Ep 43 – Jim Brown: Financial Repression and Zombification
In our latest Zombie Month episode, we welcome Jim Brown, a Monetary Metals Board Member, onto the Gold Exchange Podcast. “Hard Money” Jim dissects the increasing zombification of the economy, financial repression, and the unprecedented moves taken by Central Banks around the world. This episode was filmed LIVE at the New Orleans Investment Conference! Listen to Ben, Keith and Jim break it all down from the latest interest rate hikes, how they will impact the zombie hoards, and everything in between.
Connect with Jim on twitter @hardmoneyjim and on his Substack: https://substack.com/profile/19206076-jim-brown
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
Keith’s Theory of Interest and Prices
Marginal Productivity of Debt Research
Earn Interest on Gold and Silver
Heat Death of the Economic Universe
Podcast Chapters
00:44–06:30 The Beatings Will Continue
15:08–20:27 Theory of Interest and Prices
20:27–26:07 Federal Zombification?
26:07–30:34 Financial Repression
30:34–33:38 Heat Death of the Economic Universe
33:38–37:00 Investing in the face of Inflation
39:22–43:40 Money Creation and its Consequences
Transcript:
Ben:
Welcome back to the Gold Exchange Podcast. We are here in New Orleans at the New Orleans investment conference. I’m joined, as always, by founder and CEO of Monetary Metals, Keith Wiener. We are, of course, delighted by board member Jim Brown. Hard money, Jim. He’s on substack and always a pleasure to have. Jim, welcome back.
Jim Brown:
Thank you!
Ben:
So let’s kind of dive right in. We are now in kind of a rising moment of the interest rate. The Fed has said we plan to raise rates even if the UN says, don’t do it. If the rest of the world says, don’t do it, the rates are rising. So let’s talk about that for a little bit. Do you see in 2022 not 2023, but 2022, that rate hikes will have to be abandoned and that the Fed will pivot? Or do you think they really have the result to do it?
Jim Brown:
2022 is winding to a close pretty quickly. And Jay Powell has been very explicit and very firm, and he’s been a man of his word so far. He’s going to raise rates, and I think why is that? Because he’s got the worst consumer price increases, what he calls inflation. Not what I call inflation, but what they call inflation in 40 years. And this is politically toxic. When he’s raised rates before, he has not had to do it in this kind of an environment, but he also hasn’t had this kind of a strong labor market. He’s going to raise rates until he breaks the labor market. I think it’s kind of what he’s promised to do. He’s talked about the strong labor market, implying that there are trade offs. If he can trade off a few percentage unemployment for a reduction to CPI, back to his Magic 2%, I think he’ll do it. Unless something really awful breaks, and even then it will take a lot to dissuade him. I think they’re serious because consumer price inflation is serious. For the first time in four years. I don’t feel he thinks he has much choice. You notice he’s used the same words that Paul Volcker used in his book.
Jim Brown:
He’s channeled Volker.
Keith Weiner:
Yeah, of course, we’re in a completely different economic what was the.
Jim Brown:
Name of Volker’s book? Keeping at it. I think that’s right.
Keith Weiner:
You have to keep at it.
Jim Brown:
I think that was Volker. And Jay Powell keeps saying, we’re going to keep at it, we’re going to keep at it. He said this numerous that’s no accident, I don’t think. And I think the market has continually underestimated his commitment to doing this. By the way, I’m not saying that this commitment is great or noble or anything like that. I’m not saying that. But I am saying that this is a course he’s on. And have you noticed also that the other Fed governors seem to follow there? At first, months ago, they were kind of tepid, they were lukewarm. But now they are all falling into line. Falling into line. He has got them on his train. So there’s a lot of momentum to keep interest rates rising. I loop at the periodic Fed Funds futures and the probabilities that are calculated for the next Fed Funds hike. Right now, the probability of 75 basis point hike next time is I think it’s above 75%. Last time I looked. It’s very high. I think they’re going to keep hiking.
Ben:
Yeah, I think the term is the beatings will continue until morale improves. And clearly the beatings are continuing.
Keith Weiner:
Clearly morale is not improving.
