Jan. 23, 2022

E6: Bombing the Turkish Economy - Part 2

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Season 2

This is Part 2 of a 2-part episode on the Turkish economy and its ongoing currency/debt crisis. In this part, we will  look into some prescriptive options for Turkey and the lessons that the US and the rest of the Western world can draw from the Turkish experience. 

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Chapters

00:00 - Intro

01:51 - The Mechanics of Interest Rates

14:09 - Dealing with Economic Devil

21:36 - When the Chickens Come Home to Roost

32:46 - Ignore the Trees to See the Forest

39:46 - Thanos was a Shitty Economist

55:00 - Winning the Vietnam War

Transcript
WEBVTT

00:00:00.739 --> 00:00:04.110
Welcome back to Part II of our look into Turkish economics.

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In Part I, to set the stage, we talked about the differences between theory and practice of interest rates and inflation.

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So if you haven't listened to that or you need a refresher, I recommend you revisit that episode.

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Here in part two, we'll discuss the prescriptive options for Turkey and how those prescriptions apply to Western developed nations.

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To kick things off, here's final thoughts from Part I.

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Let's have a listen.

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Okay.

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Well, we just explained why classical theory doesn't apply here, based on the"Curtis LeMay effect".

00:00:41.509 --> 00:00:49.329
So you're probably thinking, okay, well, let's close up shop, we got it: Erdogan clearly is right, and he should lower interest rates.

00:00:49.530 --> 00:00:56.490
I mean, we just spent, I don't know how long, but we talked about all the underlying conditions, why he should be lowering the interest rates, it makes more sense.

00:00:57.570 --> 00:01:05.120
Well, actually, despite everything I just said, I agree with the classical economists, he should be raising the interest rates.

00:01:11.510 --> 00:01:12.079
Come on.

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Don't me.

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He always said: the scariest words in the English language they hear is"I am from the government, and I'm here to help."

00:01:38.819 --> 00:01:45.939
Welcome to"Come On, Don't Bullshit Me!", where we peal away the messaging of talking heads to get to the crux of today's issues.

00:01:51.250 --> 00:02:05.129
Well, first off let's, address the elephant in the room: as of the recording of this podcast Erdogan announced that he's going to guarantee the bank account of the Turkish Lira to Turkish citizens.

00:02:05.450 --> 00:02:07.329
It's basically the Turkish equivalent of a FDIC.

00:02:08.949 --> 00:02:11.969
And on this news, the value of the Lira shut up.

00:02:12.629 --> 00:02:16.849
Now whether this is gonna hold or not, I don't know, I doubt it will, my personal opinion.

00:02:16.949 --> 00:02:18.490
But what matters is the reality.

00:02:19.349 --> 00:02:25.879
But the funny thing about this though, is that again, we already, I established that Erdogan hates interest rates.

00:02:26.460 --> 00:02:36.240
And interest rates, it's not like the bank is like, you know,"Nomine patris et filii et spiritus sancti", and then the interest rates go up, right?

00:02:36.780 --> 00:02:44.159
Or I guess in Erdogan's case, it would be"Bismillah hirrahman nirrahim", and then the interest rates go up, right?

00:02:45.069 --> 00:02:47.349
Before the interest rates to go up, what happens is...

00:02:47.780 --> 00:03:02.400
It's different in the United States nowadays after quantitative easing, but generally speaking, for Central Banks and in this case for Turkey, what would happen is, to raise interest rates the Central Bank has to sell bonds, right?

00:03:02.460 --> 00:03:13.360
So what happens is, the primary dealers, or the main banks at the Central Bank, who have accounts at the Central Bank, give money to the Central Bank.

00:03:13.780 --> 00:03:15.879
So that money's removed from the economy.

00:03:16.580 --> 00:03:20.590
And in exchange, they get bonds, that give an interest payment.

00:03:21.830 --> 00:03:25.949
And those bonds, by virtue being bonds, are also not in the economy.

00:03:26.750 --> 00:03:28.030
It's like a savings accounts, right?

00:03:28.770 --> 00:03:34.909
And because there's less money in the economy, then presumably inflation will drop, right?

00:03:34.930 --> 00:03:38.310
That's what in the classical economics theory is taught.

00:03:39.400 --> 00:03:46.180
See, but that actually is not the case, because it's not like the bonds are being issued by the Central Bank.

00:03:46.610 --> 00:03:50.659
It's issued by the Treasury department of the country in question.

00:03:50.919 --> 00:03:55.419
So those bonds are already out there, they're already issued.

