you reduce the gold content in the coin, but in so doing, you are allowed to print more coins. So in effect, you are inflating away the value of the coin. Dante, John, reserved the most heinous punishment for a chap called Adam in Canto 30 of the Comedia. And Adam was a debaser. And Adam was a real person.

20:02David McWilliams: So Dante put Adam, think about how despicable the debaser was in Dante's world. He put Adamo, was his name in Italian, in the eighth circle of hell, which is one circle, just one circle above Lucifer. Right? That's how bad. And Adam was a guy who was basically reminting the florin by adding copper to the coin. So he was taking out the gold content, adding copper, and then reminting it and publishing these things. He got caught and woe betide him. In fact, he was basically a real guy. But not only did our friend Dante put him in the eighth circle of hell, but when Dante and Virgil were going down through the inferno, in the circles of hell, they put him with a guy called Sinon as a disreputable character.

20:58And who was Sinon? Sinon was the guy who was a Trojan double agent acting on behalf of the Greeks who convinced the Trojans that the horse, the wooden horse of Troy, was a gift. And he was the guy who persuaded his own people

21:16David McWilliams: to open up the gates of Troy, allowing the Greeks into Troy, out of the horse they came, and they destroyed the civilization. So in terms of a disreputable scoundrel, Not only had Dante the debaser along almost the same lines as Lucifer, but he mixed him and he matched him with a guy who didn't just betray a coin or a money, he betrayed an entire civilization. Right. That's serious stuff. So that's serious. That's my history. And of course, the greatest of all debasers was Lenin. Right. Vladimir Lenin, not John. Vladimir Lenin, he went all out on money, right? And he gave an interview in the London Chronicle on the 23rd of April 1919.

22:01And this is, I'm going to quote you. Go on. Right? Because basically Lenin was the great communist debaser. And his idea was to annihilate the power of money to destroy what remained of the capitalist system. This is what he did when he first came in. And this is a quote from the Daily Chronicle. Hundreds of thousands of ruble notes are being issued daily by our Treasury with the deliberate intention of destroying the value of money. The simplest way to exterminate the very spirit of capitalism, therefore, is to flood the country with notes of a high-phase value without any financial guarantees.

22:38Already, the hundred-ruble note is almost valueless in Russia. Soon, even the simplest peasant will realize that it's only a scrap of paper And the great illusion of the value and power of money on which the capitalist state is based will have been destroyed. So they went out explicitly to destroy money. So they took over the Russian Fed. Now Hitler, who was our friend's ideological enemy, also understood the power of destroying money because he'd lived through the hyperinflation in Weimar.

23:13David McWilliams: And Hitler had this amazing plan we've talked about before very briefly. It was called Operation Bernard. And it was to flood the United Kingdom. It's counterfeit money. Dropped from planes over the UK. It's a great story. And actually, you tell it really well in your book, Money, The History of Humanity. It's an amazing story. And all true. Yeah. And so Hitler understood that if we can undermine the power of money, we can undermine the state. Just to give you a couple of numbers, In July 1942, Hitler's new weapon cranked into production. By 1943, the 142 forgers who had been taken from concentration camps, it's an amazing thing.

24:00They were artists, colorists, paper experts, bank officials, printers, mathematicians, code breakers. They were all taken. These were Jewish guys who were in the camps, taken to Sachsenhausen, charged with destroying the Bank of England. They printed 132 ,610 ,945 ,000 in five and ten pound sterling notes. And the counterfeiters were successful. And the idea was to just drop these over the UK and watch what happened to the currency. Yeah, it was an airdrop. And of course, they came up with the plan in 1941.

24:38David McWilliams: 1942, they kicked it into action. 1943 end of they actually succeeded in getting the notes they passed them an amazing story they actually sent them to the Bank of England via circuitous route via a bank in Switzerland the Bank of England said yes these are official these are our notes because they were so good quality the forgers were so good quality they even pulled the wool over the Bank of England the actual institution that printed the notes but they'd run out of planes by 1944 the planes so they couldn't have an airdrop they didn't need a massive airdrop But they used that money to do all sorts of things.

25:13Amazingly, some of that money was used as a ransom for Mussolini, who was kidnapped by Italian partisans. It's a great story. But I come back to it. Those men, Hitler, Lenin, understood that if you debase the currency, you destroy the country. Nero, Henry VIII, really wanted to do it for their own reasons. The fascinating thing about Henry VIII is people were wise to his debate on the currency. So what did he do? He had to get money. He invented Protestantism. What Henry VIII did was like, he said, okay, I need money. What can I do here? He said, I quite like marrying various women as well. The Catholic Church doesn't like that.

25:52But before I do this, what I'm going to do is I'm going to actually create a new religion called Anglicanism, which is kind of Lutheranism, soft focus Lutheranism. and I'm going to copy what the Germans did, the Lutherans, which they confiscated all the assets of the Catholic monasteries. They said, we have a new religion now. That old religion is over. We're taking all your... So basically, the origin of British Protestantism, John, was a rights issue. It was a heist. Yeah. So what he couldn't do by debasing the currency because people were wise to him, he decided, you know, I'll get the money from somewhere else.

