How Money & Debt Built the American Dream by R. Christopher Whalen

R. Christopher Whalen, the Chairman of Whalen Global Advisors LLC, joins Jason Hartman to discuss mass migration due to Coronavirus. He shares that not only are people leaving big cities because of COVID-19 but businesses are also forced to move out of the ‘old way’ and adapt to innovations in technology and communication. Jason and Christopher also talk about the difference between inflated and inflation, quantitative easing, and the consequences of creating money and bailouts.

Announcer 0:01
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.

Announcer 0:12
Welcome to the American monetary associations podcast where we explore how monetary policy impacts the real lives of real people, and the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman 0:29
It’s my pleasure to welcome our Christopher Whalen. He is chairman of weyland Global Advisors LLC, and works as a consultant and analysts focused on financial services, mortgage finance and related technology companies. Christopher edits the institutional risk analysts, he’s author of several books, including the best selling inflated how money and debt built the American dream, Chris, welcome. How are you?

R. Christopher Whalen 0:53
I’m doing great. Greetings from New York City.

Jason Hartman 0:55
Yes, the epicenter of a lot of the stuff that’s going on now. And you know, since you are in New York City, we’ve been talking a lot on the show about this mass migration, that I think I was predicting before anybody, at least anybody in the real estate space, out of cities? Are you finding that to be true? It’s just beginning, really, but are a lot of people talking about that? I certainly, you know, I know a lot of people are in the Hamptons, and such and the outlying areas, any thoughts on that?

R. Christopher Whalen 1:24
I think there were different waves when the city shut down, you know, the hospitality and, you know, restaurants and entertainment, and Fine Arts, all those industries were shuttered. So all those kids, many of them had to go home and live with mom and dad, because they don’t have a job. We’re very big supporters of American Ballet Theatre, they’re not gonna have a season this year, Ryan, those kids aren’t working. They don’t have to go home. So that impact was initial, and then you have others, families, businesses, who are thinking about precisely the question you just asked. And I gotta tell you, there are several very large employers in New York City that are going to relocate, partly because they want to, they want to put their people in different locations. Goldman Sachs, for example, they have now split their entire investment banking team into three, and they’re not going to let them visit one another. Wow, completely partition them. And I think that’s prudent. But how do you manage a commercial building when you have to waiver everybody who walks in the door?

Jason Hartman 2:27
Yeah, it’s just it’s just impossible, it really is. You’ve got to have them sign a waiver and take their temperature too. So it’s really, this is an epic sea change in the way the world operates. It’s just unbelievable. But long term, there are some good things coming out of it for sure. I mean, companies are creating a lot of efficiencies that they didn’t have before. You know, Joseph Schumpeter is one of my favorite economists and, and that creative destruction he talked about is happening, lickety split, it would have happened over the next five or 10 years. But now Necessity is the mother of invention. And, you know, everybody’s really been pushed into it. And you know, those, those efficiencies will last far beyond the pandemic. And I think they’ll just be ingrained in the whole system. And that that’s very beneficial to a lot of things, and in probably deflationary overall, right?

R. Christopher Whalen 3:22
Well, I’ll give you example, residential mortgages, which are gonna have a great year, this year, by the way, yeah, they’re gonna do a record issuance two and a half trillion dollars this year, they sent everybody home. They sent them home with printers and scanners and PCs, and whatever. The technology was already there, right to enable that. And so what we’ve really done to go back to your your comment is, we had the capacity to change, work patterns and behavior and all of that. But we were still doing business in the old way. to a large degree, the technology was helping, and it had certainly increased efficiency in many ways. But we’re still coming into the office, we’re still commuting every day, this is going to blow that up. And it’s going to result in a change in behavior that I think is going to be long permanent. Unfortunately, when you look at things like commercial real estate, in urban centers that were built for density, and very dense usage. That’s going to change. Either by preference or by by force, or both. Right?

Jason Hartman 4:24
No, no question about it. And the other efficiency that I didn’t mention is that I think we will see a some reduced pressure on wages, as people move to the suburbs, they’ll find their cost of living drops. And of course, employers will take advantage of that by, you know, either freezing salaries or even lowering them. Maybe they give an allowance for home office or something like that. But yeah, overall, I mean, think about it. You know, I have many friends that live in New York City, young professional types, and you know, they’re paying four grand a month rent, they got a 600 square foot condo or apartment they’re renting. And you know, if they go move to the suburbs for $1500 a month, they can get a nice home in the suburbs with a yard and a two car garage and, you know, 1500 square feet for, you know, $1400 $1500. I mean, that’s just

R. Christopher Whalen 5:19
Yeah, pretty much. The other side of this story, invoking something or another economist, is that, you know, the Dutch built New York City is a grid for efficiency, right? They wanted to pack as many people in as possible. If you read short those book about New York, the city at the center of the world, and that dynamics is important to commerce. It’s very important to organizations, you can’t run everything remotely.

