Stig Brodersen 1:11
So, today’s topic is the euro. And I don’t think we can find any better guest than you, Thomas, to help educating our audience and us. Now, Thomas, I think it’s hard to fully understand the euro without first talking about the history of Europe and the two World Wars. So let’s go back in history, and could you please talk to us about what led up to the creation of the European Economic Community that we today in a slightly different form know as the European Union?

Thomas Mayer 1:45
Yes, as you say, I think they have to go back to, to World War I. Because I think this was a trauma that affected Europe. The world itself, of course. Indeed, the only time, when it brought a new world. But it was not only the war, who turned out to be a trauma for Europe. It was also the end of the war. The Treaty of Versailles was an old fashioned peace treaty that put the winners into a superior position, and made the loser pay as far as they could. The law (*inaudible*) damaged. There was clearly–the losers, they’re the guilty ones. And the winners were the ones, who had dictated the term. It was understandable from the time, but its effect is, were not very good because it paved the way for a lot of resentment on the part of the losers. Germany, in particular, which opened the door to a new nationalist feeling. And then, when you go further on in time, and you look at the Depression, the nine–the early 1930s, where the economy turned down; where there was a lot of unemployment. This facilitated or paved the way of the Nazi regime to its ascendancy. So Nazis began the World War II and were defeated, fortunately. But this time around, the Allies, and in particular, the French, the Americans, and also the British thought that it was not a good idea to repeat the policy after World War I. The Treaty of Versailles should not be repeated because everyone understood that this bred a new war. So it was primarily French exile politicians–some of them living in Washington, DC that were there martial law–that thought a year, one to two years, before the end of the war on how to deal with the defeat of Germany. And they came up with the idea that it would be much, much better for the future to bind Germany into a security structure. This idea and the help of the Americans and the British, who will (*inaudible*) allow it, the post war, post World War II politicians to build this platform for Europe, which was supposed to end war ever after. The idea was to reconcile Germany, especially with France, but also with the other Allies, and to bring it into a European Community. It is no coincidence that the European Community guarded with coal and steel. It began as a coal and steel community. These two economic sectors were put under common rule of the members of this community, notably France and other European…why coal and steel? Because back then, coal and steel were important resources for waging war. Also, no coincidence that it then progressed the European Common Agricultural Policy. Also interesting–agriculture, agriculture. You need food to wage war in your home country. You can’t rely on imports, of course, because your adversaries may cut you off. And from then on, it progressed. And it progressed to a European Economic Community that brought the countries closer together, but also provided the members a significant economic boost. It was for everyone, a big clash (*inaudible*) to be in there. Initially, the British did not join. Some other…neither, but because it was a very big success, also the British came in, in the 1970s. And out of the European Economic Community evolved to European Union, which was again, a bit broader. It was no longer a transit (*inaudible*) Economic Community, but there are also other areas of common structures added to it. In this process of adding common structures to it, we created both a European exchange rate mechanism, where the exchange rates were tied to each other. And out of that evolved the European Monetary Union with the euro. Another project that came out of it–getting closer together and going over the original structure of the European Economic Community–was the single European market. Truly a singular market of, for goods and services, which was a (*inaudible*) revolution, when you think of it. To be able to have services delivered in another country, which basically meant that the country, where the services are delivered has to accept the regulatory framework of the country, where the services are (*inaudible*) made. Some mutual recognition of regulatory frameworks was involved in that. And then, of course, we have the so-called Schengen area. Schengen is a small village in the Dutch border. That village was decided to have passport-free travel among the countries that belong to this, to this agreement. So we’ve progressed from the two wars that tore Europe apart. World War I, World War II were the events that basically removed Europe from its earlier position as the global leading power. So the lessons from these two wars was we’ll never ever have war in Europe again, and to come closer together economically and also politically.

Preston Pysh 7:50
So Thomas, let’s talk about the Monetary Union. The euro was established by the provisions in the 1992 Master Treaty and adopted by the first eleven member countries in 1999. What was the original goal of adopting the euro?