26:28I'll change religion. I'll rob all the money of the monasteries. I'll make that my own. and then I'll create a new aristocracy and that new aristocracy in my pay and I'll take the money from them and all I've got to do is change the religion. Yeah. Piece of piss. Yeah, as my auntie used to always say, Protestantism was born in the bollocks of Henry VIII. The bollocks and the pocket of Henry VIII. Yeah, yeah, yeah. And the pocket. So in actual fact, it was a money-raising exercise. So Donald Trump is different to these guys. How so? Because he only wants to do a little bit of debasing. Right? Okay.

27:00He wants to play at it. Yeah, he just wants to, so unlike all these things, what he wants, basically, Donald Trump doesn't want to debase money completely, unlike Hitler or Lenin. He wants just a little bit, just enough to keep the price of money, the rate of interest we spoke about, artificially low, to stimulate a little bit more money printing, just enough to fool the people for long enough into thinking they are richer than they actually are. and then buoyed up by this kind of temporary sugar rush of cheap money. This will push up the value of their homes, push up their stock portfolio, make the loans a little bit cheaper to service, and then the American middle class will ascribe all their creature comforts to the great Donny J, and they'll re-elect him.

27:43Happy days. What's wrong with that? There's this thing called the Constitution, John. What's wrong with that? A little small thing called the Constitution, right? But to execute this deft move, he needs a patsy in the Fed. Because unlike Henry VIII, he can't just take over the thing. He can't just take over. If Donnie J wanted, he would drop US dollars over Idaho. Yeah. But he can't do that. So he needs to do a slightly more circuitous thing, which is he needs to get his man inside the system. And in order to do that, he needs to get rid of J. Howe, right? So what he wants is a sort of a slow, subtle, difficult to decipher inflationary boost for the short term.

28:29But the long-term consequences of this is they undermine the integrity of the American dollar. Why? Because long-term interest rates will rise because people will know the people who are printing the dollar are not printing the dollar based on inflationary expectations, but presidential electoral expectations. So they're wedding the economic and financial and credit cycle to the political cycle. And why this is more serious than, say, Lenin or Henry VIII or even Hitler is the fact that the dollar is the reserve currency of the world.

29:08David McWilliams: And they're doing it slowly. Yeah. Well, let me ask you a question, Mac, then. You know, could this end up with the dollar losing that status of reserve currency? And what difference would that make anyway? Well, good question, right? So what we have basically is a short-run versus long-run phenomenon, as economists will say, an intertemporal dilemma, which is why economists should never be allowed to do podcasts because they can't speak English, right? They speak some sort of mangled thing, right? So basically what you're saying is, Trump wants a short-term sugar rush. Yeah. In the long run, does it debase the dollar?

29:47Yes, it does. Does he care? No, he doesn't. Because as John Maynard Keynes said, in the long run, we're all dead. Well, yeah. And Donnie will be well on his way out, so he doesn't give a shit. Yeah, yeah. He gives the problem to the next guy, right? So then the question is, does it really matter, right? And this comes down to something which I think is really essential, right?

30:07David McWilliams: Central bankers and orthodox monetary economists make the point that this, in the long run, will undermine the Federal Reserve's integrity, will undermine the dollar, and nothing is as guilleterious to economics as undermining the centrality of money. Yeah, yeah. I think that's a bit of bullshit, John. Oh? As a former believer, now a non-believer, as a Lutheran sceptic in the citadel of monetary economics, I think there's another story going on. Well, do stick around and tell me that story after a bit of this.

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32:42Donnie J is part of this debasers club that includes Lenin, Henry VIII, Hitler. Nero. Nero. Adama. Adamo, exactly. Adamo in the Divine Comedy. So what's going on with it? What is the problem? This is the fundamental question. What is the problem with Donald Trump wanting to not only get rid of Jay Powell for the purposes of reducing interest rates, to juice the economy and reduce his cost of borrowing. What's the problem with that? Well, now, the fascinating thing about this, John, in terms of timing is this is exactly what I'm teaching in the new monetary course. Ah, yeah. And Donald Trump has given me, on my lap,

33:26David McWilliams: has fallen in a bit of topicality. Yeah. Because the course is all about how money is created, who creates it, central banking, all that stuff, what it does to the system. And if you want to learn more about this, join us on patreon.com forward slash David McWilliams. Or if you are already a patron, and thank you very much for supporting us because we couldn't do this without you, it is free to you. But it's all about money. Brilliant. So, question is, what's the problem? Now, I've given you in part one of this podcast, the orthodoxy. It's the worst thing that can possibly happen. It's terrible.

34:01David McWilliams: It'll lead to inflation, etc. Why are central banks independent? It is reasonably recent, right? So all central banks were nationalized after the Second World War. Why were they nationalized after the Second World War? Because during the Second World War, fiscal policy, which is the government issuing debt, and monetary policy, which is the central bank printing money, were fused together. A bit like what happened in the pandemic. Okay, in the pandemic, basically the central bank said, you just print whatever you want, we will buy all the stuff, we'll do it, right? Because we're faced with an emergency.