Jason Hartman 5:44
I agree with you. I think it’s a high-tech, high-touch professional accommodation. That’s the best Yeah,

R. Christopher Whalen 5:50
For the rank and file. I mean, if I have to train people, if I have to supervise people, you know, it loses something

Jason Hartman 5:59
It does

R. Christopher Whalen 6:00
Along the way.

Jason Hartman 6:01
And conferences too. The conference business, it does lose something, but it gains some things too. So you know, it’s a mixed bag,

R. Christopher Whalen 6:08
Better quality of life, you have a family, you don’t have to commute every day. I think what you’ll see, by the way, is they’re going to rotate people in and out of offices. They’re going to give them the choice to come in when they have to. I work on a trading floor with some of my colleagues. So we’re spaced out. That’s fine. Yeah. Do I have to be there every day? No. Definitely not. Yeah. Right. And I think that’s what’s gonna happen because of liability. How can employers and buildings and cities deal with that aspect of this? They really can’t,

Jason Hartman 6:39
You know, I’ve really been puzzled about that one. And you mentioned, you know, I mean, you come into the Goldman Sachs building in in New York City, right. And you got to sign a waiver. I mean, are you kidding me? But, you know, I don’t I don’t know how Trial Lawyers could even substantiate liability for catching Coronavirus. I mean, how can you prove where you got it? Or didn’t get it? You know, I mean, that’s, that just seems impossible to me.

R. Christopher Whalen 7:06
Well, fortunately, the courts are closed, we’re gonna have to worry about

Jason Hartman 7:13
The reopening. But I know i think i think that kind of thing. You know, you can’t attribute liability to you know, how do you know you got into the office building versus the grocery store versus from your spouse or your significant other? I mean, you know, that’s just, that’s impossible. Anyway, that’s all interesting. But your book is super interesting. And I know you’ve got a few books, but I’d like to ask you a little bit about inflated how money and debt built the American dream. This is a fascinating topic, because what I love about your book, as you really look back into a longer historical perspective, the Bank of the United States, you know, free banking and private money, many people don’t really even think about it. But before 100, a little over 100 years ago, we had some other versions of central banks, right. Tell us about that history. And, and you know, how Lincoln was a money printer, and then, you know, bring us up to the robber barons in the guild in a gilded age. I was I was watching a really interesting little documentary about Andrew Carnegie last night. So this is fascinating.

R. Christopher Whalen 8:16
Well, what am Abraham Lincoln took office, the US government was broke, the soldiers were headed home because they only serve for a set period of time. So he had to figure out a way to finance the war. And one of the ways he did this was by creating a new class of banks, national banks, that could compete with the state chartered banks around the country, which were really the powers at the time. And they did not support the war. By the way, the bankers in New York and Boston, were very happy with the slave trade and the cotton trade, and they were not at all supportive of Lincoln. So national banks were able to issue paper currency that was partly levered by having treasury bonds in their vault. This was something that state chartered banks could not do. State chartered banks had to have gold in the vault, and then they could issue paper. This goes back to the great economist Badgett, and his writings about low interest rates and the need to get money out of the hands of private individuals into banks so they could create leverage, right. So through the war and the period thereafter, the US was growing very rapidly. And you had both traditional hard money, gold and silver coins. You had bills that were redeemable in gold and silver coins. And then you had these unbanked greenbacks, these new paper dollars that were issued by national banks. And these circulated for a while they were at a deep discount to hard money after the war, but then they trade it back to par.

Jason Hartman 9:51
And just to make sure. Just to make sure we catch this, Chris, what is hard money? Define hard money, if you will for this conversation. It has different meanings.

R. Christopher Whalen 10:01
Well, traditionally, it’s it’s gold and silver coinage. Could even dealt with Platinum today, I think.

Jason Hartman 10:08
Okay. Sure. And would you count a silver certificate?