Thomas Mayer 8:05
Good question. As early as, I think it was 1949, there was a famous French politician, Chagreauf (*inaudible*), who was advising Charles de Gaulle. And he said, “Europe will be made for its money or it will not be made.” So the idea is to have the common money as a instrument for bringing Europe closer together, actually played along all the time as the politicians thought that this would be a very big leap in bringing the European people together. There were efforts all–already much earlier in the early 1970s. There was a plan to build a common currency of…called Werner Plan. This was a Luxembourg Prime Minister, who initiated this or who oversaw the construction of this plan. It was very concrete already. But then, the collapse of the Bretton Woods system. People will remember the dissolution of the link of the dollar to gold in 1971 by Nixon administration. Later on, collapse of the Bretton Woods system and the introduction of a floating exchange rate system in 1973, around 73-4 that finished the plan, which had been built basically into the Bretton Woods system of–fixed by the Charles de Gaulle (*inaudible*) exchange rate. So, out of that came then, this exchange rate mechanism, I already mentioned. Also, took a while to develop that. And then, it progressed from there; serve on to the open monetary unit. It was primarily a political project to bring together European unification. Edit onto that were also economic thoughts. There was the argument that when we bring the economies closer together in a single market for goods and services, it would be much better to have a common money that would be more advantage for having this common market if you also have, have a common money. There were arguments about what would use the exchange costs and so forth. After all, we have to keep in mind that there are many small states in Europe, which in the past, all had their own money. And then, you cross border, you have to exchange, and so forth. But I would think that these economic ideas that come up head-on. The real thing was political.

Stig Brodersen 10:36
So in continuing on that, Thomas, you know, on our show, we primarily have talked about the US dollar, which is, you know, the, the main currency for international transactions. Now, how would you best explain the euro in comparison to the US dollar? How they’re similar and how they’re very different?

Thomas Mayer 10:56
The dollar is, of course, currency of a sovereign nation. I say this without thinking much about–but it’s important to recollect what you think about. That currency of a sovereign nation is very different from a common currency or a single currency for several sovereign nations. So why is that? Let’s go back a step and explain for a moment how our money is created; how it comes into existence. I mean, we all carry around a dollar bill or euro bills in our pocket. And we think that they would, that they would put these bills on deposit at a bank, and they will be there. And the bank would perhaps lend them out and collect them back. But our bank money–what we have in the bank will basically be a full reflection of the banknote issued by the Central Bank, which is called an institution of the State, so that’s wrong. It’s not how it works. In our present monetary system, the bank money–the money that they have on account at the bank is created through credit extension. So if you or I go to the bank, ask for a credit, the bank will look at whether we are credit worthy. They say yes. We find a credit contract. The bank puts in its balance sheet a claim on you and me. So credit course extended, what do they do next? They do not go out and now collect dollar bills or euro bills, in order to fund this credit. No, they create the money as a book entry. They write them on their liability side of the balance sheet. Here is their money for this person, who took out the credit. So what our bank money is the money they have or the bank account is basically a private liability; a liability created by the bank through a deposit holder. Now, the bank, of course, has the right given to it by the State. This is why they needed a license; a banking license to promise that they will exchange this bank money they created. This private liability always, anytime, one-to-one into the official currency, so into dollars or euro. That’s a promise they make, but it’s also a promise they cannot always hold. When the credit turns sour, the bank gets a problem because the money they created for the credit may also turn sour, unless the government guarantees this money and the Central Bank helps in guaranteeing this money. So this is why in the US started out, basically with banks back at that time; taking gold, yeah, and easing in notes. And later on, as the banks, banks were issuing common notes, but not with any government or Central Bank guidance; issued too many. This created a banking crisis in 1908, which laid the foundation of the creation of the Federal Reserve, and later on Big Depression 1930 to 33, they found out–the politicians found out that you also have to have a deposit insurance, so that if the bank disappears, the money doesn’t disappear. This is why the Roosevelt administration then created the FDIC, the Federal Deposit Insurance Corporation. What I’m saying here is in this money system is (*inaudible*), where large deposit of our money, namely the side deposits that they have in the bank are created by the banks and private liability. But it is guaranteed that this private liability can be exchanged into the official currency. In this system, you need a Central Bank to manage the system, and you need a government to provide insurance. Now, look at the euro. We have a Central Bank, the European Central Bank. So this is we can manage the money, but we have many governments and no common deposit insurance. Each government guarantees in its own jurisdiction to ensure the deposit up to at least 100,000 euros. But this insurance is as valuable as the financial capacity of this government. Now, you can say a government can never go bankrupt because usually or in the US, this government has a Central Bank, and when push comes to shove, the Central Bank prints money for this government. Not so in the euro area. Look at Greece. The Greeks found out that the money they had on the bank couldn’t get it out of the country because the banks are bankrupt in 2010, and the government as well. So you could see that in the Greek case that having one money for several states creates big problems. Right now, you can say that they have a Cash Union. So the euro bank note that the ECB issues, signed as like a IOU; signed by the ECB President, so far Mr. Draghi. And now, Madame Lagarde to sign the note. These notes are common credit quality all around. One institution; same insitution issue these notes. But there is–come to the bank money because we do not have a common insurance. The bank’s money; the money on deposit is as good as the bank and the government backing the bank. And this will look very different credit quality, when you have your money and account in Germany. We don’t have strong bank, but we have a government, which is financially, pretty strong. So people feel that this is safe. However, when you have your money on a Greek bank, the Greek banks are also not strong. But on top of it, they have a government, which financially is also weak. So these are two different assets; completely different of speaking quality. Normally, when things are fine that’s not so much of a problem. We have now interest rates in Greece that are not that much above those in Germany. But when, we have economic tension, so let’s say we go into a recession; of companies get into difficulties, some, some of them cannot repay their credits, it is well possible that you see again that the bank money created by the banks through credit extension becomes very different. And we cannot exchange this anymore. It happened during the Greek crisis, for instance. To sum up, the euro is really half baked, when you compare it to the dollar. The dollar, you have banknotes that are equal credit quality, and you have bank accounts that are being made of equal quality through the FDIC, a federal organization. And the euro, we are half-baked. We only have the banknotes of the same credit quality, but the bank accounts are of very different quality.

