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The Honest Money Show is your guide to understanding what money really is — and why today’s system isn’t working. Hosted by Anja Dragovic, this show cuts through the noise to explore how money shapes our lives, where it’s gone wrong, and what a better future could look like. Along the way, you'll discover how Bitcoin fits into the bigger picture — not as hype, but as a serious response to a broken system. Whether you're curious, skeptical, or already down the
Anja: Hello.
Joining me today is Paul Musson.
Paul is a veteran investment
professional with over 30 years of
experience in traditional finance.
He brings an insider's perspective
on, um, flaws of traditional
finance, you could say.
And he's also the founder of, uh,
Paddington Capital Management, which
focuses on investment consulting
and financial reform, while his
blog political economy spelled Paul
for political economy, dissects
economic policies and inequality.
Inaccessible, no nonsense, uh, terms,
most notably his book, capital Offense,
why Some Benefit at Your Expense is out
now, and we are here to talk about that.
Welcome to Honest Money Paul.
Paul: Thank you Anja.
It's great to be here.
Anja: I would love for you to introduce
yourself as well to my audience a
little bit, and yeah, tell us what your
journey has been to this date and what
ultimately led to you writing this book.
Paul: Yeah, so I was, uh, going
way back, I was born in Wales.
Uh, the family moved to
Montreal in Canada, 1965.
I was almost four.
Grew up there.
And, um, but I wasn't fluently
bilingual as a bilingual province
in Quebec, French and English.
And, uh, language is not my, uh, forte.
Even English, nevermind other
languages, you know, so, so
it was tough finding a job.
So in 1990, I uh, loaded up my 1980
Plymouth Vale with all my possessions
and headed to Toronto looking for work.
And so I arrived in the city.
I was literally sleeping on a hardwood
floor of like a small bachelor apartment,
I dunno what you call it in Australia,
but it's like a one room plus a bathroom.
Um, yeah, just started looking for
work and my first job was in a video
store working nights from six till
1230 at night, and I was 29 years old.
And that's how I got my start in Toronto.
And it, uh, it was a long, sort
of circuitous, unchartered,
uncharted path, if you will.
Uh, to get to where I got to.
I knew I wanted to be in research.
I knew I wanted to analyze businesses,
investment analysis, but I was very
naive about the structure of the
industry because all through school
I wasn't really serious about, I knew
school was important, but I didn't
know what I wanted to do, and so.
At the time, all I wanted to do, I had
a thirst for knowledge, so like history
or philosophy, geography, nature.
So I would just do what was
required in school just to get
by, rush home and read my books.
And it reminds me of
that old Mark Twain line.
I never let school
interfere with my education.
And, uh, so, so like I didn't realize
at the time, but I was, I was sort of
building a foundation of principles
and, and morals I think at the time.
Um, I was just doing
it because I loved it.
It was so much fun.
And then, um, yeah, one job led to
another and eventually I ended up,
uh, uh, in the mutual fund industry.
Yeah.
Started as an analyst and I became a
portfolio manager, and then my boss left
and then I ended up heading up the team.
And our investment style was to
invest in very high quality companies,
uh, defined as a business that we think
has a sustainable competitive advantage.
It's not that difficult to find businesses
that have a competitive advantage.
You can just look at the financials
and if you've got great cash flow,
great free cash flow, good return
on capital, they're growing.
They have a strong balance sheet.
You might not know what's
special about them, but there's
something special about it.
Then you gotta go figure out what it is.
What is it that enables that companies
to generate these great financials?
You can figure that out.
The most difficult part, of course, is
having confidence with respect to the
sustainability of that competitive edge.
And there are no guarantees.
But one of the big things
that we would look at is the
corporate culture of the business.
Is it a, uh, a self-reinforcing
type corporate culture?
Is it a business model where
all the constituents of the
business are benefiting?
So not just the shareholders and senior
management, but also the suppliers, also
the employees, also society at large.
And then finally the sixth one and
the most important, the customer.
Is it a true customer value
proposition that the customer's
willing to pay for part with some
of their hard earned capital to
buy whatever it is you're offering.
And the reason the customer is the
most important out of all these
six is 'cause the customer is the
only constituent in this business
model that pays all the others take.
And um, and it was fun.
It was fun to do.
I've been in Australia, in
Australia a number of times looking
at some businesses down there.
It was a fantastic job.
And so what led me to where I am
today in terms of writing this book?
Is that
many years ago, even before I became
an investor, I had decided that I
was gonna do everything possible
to not be a burden on anybody else.
And so whatever I have from a material
wealth perspective, I would hope would
be a reflection of the wealth that
somebody else out there also has.
And in a free market capitalist system,
that's the way it's supposed to work.
You only benefit if you create a capital
that somebody else values and they're
willing to, without coercion, freely
exchange their capital for your capital.
And we do it through the medium
of exchange called money, which
we'll talk about, I'm sure.
And uh, so when that's happening
is a beautiful thing increasingly.
That's not happening.
People are benefiting at the
expense of somebody else.
And I talk about this and, but it's
often two or three steps removed.
You can't see the perpetrator, you
know, you're getting screwed and
life's getting more difficult, but
you can't see who it is as benefiting
directly from your, from your stress.
And so I talk about it in a book.
It's, it's getting like, you
know, a big game of poker.
So in a game of poker, there's
no capital created at the table.
There is a redistribution of wealth at
the table and at the end of the game you
have one winner and a bunch of losers,
which, you know, is sounding increasingly
familiar to a lot of people out there.
And it's because I believe the
monetary system, um, enables, not
only enables it, but encourages it
not, and it's not a conspiracy theory.
I don't believe that policy
makers purposely set.
To increase wealth disparity,
which is what has happened.
And, and it was entirely
predictable by the way.
They convinced themselves that by bailing
out Wall Street, by creating a housing
wealth effect after the oh one recession,
that by driving asset prices higher, yes,
the existing asset owners would benefit.
But don't worry, the benefits of that
will all trickle down to everybody else
because those higher asset prices are
gonna drag the economy up with them.
