Preston Pysh  3:20  

We will be the witchdoctors for you,folks. But anyway, let’s go ahead and kick this thing off. The first thing I want to talk about before we really start talking about the history of the Fed and how we got into the position that we’re at, I want to talk about this difference between economic inflation versus currency inflation.

I think a lot of people get that terminology confused. A lot of people hear the word inflation, and they immediately think, or at least I used to think that it was just talking about currency inflation. That term is often used interchangeably, where you hear a lot of people saying, “Oh, well, we got to worry about deflation right now.” The terms really get confusing. 

I’m going to make it real simple for folks. There’s economic inflation and deflation that occurs. That is caused by the addition of credit into the economy. When you look back at the 1950s, 1960s, and 1970s, during that timeframe, the United States was going through an enormous economic inflation, where the economy was growing and booming. 

This was all because of the fact that the Fed was increasing the supply of money or the credit in the system, not real dollars, but the credit in the system. This was making the economy just go like crazy. When that’s happening, you don’t necessarily see the currency inflating during that period…

But prior to that, it wasn’t really noticeable that the currency was being inflated. This is also because it was tied to gold back during that period. It’s really important to know though that the economic inflation occurred. 

Then past 1981 and on, you had this economic deflation that was occurring, where the currency was starting to inflate. Okay, so that’s the terminology gap that I think a lot of people get confused on. 

When we discuss some of the things in here, we’re going to try real hard to make sure that we say economic inflation versus currency, inflation and deflation, whenever we’re discussing these topics. 

The first thing that I think people need to understand before we get into this is the idea of a money multiplier, because in my personal opinion, that’s really the critical variable to all of this. Whenever you listen to Ray Dalio and some of these other folks, hopefully you’ve watched the video that Stig and I’ve been talking about, because we just find that to be insanely important for your own education as we go through this. 

Anyway, the critical variable, in my opinion, is this money multiplier, because that’s what separates real dollars, the ones that you find in your wallet versus credit that is created through the reserve ratio and through the Federal Reserve. 

What’s the common term, if you were going to Google money multiplier, what that is, that’s the Fed’s tool that they use in order to allow banks to lend more than the dollars that they’re actually sitting on. 

Okay, so let’s use an example. Let’s say that Stig goes to the bank here in the US, which he can’t because he’s from Denmark, but let’s just say that he can. He deposits $10 into the bank. Whenever he makes that deposit of 10 real dollars, he’s actually holding those $10. He deposits that into the bank, the bank then takes that and puts it into his account. Then they can lend out money based on that $10 deposit that Stig just gave them. 

The amount that they can lend out is based off of the reserve ratio, or also called the money multiplier. That money multiplier is adjusted by the Federal Reserve. 

Ben Bernanke, I think a lot of people know now it’s Janet Yellen, Alan Greenspan, they were all the chairman of the Federal Reserve. They were the ones actually calling the shots saying, “Jey, the money multiplier is now whatever.” 

Okay, so let me give you an idea of this example. With Stig depositing $10 into the bank, if the money multiplier was 10, that means that the bank could then lend out $100, even though they were only sitting on $10 on the deposit.

You might be asking, “Well, where in the world are they going to get $100, if they only got 10 from Stig and there’s no other money at play here?” Well, they get it from the Federal Reserve.

The Federal Reserve would supply the bank with that extra money, and then they could make off that loan. So the money is really created from thin air from the Federal Reserve in order to do that. 

As you might imagine, if the Federal Reserve changes that money multiplier down to five, okay, that contraction of the money that’s available, the credit, the key word is credit. 

I think we need to distinguish between money and credit. It’s used interchangeably and that’s what causes all the confusion. 

If that money multiplier changes to five, now the bank is only able to lend out $50 for every $10 that would be the positive to it. That has a tremendous impact on the economy. That’s what I think a lot of people don’t realize when they see the stock market go crazy, they say, “Wall Street this and that. It’s big business,” but truly at the heart of this, it’s the money multiplier. It is the way that the Fed adjusts that money multiplier that is really controlling the way our economy interacts from time to time. 