00:03:55.639 --> 00:04:01.930
So it's a question of are the interest payments going to be paid to the Central Bank, right?

00:04:01.931 --> 00:04:02.490
To the Fed.

00:04:02.780 --> 00:04:09.169
Which, because by virtue of that the Central Bank is effectively outside of the economy, those interest payments don't do anything.

00:04:09.590 --> 00:04:14.169
Or those interest payments are gonna go to the banks themselves, which actually are in the economy.

00:04:14.990 --> 00:04:16.889
And the best way I can explain this..

00:04:17.610 --> 00:04:23.439
I don't know why I keep going back to food or Italy, or Italian food, but anyway, you know about the espresso machines?

00:04:24.300 --> 00:04:26.480
So, let me give you a story about espresso machines.

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When I was stationed in Italy, we had a lot of downtime.

00:04:31.480 --> 00:04:35.160
And you know, that's not a knock against Italy saying, Oh, Italians don't work, so you got a lot of downtime.

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No, it just, as there is an expression war is, it's sudden bursts of chaos with long periods of boredom.

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So during those long periods of boredom, for some reason, I decided to read macroeconomics textbooks to try to understand the economy.

00:04:53.449 --> 00:04:59.389
But the way I kind of visualized the economics was staring at my surroundings.

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And for my surroundings, which was in the break room at the Command Center or the Ops Center, as we call it in the Air Force, was a barista.

00:05:08.560 --> 00:05:11.980
And he would fill out the entire Base's orders.

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Because basically everyone would come over to the break room and he would fill out all the orders of all the coffees.

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And me, being an American, not really being exposed to the Italian coffee culture, it was my first time seeing a proper, real espresso machine.

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I didn't really even know what an espresso was,'cause I was that culturally inept, but I would see, it's almost like an art form with the grinding of the beans and putting in the machine, and getting it with the pressing of the grounds and then the extraction of the coffee.

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And it was really mesmerizing.

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It was kinda like watching a classical music orchestra: it's simultaneously boring, but mesmerizing.

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So the way I was able to imprint the economy into my brain was basically that the entire espresso machine is the economy and the top of the machine, or where the coffee beans are whatnot,-- that's the government.

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And the amount of beans you put in-- that's what's going to go ultimately and turn into coffee.

00:06:12.519 --> 00:06:15.800
It's essentially what the Treasury department spends, right?

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The government, your government is going to spend, based on either, if it's a autocracy, that's dictated, or if your democracy, that's some sort of parliament or congressional laws passed, and that's how the payments happen.

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And this is kind of like what we were talking about with the government printing the bonds.

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Bonds, as we said, could either end up with the Fed or in the general economy.

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And in espresso machine, you have the multiple spouts.

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So generally you have two spouts, and with the two spouts you can either put two espresso cups and then fill two orders at one time, or you put one giant cup in there and then get both of the streams in that one cup, and then you can make doppio, as they say in Italy.

00:07:04.509 --> 00:07:08.290
So this is kind of like how, the way the bonds and the interest payments work, right?

00:07:08.639 --> 00:07:13.769
Because the bonds are being issued by the Central Government and not the Central Bank, right?

00:07:14.089 --> 00:07:15.370
There's a distinction between government and bank.

00:07:15.629 --> 00:07:20.360
So the central government is going to issue the bonds, based on whatever laws are passed.

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And the Central Bank is kind of like the barista in charge of putting the cups underneath the spouts.

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And by lowering the interest rate, what you do is, you're essentially putting two cups in there, where some of the money is going into the economy, like in one cup; and the other is, because of by virtue of the fact that you have low interest rates..

00:07:42.389 --> 00:07:53.829
And again, like we said, low interest rates means the Fed or the Central Bank in broader terms has bought a lot of those bonds, means, those interest payments are going into the Central Bank.

00:07:53.831 --> 00:07:58.750
And of course, then it gets recycled back to Central Government and essentially it is washed out, it's outside of the economy, right?

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Whereas when you raise the interest rates, those bonds are now, rather than being locked up in the Central Bank, are now back in economy.

00:08:07.040 --> 00:08:18.699
So in this case, it's kinda like with the espresso machine analogy, rather than having two cups for the two spouts, you're putting one giant cup underneath the machine, and both spouts are going to that one cup.

00:08:19.790 --> 00:08:23.769
The government payments of interest, payments are gonna happen regardless.

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Regardless of what happens with the Central Bank, because that's determined by law or in authoritarian regimes by a decree.

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And the only thing that Central Bank can do is divert those payments either into or out of the economy.

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And that's key point here is that interest rates are not raised by decree.