No, it doesn't work that way.
So if you back up, so for stock markets,
if stock markets are going higher,
because companies that are in the index
are putting capital, putting scarce
resources to productive use to create
more capital, they increase their profit,
they hire more people, they pay them
more, they reinvest in the business.
Ratchets up that higher profitability
then pushes their share price higher,
and then of all the companies in the
index, or most of them are doing that,
then the stock market grows higher.
So that's a real wealth effect.
People feel wealthier because
they truly are, not only are they
wealthier, but society as a whole
is wealthier because there's more
capital than there was before.
That's a really good wealth effect.
But if stock markets are going higher
because the Fed is taking interest
rates down to zero or resuming QE,
printing money to buy assets and drive
equities higher through the portfolio
effect, which we can talk about then
no real wealth is being created.
Wealth is being redistributed
within the system.
The asset owners are receiving
more for the capital that they own.
It's not that more capital is being
produced, and we can go into exactly
how that works if you're interested.
So we've had a fake wealth effect.
It doesn't mean that there's no.
Wealth being created.
It's just those who own stocks are
much wealthier than they would've been
otherwise if the Fed hadn't imposed its
will on stock markets and deliberately.
And that's, this is the problem, right?
The, the markets know that the Fed
will not let the stock market fall.
They'll come to the rescue.
So what encourages reckless behavior
encourages mass speculation.
Take on as much leverage as you
can because the Fed is gonna be
there and they've got your back.
But this is extremely harmful for
the economy, the price discovery
mechanism of capital markets.
Capital markets market players
with skin in the game who know
there's a real chance of loss.
So they're very careful with how they
allocate their hard earned capital.
And it results in the most
efficient allocation of capital.
It results in the best
productivity growth.
What we've had over the last 25
years is declining productivity
growth, still growing, but not
nearly as fast as it used to.
And you've got zombie companies
roaming the earth, you know, who were
destroying capital back in the early
eighties, according to the BIS or
Bank for international settlements.
Zombie companies that back in the eighties
were like low single digit percentage of
listed companies and developed economies,
um, maybe two, 3% before pre COVID.
I think they got up to 17%.
So these are companies that, through
Champ Peter's creative destruction
should have gone away a long time ago.
And at Capital, those resources should
have been reallocated within the
economy and put to more productive use.
Instead, they're allowed to, to exist and
consume capital rather than create it.
So that's on the stock side.
Even worse, well, I
don't know if it's worse.
Well, it's worse for young people, is.
Attempting to create a wealth
effect through the housing
.
Yeah, so, uh, we were talking
about the housing effect, so, or
the wealth effect through housing.
So even worse than a fake wealth
effect by artificially driving
stock markets higher by distorting
the price discovery mechanism and
capital markets and distorting the
most important price in the economy,
which I think Jim Grant talks about.
This is interest rates, the most
important price and it has been
completely hampered by central banks
and it's not allowed to fulfill its
really important role of helping to.
To allocate things and direct
things within the economy.
We have a distorted signal now, but even
worse than this, is driving housing prices
higher in order to create a wealth effect.
Now, the central, the Fed will
never explicitly say, although their
actions in many things, they've
said, it's pretty clear this is
what they were doing in my opinion.
So after you remember the.com technology
boom in the 1990s, the whole rational
exuberance thing that Greenspan called
it, then he then he thought it was okay
because productivity was justifying
higher market prices for stock prices.
So it was creating a very positive
wealth effect as stock markets
were soaring, people were feeling
wealthier because they were wealthier.
So they would either sell their stocks
and spend it or borrow on their portfolio
spend that that was contributing to
G-D-P-G-D-P, just final spending.
And by the way, we could talk
about why that, I believe is a.
A very misleading, uh, um, a
misguided measure of economic health.
So then it all came crashing down and
then there was a negative wealth effect.
People were feeling less wealthy,
so they started spending less money,
which is not good for that GDP number.
And so back in oh one Paul McCulley of
PIMCO and Paul Krugman echoed Paul, that
the Fed should create a new wealth effect
through the housing market because a
lot more people own houses than stocks.
And so if you can drive housing
prices higher, that will encourage
even more people to spend and
that will be good for the economy.
Again, this is this the Keynesian
sort of mindset that consumption is
the foun of all economic prosperity?
No, that is the result.
It.
What drives an economy forward is saving
an investment that allows us then to
consume is so they're gonna all ask
backwards and they think that because
they look at GDP final spending and
two thirds of it is consumption and
your consumption to somebody else's
income, but you cannot consume, like
John Baptist say, said, you know what
you produce gives you the wherewithal
to then go and demand something.
I mean, I'm getting off track
anyways, back, back to housing.
We can talk about that.
So they take interest rates down to 1%.
I think this was in oh two
or oh three, despite the fact
that the economy was growing.
The recession in the US
in 2001 was very mild.
It wasn't even two consecutive quarters
of contraction, it was only one quarter.
And so in oh three, the
economy is growing presumed.
They keep interest rates at what
would've been normally being
considered emergency levels.
We must be at war or there
must be something going on, you
know, a, a plague or something.
No, they kept it down to drive housing
prices higher and they kept it extremely
low levels for about three years.
And of course, the housing market
responded and you had that crazy wacko
housing market in the two thousands
which resulted in the subprime
mortgage debacle and, uh, the greatest
financial crisis since the 1930s.
And so, rather than say to
themselves, well, you know what,
maybe we shouldn't have done that.
Instead they doubled and tripled down with
now with QE printing trillions of dollars.
Buying trillions of dollars of
mortgage backed securities to drive
mortgage rates to the floor to try
and get housing prices back up.
Now with qe, QE one, I still
don't think it was justified.
I think Wall Street presented
policy makers, politicians
with a false dichotomy.
They said, you can bail us out.
I know that's distasteful.
Or your only other alternative
is global financial Armageddon.
So I think there were lots of things
in between there, but of course
they wouldn't have been very much
fun for the bank banking community.