What is really interesting is when we go back in time and we look at history over the last 100 years, we can see how we arrived at the current situation that we’re in. I’m gonna throw it over to Stig.

Stig Brodersen  9:59  

One thing I think is extremely interesting here is the credit thing that you’re talking about because when we’re talking about money, is money really credit? So if we think about money in terms of green dollar bills, that’s one thing. We have something like $3 trillion printed, but in terms of credit, we actually have $50 trillion. 

There’s a huge difference between what you might be thinking is money, and then what credit is. It is basically just produced in the system. That’s also one of the reasons why we have these cycles, because we have this credit that can just go crazy and all over the place. That is basically what you’re seeing right now. 

Understanding the difference between money that you can touch and then credit in the system, that’s probably one of the first steps you really have to pay close attention to for this podcast episode.

People might ask, “Well, if there’s only $3 trillion of real money and there’s 50 trillion of this credit, or fake money, what happens if everybody calls the bank on their loans, and they make a bank run?” which was commonly referred to back in the early 1900. 

Preston Pysh  11:16  

Well, the fact of the matter is, the Federal Reserve would have to print money. They’d have to make those real. Then what you’d see is a drastic inflation. What the Fed is banking on, and no pun intended, is that there isn’t a run on those dollars, that the psychology of the overall economy takes place and just holds everything in their place.

Stig Brodersen  11:40  

This is really a serious concern. This is actually the reason why the Fed was created back in the early 1900s because they wanted to prevent these bank runs. We don’t see them that often. 

We actually saw it in Greece a few years ago, but we don’t see that often in Western Europe and in the US. However, it’s a serious concern. 

Today, the Fed has a lot of obligations, but basically, the whole reason why the Fed was created was to avoid these bank runs, which is extremely important to avoid for any developed economy because it would completely ruin the financial system, which is the basis for economic growth for the country.

Preston Pysh  12:32  

Stig brings up a good point about the history of how the central banks came to existence today. Back in 1907, in the United States, there was a really bad panic that was called the Panic of 1907. 

There was no central bank at the time, and there were bank runs. I want to say this persisted for like two years that they had a really deep recession. When the United States looked around the world, they saw that Great Britain, Germany, all these different countries had their own central banks. They were able to alleviate these constant downturns by basically using this system where they would put an influx of money into the system during the recession and it would subside a lot faster. 

During that time frame, 1910 to 1914 timeframe in the United States is when the Federal Reserve came to fruition, there’s a really interesting book called “The Creature From Jekyll Island” where this gentleman describes this as the formation of the Federal Reserve. It’s a really good start. He does a great job describing finance and making it interesting, unlike most finance books.

It’s really interesting that he talks about 1/4 of the entire world’s wealth gathered at Jekyll Island in order to create the Fed with the few representatives that they had from all these big wealthy banks out of New York. Kind of a really interesting story. We’ll have that book up on the show notes, if you guys are interested in reading it. 

Anyway, 1914 hits and that’s World War One. This allowed Europe, Great Britain or Germany specifically to incur large amounts of debt when they abandoned the gold standard during this First World War. 

This opened the door for the US to come in as a world economic power. That was kind of the foundation of the Federal Reserve. As we progress in time, and we look at what happened with the Federal Reserve, we could talk about the Great Depression, but we’re really not going to talk about that very much because by the end of the Great Depression, in the 1940 timeframe, the US had actually done pretty well at reducing their amount of total debt to the GDP at that time. 

By 1940, the federal debt to GDP was only 50%. That’s actually really good when you look around the world right now, we’re at what 330 odd percent?

Stig Brodersen  14:44  

Yeah, something like that.

Preston Pysh  14:45  

Yes, it’s a very high total debt to GDP. The federal debt to GDP, I think is still under 100%, but still very high. 

When you look at that timeframe coming out of the Great Depression, the US was actually in a very good position as far as management of debt. The key factor, that money multiplier that we had talked about, the money multiplier in 1940 was a four. That means for every dollar they could lend out for $4. That’s what the banks did.