Ben:
Yeah, clearly morale did not improve.
Keith Weiner:
So you got to keep whipping them.
Jim Brown:
Jay would say the labor market is strong, three and a half percent unemployment or whatever it is, even though job openings are slowing down. You’ve got distant early warnings of a worse market, but he’s going to trade off.
Keith Weiner:
I’ve got two comments about that, and one is in the early stage, high growth companies, they’ve been told by their investors, you should assume you’re not getting any more money to cut the burn until you get to cash flow positive. And so there have been some layoffs, but not enough to really affect the bigger statistics yet. But the other thing I read, which I thought was interesting, is that there’s been a lot of these cycles over the decades, and most of the employers have kind of learned you don’t want to react by laying off too many people too fast. A lot of companies laid off too many people in COVID and regretted it because you can’t bring the workforce again. They move on or they’re pissed off and they don’t return. So everyone’s like, well, as soon as this is going to be your pivot, things are going to turn and we want to be prepared for that. And so if this is a game of chicken between the guy who’s administering the beatings and the person whose morale is supposed to improve but isn’t really that bad, and they have to make it worse first, it’s kind of a funny psychology as they stare each other down.
Of course, in the end, assuming they persist on the rate hikes, there’ll have to be a lot of layoffs because a lot of productive enterprise will be rendered submarginal at those higher rates. That’s the whole concept of zombie. And this being zombie month here at Monetary Metals, where somebody was you that produced a video of like something’s gone wrong at Monetary Metals. It shows the logo and then it distorts and it’s the Scream and Dracula.
Ben:
Yeah, we’re going to have it as our intro here. Everyone will get to see it.
Keith Weiner:
And this idea that there are companies that even at 0% interest rates, couldn’t pay their interest expense out of their net profits, and then you start hiking interest rates, not only do they go farther under the margin, but a lot of companies that had not been zombies, when you raise the margin, suddenly comes off. They’re under that new line, and then as those companies lay off, then that feeds the spending and more companies are dragged in. And then when these companies go out of business, all of their vendors and suppliers suddenly have less revenue. And it’s a vicious spiral.
Jim Brown:
I wonder what the Fed is going to do, because numbers I’ve seen indicate, and I haven’t seen them updated in a long time, but at one time I saw the numbers that said something like 17% of the companies stock, it was this high in the S&P 500 were in this category that they actually were at zero profit. At current rock bottom interest rates.
Keith Weiner:
It’s something like 20% of all corporate debt out there, according to the bank for International Settlements. Not like conspiracy central.com. It’s a bank for International settlements. 20%. This was before.
Jim Brown:
And they’re the ones that have the best or the most widely held, I guess, definition of a zombie. They have a specific definition.
Keith Weiner:
It’s actually strictly so when net profits are less than interest expense. It’s kind of a basic concept of it, but it’s stricter than that and tighter than that. That condition has to apply for two years or something. And it can’t be one of those, like, Tesla, you could argue, is an open ended company situation. We could have explosive growth to the upside. So they try to exclude that. They’re trying to say these are the hopeless basket cases, that they’re losing money net of interest expenses and have no real and then they keep a statistic of how many zombies get out of zombie status, which is very small yeah. And declining. And obviously it’s interest rates.
Jim Brown:
Those are the zombies that go right. So this is the question I have. There’s so many of these. You would think that this makes the economy extremely fragile, that you just raise interest rates a little bit and all these dominoes start falling and maybe that’s the breakage that happens that causes the Fed to pivot. But then I read a really good book recently called The Fed Unbound by a lawyer from Columbia named Lev Menand, very insightful, but don’t agree with his position on how monetary policy should work and how the Fed should work. And all that. But he’s got his facts straight and he’s got his monetary history good as far as I can tell. Well, what he points out is that the Fed has become so activist and into areas that it has never done before. It used to be just the lender of last resort. Now it’s the lender of first resort. And you saw this in the Pandemic. They extended loans and bought bonds directly of all kinds of companies that they would have not just treasury bonds, but just corporate and municipal. They’re authorized to buy municipals but they have rarely exercised that authority. Did you know that they bought bonds of Apple? The Fed bought bonds of apple. Now that’s a good credit of at and T, which is not a great credit, but it’s triple B of a whole bunch of other big name corporations. And why did they do this? They did it to show that they’re ready to step in and prop up the market. They didn’t buy enough to actually change the fortunes of the company, but they did it to signal. So here’s my question. With that big lead up, when we start to see zombies fall, what about the theory that the Fed will let some of the zombies die and die their final death? But if it’s a really important company they’ll intervene directly to that company and save that company. That way they don’t have to necessarily unleash all their monetary loosening power into the whole economy. But as an example, not that it’s a zombie, but I guarantee you that that’s not going to let American Airlines fail. They’re not going to let American Airlines even go bankruptcy.