I think any banks that were insolvent
should have been nationalized, not let go.
Don't, they don't go bankrupt.
Government takes 'em over,
shareholders wiped out bond holders.
Maybe you're getting 25 cents on
the dollar or something like that.
But the banks are still running.
ATMs are still running.
You fire the board, you fire the
senior management, middle management's
still there running the business.
And then you break the banks up back to
the old glass eagle thing from the 1930s
Speaker 3: and
Paul: separating commercial
and investment banking.
And um, and so you make the banks smaller
and so none of them are able ever again
to hold the rest of the world hostage.
But anyways, back to the
housing wealth effect.
A house has no business going up in price.
Now there are going to be some instances
in areas, very popular areas like
New York City or London or wherever.
They're always gonna be more expensive.
But like I was saying earlier, you
know, in a free market capitalist
system, you're only supposed to
be benefiting to the extent that
you're benefiting somebody else.
So you create capital, they create
capital, you fairly exchange it.
So my wife and I live in this house.
It's in a suburb of Toronto
and we bought it in 2001.
It just happened to coincide with
when the Fed started their wealth
effect housing wealth effect policy.
And so our house has gone up four
times in value over the last 24 years.
So if we're only supposed to be
benefiting because somebody else is
benefiting and we make four times
on our home, who else out there made
four times what we made on our home?
Nobody.
But it's worse than that.
It's not that somebody else didn't
make four times their, it comes at
their expense four times their expense.
So we only, our, the house
is not a productive asset.
Our house is not producing four times the
amount of stuff that it produced in 2001.
It hasn't increased four times in size.
It hasn't relocated to where you live.
The beautiful area of part of Australia.
It's the same economic good that a
younger couple or, uh, a newcomer
immigrant to our country is forced to
pay four times what we paid for it.
So it's a redistribution of
wealth from their bank account
and into our bank account.
And you're at the point.
So it's completely unfair.
I think it's immoral.
I don't think policy, like I
said before, I don't think policy
makers really thought it through.
I don't think they thought that these
actions would lead to a, a housing
affordability crisis where a whole
generation is priced out of the market.
Where there, I think the average
first time home buyer in the states,
the average age is 40 years old now.
I mean, this is ridiculous.
Australia.
Yeah, it's, it's, yeah.
I mean, and Australia and Canada are
probably the two worst housing markets
from an affordability perspective.
So nobody planned, intended
to get us to this place.
Um, although it was very predictable.
And so here we are where a
whole generation, they're pissed
and they should be, right.
They, they, they've played by the rules.
They've gone to school.
They're better educated than me.
They're willing to work just as hard,
just as smart, smarter probably.
Um, yet they can even dream of
affording the sort of lifestyle that
I have been fortunate enough to enjoy.
Now, don't get me wrong, I worked
very hard, but so are they.
And so it's like the contract
has been sort of ripped up
and thrown out the window.
Now I'm 64 and you know, I
haven't done anything wrong.
And when I tell this to, you know,
my friends, my family, my generation.
Like, no one is to blame.
This is not about a, I'm not trying
to be sort of vindictive here.
It's like we all play by the rules and
you thought, well, yeah, just get on
the housing ladder as they call it,
and you know, and then you'll be able
to sell that house and get a bigger
one and that will go up in price and,
and then you can retire in comfort.
So, you know, it is not about bad
people, it's just about a bad system.
And so when I tell people my age,
this story, you know, at first
they don't like it and I get it
right, because it's human nature.
You like to, you know, made four
times on your house Musson way to go.
I'd say, yeah, I know a
thing about real estate.
You know, I knew what I was doing.
No, I didn't.
We just needed a place to
live and we happened to buy
it just when the Fed started.
There were housing wealth
effect policy back in 2001.
I just got lucky.
That's it.
Right.
Doesn't mean I didn't work hard.
And same thing with all
my friends and family.
They all worked hard, went to
school saved, and, uh, they
met a fortune on their home.
And so when I explained this to
them, at first, they don't really
like it, or, or they sat sounds,
they, they look surprised, but
then they very quickly get it.
And they, the vast, vast
majority say You're right.
It's not fair.
Um, although every now and then I do run
into someone, not, not very many, but
every now and then I run into someone who
not only doesn't like it, but refuses to
acknowledge it, refuses to acknowledge
that they have, we have unfairly benefited
at the expense of the next generation.
And they'll come up with all kinds of.
Crazy theories as to what's
going on, which are all very
easy to debunk, obviously.
But I get it.
You know, and they're not bad
people, don't get me wrong.
They're not bad people.
But it's tough when you've lived your
whole life believing something and
then you're told by me, you know, Mr.
Debbie Downer, that, you know,
maybe, maybe we didn't deserve this.
And, and, um, and it's, I'm always
reminded of that saying by Upton
Sinclair, he was a US I think it was
a politician, like a left-leaning
socialist politician back in the 1930s.
And he said that if somebody's
income depends on them not
understanding something, then
don't expect them to understand it.
It's not that they can't, they don't
want to emotionally, they can't.
Intellectually they can for
sure, but they don't want to.
It's too painful.
Yeah.
And I totally understand it.
And so over the years as I was investing,
you know, I said earlier, we looking
for like world class businesses.
So we would take the savings, the hard
earned capital of Canadians, and they
had already saved and they're doing well.
Then we would take their capital
and try and augment that for them.
Just grow a little bit,
protect it at the same time.
And we would do that, affect that by
investing in world-class businesses
who we were confident would put
their capital to productive use
and grow it, grow it carefully.
And then that comes back to the
clients and they're better off and
they pay us and they pay their advisor
and, and everybody wins because
everybody's providing a service.
Like I don't create capital, I play like
a facilitator role, which we could talk
about how government and finance industry
are facilitators of capital creation.
You don't create capital and
so, so I always felt that I was
playing an important role myself
and thousands of other investors.
This is the role that we play
channeling savings to, to productive
use and keeping companies honest.
And if they're not putting the capital
to productive use or doing stupid
things or making reckless acquisitions
because their organic growth is slowing.