Preston Pysh 18:46
So, Thomas, with that, would you argue whether the euro has made the European banking stronger or weaker through the years?

Thomas Mayer 18:53
It has not made it stronger. When we think again of how the banking system interacts with the government and the Central Bank, I called it a private public partnership of money production. The Central Bank is the manager of the money production. The government is the guarantor. If something goes wrong, the government will step in. It will fit all the rules for everybody, and the banks are the producers. So we have these three elements working together. But as we discussed already, in the euro area, the allocation of responsibilities is diffused. That is why the banks are operating in different areas of quality. If you’re operating in a jurisdiction with a strong government, you are better off than when you’re operating in your jurisdiction with a weak government financially becoming or financially strong. So in that sense, we have a fragmented banking system. And we also have banks that have very different degrees of safety. So I would say we have not been able to move forward; integrate the banking markets. And an unintegrated banking market, of banking markets, where the banks participated in the market are handicapped by the setup of the system is in my view a weaker banking market than a national banking market, where everyone knows the rules.

Stig Brodersen 20:33
Thomas, many people outside of Europe think of Europe as being divided. If they think of Europe as being divided, more into east and west, and perhaps that’s primarily due to historical reasons. But for you and other economists starting the euro, very often you think of the eurozone as North and South.

Thomas Mayer 20:54
Yes.

Stig Brodersen 20:55
And in between, there’s very little trust. So the North thinks of the South as irresponsible and untrustworthy. And I would just like to apologize to all our listeners in Southern Europe. This comes from perhaps Thomas sitting in, in Germany. I’m sitting here in Denmark in Northern Europe. And the South looks at the North and feels it’s being unfairly treated. And you can probably put some more colorful verbs on that too.

Thomas Mayer 21:23
Okay.

Stig Brodersen 21:24
Could you please elaborate on the lack of trust between the Euro members, and how it continues to poison the relationship between the different areas?