R. Christopher Whalen 10:14
Yeah, because it was it was exchangeable, it could be paid at the option of the holder in hard currency that has now gone away, right? FDR seizure of gold in the 30s. Other changes in the laws have slowly but surely, detached money in the sense of legal tender dollars from precious metals. And it said evolution that, you know, is basically created the inflationary situation that we see today. But you know, before the creation of the Fed in 1913, JP Morgan, was essentially the central bank. In 1907, the great crisis, Theodore Roosevelt handed JPMorgan a pile of cash, and he said, go fix it. There are a lot of busted trust banks, what we would call non banks today. And Morgan triage them, and the ones that were insolvent to get rid of and the other ones he kept. But that was a little unseemly politically, and that helped Woodrow Wilson and members of Congress eventually create a second central bank in the United States. So the history is important. But ultimately, it was driven by the need for liquidity, and flow of the commercial sector of the agricultural sector, and traditionally caused problems. You know, in times of harvests, everybody was flush, but for the rest of the year, they had to live on credit. And the credit of banks was not reliable. In fact, the funny story your listeners will love is that JP Morgan was never a member of the New York clearing house, they always made the members of the clearing house wait in the lobby, to do business with them. Because they saw themselves as better than that. But the bankers were not really willing or able to stand up when the country needed liquidity. And that’s why they created the Fed. And that’s why they created many other agencies during the Great Depression, total housing agencies, or the Small Business Administration, all of these came from a need to somehow put more juice in the system to prevent contagion and prevent, as my dad would tell us to keep people on the streets.

Jason Hartman 12:26
Okay, so. Right, right. And just take us to the sort of the overall premise of inflated, when you use that title, you’re not talking about inflation per se, right? You’re you’re talking about this in a different way, just how the whole economy is levered, right?

R. Christopher Whalen 12:46
Well, that’s right. It’s the inflation of the currency. But it’s also the inflation of assets. Because as you create new ways to add debt and add liquidity to the system, you naturally allow price speculation, you’ll have growth, you will allow all sorts of activities that would not occur in a system that was rigidly fixed. In other words, if you had a rigid gold standard, there would only be so much money, right. And the competition for that money would be intense, depending on what was going on in the economy. So that was really the thesis it was to try and explain to people that you know, America, of course, but any society has this dynamic. And particularly for the United States after World War Two, Bretton Woods, when the, you know, the current currency system was set up, the dollar became the world’s money, it became the means of exchange and became the unit of account, for better for worse. And so what that means is that the US can behave very badly when it comes to fiscal issues and inflation. But the rest of the world is essentially short dollars. And they’re in a bad state. Look at Argentina, the Argentine peso is now 75. This morning, my wife is from waterboy, which is around 35. Argentina used to trade at a premium. To give you some sense of what’s happened down there. And anybody who can or has the means to do so is going to leave the country. So it has grave consequences, where countries are forced to fund themselves in dollars. They can’t manage that they would have been a suela an example. Right? The whole country is basically been destroyed. So does that make sense? Even China have this problem? The Europeans have this problem.

Jason Hartman 14:36
Sure because, and you know, that’s what’s so interesting about all the detractors of the dollar, all the people saying Oh, the dollar is going to collapse. It’s fiat money. Well, compared to what I you know, I mean, they just never seemed to ask that fundamental question. And that, you know, the dollar is backed extremely well. It’s backed by the biggest military the human race has ever known. You know, that the US is not going to like voluntarily relinquish its reserve currency status that it enjoys

R. Christopher Whalen 15:08
It’s a job that finds you. You don’t choose to be the reserve currency of Britain, for example, during the colonial but

Jason Hartman 15:15
I like that. So wait wait, that’s an important point. It’s a job that finds you. So meaning that the US didn’t volunteer to be written in reserve currency or the dollar didn’t, you know, volunteer, the world found it and said, this is the this is the best thing we can find. So you were talking about Britain? Go ahead.

R. Christopher Whalen 15:36
Well, the rest of the world was bust after the war. I mean, the most European countries, they were in horrible, horrible strain, where you’re talking where you want to, of course, that’s right. And you know, I think to some degree after Korea, but really World War Two, and we spent the money, we lent the money, we forgave money to get the world back on its feet. And those countries in turn, traded with us, and they accepted the dollar as the means of exchange.

Jason Hartman 16:03
So what’s the Marshall Plan? Was the Marshall Plan really like a great business plan to create the almighty dollar reserve currency? That’s interesting

R. Christopher Whalen 16:14
It was but they didn’t see it that way. At the time, I don’t think Americans in that era realized what they had happened upon, right? I don’t think they they kind of knew that they had taken over for the British after World War One, the Brits were broke, and they handed us the ball. And so here, we are now the world power. But it was only after World War Two, when we did rebuild Europe, and we didn’t rebuild much of Asia, that we took that role. And as I say it evolved over time, it wasn’t automatic. But today, the dollar is the only currency that’s big enough to support global trade. You can’t do it in euros or yen. And those are the only two alternatives. The ruble, now the Chinese currency, absolutely not. So you know, we are the de facto means of exchange and unit of account for the world. But we a store of value. It depends. It really depends on the perspective, but I would say no, I think the dollar is the default means of exchange unit of account for global trade, global investing.

