Anthony Pompliano 0:00
Yeah, so let’s talk about 2008 oh nine crisis first, and then we’ll get to kind of what’s going on now. So in 2008, obviously, there was the housing crisis, the government stepped in created a ton of monetary stimulus. Every single person who’s ever read any economics book immediately says, if they print a bunch of money, we’re gonna go to inflation, maybe even hyperinflation. Right. Did you think that QE potentially could cause deflation? And how does that actually work from a mechanism standpoint?
Cullen Roche 0:31
Well, it was interesting Back then, I actually knew a bunch of guys that worked, friends of mine family, friends, and a couple of other friends that worked in amaura in Japan. And it was interesting when they first started ramping up all these big programs. I started talking to these guys in Japan, because they had been doing QE for like 15 years at this point. So kind of trying to go back through history and trying to understand it. It’s sort of an operational level.
I talked to these guys and they’re basically like, Look, this thing doesn’t do any of the stuff that a lot of the mainstream narratives imply it doesn’t. It’s not like printing money, it doesn’t make inflation go up. It won’t necessarily make the stock market go up their argument basically it was that it is marginally deflationary because what they’re basically doing, the Fed is creating money. Okay, so they’re creating central bank reserves and basically swapping though they’re purchasing a, like a treasury bond or a mortgage backed security from the private sector.
And what that basically is it’s a clean asset swap. Basically, the the Fed prints a reserve swaps it for a treasury bond. But the crucial thing is that they take the treasury bond out of the private sector economy. So it’s almost as if the treasury bond has been unprinted to some degrees. The Fed takes it and puts it on their balance sheet and the Fed’s balance sheet is. It’s like a black hole. It’s just this nebulous thing that doesn’t exist in the real economy. I mean, we could see the accounting of it, it’s there, but it’s not like the Fed isn’t going to Walmart and buying things with their balance sheet.
So it’s like, it’s almost like they take the money out of the the treasury bonds out of the private sector, and they bury him in the backyard or something. But the kicker with it was that what they’re really doing when they do this is they’re taking interest income out of the private sector. And so the private sectors incomes actually go down. So in a sense, it’s kind of like, it’s like they’ve swapped a checking account for a savings account, expecting there to be like some sort of big rush to go you know, now use your your new checking account to go buy goods and services.
So the whole the whole program, in my view is sort of misguided and I’m, you know, it’s funny, I know you’re a critic. of the Fed. And but I’m, I’m weirdly, also a critic of the Fed in the sense that I basically think that the Fed and a lot of what it does is not nearly as impactful or important, as a lot of the mainstream narratives make it seem so the Fed to me, it engages in a lot of this funny business with the economy that doesn’t really do all of the things that a lot of people seem to think it does.
Anthony Pompliano 3:27
So, okay, this is interesting, right? Because I actually think that we may agree on the funny business, my perspective is just like, they shouldn’t do it. I think your perspective is like, hey, they’re doing it, but it doesn’t have the impact everyone thinks it has. Would it be fair to say that you agree they shouldn’t do it, or you’re in the camp of they should not be doing that stuff?
Cullen Roche 3:49
It does depend, I think, but like I would have said in in 2008, I actually thought that QE one was somewhat important and that what they were doing It was they were really trying to shore up the banking system and the banking system was such a cluster at that point that you needed to do something because the I mean, that’s the feds primary purpose. And I think this is another thing that some people, I think misunderstand about the Fed is that the Fed is basically just clearing house. So they clear payments for banks, they’re the banker for the banking system, basically.
And in periods like 2008, the banking system starts to shut down. And that becomes problematic because, if mean, you can’t clear a payment, because JP Morgan and Bank of America are scared of each other, then it causes all these negative knock on effects that, you know, like your business could start to fail or, you know, potentially shut down for periods of time just because the banks are scared of each other. And that’s idiotic, the way that you know, that can even happen.
So the Fed is just basically a public clearing house. That is it’s all Always open, they never shut down. So when JP Morgan and bank of america get scared of each other, the Fed comes in and says, Don’t worry about it, we’re going to clear payments. And we’re going to make sure that Anthony and Collin, don’t go out of business just because the Bank of America and JP Morgan are idiots and scared of each other. So that’s the feds primary role.
And they do all this other stuff that is sort of tangentially supportive of the banking system but isn’t really always necessary. Like I would say that QE two QE three, all the other iterations. I would say even though the version they’re doing now, probably a big waste of time, I’m probably not having a very big impact on anything really. And probably, to some degree, not necessarily a waste of money, but sort of an unimportant or, yeah, a waste of energy to some degree, just because then There are things that they can do to support the economy. And QE just isn’t one of the things that’s very effective.
Anthony Pompliano 6:06
So I think that a lot of people understand, you know, central bank’s base guide these two tools, right, they can manipulate interest rates, and they can print money or quantitative easing, and tools like over the last, it really kind of 12 years or so but but even a little bit before that, the idea of quantitative easing has not only become accepted, we went from emergency measures to now it’s, hey, this is part of what they’re going to do at certain times.
And I guess the big question most people have, right, so some of the listeners have zero clue how the Fed actually quote unquote, prints money and then injected into the economy. You’ve talked a little bit about that, maybe just explain the actual mechanism of injecting that liquidity, and then we can get to the impact of what that does to an economy in times of recessionary periods.
Cullen Roche 6:57
Yeah. Well, the Fed In its simplest manner is just a really big bank. And banks have the ability to create money from thin air literally. So if you and I go into a bank and we get alone, that bank doesn’t it, they don’t create the new loan by having deposits necessarily or multiplying their deposits or anything like that. They’re literally creating a new loan agreement from thin air.
And so that deposit alone creates a deposit from thin air and it’s only backed by whatever the agreement underlying that is that we have some income and maybe some assets that are backing the loan or whatever it is, but the the loan itself and the deposit the new deposit that is created is created from thin air. It is a new financial asset and a new financial liability for each of us. And so the entire state of the entire economy grows a little bit when that loan is made, the Fed does the same basic thing there.
They basically just create these, these financial agreements from thin air wherein the kicker with the Fed is they have all these private banks that are basically required to make markets for them. So when the when the New York Fed goes out and they start implementing quantitative easing, they win. And they basically order the primary dealers who are the big banks that basically make markets for the for the Fed.
They’re basically ordering them to go out and purchase bonds and the Fed is giving them reserve deposits, creating reserve deposits within the banking system. And the banks are basically going in and buying the bonds in swapping those bonds with the new deposits that the reserves resulted. So the Fed sort of forces the private banking system to be its market maker. And that’s how they create all this new money. That ends up basically being swapped for the treasury bonds.