Thomas Mayer 21:34
That is a key issue of really, really important issue. That is not feature(d) at all, when we talked about creating of European monetary–an intercultural divide; a battle of ideas, what does it mean? It means that the different ideas of the role of money and the organization of the economy. Simply speaking, there is a preference on the German side. And in that sense, the German side stand to bid for the Nordic side. There’s a preference for hard money and rules. What does it mean? Rules, market economy, property rights, rule of law; and the role of the government is not to manage the economy, but to make sure that the rules are being obeyed. Money, have money produced by an institution, whose only focus is price stability–not employment, not growth–price stability. Kind of an intelligent gold mine, and that’s the Nordic, but you could also say, the German view. Take the other one, the French or the Southern view; the southern view, the government is–has a much stronger role in managing the economy. More over, money is an instrument of economic policy; of government policy. So you use money or you use monetary (*inaudible*) policy to achieve certain economic ob–objectives. This can range from stabilizing the business cycle to funding important project of the government, so that they–Central Bank funds government ability. So these, these two ideas; these two philosophies are clashing. Interestingly, there was–I cannot remember that there was any talk of that, when the euro was created. Then, the key issue that they haven’t resolved. When you look at the Master Treaty. This is the predecessor of the European treaties regulating monetary union. When you look at this Master Treaty, which is now the, the European Treaty, you will find manufactured. They couldn’t agree to…on, on certain position, so they touched it. For instance, there is a rule that governments must not be bailed out by other governments or their Central Bank, when they’re, when they’re in difficulties. That’s a rule, right? On the other hand, they are also opening somewhere else in the treaty–where a government in trouble can get support from other governments. As we saw the euro crisis evolve from 2009 with the Greeks first confessed that they had a problem with their statistics. So from 2009 onwards, until its peak in 2012, there was his shift of the structure; of the system; of the–of E and U from originally more on the German side towards the French side; or the you could call it from the Nordic side towards the Southern side. The euro was sliding from east to west as “they simply disregarded or broke,” as Madame Lagarde said, “or broke rule to save the euro.” And it peaked in the sentence of the ECB President Draghi in June. I think it was June 2012, when he said, “We shall do whatever it takes to save the euro.” He added on this on our mandate, but–and most people remembered; and most people heard, they said, “We shall do whatever it takes.” And this disagreement of whether rules should reign or discretion should reign; this disagreement remains with us.

Preston Pysh 23:08
So keeping that in mind, which countries do you think benefit from the euro versus the countries that don’t?

Thomas Mayer 26:10
Yeah, this is a question that you would answer differently from each country’s vantage point. If you are an Italian, you will see it’s the German, who benefit most from the euro. If you would be a German, you would say it’s Italians, who benefit most from the euro. If you are French, you would say that it’s largely, again, the Germans, who benefit from the euro. If you are Danish, perhaps you would say, the Greeks benefited a lot from the euro or the Italians. So the country’s indebted, why is that? The Nordic countries, they look primarily at the potential liabilities that they’re accumulating by having given credit to the other countries, especially in the South; notably Greece, but also Spain, Portugal, then the smaller one, Cyprus. But the Nordic ones are thinking that they are kind of keeping the structure up. They are footing the bill. And as far as Greece is concerned, they don’t really expect to get their money back. So they say will other benefit. Then, when you are in a Southern country, you will see that the Northern countries haven’t given their money for free. They have imposed conditions. What you had to do, you had to follow the rules of the program that was managed by the IMF in cooperation with the European Commission and the European Central Bank. The old sovereignty was entrenched. Other people, bureaucrats would come in and tell your elected government what it has to do, so you feel that the euro is largely benefiting the others. And many of the others say the euro is basically an instrument to cement German hegemony in Europe. It’s a very contentious question of which that I think you cannot really answer it, answer it objectively. Economists have tried to come up with estimates in whether a common currency is economically a good thing or a bad thing. Most interestingly, the UK administration under Tony Blair, conducted every year tests, whether the euro is good or bad because they have said that they might get in, where they find out that it’s good. And the test is always inconclusive. It’s a very subjective issue. I guess, it largely boiled down to your judgment. That you would think that advancing the euro is a good idea to keeping Europe together, or that you fear that advancing the euro may actually push Europe more apart.

Stig Brodersen 29:09
Let’s talk more about the euro. You made some very interesting research about how you see the future of the euro. And I’ll definitely make sure to link to all of that in the show notes for the audience to look more into. Thomas, you made the argument that disassociation of the euro could, if not save, then make the Monetary Union stronger, and make it resilient for the future. Now, could you please elaborate on what needs to happen before we can digitalize the euro and why it would work?