As this progression takes place from 1940, clear up to where we’re at right now, you’re going to see that money multiplier totally ballooned. At its peak in the early 1980s, when inflation was at its highest, that money multiplier was huge. It was at 12. That’s the highest that it got over the last 100 years. 

What’s really interesting is when that money multipliers high, the credit is high. Everyone thinks there are real dollars in the system, even though there’s not. That’s what’s causing this economic inflation to occur. That’s why you saw the US just took off during that period from the 1940s. 

We’ll briefly talk about World War Two and its impact, but from the 1940s up to 1981, you saw this economic inflation occur. What’s interesting in 1940, like we said, the federal debt to GDP was only 50%. 

However, fast forward, just six years later, because of World War Two, the US went on an enormous spending binge. The federal debt to GDP went up to 115%. It more than doubled in a six year period. What you saw, in order for the US to account for that, they had to adjust this money multiplier. Like I said, in 1940, the money multiplier was four. So they lend out $4 for every $1. 

By 1946, six years later, that money multiplier had increased to six. So they’re now lending out $6 for every $1. That is a very high money multiplier. 

What didn’t help things in order for them to pay down that high debt from World War Two, they kept increasing that money multiplier and increasing more credit into the system. 

Some of our older listeners that might be from the era of the 1960s will remember that era as being a very amazing time when everything was really kind of booming, because you had all this economic inflation.

If you look at the money multiplier in the mid 1960s, it was at an eight. Just in 20 years, from 1940 to 1960, you had the money supply literally doubled. It doubled because of the credit creation, it wasn’t like they’re adding more dollars here. They were just adding more credit into the system through the Federal Reserve. 

That was the reason for this economic inflation. That’s why you saw things taking off during that period. The reason that we’re talking about this, you might be like, “Why in the world is Preston talking about the 1940s and 1960s? How does that have anything to do with today?”

It has everything to do with today because of economic inflation. Think of currency inflation and economic inflation as being a rope on a pulley. Whenever you pull on one side, the other side has to go up. When you pull on the other side to go back down, it just works in tandem with this pulley system. 

When economic inflation starts going up, okay, no one’s seeing the currency inflation, but whenever you start pulling that economic inflation down, that’s when the currency inflation has to start coming up. 

What’s really ironic is when we talk about this economic inflation and how it was really growing through 1960, into 1970… 1971, when the money multiplier was a 10, this was when President Nixon came on. He said that we’re coming off the gold standard right in 1971. 

You saw that money multiplier keep trickling up. Then in 1971, that’s when he came in and said, “You know what, we can’t even back these 10 times the real dollars that are in the system. We can’t back this up anymore so we have to come off the gold standard, because we can’t actually fulfill our obligation here.”

He comes off the gold standard and that’s where things really got interesting. The important part, I think, that a lot of people need to understand, because they’re probably thinking, “Why in the world did these leaders of that generation do this?” 

It really comes down to one thing: I think that the United States was stunned so much by the Great Depression and having unemployment at just epic proportions that they remembered that as they were going through this. They basically used the Federal Reserve as a tool to prevent these unemployment rates. 

And so, throughout that entire period, especially during Johnson’s administration in the mid 1960s, it was all about this idea of his Great Society of no one being out of work. You saw that carry on for decades where they thought, “Let’s just use the Fed to increase the money supply through the money multiplier and we won’t have to ever have people unemployed ever again.” It was pretty much the mindset. 

Unfortunately, that mindset over decades, has been what really created this oversupply of money and the consequence that we’re kind of facing today and how it’s all shaking out. 

Like I said, 1971, Nixon came off the gold standard. The money multiplier at that point in time was a 10. Now, this is where it got really bad, because you had a Fed Chairman, Arthur Burns from 1971 to 1981. 

Burns just kept things and increased the money multiplier through the 70s. Into the 80s, really doing nothing to try to stunt this oversupply of money. You saw the money multiplier go from 10 to 12, over that 10 year period. 

This was also the first decade that we came off the gold standard. What you saw was the value of the dollar go from $1, down to 45 cents, when compared to the gold that it used to represent. 