Keith Weiner:
The one that comes to the Fed I was going to say Congress and the fiscal policy will declare American Airlines to be a national treasurer or whatever term they want to use. True, they’ll subsidize them directly, but before they even get to the Fed but.
Jim Brown:
The Fed backstops it. Here’s what’s so interesting to me about the Pandemic. The Fed put, or they did this special legislation where the treasury put up about 10% of the money. They created these special purpose vehicles and then the treasury loaned them the rest of the money and the Fed backstop those loans so they really show up as federal spending. They’re actually Fed sponsored loans and you could get new money, brand new money to these companies and save them without a Tarp type bailout, which was tax money because Tarp, remember bailout the banks that selling it. That was tax money that did that.
Keith Weiner:
You make an interesting point that there’s a whole book on Federal Reserve accounting practices which are not the same as generally accepted accounting practices. Basically it’s operating on the subjective theory that if you write something different in your financial statements then that dictates the reality and that becomes true because you wrote it. I mean, Nickel boss, it’s a deferred. I forget what they call it, but there’s like a postponed gain or deferred dean or something like that.
Jim Brown:
The Fed doesn’t have to worry about being insolvent though, right? Not as long as people accept the fact that they can.
Keith Weiner:
I think they do. Two things matter. Well, ultimately one thing I was going to say, when assets are less than liabilities, I think that actually matters. And people have said, why hasn’t all the Fed money printing caused the hyperinflation that everybody or not everybody, a lot of people have been predicting for decades. As long as they are, and I call it borrowing, not money printing. As long as they’re borrowing to finance assets that are money good, there’s no problem. And no particular limit either. There’s a lot of problems, but not hyperinflation problem. But the other is when net interest margin or interest revenues minus interest expense, when that goes negative. Now the Fed is printing not to buy assets that are money good, but to simply feed a negative cash flow. That’s your death spiral. That’s your Weimar Germany spiral. And it starts out slow, but it’s an exponential trend and spiral faster and faster. It will get away from them in the end. And now with all the interest rates hike, two things are happening. One is because most of their funding is very short term funding. There’s trillions of dollars of reserves held at the Fed, which is the Fed’s short term funding, which the interest rate on that goes up immediately every time the Fed hikes rate.
Right. But the average duration of the Fed’s portfolio of assets is last time I had looked, twelve and a half years. So the interest rate the Fed is getting on, some of it rolls over and it rolls at higher rates, but most of that stuff doesn’t really change very quickly. And so they’re not getting higher revenues. However, the longer the duration of the asset, the more sensitive it is to interest rates. The Fed is now taking a huge, at least on a mark to market basis. Although they don’t have to market to market. Right, of course. But the actual value of that portfolio has gone down while the liability remains hard and the cash flow is negative. That’s going to matter at some point. I was going to say, talking about the economy being so sensitive, you hike rates a little bit and you wipe out half the economy. My theory is interest in prices. I talk about the interest rates fall. There’s both means and motive to lever up. You have to borrow more and more because you’re getting smaller spread and that everything becomes brittle. And I had a picture of one of those I don’t know if you’ll be familiar with Gadro.