Thomas Mayer 29:42
Yeah, we talked we discussed the basically two tier money that we have. We have a cash union, but we do not have a bank money union. And we also touched upon the very high debt that’s some of the countries have. Italy more than 135% of GDP; Greece, a very large number. If I remember correctly, we are not touching about 180% of GDP. Even, even France has something like touching a 100% of GDP. So we have highly indebted countries. And we have a two tier monetary union, where only the cash is really of the same quality within the entire monetary union. Now, what we should do is, we have to deal with two things. We have to make these countries financially stronger. And secondly, we have to overcome the difference between cash and bank money. Let’s talk about the second first. Basically, you can overcome the bank and cash money if you require for every bank money that belongs to, to you and me; that every euro in the bank is being backed by one euro of bank reserves in the ECB’s account. So if I have a euro in a bank account, the bank has one euro to back this in the ECB’s account. You do this as a safe deposit. Safe deposit means even if the bank disappears, the euro that I have in this account will continue to exist because its counterpart in the ECB’s account. So that would be the first–that create a safe deposit at (*inaudible*) either. Interestingly, the Central Banks have shown how it can be done through quantitative easing. They have done quantitative easing for other purposes, but it shows how it can go. When a Central Bank eyes a bond, then it asks a commercial bank to look for the bond, or if it has it on its balance sheet expansion to sell this bond to the Central Bank. The Central Bank pays this with Central Bank money for this bond. And the bank gets the Central Bank’s money in its account, and it pays the bond holder to acquire this bond by creating for–to, for this bond holder, bank money. So bond holder gives the money to the bank; gets bank money in return; and the bank gets the bond to the Central Bank and gets reserve money in return. And in the end, the Central Bank has the bond; has an asset. The reserve money is a liability. The bank has the reserve money as an asset, and the side deposit, the bank money is a liability. The side deposit, the euro on deposit that may have created this wave; all the way covered basically with the central bank. Presently, until (*inaudible*), we don’t link them together. So you cannot–if you have a euro on the bank, you cannot say this euro in the bank is one-to-one back by a, a euro deposited on, in the Central Bank. That’s not the case. But you can do this. Remember what I said. It’s being created by the Central Bank buying bonds. So what could the Central Bank do to help the government? It could buy government bond. It already did buy government bond. You can buy more government bond. Keep these government bonds out of the market. Keep them as a stock, as a cover, so the reserve money that it is used (*inaudible*), which backs the bank money that the banks have created to acquire the bonds. So then, you have a side deposit, and you have taken government debt out of the market. This is actually something economists have long talked about. A group of preeminent–your American economists, including such big names as Irving Fisher and Frank Knight, and other…In 1933, we have proposed this to the Roosevelt administration. Roosevelt decided not to do it for many reasons, let’s leave that out. We can talk long about it. But that’s the plan that has been developed and has been around; an idea that has been around for a long time. Now, as I said, an old idea, but you can actually now go one step further. You can now say, “Why have this bank money still being managed by the banks?” Because it’s covered one-to-one by reserve money. Why not take the bank money and the reserve money that goes with it to the liability on the banking’s balance sheet and asset on the banking’s balance sheet, or push it now on to the Central Bank? And people would say, “Oh, God! Everyone having an account with a Central Bank, how big will that Central Bank have to be?” I mean, they would have miles and miles of offices to, to deal with the account holders. Here comes digitalization. You don’t need this. If you make reserve money and electronic bonds tradable via blockchain, then you can have peer-to-peer payments or money transfers via blockchain without any administration, build around it. So you could actually by digitizing the euro, you could actually create the equivalent of the paper money euro in cyberspace. The tools will be complimentary, so you could take the cyberspace–the digital euros if you want, yeah? That you can create via blockchain from person-to-person without having to hand it over personally. You can take–stick (*inaudible*) to the euro, and let’s say, exchange it at the Central Bank again to pay for euro if you want. With that, you would have ended the role of the bank as the agent for cashless payments. This is by the way, how they came into existence, making cashless payments possible. But you don’t need them, when you deal with crypto money; when you can trade money on a blockchain. So you’re in this, and then, you’ll let them now deal in the future with taking in savings, deposits, and lending them all to a creditor.

Preston Pysh 36:38
We’ve seen innovation in all fields and money is no different, especially, right now. You know, you can go back to the Sumerian barley money 5000 years ago, or you can look at what’s happening right now. And progressive economists would argue that it’s only a question of when the euro becomes digital. Well, many economists argue that it will never happen. What do you think the timeline is for the digitization of the euro? And which steps are feasible in the current political climate?