And then we take the capital back,
you starve basket case companies of
capital, but then the housing effect,
then the bailouts of Wall Street.
And I just became increasingly frustrated
that this was happening and you could see.
The path that we were on and
how this could potentially
end and it will not end well.
That I know for sure is not sustainable.
Exactly what that ending looks like.
I don't know for sure.
I've got some things and we can
discuss one or two things and I
don't know when nobody does, but, and
I've been talking about this with my
clients who are financial advisors
or stockbrokers, financial planners,
like amazing people for many, many
years, and a number of people over
the years said, you know, Paul, you
should really write a book about this.
You're the only one that talks about
it in this way, at least in the mutual
fund industry that they they of.
And I think one of the reasons they
recommended that I write a book.
It's because of my presentation style.
So back when I first started off in
the investment industry, you know, you
go to a conference and you get up on
stage and you got hundreds of financial
advisors out in the audience there,
and you're nervous as hell and 'cause
a lot of smart people in the audience.
And so my goal was to impress them, try
and impress them with how smart I was.
So I used all kinds of charts, graphs,
fancy words, and, and you know, I started
getting caught out in little white
lies over the years, or contradicting
myself because I was saying things
to get the sale, to get their money,
rather than being intellectually honest
and thinking about how best can I help
them with their business, how can I
help them explain to their clients?
Why they're investing their
money with us or why they're not
investing their money with us.
And so yeah, it was getting embarrassing,
embarrassing getting caught out like that.
So I just said, that is it.
I'm not doing this anymore.
I am just gonna tell everybody the
unvarnished truth, whether I, whether or
not I think it's gonna lead to a sale.
Like I never lied, but I would
tell people what they want.
I knew what they wanted to hear.
Anja: Yeah.
Paul: And so, yeah, so then I just
started think, how can I most clearly
communicate what we do and why,
what's going on in the economy?
And empower them.
Empower them to make the right decision
with their clients, hard earned capital.
And it might mean that they don't invest
with us, but that's a good outcome.
Then because we're not appropriate
for them, they have a different risk
tolerance or whatever, they won't stay
the courts, they'll get pissed off.
'cause we're not keeping
pace in a crazy market.
And so, and so intellectual honesty
and clear communication became
an extremely important part of.
Of, of what I was doing and it was fun.
And the more I did it,
um, the more I enjoyed it.
And so my book, capital Offense, why some
Benefit at Your Expense was, uh, or is
written in very easy to understand terms.
And so if somebody reads it
takes the time to read it, they
will understand what's going on.
I use all kinds of analogies, stories
and stuff like that to sort of bring
home the point and the reason it's
called Capital Offense, you know,
it's a very, um, you know, title.
Very provocative title, I guess.
Yeah, yeah, to say the least.
But the reason it's called that is
so people need to understand the
difference between capital and money.
So money is extremely important.
But it's not money that
makes the world go round.
It's the creation of capital.
So money is simply the medium of exchange.
What we use to exchange all that
capital indirectly, and we temporarily
store up our capital in that money.
So the example I like to give is, let's
say you make a bike and I make a suit.
So we both created a capital.
There was no bike in the
economy, there was no suit.
You made a bike, I made a suit,
and then we exchanged the bike
in a suit with each other.
So that's barter, direct exchange.
And now I've got your
bike, you got my suit.
This creation of capital in the exchange
didn't come at anybody else's expense.
Nobody else is worse off because
of what you and I just did.
That's the way it's supposed to work.
Now, we don't do direct exchange.
You could not have a, an economy of any
size if, if you were just doing barter.
An example I use in my book, you know,
well, how many kitchen chairs do I have
to make to buy a, a flight to Florida?
You know, or, or what about, you know, uh,
someone who sells filters for a furnace?
What if they need brain surgery?
You know, so it doesn't work.
So we have money.
So now let's say you make 10
bikes or a thousand bucks each.
They're nice bikes.
You sell them.
So you've got $10,000
in your bank account.
What that $10,000 effectively represents
is the 10 bikes that you made.
You're effectively storing
up 10 bikes in your money.
While you're waiting to use it,
while you're waiting to spend it.
So you don't wanna spend
your $10,000 right away.
You are, uh, saving it to go on a
vacation at the end of the year.
Now, before you get a chance to
spend your money, the central
bank doubles the money supply.
Now, when a central bank increases
the money supply, they do not create
any capital to access that money.
They just create that money out of thin
air, print it or press a few buttons.
It's digitally created, and so that
new money has no capital stored up
in it, but it obtains capital as
soon as it comes into circulation, it
obtains capital from the rest of the
money that's already in existence.
So as soon as the, the, the Fed
doubles the money supply and that
money comes into the economy.
It takes five bikes from your $10,000
and puts it into the newly printed money.
So now your bank account statement
still says that if you've got 10,000
bucks in your account, but instead of
storing 10 bikes, it's only storing five.
And so now your $10,000 will only buy
half as much as it would've done before
the Fed doubled the money supply.
And that's why my book is called Capital
Offense because they take your capital
from your money without your permission
and doesn't produce government's.
Very important.
I'm not anti-government and I'm
not anti welfare state either.
I'm very much in favor of it.
I'm not in favor of too much.
You know, if, if you're, if the
benefits are too generous, it's a
disincentive, disincentive to work.
And the only way you can pay
those is by taxing people more
and the more you tax them.
They're disincentivized to work as well.
So both sides are disincentivized to work
and you get less and less stuff being
produced and or otherwise would've been.
So the government doesn't produce anything
itself, anything that it spends it first
obtains from the private sector and
it can obtain capital from the private
sector only in one of three ways.
Most obvious is taxation.
And that is something that you
know, they can campaign on and
we can all vote accordingly.
Deciding on what we think is a fair amount
of capital to be taxed away from us,
to help those who are less fortunate to
help pay for Medicare, uh, to help pay
for welfare, defense, whatever police.
So taxation.
Second way government's gonna obtain
capital obviously, is by borrowing it.