It’s a fancy high end porcelain figurines and artwork. So most people have like the little ones, like a little figure, they make some big elaborate ones and they have this Chinese dragon. The thing is this big and it has the fork tongue and the tail that’s this long thing anyway, it’s very thin and very brittle, and it’s like it just looks like one little pink, and you break off pieces. And I was like, this is what firms and ultimately the economy become after a long period of falling interest. That’s where we’re at. If there was a map, you are here, right? So can they do this and how much damage are they going to cause? It’s a real political question because some of the Fed people now, some of those Fed people are not in the Fed anymore, but the Dick Fishers and the Ben Bernanke’s, we learned our lesson. You can’t selectively allow Lehman Brothers to fail while saving Merrill Lynch and Countrywide or at least arranging for them to be acquired, that we had to basically save everybody and not allow the failures. But some of those people are gone, and there’s a new crew in there.
Do they remember that lesson? Is that even the right lesson is a whole different story. Are they going to allow selective failures? If it’s American Airlines, you don’t allow it. But if it’s Harris Casino, I don’t know if that’s as big as American Airlines, but maybe MGM Grand might be, oh, that’s a casino. Let those guys sell because that’s a vice.
Jim Brown:
The thing is, the casinos and the betting sites, they’re going to do great.
Keith Weiner:
That’s right.
Jim Brown:
The local bike, that’s what you probably should invest in.
Keith Weiner:
But they’re all over leverage. It’s not that people stop gambling. It’s that they’re over leveraged. And I’m sure that’s the same thing, short term liabilities, that their costs are going up. But if people get stressed and unemployed, they can’t gamble as much anyway.
Jim Brown:
I don’t know if there’s any zombies in the systemically important non financial companies. Okay? Financial companies.
Keith Weiner:
Oh, yeah.
Jim Brown:
They’re not going to let a financial they’re going to try not to let a systemic financial failure happen again. But what I’m really interested in is what if, I don’t know, just American Airlines keeps coming to mind, but what about a systemically important industrial company or several that are on the ropes due to a combination of higher interest rates and say, I don’t know, the war in Ukraine or something that happens? What will they do? I think they’re going to step in and become more and more the economic central planners that they aspire to be. And they will purchase bonds. They will finance. They will loan at low rates.
Keith Weiner:
The very curious thing about all this allegedly breaking the speed of demand and higher interest rates, the automakers, as of last week, last time I saw a TV commercial, are still offering 0% for 72 months wow. To buy a car. Now, that was a subsidy that cost the automakers a pretty penny even before interest rates were going up. Now it’s a current place that we’re at. The cost of that subsidy has increased pretty drastically, right. The fact that they’re still doing it. So if you’re an automaker, you have to perform this calculation like, okay, if we do the subsidy, we know how much it’s going to cost us per car. And that’s pretty straightforward. You see a calculator to know that our cost of borrow is 6%. We’re giving money at 0% times this value. That’s what the cost is. But then the other thing is what’s the sales volume we get if we do offer the subsidy? What would be the sales volume if we said no, you have to pay the market rate of interest. Obviously it gold be a lot lower. And I argue it would be so much lower that essentially you have to start writing down the plant itself because it’s so underutilized.
We have to close some plants to consolidate that when you’re in capital intensive business, you’d actually rather operate a small boss than shut it down. And of course, once you shut it down, it’s all written off and then to restart six or twelve months later. It could be impossible.
Jim Brown:
You could get along on the used car fleet in this country for a long time if you really had to.
Keith Weiner:
Right, right. If you’re afforded if you close the plant, you’re not reopening it. It’s done. The workers move on. So they’d rather keep it open. Basically. That’s also another form of zombie. Even a Ford Corporation still generates a nominal profit. That’s still kind of a zombie ish activity. There’s no demand for the cars except at zero interest rates.
Jim Brown:
Okay, so what about the opposite of that? What businesses will never be zombies, cannot be zombies.
Ben:
Are there any anything that’s immune to this kind of zombification process? I was thinking about the Fed, the US. Government. Let’s say our interest rates rise. I mean this is now all hypothetical, but if our interest rates rise to a point and our debt is now at 30 trillion and obviously doubling, it seems, every eight years, is there going to be a point where high enough interest rates would zombify the US economy to the point where our US debt is just almost unpayable at the interest expense?