Thomas Mayer 37:07
Yes, of course, I come here from a, for a certain position. And so then, piece of this (*inaudible*), so I’d say that this pronouncement of digital money will never come reminds me a bit of the pronouncement that the horse will always be the primary means of transportation and cars are only a short-lived idea that will soon go away. No, I, I think digital money will come. It is like paper money that was invented in China and was brought in the 17th century to Europe, and the paper money took a lot, and simply pushed out the metal base money because it was easier to handle. And I think you have to look at digital money as a money revolution like paper money. And so I–forgive me, but I think that the authorities or whoever will not be able to forbid it. You can’t forbid it. It’s there. You can’t uninvent the blockchain. The bigger question that I see is how the money system will run in the digital area. Presently, I think every central bank, no that, that’s too much; but most Central Banks, and they include, of course, the Federal Reserve, the People’s Bank of China; the Swedish Riksbank, which always, by the way, is a money pioneer. They were the first to bring paper money to, to Europe; the bank of England; even the ECB, even ECB. They all presently work on digital money. The BIS, the Bank International Settlement–this is bank of the Central Banks–has created a working group led by Mr. Cœuré, presently still an ECB governing council member, but soon, I trust, the head of this group. So they are heading this group. So we, we shall see digital money, no doubt about it, and digital Central Bank money. But the bigger question is: If the digital Central Bank money just like the paper mode? And, and, it does not replace the bank money? You could think of that. You could leave the bank money as it is in place. Bank money are created through credit extension by the banks with all the problems associated, but serving certain purposes. And have instead of the paper bank mode just a digital money, but not change decision. That will be one way to go about it. I can understand that when the existing system works well, this may be the way to go. It’s probably the way the US will go or whoever. But in the euro, we have a special situation. I think the euro as it is set up is not working. Because in this system of credit money, where we create the bank money through credit extension, this does not function. Then will have many sovereign nations using the same money and not actually being able to agree on how to ensure this because the North feels that it’s paying for the South, and so on, and so forth. For that particular money, I think a digitalization offers change of the system. It is almost like going from the combustion engine to the electric engine. So my bottom line with this is, wish the Central Bank money will come, but whether it’s going to come, together with the change of the credit money system into hundred percent money. This isn’t an early official call (*inaudible*), but hundred percent money–that’s another question. But in my view, it would be a good opportunity to put the euro on a firm footing and avoid its eventual collapse, which could well happen in the next severe recession.

Stig Brodersen 40:55
I think you bring up a really good point and the euro in the current structure is just now that fit for competing with the other major currencies.

Thomas Mayer 41:04
That’s right.

Stig Brodersen 41:04
I definitely think you have a good point there. Let’s talk slightly more operational. Let’s say that it will be implemented. We will have a digital currency in this scenario. How would that impact the business and banks in the euro area?