Jason Hartman 17:19
Very interesting, very interesting. Where are we now? And what can we expect in the future? I’ve long said that I think the dollar and the US government can just sort of continue to defy gravity, in that they can keep creating more money, keep doing bailouts, you know, everything from the stuff we saw during the Great Recession to you know, now that the PPP and all the rest, are there any consequences? Or is this just sort of like this fantasy land where they can just pray more money and just have more bailouts?

R. Christopher Whalen 17:53
You know, I think the first consequences that we do have real inflation, the statistics don’t measure it very well, I agree. But from the perspective of an individual, prices are pretty consistently going higher. And this is partly because the Fed has decided that deflation is bad. They don’t want to repeat that. So they are constantly injecting funds into the system. Since Ben Bernanke and Janet Yellen, were on the Federal Reserve Board, we’ve adopted this thing called quantitative easing when they basically buy bonds from the banks, and thereby inject cash into the system. The trouble is, you can’t go back. So today, we have $7 trillion in the system, open market account. And I would tell you that the Fed is not going to be able to let that go down very much we learned in 2018 2019, then we left the balance sheet shrink, bank deposits shrink, too, and liquidity in the money markets shrinks. So what does that mean? It means that the Fed is going to basically going to have to maintain that size portfolio, and they will be monetizing trillions of dollars worth of Treasury debt. So to your point, yes, this is kind of a neat deal. If we could just make trillions of dollars for the Treasury that goes away. That takes the pressure off the fiscal side, but I don’t think it takes the pressure off individuals. I think that’s one reason why stocks keep going up. It’s definitely a reason why real estate keeps going up in a manic sort of fashion.

Jason Hartman 19:24
Yeah. And it really makes the distribution of wealth very uneven, then it just keeps getting worse and worse. But you said that individuals are experiencing much more inflation than the you know, the official stats would say and I couldn’t agree more. Any idea what that real inflation rate is? I mean, you know, John Williams from shadow stats has been on the show before, and I know that he keeps track of that it varies from person to person, of course, but you know, just fine. Throw the question out there for you.

R. Christopher Whalen 19:54
Well, the cost of housing is certainly galloping along at double digits. That’s obvious just from the data When you look at CPI and some of these other measures, what I would say is that you ought to just double them. And that will give you a better idea of what the man on the street the woman on the street is seeing when they walk into a grocery store. There’s all sorts of indexes you could use. But I think, you know, when you increase the amount of currency in the system, it does have a long term effect. And it forces people, the competition for assets, whether it’s for investment purposes, or just a place to live or work intensifies. And even though rates are low, that doesn’t seem to be helping a whole lot. It helps debtors. And it helps indebted governments but it doesn’t help people who save, we have to penalize those who who do the right thing, right. And you’re constantly bailing out those who do the wrong thing. So for example, you see the Fed buying corporate bonds, which is pointless. Buying somebody that’s existing dad is not going to help them if they’re insulted. But explaining this to people in the Board of Governors is difficult. I do try periodically, right?

Jason Hartman 21:05
It seems it seems

R. Christopher Whalen 21:06
like they, they have a Keynesian view that says they have to do something,

Jason Hartman 21:10
Right, right. And we have this culture that nobody wants to have any pain anymore. It’s like the Fed and the Treasury, they have to insulate us from all pain. So they create these zombie companies. They keep them going when they should be destroyed, and someone should start a new company, right. But that’s a

R. Christopher Whalen 21:27
There’s a bank that should have been bound up 10 years now, why? The German government doesn’t have the money. They don’t have the will. And frankly, US regulators have dropped the ball to you know, they’re the biggest custodian and residential real estate, by the way. Wow. But you know, it’s just politically impossible for the Europeans because they don’t have any growth. There’s no money, so they can’t fix their banks. That’s the one word you’re not allowed to mention. In Europe. By the way, if you’re in government circles as bank our banks are relatively in good shape, but they’re gonna really take a beating next couple of years.

Jason Hartman 22:08
Yeah. It’s a crazy time in history. It really is. Hey, Chris, you’re a fascinating guest. I’d love to have you back. You know, on a regular basis, give out your website and tell people where they can learn more about you. Of course, the books are available in all the usual places.

R. Christopher Whalen 22:23
Yeah, that’s, that’s correct. My website is RC Whalen w h a l e n dot com. And of course, you mentioned the institutional risk analyst which is my blog. I am also a contributing editor to National Mortgage News if you really like geeky, hardcore mortgage stuff. And then I write for the American Conservative and some other publications. Message me on Twitter under RCWhalen. Come join us. We have lots of fun.

Jason Hartman 22:50
Excellent Christopher Whalen, thanks so much for joining us.

R. Christopher Whalen 22:53
Thank you very much.

Jason Hartman 22:59
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