Jim Brown:
Yeah. So when interest expense sort of approaches the starts to eat up a big portion of the tax revenue, how do you fund and how do you keep borrowing it?
Ben:
Well, that spiral you were mentioning.
Jim Brown:
What I suspect will happen there is, and I don’t know how this relates to a company that’s zombie proof. What I suspect happens there is that interest rate manipulation starts to take place and you get this, what some people call financial repression. And that the government, the Fed in cahoots with the Fed legislatively. They’ll start mandating that people own Treasuries at a certain price. They start mandating that banks buy Treasuries in the banks, for example, they reduce the special leverage ratio requirements. They change those to encourage banks to buy securities to take up that buy Treasuries and create more money. There’s ways that you can require it’s a terrible repression on savers and a terrible repression on interest rates. But you can do this for a while. You can keep inflation high, you can force interest rates low, and gradually you can sort of, quote, pay down that debt with inflated dollars. And you can make a dent if you want to put it in the debt to GDP ratio, you can make a dent in the debt to GDP ratio. There are some examples in history when this has been done, like the UK post World War II and so forth.
Jim Brown:
My guess is that’s what they’re going to have to try, because they don’t have any choice. When things get so I think before things fall apart, we’ll see that kind of repression.
Ben:
Yeah, we talk about this kind of can that keeps getting kicked down the road. Listen, they don’t have any great tools, really, but one thing they can do, just keep kicking it down the road and there’s a lot more kicks in that can. I think we talked about reiki.
Keith Weiner:
I would say that can, there’s a lot more good kicks left in it than people than people think. Now, the debt to GDP, one is interesting because I haven’t really closely studied the UK number, but I’ve looked at the US number quite a bit.
Jim Brown:
UK is actually a little bit, it just went over 100% of GDP and it’s actually not quite as high as the US.
Keith Weiner:
But what I do is I drill into marginal productivity of debt, which is okay for each fresh, newly borrowed dollar of debt, or in their case, obviously pound sterling.
Jim Brown:
How much real GDP do?
Keith Weiner:
If you’re actually adding more GDP than you’re adding to debt, then that theory would be true. But when you look at marginal productivity of debt, number one, it’s way, way below a dollar. Number two, it’s been a secular decline since at least 1950. And I say 1950 because that’s the oldest data that I’ve been able to grab on the internet. I don’t know if the data exists prior to that or if it’s in a micro fish somewhere, probably hasn’t been put on the internet, but it’s in secular decline, which means we can’t actually get out of the problem by growing our way out. In the irredeemable currency system, growth means borrowing to add to GDP. There is no other kind of growth. We’ve crowded all that out decades ago. So the problem is actually intractable.
Jim Brown:
I wrote an article, but if you could raise consumer prices, just say hypothetically 30, 40, 50% a year for five years, and you could repress interest rates so that they were down way low, like banana illegally shame, you get it. You could create so much income in GDP. I’m not talking about real GDP, I’m talking about nominal GDP. You could create so much nominal GDP. You’d basically rob people of their wealth to pay off the debts in depreciated currency. This is what I mean by repression.
Keith Weiner:
I get that. But my view is inflation is the process of borrowing more. So although each dollar is worth less, you owe exponentially more of them. You’re still digging that damn hole deeper. You’re not actually getting out of it.
Jim Brown:
Yeah, I guess my point is if you print so many dollars that you pay off the old debt at a much lower rate, I think it’s theoretically possible. The prospect of it is very bad. We’re really talking about massive poverty here because you’re basically robbing savers, which gets us into a segue of how, to me, is something that I find is interesting. I think we’re kind of approaching this point of repression already, and I’m going to use an example. My brother, my dear brother, who’s a retired school teacher. He’s on a fixed salary from the Texas teachers’retirement system. He has no cost of living increases or anything like that. He just turned 71, and he has just discovered that if he keeps going, he’s looking at 810 12% prices, and he loop pretty well. He owns a home in the Midwest and has a pretty good life. But he’s discovered that if he lives another 20 years, he and his wife are going to end up in an apartment by the time they’re 90, and so he’s going back to work. Now, that’s not a horrible thing for.