Thomas Mayer 41:21
Yes, actually, I think if you are a consumer and you’re not interested in all these things, I think you will not find much difference. You will probably still pay, but probably not worth the bank card, but with your mobile phone or smartphone. Or if you don’t like this, you can still get your paper notes out of a cash machine. So the uninterested average person doesn’t have to worry about what is driving the payment app that she or he passed on a smart phone. It’s more for what is going on behind it. It’s kind of, kind of like if you’re driving a car, right? You drive 20 or not (*inaudible*) necessarily, when you’re sort of going along; when–you should say you’re riding the car, you will not necessarily find some–that much of a difference, whether it’s electric or whether it is a combustion engine. If you, when you drive it, when you (*inaudible*), you may feel it. So for the, for the rider, it is not such a big deal, but when you drive it, then you’re also dealing with it. It, it’s very different. I actually have a different role. I take the banks, as we said, the banks presently create money by extending credit. In such a system as I have sketched it, the banks will not create money. It will be the Central Bank that will do it. Only the central bank that will do it; the banks not. The banks would collect existing money and lend the existing money on to borrowers, who could use it to…whatever, whatever purpose; fund an investment, whatever, you know? Fund your house, construction, or purchase, or whatever. It would not create it. The money would always be used for one thing. So if I give it up and do not use it as–for consumption. I save it. I give it up. I give it to someone else. Try to do it. I put it in my bank, and the bank can give it to someone, who invests with it. He uses it to pay construction workers or whatever. And the construction workers put it in the bank as before. That’s different. That’s different from the situation today because it can create money for double use or free your resources. If I go to the bank, take out the credit; get the money in my account. I spend it. I engage construction workers, but no one else may have saved at all. So we create claims in multiple numbers; claims on the same pre-originals (*inaudible*). So banks, as I said then, would collect the existing money and lend it. On a good feet, they would be more like Crowdfunder. Perhaps, this one is different. We have an equity cushion, equity position, and this cushion would work like a first lot of insurance. So let’s say a bank has 10% equity of its balance sheet; ten, the first 10% of the lot are insured. Once equity is gone, the bank is bankrupt. You have the credit as the–do the assets as, as the creditor of, of the bank. So that’s the role of the bank. So what of the government? First of all, the government who can actually get a big boost (*inaudible*) on their fiscal, on, on their debt position. As I mentioned before, when you take this government bond as a cover for it, out–then the money, you can reduce the outstanding government debt because this covers permanently, permanently needed. Presently, we have about 7 billion euros in bank. Money as side deposit, you should take this out and buy government bonds for this. You can actually review euro area government debt ratio from 85% of GDP at present to less than 25% of GDP. And you can do this for every single country. Some would benefit more. Let’s say, the Italians could go down from 135 to 25. The Germans would benefit less. They would go down from a little bit more 16 to 25. But it could be generate(d) (*inaudible*) in this regard because everyone would benefit. This would also allow the government now to engage in fiscal growth checks in a prudent way because they would have to take into account that they will not be bailed out anymore; because they could not have the banks create new money for them. And they would not be able to force this European Central Bank in this new system to create digital money for them. So the government’s would get relief, but also more room for freedom. And, of course, the investors would be more likely to presently in the capital markets. They would either raise money on the capital market, existing money and/or they could go to the banks or the banks will mediate (*inaudible*) accepting money to them. If there would be governments who cannot deal with this because they need money for fiscal purposes, they could in my view, issue tokens; token money to fund their expenses. Remember that the Greeks experimented with this as a parallel currency; of fiscal currency. And the Italians are toying with the idea with so-called mini bots, which are basically short dated government debt issued every currency because it’s without interest, and with infinite maturity to fund government projects. So I wouldn’t be, be too rigid about it. Let’s have the euro as a non political money, created solely for the benefit of the user. Have the government to fiscally improve (*inaudible*) policies and hopefully live within their means. But if they don’t, then they can issue their own money in parallel to the euro. See whether they get them any advantage. I doubt, but I wouldn’t forbid it.

Stig Brodersen 47:17
So, Thomas, here on the show, we talk a lot about how various stocks will perform during the next recession. But I think there’s an under appreciation of understanding how the main currencies will perform. So if we zoom out, and you know, sum up some of the things we learned here today, together with you, how can the investor, whether that investor is, you know, situated in Europe, US, or wherever that might be, how can they look at how the euro will be positioned for the next recession, giving everything we talked about in this interview?

Thomas Mayer 47:53
Yes. Let me start with one caveat. What I’m saying is purely the view of an economist, and there is certainly no investment recommendation. I think as an economist that the next recession will put considerable strain on the banks and on the financial system. We know that they have higher debt now than we had before the last debt crisis that led to the Great Recession of 2007-2008. High debt that would put a lot of stress on the banking system, and put a lot of stress on our existing money system. And in times of this, of such stress, the weakest currencies are often the ones that suffer most. It could see this already in the A team with some of the emerging markets; country currencies taking it as the Fed was raising rates. And I think then, with your downturn, we can see a flight to safe places to save currency. Now within the existing money system, usually the dollar is such a currency. Sometimes the yen. People will fly out of the money system and fly to gold. We’ve already seen quite a bit of appreciation of the gold price. And I’m afraid, when we have a serious recession, the biggest center for those forces will fall on the euro as the euro is half-baked. And it is conceivable that like in the Euro Crisis of 2010, that some of the euro bank money will no longer be convertible, i.e. people cannot use it to make payments cross border. This is what the Greeks learned. When the ECB stopped, the access of the Greek banks to its refinancing facility. There’s so small (*inaudible*) that if you have euros and deposit at a Greek bank, you couldn’t transfer them abroad. So what did you do? We’re trying to get hold of your bank notes. They’re going into the cash machine; try to get out your deposit money in the form of bank notes. Well, they also stop that. You have a strict limit imposed on how many banknotes; how much money in the form of banknotes you could take out. So concern is, during the next year via recession, we may see the Greek predicament of 2010, perhaps magic lie, and being seen in other countries. People will then flee out of the US after they can follow gold. Maybe the haven, where they will go.