34:34Now, then into the 1960s and 70s, this all worked in the 1970s and started to break down. Right. And there was a sense, particularly driven by ideological right-wingers, that the source of inflation in the world was government excessive spending, driven by left-wingers and Keynesians, right?

34:53David McWilliams: So the right-wingers, aka monetarists, you might have heard of them, under the tutelage of a fellow called Milton Friedman and picked up by Mrs. Thatcher and Ronald Reagan, they said, look, the source of all evil here is excessive government spending. If we create independent central banks and we give them a mandate that they will raise interest rates as soon as government spending becomes excessive, that will bear down on government spending and we will be able to run the economy in a non-inflationary way, number one. And number two, they said monetary economics is always at the root of inflation in the sense that inflation comes when you print too much money.

35:44Print less money, you'll have less inflation.

35:46David McWilliams: This is why they had this idea of monetary targeting of money supply. This was a big thing. When I was a young economist, this was the big vogue, right? So the idea was, therefore, that central banks act as guardrails against excessive government spending, which was heavily ideological, number one. And number two, the assumption was that central banks are value neutral. So they are non-ideological. These are the two things that were sold to the electorates. And gradually, over time, all central banks became independent. probably the last major was the bank of england in 1999 okay yes the bank of england was nationalized in 1945 yeah and was very much interest rates were set by the treasury in the uk up until about 1999 oh okay i didn't realize that and gordon brown was very much prudent prudent absolutely prudent right so you have this bizarre idea that said look if we have independent central banks we have control of our fiscal policy.

36:52And that is a good thing. But there's no evidence of that. So the first chink in the armory of the independent central bank argument is

37:00David McWilliams: what has actually happened while central banks have been independent in major Western countries has been an explosion in government debt, an explosion in government debt GDP ratios, and an explosion in government spending. So the idea that central bankers are in some way sitting there with a big cudgel, slapping the head off politicians, is not true, number one. Okay, that's interesting. Number two, QE. Remember our friend QE? I do. QE was in effect central bankers legislating for governments to spend money because QE, all QE was, was the central banks would buy up government debt and give the governments or the market in return for that debt, real cash.

37:49But then was it an emergency situation as well after the GFC? It was after the GFC,

37:54David McWilliams: but it broke the intellectual and monetary link between central bankers and the non-monetisation of debt. So in effect, to use normal parlance, that horse has already bolted well beyond the barn doors. Right, right, right. So if you actually look critically at what Donald Trump is doing, First of all, the edifice that has been built up by central bankers saying that they are in some way the reasonable last restraint from governments is all horseshit. Right. Okay. This is why I'm – I'll give you the other side of the argument, right? So this may be the reason why we have this week not seen a massive sell-off of long bonds.

38:44Right. Because the market already understands that central bank independence is a mantra rather than a real policy. So what's with these bond vigilantes then? The bond vigilantes disappear if the central banks start buying government bonds.

39:01David McWilliams: Right. Because there's always this expression, don't fight the Fed. meaning the Fed, because it prints the currency, has the infinite capacity to buy up government bonds. The downside is the currency will begin to fall in value. This is back to your reserve currency. But that's what Trump wants. He wants the American currency to fall in value. So American capitalism will flourish within America. American manufacturing will come back and the Americans will become competitive. But that's only, as you say, it's only a temporary thing that begins to blow up in its face after a while. Is that right?

39:41David McWilliams: That's the theory. But the practice is very different. Right, okay. So what we're doing, you know, it's Garfield's journey. We've got the great expression, it works in theory, it doesn't work in practice. Garfield's journey was said, it works in practice, but doesn't work in theory, right? It was a boffin, okay? So what we have is, I think Trump has seen through something, which is that there is a huge amount of hot air associated with international central banking. And they go to Jackson Hole and they talk about setting monetary policy and there are all these men, usually in blue suits of a certain age, quite satisfied with themselves, quite smug.

40:23And if you read the lords of easy money, they also have this idea that they're non-ideological. But that's not true. Because as we know, if you print money and you give that money to the banking system to distribute, the banking system will give that money to people with the best collateral. The people with the best collateral are the already rich. So they get their hands in the money. Their assets go up in value. Who owns assets? Rich people or poor people? Rich people. They're rich because they own shit. Yeah. So I think that this is a positive moment. Right. And I think, you know. And what do you think is going to happen then?

41:07Nothing.

41:09David McWilliams: No, but in the long term, what happens to. I think there could be some chipping away at the integrity of the dollar. I don't see the Bank of China or the ECB really ready to use their currencies as the international reserve currency because that comes with a huge obligation. The obligation is to print your currency when the world runs out of your currency in a crash. I don't see the Chinese or the Europeans having the gumption or the ambition to do that. Remember we did this thing about China a couple of weeks ago that they're actually, it's all about consolidating internally. So we're going to leave it here, John.

41:44Let's just say that I think Trump may well have called the bluff of a few spoofers in the central banking community and the way in which markets have reacted would suggest, you know what, this is the new normal. We'll leave it there. Controversial. Always.

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