Keith Weiner:
Those who have the ability to go.
Jim Brown:
Back to work healthy. He can go back to work, and there’s things that he would like to do, but to maintain any semblance of a lifestyle without descending into a much poor mode of existence, and he lives in right now, he has to go back to work. So he’s already being financially repressed. And this really made it real to me. Maybe I live in a bubble, frankly. It’s not that I don’t care. I don’t feel it. When beef prices go to $25 a pound, I don’t feel it that much. I noticed, but I don’t feel it. But lots of people do. This is getting us back to why Jay Powell feels like he’s got to stop this. This is political poison for him and for everyone associated with it. Right.
Keith Weiner:
Right.
Ben:
The financial repression you’re kind of talking about we talk about the disenfranchising of savers. Right. There’s no honest way to save anymore.
Jim Brown:
That’s right.
Ben:
We’re now getting to a point where we’re approaching the zero line. Okay, but sorry, there is an honest way to save now, but outside of monetary metals. Right. It’s really difficult in dollars, let’s put it that way, to save. Because not only are you looking at essentially zero interest rates or let’s talk about what you’re really getting for your dollar. It’s increasing in prices from beef to food, and there’s really no way to kind of say, hey, listen, I’ve made my money. I’ve got this kind of yield purchasing power and it’s just in a secular decline.
Jim Brown:
So for years we’ve had essentially zero interest rates with low inflation, still negative interest rates. Now we have higher interest rates and higher inflation, still negative real interest rates. Truly, you’re right.
Keith Weiner:
In my view the ultimate financial repression was 1933. When they said the most conservative savers who would be holding gold physically are no longer allowed to own gold number one. Now that we legalize it 1975. In no small part due to the efforts of the founder of this conference. Jim Blanchard. Who deserves to have his name in the hall of Fame as one of the good guys for fighting to relegalize gold. But by the time it was re legalized, gold had been completely vanished in the monetary system, obviously. And if you want to hold a money balance, it’s a dollar or a treasury bond or bank balance or something like that. So the saver has been disenfranchised. That is the root of financial repression. 1933.
Jim Brown:
Oh, I think you’re absolutely.
Keith Weiner:
I wrote up an article, a pretty short one, which of all the things I’ve written, and some of which are extremely controversial…
Jim Brown:
The idea that the gold price is not suppressed extremely controversial, you mean? Not suppressed and manipulated by the banks.
Keith Weiner:
The bullion banks and naked shorting and all that stuff. Right. I published the data-
Jim Brown:
You mean you’re controversial because you’re not a conspiracy theorist.
Keith Weiner:
And my name came up in a session that I wasn’t in.
Jim Brown:
Yes, I was there.
Keith Weiner:
Where’s Keith Wiener right when they’re talking about that perhaps one of my most controversial, if not the most controversial. And there are places that normally syndicate and publish my stuff that refused it. It’s called the heat death of the economic universe. And so, making the analogy of physics, which I sometimes like to do in my articles, the heat death of the universe, supposedly everything is expanding. If you accept the mainstream cosmology view, which I don’t necessarily accept, but as things get more and more distant, the average density of matter and energy is decreasing and then eventually all the stars wink out and you end up with near absolute zero. And that’s the end. And in the economy, you have this problem of declining marginal productivity of debt, which means we’re obliged to borrow more and more to get the same bang of the dollar of GDP. And eventually when marginal productivity of debt turns negative, then you’re borrowing more and more and you’re shrinking the economy. And that the thing, is unsustainable. And that’s the point at which something goes boom. No, we’re not there yet. And that can have some more good kicks left in it.
It’s not going to happen tomorrow morning. But then ultimately, this is all baked into cake. And the problem is, when you think about interest rates, you can’t think about that without looking at productive enterprise. Every productive enterprise has a return. On assets, a return on capital invested and the interest rate can’t be above. Well, the Fed can manipulate return on capital, of course, but that’s enormously destructive. And so the last time that happened was the 1960s and 1970s, which was a great hollowing out. They gutted American industry by doing that. And now if you want to hike interest rates, what firm has a return on capital that’s above 60% in a world where they’ve been able to borrow it at two or 3% for a very long time? Anything that had a return on capital that high, major enterprises would have borrowed an expanded production and pulled. But there’s an arbitrage between return on capital and cost of capital. And normally that borrowing should raise the cost of capital and pull down the return on capital until you get to a stability point. But when you have a Fed that’s controlling interest rates, this isn’t coming up.