So we freely lend our money
capital to the government and
then we expect to be paid back.
And we can talk about that when
you have a government bond.
It's an asset, but it's not an investment.
The government does not invest
your capital, it's consumed.
We'll talk about that later.
And then the third way that the government
accesses capital is by printing money,
by extracting capital from the rest of
the money that's already in existence.
And, um, yeah.
Anyways, I've gone on for a bit.
Maybe I'll stop there and
see where you wanna go next.
Anja: Yeah, there's, um.
A lot that I wanna cover, but like
I, I guess the first question I have
that I'm most curious, so obviously
you said you know, you're a voracious
reader and you've always had education
that you've done on the side in
conjunction with your schooling.
I'm very curious to know that when you
entered traditional finance, were you
immediately aware of this problem or
is that something that came later on?
Paul: Yeah, I had no idea.
No idea.
And I would say it was only around
2003, 2004, that where the housing
wealth effect was starting.
And, and it was like, it was like
mind boggling what was happening.
Like these negative am negative
amortization mortgages.
I dunno if you, so Central Bank and the
financial community, were doing everything
they could to increase demand for housing.
So first by driving interest rate down
to one or extremely low levels, and
then by, with new mortgage structures.
So first they started, um,
offering interest only mortgages.
So your your monthly mortgage payment,
you're only paying the interest, you're
not paying any of the principal down.
Of course, that lowers your monthly
mortgage payment and enables you then
to buy more house or bid more on a
house and drive the house price higher.
Then they started doing negative am
or negative amortization mortgages.
So they would, let's say it was
a 6% mortgage for the first three
years, let's say it would start off
with a teaser rate of two or 3%.
So you're not even paying the full
interest expense on your mortgage.
You're only paying two or 3%.
The other 3% would be
added to your mortgage.
So each year, your mortgage, despite
the fact you're making monthly
mortgage payments, your mortgage
was getting bigger and bigger.
But of course, people who were
doing this were told by the banking
community, well, don't worry.
'cause house prices are
going up 20% per year.
And especially in Florida,
they're not billing any more
ocean front and all this nonsense.
And so, you know, after three years, when
the, when, when, when it's triggered, when
you have to start paying your principal
down and you're not able to afford it,
well you just refinance because your
house has gone up 30% in value and then
you start the whole thing all over again.
Well, that worked until house
prices stopped going up.
I started going down and then I
think you had about 25% of mortgages
in the US by oh nine that were
in a negative equity position.
So they owed more.
Uh, to the bank, then the house was worth.
So back in oh 4, 0 5 0 6 when this was
starting to happen, I said, this is insane
that, I mean, this is, you're getting
people into houses that they can't afford.
And, um, and a lot of
people suffered enormously.
And I didn't know it was going to end
up being the great financial crisis,
but I knew it was stupid and I knew it
was IR irresponsible and I knew it was
reckless, and I knew why it was happening.
Um, and I think that was the
start, you know, that combined.
But like long before that, I had
this, my blog, which you mentioned
called Paul Political Economy.
It's a free weekly blog by the way.
Anyone can sign up at the end.
I do an audio version as well.
At the end of every post, I sign
off with be free and do no harm.
You know, I don't wanna prescribe all
the great things people should be doing.
It's none of my business.
But I think, you know, if you, if,
if you're free and you really focus
on trying not to do any harm, either
physically, financially, emotionally,
just by focusing on that, it's really
hard not to make the world a better place.
You know, follow your dreams.
Do what, just make sure that it's
not coming at anybody else's expense.
And then you can do all
the other stuff as well.
Help people out when they need
it and all that kind of stuff.
I'm not saying you shouldn't do that.
And um, yeah, so I think that's my
initial foundations, if you will, and
then seeing what was going on and then
it sort of woke me up, if you will.
And then, and then I've been
on a journey ever since.
So really starting in oh seven is
what I started reading, economic
philosophy, and I didn't really
know anything about economics.
And so I didn't have any
preconceived ideology, if you
will, apart from the do no harm.
And so, and the, and so then I
definitely lent or leaned towards
the, the Aus School of Economics.
I liked classical school.
So actually, uh, one of your guys,
um, Steven Kates, he's an economist.
He's actually a former Canadian.
He's an economist.
He lives in, uh, Australia, and
he wrote a book about, say's Law.
He's written a few books.
He's a great writer.
I've had a few email exchanges with him
years ago, but I learned so much from him.
And then the, actually, the economist I
learned the most from was just on your
show a few weeks ago of Bob Murphy.
Just, he's so good.
And, uh, and George Sgin.
I don't know if you've ever heard of him.
He's a free banking.
No,
Anja: I haven't heard of George.
Um, no.
Paul: Yeah, he's, he's amazing.
He's, uh, so, so those three guys, um,
so, but you know, I was reading, going all
the way back, um, just trying to again,
create a foundation, if you will, of like
a philosophy, like what are the different
schools of thought and why do they exist?
And, you know, you would think the
economic laws are, but they are.
And, and they are.
But there's different schools of
economic thoughts because, you
know, economics is a social science.
It's not a hard science
like chemistry or physics.
It's based on human action as Bob
talked about when he was on your show.
And so, you know, the laws of
economics can be very inconvenient.
And can, you know, dictate that
government should not run deficits.
They should not run up the debt
tab because it's not good for the
economy, not with emergencies.
There's nothing wrong with that.
But post emergency we should pay it off.
And um, and so, so then people, I
think it's called normative economics.
So economic schools of thought based on
ideology, based on how you would like
the laws to be rather than how they are.
Then you come up with complicated formulas
and stuff like that and consequences,
two, three steps removed from the action.
So it's hard to like connect the
dots and you know, I think Bob
used the example on your show.
He is used it many times.
You know, it's like getting angry, uh,
or blaming gravity for plane crashes.
Stupid gravity.
Well, no, gravity is what it is.
You can't change it.
So don't try and come up with a new,
new law, which will get rid of gravity.
It's not going to happen.
Or blaming gravity for, you
know, unfairly targeting visible
minorities or no, people do that.