In just a decade, you saw the value of the dollar literally get cut in half. This is where you started seeing the currency start to just inflate. Really interesting time. This is when you had a person come into the Fed for the first time that recognized, “Hey, this is not sustainable. We just can’t keep printing money until we have an epic failure.” That person was Paul Volcker. 

Paul Volcker came in in 1979 and he was the Fed Chairman from 1979 to 1987.  He made some very hard decisions. During this time period, if people remember back then, this was when inflation was just through the roof: 16%.

You want to go out and buy a house, those were the interest rates they were dealing with back then. The interest rates peaked in 1981. Now, what you’re going to find, and this is what’s really interesting, when you go back and you look at all these charts, you see these 100-year bubbles or 75-year bubbles, you will see a common theme: the money multiplier changed from 1940 until right now. It looks like a big giant bubble when the bubble peaked in 1981. 

If you look at interest rates, it looks like a big giant bubble and the bubble peaked in 1981. Then they’ve come back down ever since. They’ve been going down ever since 1981. If you look at GDP growth, it was a big bubble from 1940, clear up 1981 then back down.

We’re going to have these charts in the show notes so you can see exactly what I’m talking about: how the interest rates moved in this 100-year cycle, how the GDP moves in this 100-year cycle, how the money multiplier moves in this 100-year cycle. It’s all inter-related. 

When Paul Volcker came in, he made these hard decisions. He basically started contracting this money multiplier, and that had a shock to the system. Particularly by 1987, you saw the biggest stock market downturn of all time. It was a total shock to the system. 

This was also when Alan Greenspan came in. This was one of his first economic emergencies that he handled. What people have come to realize is that it’s very easy. This is very easy for me to say this is another Monday morning quarterback kind of thing. It’s very easy to spark the economy when you have a very big interest rate lever that you can adjust and move it down. 

In 1987, whenever they had this big stock market crash, Alan Greenspan came in. Interest rates were in the 8% to 10% range. 

Alan Greenspan had a very big lever to play with as the stock market took a big hit and the economy is contracting. All he has to do is lower the interest rates and it immediately sparks it back up again. He’s able to control that very easily. This persists, and Alan Greenspan stays there for a very long time, clear up to… What was it in 2006? 

What he had was this interest rate lever to continue to adjust as each time the US went through another business cycle, if you will. He was able to adjust those interest rates and control it. 

However, here’s where it gets scary. If you look at these charts, you can see how the interest rates peaked in 1981. They’ve consistently been coming down at a very steady rate. 

The reason that they’ve been doing that is because the Fed has to do that. They have to keep that interest rate lower than your GDP growth, because if they do not, that’s what’s going to set off a very large economic collapse.

Stig Brodersen  24:51  

I actually would like to talk about the stock market. Sorry about that. I can’t help talking about the stock market. But what is actually extremely interesting is what you see happening to the stock market after 1981. It’s something that we also discussed early on the podcast, not this episode, though:the interest rate’s impact on asset prices. 

Asset prices surely also include the stock market. So what you would see from 1981 and then 70 years later is that the stock market would increase more than 11 fold. This is a period of time where I think the GDP growth in the US was something like, I think triple or something during that period. But still, you saw 11 times as high a stock market. 

Then you can compare that from the period from ’64 to ’81, where you had steadily increasing in the interest rate. Then the stock market failed. It didn’t move. It moved for something like 874 to 875. That’s the Dow we’re talking about. Clearly nothing really happened. 

A lot of the reason for this is really the interest rate. The interest rate has an enormous impact on how asset prices go. Another thing I’d like to comment on is Greenspan’s ideology in terms of the stock market, because one quote he is very famous for saying is that, “As long as the stock market increases in price, this is the most important factor for simulating the economy.”

I know it’s easy to look back at that now. As Preston said, being one on one quarterbacks, but I think that’s a very dangerous approach to have to the stock market, just as long as price increases stocks, that will do more than anything to stimulate the economy. Now, it might do that in the short run, but in the long run, it’s a dangerous approach to have.