You’re just simply dragging this down because the return on capital almost everywhere. Unless you have a proprietary franchise that, you know, like an Apple or something like that, that you can get an outsized return on capital that can’t be arbitraged away, you pull down return on capital after this financial repression, at least the 2008 arguably gold a lot longer than that. Now you want to raise interest rates back here while everybody’s submarginal. It’s not a few zombies. Nobody’s getting a return on capital to match, which means everybody has to delever, sell assets, shut, reduce production.
Jim Brown:
Still, there are companies out there that produce real wealth and get real returns on capital and real returns on equity. And I think, I don’t know if they’re not immune to the financial conditions, but they can certainly keep producing because they produce something that everyone needs and everyone wants and it represents real wealth and they’re going to get paid for that.
Keith Weiner:
Devotees something again, a company that has a wide moat around a proprietary business. If there’s something that other people could produce and you could produce more of it too, and your cost of capital is 1.7% and you’re getting an 8% return on capital, why aren’t you borrowing more to scale up your production?
Jim Brown:
I get it.
Keith Weiner:
And why aren’t all your competitors doing it? And after all these years of that cost of capital being that low that has occurred, nobody is getting that return on capital. They can be positive and they can be making money. I’m not denying that. But the return on capital has been pulled down. Now you want to skyrocket the cost of capital. You’re running some very sort of fundamental laws of physics, limitations on what the economy can really bear, right?
Jim Brown:
So these kinds of companies, they can delever, they’ll be fine. So I’m thinking of stocks that I have tried to own and tried to invest in and I’m very long energy. And energy is this country, probably the world has been under investing in energy for a decade, maybe not quite that long, but many years. And with the sudden cut off with the Ukraine war, these have been things that work really well. All kinds of energy. Believe it or not, the best investment I’ve made in the last four years, five years, is in a coal partnership. I hope this doesn’t go out to any of the green dreamers out there, but this has been like a five bagger. And this was a company that had no debt and a very good balance sheet, but was extremely low valuation because coal was considered to be dead. Coal is considered to be an obsolete power source, at least in the USA. And suddenly when the energy crunch hits and the Green New Deal or the net Zero dream falls apart in Europe and Joe closes the pipeline from the Columbia, pipeline from Canada and various things, suddenly everyone needs coal.
Jim Brown:
And the price of coal is like quadrupled. So these are the kinds of things there are investments out there where you can protect yourself against inflation.
Ben:
Well, that’s what I kind of wanted to ask you. Let’s take a kind of long view of the century. What was that one asset be that you hold maybe a decade, which is more of a shorter view. And then for the year as short as it comes, obviously we’re not going to rep Monetary Metals, but that’s always a great option. Let’s talk about it.
Jim Brown:
I’m an investor in Monetary Metals, and that’s one of the reasons I invested. Not just deposited a fair amount of gold there, but I’m an equity investor in monetary metals. This is a unique all great credit to keep. This is unique vision, a unique opportunity. There’s nothing like it. You can actually put gold back into circulation functioning. I haven’t really thought about are we making gold function as money? We’re getting pretty close. And to me, this is real finance. This is not fake finance. And you can actually lend someone a commodity that they use in production and then pay you back interest in that commodity. That is about that’s the most real finance that I can imagine. And that’s what we’re doing. And I think it’s I was going.
Keith Weiner:
To say, and to your point about returning the use of gold as a currency or as a money, still money, we have an increasing number of clients that are saying, hey, is there a way that I can spend the interest that I get as gold? Like, okay, I get I can sell it, wire to my bank and then buy things in dollars. Is there a marketplace where I can buy things in gold? Because now I have a gold income and we’re like, yeah, not yet, we don’t have that today. But we’re going in that direction.