Economic laws don't do that.
And, and so one of my main goals with the
book, because I think when I have great
faith in people, and I think the average
person is very smart, particularly when
it comes to what they should be doing
with their own hard earned capital,
they don't need a policymaker to tell
them that stocks are, are fairly valued.
So you should be buying them.
You should be buying this house
because the price is gonna go up
again and you're gonna make a fortune.
No, shut up.
It's none of your business.
You should not be trying to coerce
people or encourage people into
spending their money in areas
that you think they should be.
It is.
That makes me so angry.
And so the average person is very
smart, and I think the average person
as well is, is a very good person.
Most people want to do good things.
And, and I, and I believe that one of the
main issues, the reason that we've gotten
to where we are today is because people
don't really understand what's happening.
They don't understand why they're
making a fortune on their home.
And there's an old saying that the
people always get the government
that they deserve, you know, in other
words, well, you voted for them,
so shut up and stop complaining.
Well, no, you know, you only
get the government, you deserve
a, if the government does what
they said they were going to do.
But also if you actually understand what's
going on, you can't vote accordingly
if you don't know what's going on.
And so my goal with the book is to help
people understand what's going on, is to
educate all these beautiful, well-meaning
very smart people with respect to how
their capital is being taken from them.
And redistributed all with
good intentions, by the way.
And then demand different
actions from our policymakers.
And our policymakers will do it
because they're not bad people.
They wanna do the right thing,
but doing the right thing today is
political suicide because they and the
academics have convinced us all that
you can get something for nothing.
The deficits and debts don't matter.
They do.
They matter a lot.
And so if a politician tries to do
the right thing by being responsible
and stop redistributing other people's
wealth from the next generation to
our generation, well, guess what?
They're not gonna be in office very long.
And so they're not gonna be
remain empowered to do all the
right but difficult things.
They'll do it once we demand it.
Anja: Yeah.
On that.
I'm very curious to know, because the
way I kind of understand the system
is it's set up in a way that, um, the
governments and the policy makers of the
day kind of have no option but to kick
the can down the road as far as they can.
If we were to demand change, what might
actually some of the solutions be?
Can we like reform the system
that is so badly designed?
Paul: Absolutely, we can, uh, the only
trouble is that it won't be without pain
and it won't be easy.
Some people will benefit enormously
from that change, uh, next generation.
My generation will be harmed.
And you know, like I mentioned, our
house has gone up for, and, and,
and it's worse than you think, Anya.
So by encouraging people to rely on the
inflated value of their home for their
retirement, it encouraged people to
spend and consume more of their capital
than they otherwise would've done.
So society saved less.
So the time preference in economics,
they call it, the time preference
of society is higher than it that
it, that it would've been otherwise.
So time preference for, I like to make
sure people all all understand it.
Time preference is just your,
your desire to consume today.
Rather than delay your consumption
and consume in the future.
So if you have a high time preference,
you typically save a lot less or
nothing and you consume it all today.
If you've got a low time preference, then
you consume less today, you save more of
your money, you invest it, and you can
consume that much more in, in the future.
So you delay your gratification
for your consumption.
So encouraging people to rely on
their homes for their retirement,
encourage people to save less so there
was less saving and investment in the
economy than there otherwise would've
been, which I think has contributed
to declining productivity growth.
So that's the first thing.
So when people, you know, when you
pay off your, your home, the way your
home should provide you with a NASDAQ
for your retirement is because you
paid off your mortgage over the years.
And it's a really cool
thing like a mortgage.
It's, it's a, it's a
form of forced savings.
So you have to pay the bank,
the monthly mortgage, otherwise
you might lose your home.
And so every time you make a monthly
payment on your house, on your
mortgage, it's like a piggy bank.
You're putting some money into your home.
So if you make bikes, you sell a
bike and you've got money, your,
your bike is stored up in that money.
Now you use that money to
pay off some of the mortgage.
So effectively what you're doing is
you're storing your bikes in your house.
So after 25 years or whatever
you've paid off your mortgage,
you own your house free and clear.
Let's say it's worth $400,000.
Effectively what that is, is 400.
Do the 400.
What it represents is the
$400,000 worth of bikes that you
created through your career and
exchange with other people, right?
So that now you retire and you've
got $400,000 worth of bikes stored
up in your house that you can now.
Fund your retirement with.
But in places like Canada and
Australia, your $400,000 home
is probably worth 1.6 million.
So not only is it storing $400,000 worth
of bikes, but it might be storing $400,000
worth of n nursing services from a, a
younger couple or electrician services
or, or suits from, uh, new immigrants
who are, they wanna buy a home now.
So you've got all this other capital from
all other people stored up in your home
that you can now go and spend, but that,
that's capital that they cannot spend.
So, um, we can reform the system
at first, at the end of the book,
I've got sort of the 10 steps.
It just happened to be 10.
I hate it when people have an even number.
It looks like they started, I need 10, and
then they sort of reverse engineered it.
It just happened to be 10.
But the first one I should
have put was what I just said.
That step one is educating people
with respect to what's happening.
But step two would be to stop increasing
the money supply at such a rapid rate.
Now, I know you've had a lot of
Bitcoin people on, and I totally
understand where they're coming from.
I get it.
I understand the principles of.
For the principle of why Bitcoin?
I don't know that we
have to go to Bitcoin.
Maybe we do.
I don't know.
But I, there's nothing wrong with
a fiat currency system per se,
other than it's subject to terrible
abuse by, well, no, exactly.
So, you know, you, I don't
know if you've ever read any
of Lawrence White's, uh, work.
He's, um, he's got a good book
published last year, gold, I
think it's Gold Dollar or Bitcoin.
And, um, it's well worth reading.
And so, you know, gold standard, I think,
I think that's what he leans towards, you
know, a slightly elastic money supply.
I don't think he wants a completely
inelastic money supply like bitcoin.
Then he talks about Bitcoin as well.
But I don't, I don't think
you need to go to, to gold.