As you come down off of this economic inflation, okay, the economy was growing from the 40s, clear up into the 1980s. As Paul Volcker started this trend of changing that money multiplier and bringing it back down, that’s when we started coming off this ledge. It’s been a slippery slope ever since. 

Preston Pysh  27:22  

What you’ve seen is that the prices of assets is where the money kind of started plugging itself into the 1990s, as you saw the stock market just explode. It did not help that Alan Greenspan really did nothing at the 1995-1996 timeframe, to do something about these insane stock market values. You saw PE ratios as high… I think the average PE ratio was what? 70 or 80? It was totally insane. Your average PR ratio is like 15 or 14, somewhere around in there over a 100-year period.

For it to be at a PE of 80 is literally totally nuts. For the Fed to not be raising rates through the nose at that point for over a four-year period is very, I don’t know… I don’t even have words for it to be quite honest. It’s very upsetting. 

I think that historians, as they look back at this, are definitely going to look at a few Fed chairmans and really place a lot of blame on some of their actions. I think Alan Greenspan is probably going to be one of those people. 

What you saw was that there was an asset bubble that happened in the 1990s timeframe. Then what happened is after the 2000 crash, which was definitely inevitable, you saw those bubbles basically shift straight into real estate. Then that bubble started growing and expanding. Then that’s when Greenspan left in 2006. 

You had Ben Bernanke come in. Surprisingly, Bernanke for the first two years didn’t even think that there was a housing bubble at all. I mean, I saw some videos with Bernanke where there are these different correspondents asking him questions about the real estate bubble. He goes, “I don’t really necessarily see that bubble.”

What’s really crazy is that you have Gary Shilling, one of the best economic professors out there. He had been calling this housing bubble for an extremely long period of time. He had charts showing that it had grown like 100 fold. And so, it was really kind of frustrating to see the money multiplier kind of tick up from 2006 through 2008 with Ben Bernanke trying to, I guess, still stimulate the economy from the 2003 crash, which is just crazy that the money multiplier would still be going up.

That’s one of the main reasons that you saw a significant shift in these housing bubbles, not to mention a lot of government policy and a bunch of other things. I mean, there are so many variables in this stuff. We’re talking about the really big chunks and pieces of it. 

What we’re going to talk about at this point, and I made a video on YouTube on this, so if you’ve watched this video, it’s probably a little bit better than probably just listening to me. For those people that want to watch the video, we’ll have it up in the show notes, where I describe kind of what happened here in 2008 and to the present, with the way that the money multiplier changed after the 2008 crash. 

So because there was all this credit in the system, we had a money multiplier that was very high, leading up to the 2008 crash. After that crash had occurred, the money multiplier was basically cut in half. 

When they did that to ensure that we didn’t have currency deflation at that point, they had to print an enormous amount of money to make up for all that credit that was in the system. It was basically trading one-for-one where they were taking credit out of the system and then they had to put real dollars behind it in order to offset it. That’s exactly what Ben Bernanke did with quantitative easing. 

So now you’re at a point where the money multiplier is so low that you don’t have a very large door of credit for people to borrow money. Businesses require credit in order to operate. You’ve got companies that have to go out and buy inventory. They have to have a revolving door of credit in order to operate their business, in order to pay their bills and to pay their employees and all sorts of things. So you’ve gotten in a position where this money multiplier is so low. 

Now the thing that I find really intriguing and really interesting, and I see patterns… When you’ve been doing it for a few years, you start to see patterns. I found it really interesting that right before the crash in 2008, you saw oil just go through the roof. Oil was like $150 a barrel. 

Right now, in 2015, we’re seeing oil at epic lows. I find that pattern really ironic. I don’t know if there’s some type of correlation there, but I do find it very interesting. If I had to pin something to it, or where my interest is, for more research, I’m interested in looking at how that reduced amount of credit in the system, how that money multiplier is shrinking to very low levels at this point, how that’s impacting these oil companies, because they rely on a very large revolving door of credit in order to exercise their monstrous companies. 

If their credit is reduced, and they don’t have that ability, what is an oil producer going to do? Well, they’re going to produce more oil, because that’s their inventory. If they pull more oil out of the ground and start producing more, then they have more capital to pay their bills and to function. 