Jim Brown:
Well, we have these things and I’ve met a lot of people at this conference. This isn’t exactly it. But this is a gold impregnated bill. This is a monetary metals token worth about a dollar 70. But I have a lot of these that I just bought this little Christmas. I’m going to start giving these as bar tips. I’m going to get these in circulation myself
Keith Weiner:
Jim Brown has started the gold revolution.
Ben:
Well, Jim, we’re going to end here soon, but I want to know, where can people find your work? Obviously, we love interacting with you. Obviously Monetary Metals loves you, but let’s hear where can we kind of find some more of your work and more of your thoughts?
Jim Brown:
Okay, well, first, a caution. I have a very specific interest, and it’s called Money Creation and Its Consequences. I write about modern money creation, not about gold. I write about how banks, how we live in an era of pure credit creation. It’s a corrupt system. It shouldn’t really exist, in my opinion, but it is what it is. And to me, the road back to sound money starts with understanding how the current banking and money creation system work.
Do I have five minutes to explain something? I saw a really interesting article recently by a professor from Sussex University named Andrew Hook. He’s an anthropologist, of all things, and he took apart the money creation system. He did a really nice, helpful diagram of it. It’s a very good article. Andrew Hook is his name. It’s called I’m forgetting money Creation in the Modern Economy, or something like that. All right. He pointed out a survey of British UK ministers of Parliament that revealed that only 17% of the UK ministers understand that money, as we understand money in terms of deposits, which is the vast majority bank deposits, the vast majority of the money we use is created in the banks by the banks. Only 17% knew that. Now, these are the people who supervise the banking regulators that they appoint. They didn’t know it. Now, if they don’t know it, who does? A couple of years ago, when I really got interested in this, I was talking to my daughter and son in law and they just bought a house. And I said, well, isn’t that interesting that $300 said in passing? Isn’t it interesting that the $300,000 that you just got to buy your house never existed before the bank made the loan, they created a deposit, basically ex Neil for you, and now your house is their collateral.
Jim Brown:
But they created that money. And my son in law says no. He says, that was somebody else’s savings. I mean, there was somebody else’s money that they put into the bank. They don’t have a video. I said, no, sorry, that is not the way it works. And I think he still thinks I’m crazy. But my daughter believes me. My daughter believes me because she knows I’ve been in the finance business for 35 years.
Keith Weiner:
Isn’t it interesting when facts become controversial.
Jim Brown:
Yes.
Keith Weiner:
Like you’re entitled to your own opinion, but not your own facts.
Jim Brown:
Absolutely. So this is the astounding thing, and there are many economists, many economists who get this wrong.
Ben:
Let’s talk about MMT. I mean, starting with facts and going to opinions. It’s like, oh, my gosh.
Jim Brown:
Anyway, just to get back to my plug sorry. I’m just trying to get people to understand the basic facts of how money’s created, and then if you understand how it’s created and who it goes to first, you can get an idea of what prices are going to happen. The whole thing about the canteen effect, whoever gets the money first has the advantage, bids up the price, and then that’s really the process by which price inflation takes root in an economy. So money creation and its consequences are my topic, and everything I write about relates back to that. Yes. And so money creation and the consequences of low interest rates for many years created the zombies, most certainly. Right. That’s just one example.
Ben:
Well, I want to ask you one last question here. We’re at the New Orleans investment conference. We want to know what is some of the best investing advice you’ve received? And maybe you can give us some wisdom.
Jim Brown:
Wisdom? Opinions. You get opinions. Okay. I have learned. I do think there’s a good future in energy investment. I do think there’s will be a good future in commodities, metals, and mining. Personally, I am very long gold mining stocks. I’m very long gold, and I’m very long energy. I have a few other cats and dogs, too. That’s the bet I’ve made. So God help me if I’m wrong, and God help anybody if they take this as advice, because this is not investment advice. It’s what works for me and works for my family.
Ben:
Jim, I want to say thank you so much. We’ve loved having you on the Gold Exchange podcast. We love having you on the board, and we’ll see you again soon.
Jim Brown:
Likewise. Thanks.
Additional Resources for Earning Interest on Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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