Like if you could have, if, if
the authorities could be trusted
with a fiat currency system.
'cause I think it's a lot more efficient,
obviously a lot less costly than going
around the world and digging up gold
and transporting it all over the place.
Um, but that's, that's the issue.
Like, can they be trusted?
And, you know, whenever there's an
emergency and they decide what defines
an emergency, they'll simply break
the rule and start printing again.
And they'll, like, during a great
financial crisis, their favorite
saying, well this is no time
to worry about moral hazard.
Yes it is.
That's exactly the time that you should
be worrying most about moral hazard.
And, um, and they'll do that
because they're able to convince
people and themselves that
it's for everybody's own good.
So it's only with an understanding
that it's not, will they
potentially not do that?
It just understanding empathy,
you know, we need all this
compassion is not gonna be easy.
So understanding, stop
increasing the money supply.
I think Milton freed me to talk about
increasing the money supply at a,
at a preordained rate, if you will.
Like 3%, three to 5%
or something like that.
That'd be a lot better than what we've
been experiencing over the last decades.
Um, the next step is to stop.
Interfering at distorting interest rates,
as James Grant says, the most important
price in the economy that would lead
to significantly better, um, allocation
of capital and productivity growth.
Um, and then no more bailouts.
Wall Street needs to know, and investors
need to know that if they screw up,
taxpayers are not coming to their rescue
either with fiscal stimulus or by the
fed printing money and extracting capital
from the savings of all the taxpayers.
And that alone would have such a positive
impact on the economy eventually.
Initially, it'd be very painful.
'cause asset prices are going
to fall to their intrinsic
value, both housing and stocks.
And you know, you by no means should
authorities try and force prices down.
But if you stop manipulating interest
rates and printing money and Wall
Street knows that the fed's no longer
coming to the rescue, then prices
will, will adjust all under own.
And so it will be painful for
some, and I understand that.
And I mean, and it's terrible.
It's terrible.
But this is not about punishing people.
Some economists out there, they think
that, you know, for people like me who
claim that a recession is necessary.
Wants an economy has been distorted
higher by central bank policy.
A recession is necessary to
cleanse the economy, to fix the
economy, to heal the economy.
It's not about punishing people.
So, and I use this example in my book,
you know, if, if you have a tumor and
you go to the doctor and the doctor
says, okay, it's serious business here.
I can operate and I can save you,
but it's gonna be 18 months of rehab,
you're not gonna be able to work.
And so from an economic perspective,
it's gonna be very tough for you.
It's gonna be a pretty bad
recession in your household.
And guess what?
There's gonna be contagion.
Your household, your, your family
members, due to no fault of their
own, are going to suffer as well.
They're gonna, everyone's gonna
have to tighten their belt here,
but after 18 months, you'll be
healed and then you can go back out.
It's not up to me, the doctor to tell
you whether you should work or not.
How much you should
earn, how much you spend.
No, I just focus on your health.
So as the doctor, am I punishing
that person by trying to heal them?
No.
You know, and so, so doctors don't
take that route because they don't want
you to be outta work for 18 months.
So instead they print money
to drive the asset prices higher right
away and, and paper over the tumor.
Instead of taking the tumor out,
they give you this stimulant and
whatnot, and you feel better.
You go back to work the next day,
but 18 months later or nine months
later, you come back to the doctor,
you still don't feel too good.
Well, guess what?
The tumor is not only still
there, but it's bigger.
Oh, I can still operate and save
you, but instead of 18 months
of rehab, now it's three years.
And so the consequences of now doing
the right thing are that much more
severe, which makes it that much more
difficult to do the right thing, right?
'cause you're gonna get blamed for the
suffering that everybody's going through,
which are the consequences of bad
policy from so many years in the past.
And so, so for people who bought,
like people from me, like me, so if
my house went down, got high price,
got cut in half, yeah, that's uh,
big blow to my household wealth.
But I didn't earn it.
I should never have been
mine in the first place.
And so with that sort of mindset, it's
easier for me to say, well, I would.
Accept, well, I wouldn't have any choice,
but I would actually celebrate that
happening because it means that the
next generation now is going to be able
to afford what I was able to afford.
Like it's a, a, a more fair and
moral way of, of being, if you will.
Now, it's very easy for me to say that,
but it's not as easy for, let's say
a younger couple who recently bought
a home at a very inflated price, and
for them it would be particularly
painful and that's not good.
But it doesn't mean that you
should continue to price a whole
generation out of the housing market
behind them just to maintain the
value of these people's homes.
But, but for people like me
who still have a capital gain.
On the price of their home, that when
you sell your home, some of that, there
could be some form of capital gains tax
to help those younger people who bought
at right at the top due to no fault of
their own, and now they're down 30% and
they have to move and are 30% underwater,
underwater under their mortgage.
That's not their fault.
So those who benefited, I think
should be willing to help.
Like in and in the states, you, you
have capital gains on your home, right?
So I think for an individual.
If you make, uh, money on your home,
the first $250,000 gain is tax free
essentially, and for a couple you
can claim up to half a million,
but above that, you're getting
tax at the capital gains rate.
And I don't think there's a capital
gain on house on your principal
residence anyways in Australia
and, and there's not in Canada.
So people can make millions
on their homes up here.
And um, again, they haven't done
anything wrong, but if it's come at
somebody else's expense, I think a
lot of people would be willing to.
Okay.
So maybe it's, you know, like maybe in
the states, maybe after $250,000 of gains
or half a million dollars of gains that
you start to get taxed at the capital
gains rate or something like that.
I don't know, like there probably a number
of different solutions, but I think if we
all approach it in the spirit of fairness.
Of understanding and compassion and not
trying to demonize anybody, then I think
we can come up with some solutions that
would result in the least amount of pain
for the least amount of people, I think.
Absolutely.
Yeah.
Yeah.
No, no, absolutely.
You're absolutely right.
And um, so somebody's
getting screwed here.
That is a given, that is unavoidable.
And so I think you want to have the
least amount of people being screwed
by the least amount, if you will.