I think what you’ve seen since 2008, is you’ve seen the supply and demand of oil change drastically. I think this is a hard theory. I would really appreciate it if people email me or start something on the forum to have this discussion. I think there’s a potential that because this money multiplier was adjusted so significantly, and you don’t have that revolving door of credit available, that you see these oil companies over supplying, even though that there’s no demand for it. That’s why you’re seeing the price of oil just kind of go through the floor. That’s my theory. I don’t know if I’m right.  

Stig, what do you think? You used to cover some of this stuff. 

Stig Brodersen  33:34  

Yeah, I definitely agree with you to some extent, in terms of the monomer supplier. Another thing that we also need to discuss when talking about oil, not really to go too much off topic, is that the oil market is very different now than it was, especially in the 70s, 80s and 90s because we don’t have OPEC, for instance, that were controlling the supply. 

As you probably all know, if we have a lower supply, then we have a higher price. So right now, we don’t have anyone who is determining the supply. Everyone can just go out there and produce a level of oil. Clearly, that will drag down the price. 

Another thing that we’re seeing, especially right now, is that we have an extremely strong dollar. When we have a strong dollar, it has a negative correlation to the oil price, because it’s accounted for in dollars, so you will see that it has negative correlation. 

For instance, just compared to the Euro, the dollar has appreciated 23% over the last year. So that is really also what you’re seeing. 

There’s a lot of different factors, including the money multiplier that is really pushing down the oil price at the moment. Now whether or not that oil price is in equilibrium, that’s always really hard to say, but I think there’s a lot of psychology at the moment. There’s a lot of macroeconomic factors that are really pushing the oil price down at the moment.

Preston Pysh  34:54  

Okay, so we really didn’t plan on talking about oil. That just kind of came out as we were doing this, but we’ll get back to the Fed. 

We were talking about different money multiplier levels through the years. When we’re talking about that, when the money multiplier, post 2008, dropped down to around the three mark, whenever you’re talking about M2, money multiplier. 

The money multiplier that we’ve been talking about throughout this episode is the M2 money multiplier. So after 2008, you’re down below a three, which is the lowest that that money multiplier has been in the last 100 years. So that’s kind of an interesting thing. 

What that means, who knows? I mean, again, we’ll go back to the Charlie Munger quote: who knows what that means. We just know that there’s going to be some type of ramifications because of it. 

So that puts us in a pretty unique situation where here we are in 2015 and we’re getting all these senses that there’s something happening. We don’t necessarily know what it is.  

All the billionaires that we track are sitting on an enormous amount of cash. We just don’t really know how this is going to end. We just know that we’re having interesting times. 

When you listen to Ray Dalio, he talks about the productivity curve and how productivity progresses at a very linear rate of about 2% annually. I guess my concern is this, as we adjusted this money multiplier over this past 75 year period to very high levels 12 times, the actual dollars that were ever sitting in account, what we had was GDP that grew at a very high rate through that period, much higher than 2%.

And so, my concern, I guess, I should say is that as we artificially adjusted this money multiplier higher and we basically created GDP growth, far in excess of that 2% mark, annually, I think we maybe put ourselves in a situation where we might have to pay that price later on down the road. I don’t necessarily know if that’s going to come to fruition or not, but that’s kind of my concern.

Stig Brodersen  37:04  

I really hate always agreeing with Preston. Ray Dalio likes to surround himself with people that disagree with him all the time. I just always have to agree with Preston or as I like to think so, he always likes to agree with me.

But in any case, as a process, at least in my opinion, we are drastically over inflated at the moment. So the 2% real GDP growth Preston’s talking about, when you look at that, has nothing to do with the realities that you’re seeing right now when you look at the asset prices.  

I just want to put in another statistic here. Stock spot and margin is very near an all time high. Even though you adjust for currency inflation, we are looking at an almost an all time high stock spot and margin. 

Let me just tell you a very short story, I received an email, actually multiple emails from my broker here the last few weeks. They want me to take on loans. They’re saying that you have a very nice portfolio, so you can borrow against your portfolio down to 1%. No questions asked, in terms of where you will place that money. I guess my broker will probably hold off and invest more stocks. 