Stig Brodersen 50:43
Very, very interesting how you look at this. Thomas, thank you so much for coming here on the show. As a trained economist myself, I’m humbled by the wealth of knowledge that, that you bring to the show, and how you, how you explain the euro so well. Where can the audience learn more about you and Flossbach von Storch Research Institute.

Thomas Mayer 51:05
Yes, we have a website. You can find it very easily if you put it into a search machine: Flossbach von Storch Research Institute. Also you can type in: www. x r s -rm.com.

Preston Pysh 51:23
So this is fantastic stuff, Thomas. Thank you so much for making time for us! I know I thoroughly enjoyed this conversation and learning from you. We’ll be sure to have links in the show notes for anybody to click on those, and check out everything that you just talked about. Thank you so much.

Thomas Mayer 51:39
My pleasure!

Stig Brodersen 51:40
All right. So before we let you go, we would like to play a short clip for our new show, Millennial Investing, hosted by Robert Leonard. If you like to get more content from The Investor’s Podcast Network, and you just started to invest. Millennial Investing takes you through all areas of investing from real estate, stock investing, how to invest in yourself, you name it. And in this short clip I’m going to play, the guest is Jason Moser, who you might know from the month before, and the topic is stock picking. Enjoy.

Robert Leonard 52:13
So in this part of the show, I want to do something that we haven’t been able to do yet. And I want to take a deep dive into an individual stock pick that you have. I want to walk the listeners through a full analysis of better understanding of how to analyze a company. Let’s dive into that a little bit more. Which company are we going to be looking at today?

Jason Moser 52:31
Etsy. Ticker is E-T-S-Y.

Robert Leonard 52:35
So first thing, how did you find this company? You know, with thousands and thousands of companies available to invest in, how did this one make it onto your radar, specifically?

Jason Moser 52:44
Yeah, you know, I remember the brand name Etsy from when it is started in the early I guess, 2010 or 11, or something like that. And it just was something that I had seen. I remember when it went public, then I thought I just said, “Noted that, it’s gone public.” But I have my younger daughter hit this stage at school, where she was in the making a lot of slime. It was like the stuff to do at school. Like they’re making like this craft slime with different colors, and textures, and selling. And so she got into doing that. And I mean, you know, they were selling it. And so she asked about opening up a little slime store online. And so we went actually through the process on Etsy and doing that, and all along the way I was thinking, “Man, this is really robust setup.” And it got me just interested in at least what kind of business it was. And so, then I went to work and I, I read through the 10K, you know, which is basically the annual report and just learned more about the actual business itself; its model like how does it make money? I think that’s the key focus with any company if you’re going to take a look at it is know how it makes its money. I mean, you’ll see, I think, metrics on TV thrown out there all the time P/E ratio and whatnot. I mean, that’s all fine, but it doesn’t really tell you about the business itself. So learning about how Etsy worked as a business. Then, trying to figure out, okay, what kind of a market is there for this? How big of a market opportunity is this? And then, the $50,000 question, and as we’ve been asking, with so many companies is how did they survive Amazon? Because, I mean, Etsy is ultimately the business model. It’s a very capital light marketplace. You know, it’s just, it’s a great network of people, who sell their goods. But the Etsy business itself, I mean, they don’t carry any inventory. They don’t own any really stuff, right? They’re just connecting people. And so learning a little bit more about all of that. It got to the point, where you could see it was a growing business with a big market opportunity. And, you know, when you have those capital light businesses, they can make a lot of money along the way. It did seem like there were some concerns regarding leadership, and I think Amazon as well. And I think that kept a lid on the stock for a while. I think the market wasn’t very fond of it. But there’s been a leadership change there. Back in 2017, Joshua Silverman, I believe it’s his name; and is the CEO there now. And he’s just, he’s done a lot of things to grow this network; make it more valuable to the buyers and sellers that use it. And that’s showing through all of the metrics that they report core in or core out, so you see a pretty good business that’s growing with good leadership. Then, you start thinking, “All right, well, maybe that would make a good investment.” And then in this case, it’s been a good one, so far. We still got some time to go.

Stig Brodersen 55:06
Okay, guys, so if you would like to listen to the rest of the episode with Jason Moser, I’ll make sure to link to the episode in the show notes. Or even better, make sure to subscribe to Millennial Investing by searching for The Investor’s Podcast Network on Apple’s podcast app, Spotify, or whatever podcast app you’re using. All right, so that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We see each other again next week.

Outro 55:33
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