And, um, yeah, it won't be easy.
Yeah.
But I think, you know, as I said before.
Understanding, compassion,
fairness, that right.
It's amazing what people can do if they
put their heads to it and they really
want to make a difference and they really
want to make it fair and least painful.
But it's also amazing what people can
do when they want to convince themselves
that they, that they are justified
in making four times in their home.
It's amazing what Wall Street
can do to justify why the
Fed needs to bail them out.
They won't consider anything else, right?
They will just consider,
they will, they will.
They will counter any other potential
solution other than bailout because
any other potential solution is
not gonna be very good for them.
And, um.
So, yeah, so there are no
easy answers here at all.
I'm not here to tell people that
there are, I wish there were, but
you know, particularly in the US and
increasingly in Canada, I'm not sure
what, what it's like in Australia, but
society's getting divided, you know?
And it is so sad to see, and I
think this is a huge part of it.
Younger people in particular, they
understand that they're not getting
a fair shake for the most part.
They understand that it's not fair,
but they don't understand why.
And that's why I wrote my book.
And so if you don't, so if you don't
understand why, but you understand you
are getting screwed, that is very natural.
To look for someone to blame.
And so it was very natural
then for Republicans to blame
Democrats and Democrats to blame.
Republicans appear in Canada as
conservatives, blaming liberals
and liberals blaming conservatives.
Right.
And because that's almost all you got.
And now people can't
even talk to each other.
You know, we, uh, my mom and my, our
eldest daughter live down in Florida,
and so we go down there a lot and
we've got a lot of friends down
there, uh, Democrats and Republicans,
they're all beautiful people.
Many of them can't talk to each
other, you know, and they agree on
95% of the stuff, you know, and even
the 5%, what they differ, I mean,
they don't really differ a lot, but
they're told to hate the other side.
And, uh, and it's getting worse
because the, the, the root
cause of it, in my opinion.
It is not going away.
And um, so yeah, we can decide
to, and, and it's not sustainable.
So it's not sustainable.
And so one way or another is
going to end in my opinion.
Now it might end next week.
It might not end for another 10 years.
You know, there's this rule
of, um, the rule of holes.
The rule of holes is when you
find yourself in a hole, the
first rule is to stop digging.
And instead we've been digging faster
and faster such that, you know,
the bailouts are that much bigger.
Government gets even more,
uh, involved in the economy.
The central bank balance
sheet grows even higher and.
And yeah, so, so it will end and it will
either be my opinion, an out of control
explosion where the people, those are
getting screwed, finally have the vote
and they say, well, no more of this.
And you get some sort of hardcore
socialism and you're getting more
and more movements and it's natural
that socialists are, are pissed off.
They should be, but they don't
understand what's going on.
So they're, they would, they would throw
out the free market capitalist baby
with the crony capitalism, bathwater
with the crony capitalism, moral hazard
bailout, wall street, bath water.
And then you think things are bad.
Now things would be con it,
it'd be a lot more fair.
But instead of the wealth disparity be
here, which is ridiculous, it should.
There should be wealth disparity
based on contributions, ability,
whatever, you know, should be
here, we're here, which is crazy.
With socialism, it would be much
more even, but we'd all be way down
here, you know, and so that's the out
of control explosion, or we have a
controlled explosion, like what I've
talked about earlier, talked earlier,
and um, listen, I, I wish there was,
there were other choices and maybe
there are, I mean, I, I just don't know
them and I'd be more than happy to, to
listen to what other people have to say.
But, um, but I don't, I just,
I don't see it, but yeah.
Exactly.
Exactly.
And, and, and it, and, and it is
complicated and the terms that are used
are in some ways deliberately made to
confuse, you know, and, uh, but like,
as you just said it, you know, it's,
it's because of a lack of understanding.
Which is precisely why
I've written the book.
That is step one.
And it is my hope that, well, first of
all, it gets read and that, you know,
hopefully it can make a difference and
start a movement where, I mean, there
are so many incredibly talented, capable
people in this world, and if you can get
them on board, I think we can get there.
Um, I do like, I, I'm an optimist.
Uh, I'm a realist first and foremost.
I'm, I, I am, but I'm also an
optimist in, in that, yeah, I
really do believe in people.
And for the most part, people
wanna do the right thing.
They just don't know what to do.
Right.
And they don't know that
they're doing the wrong thing.
And you know, it's bad systems bring
out the worst and very good people.
And vice versa.
Okay.
And vice versa.
And I think with a better system, a
fairer system, a more honest system,
a a more honest money that you know,
that could really bring out the best in
so many people, create that many more
opportunities for that many more people.
So many people don't have
a fair shake at the stick.
They don't have a fair chance.
And just imagine if that many more people
were able to productively contribute to
society, we'd all be that much better off.
I mean, nevermind first and foremost,
from a moral perspective, giving
people the opportunity to live a
fulfilling life and a productive
life, we'd also all benefit from it.
You know, it really is a
win-win situation in my mind.
And, um.
So that's my hope.
Maybe it's a dream.
I don't know.
I guess I would, yeah, try not to.
A lot of people are very angry.
Understand, but try not to get angry
at, you know, your fellow citizens.
Try to have more empathy from, you know,
try to see things from their perspective.
And I think with more understanding
and more education about what's going
on, I think more people will be on
board and want to help each other.
I really do believe that, but
people are gonna need to see
evidence and I get that too.
And I think that,
you know, once we all decide
to do the right thing,
like we'll do it.
And, but it's, it's important
that people know and trust.
That we are all in this together.
And it's not just me that's gonna
suffer and they're all gonna be fine.
You know?
And, and I, and I think that will happen
if we don't, we're gonna end up in
something like the movie from the Hunger
Games, you know where, I dunno if you saw
that movie, but, you know, well, yeah.
And whether it's in the form of gated
communities or whatever, I mean, that's,
uh, and less and less stuff being produced
and, and people worse and worse off.
But, uh, I just think have faith
in people and let's move forward.
Well, thank you, Anya.
It's been great.