Also, there was this suggestion about mortgages. Take a mortgage and then inflate the housing crisis in Denmark. I haven’t seen anything as crazy as this before. Well, except before the last crash, when I saw something similar. So there’s a lot of crazy things going on because there’s so much credit in the system, and there was nowhere to put all that money. 

Preston Pysh  39:07  

I like to ask myself, whenever I’m involved in a deal, am I the smart person on the end of this deal or am I the dumb person on the end of this deal? So when the bank comes knocking on your door and saying, “Hey, we really want to lend you money, and that’s at a lower interest rate than what you’re already paying,” you have to ask yourself, “Why do they want to do that? What is the reason? Is it because they want to have lower earnings in the future?” 

I highly doubt that’s the reason. And so, you have to ask yourself, what do they know that I don’t know?

I think until you answer that question, I think you need to really be you really got to question whether you’re doing the right thing when you’re presented with something that seems so obvious. 

I’m not here to tell you what to do. I’m just telling you, I guess to try to educate yourself as much as possible. Learn about this as much as you can before you make any large financial decisions, whether you’re going and buying a house, whether you’re going and buying commercial real estate or whatever, because I share your concerns there. 

When you look at things, the obvious choice at this point is real estate because interest rates are low. But I guess the concern is let’s say you buy a house or you buy some type of commercial real estate right now. We do go through another crash and the symptoms are very similar to 2008 in that asset values lose a considerable amount of money. 

Then you’re faced with the Fed not having any tools at their disposal to park the economy again, except for drastic inflation of the currency. So I share your concern. I don’t really know what else to say other than I think I agree with Charlie Munger. We’re upon interesting times here and I really can’t tell people one way or the other. 

However, I do think that if you were a person giving a loan to somebody else, you better really understand how they are going to pay you back in the future. I think that’s something that people really need to fully understand. 

If you’re buying bonds, you are lending money. That’s what you are doing, you are lending money so you better have a firm understanding of how that person is going to pay your coupons and your principal back, whenever that bond matures. You might want to look at the duration of it or the term of it. 

Stig Brodersen  40:59  

Yeah, so that was really a great point, Preston, about being concerned, because I think that if you look at people’s balance sheets, it might look like they have a lot of equity. So it might look like they have a lot more value than having debt. 

However, what’s really interesting is that when asset prices will decline, and the will at some point in time, all of this moves in cycles, then you have this problem because the debt is real, but the asset value is not. So you have an asset that is inflated, and that might be cut in half. 

Now, your debt is still the same outstanding. So what will you do? Well, you’re probably forced to sell some of your assets and even incur a loss. That will just drag down the whole system. So there were a lot of good reasons to be really careful at the moment. Sorry, for predicting too much, Charlie.

Preston Pysh  41:47  

That’s about all we have for you this week, where we were talking about the Fed talking about this money multiplier, how it adjusted. I highly encourage you to go to our show notes and look at these charts. Look at how these have adjusted and how they’ve gone in lockstep with this money multiplier over this 75 to 100-year period, and how that’s actually controlling how everything is shaking out, then how we’re at the end of the cycle right now. We don’t really know how it’s going to progress as we go into the next decade. Really interesting discussion. It’s really fun to talk about. 

If you guys have any comments at all, please come to our Warren Buffett forum. That’s WarrenBuffettForum.com. The very top post in there is where we’re having the ongoing discussion about this de-leveraging and this long term debt cycle. We’re really looking for people to shoot holes through some of our analysis. 

Just like Ray Dalio, we’re looking for those types of people to provide value to the community and to the group, and to have this one big giant Mastermind discussion of this topic. So everyone out there that’s been helping to educate us on this, we truly appreciate it. 

We want people to submit questions. We’ve actually been not receiving a lot of voice recordings of questions lately. So please send in your questions at asktheinvestors.com. We’ll play it on the air if you guys ask your question. Anyway, that’s all we have for you this week and we’ll see you guys next week.

Outro  46:17  

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