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Raising interest rates is done through the buying or the selling of bonds by the Central Bank.

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And all that does is divert already existing central government coupon payments, right?

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'Cause the bonds are already issued.

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The coffee is already ground.

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It's gonna come out of the spout regardless.

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It's either gonna go into a separate cup or into the drip tray, right?

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Or it's gonna go into the actual espresso cup, that's being served.

00:09:13.340 --> 00:09:37.620
Or in an economic sense, if the Central Bank raises the interest rates, that means all those bonds that were locked away from the economy are now actually in the economy and the constant interest payments that are being paid, regardless of it's in the Central Bank or in the commercial banks, the Treasury department of the central government is paying the money on the interest of these bonds.

00:09:38.440 --> 00:09:53.539
And now, because they're not locked away in the Central Bank, but actually all that money is being issued to the commercial banks, well, that's more money that's actually going to the economy and more money just increases the price level, so it increases inflation.

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So a higher interest rate actually, contrary to what classical economic states, increases inflation.

00:10:02.029 --> 00:10:11.210
And again, like I said before, this is perfectly evidenced by both Argentina and Japan as classic examples here of this.

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Argentina, they've raised interest rates, thinking classically that it's going to reduce inflation, but inflation has been going up.

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And Japan, again, the opposite, is that they've lowered their interest rate and the interest rates have been, uh, have been lower.

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Plus all the other things that we've been talking about with the price level increasing, because of the time lag of trade financing.

00:10:33.980 --> 00:10:35.960
So this is the thing that Erdogan is against, right?

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What he is saying is, he's against interest rates.

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And again, whether it's because of Islamic theory or not, that's immaterial, the point is, he is against interest rates.

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Which functionally means, he is against the Central Bank giving bonds to the economy.

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And when the Central Bank gives bonds to the economy, what does that mean?

00:11:00.181 --> 00:11:14.340
That means the Central Government, the Treasury department, rather than giving these coupons to the Central Bank, which is immaterial to the economy, that interest payments on those bonds is being given to the commercial economy.

00:11:14.799 --> 00:11:25.450
So by him saying"I am against raising interest rates", he is functionally saying,"I am against injecting money into the economy".

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But what is this buyback or what is this Central Government guarantee that he just announced yesterday, functionally doing?

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Well, he is saying that if the price of the Lira falls, well, I'm gonna give you more Lira to guarantee the conversion to the foreign currency.

00:11:46.029 --> 00:11:48.720
Well, functionally, that's exactly the same thing as interest rates.

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So this whole thing about him saying, oh, I'm against interest rates, well, he's actually doing the very thing that he's saying that he's not going to do.

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Which from a classical theory standpoint, the classical economists recognize, saying, yeah, okay, whatever, Erdogan, you can say, whatever the hell you want, but you just said, you're going to increase interest rates, so for us that's good news.

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And that's why the lira shot up.

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So he's actually doing the things that the foreign investors want to do.

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Now, all that aside, again,'cause this is just a funny little anecdote, but more broadly, again, like I said, despite the fact that classical economics is not applicable to the Turkish environment and raising interest rates will just raise inflation, is think raising interest rates is the right thing to do.

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Because like I said earlier, controlling inflation is not the end all be all of governing an economy, or managing an economy.

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It's about facilitating the goods and services and providing for the citizens.

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And right now with Turkish people, struggling so much with the shambles of an economy, they need capital flow.

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And again, the capital flow is not coming, because the foreign investors are not coming.

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Because again, because of the risky business and all the things that we've been discussing for this entire episode.

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So the only way to get the funding to facilitate the flow of the Turkish economy is to attract foreign investment.

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And right now, unfortunately, or fortunately, depending on your perspective, what that means is the Central Bank has to raise interest rates.

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Not because it's going to help with inflation, but because it's going to help attract foreign investment.

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Because right now what Turkey needs is foreign investment.

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Because the Turkish Lira is an ineffective medium for facilitating trade within the country.

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You need the foreign investment, unfortunately.

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And the only way to attract that foreign investment is to raise the interest rate, to match the perceived risk premium that is in investing in Turkey.

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We also could say politically, things that Erdogan can do, is become more liberal, less autocratic.

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But obviously you can see, that's a Total Order, and that's not really gonna happen.

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We will see that happening, when pigs fly.

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Now, all that being said, there are some other reasons, a lot of people write off, what Erdogan is proposing.

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As in, oh he's either being senile, he doesn't understand economic theory.

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Or because he's Muslim and he's just trying to create a Sharia theocracy and dismantle thee secular institution of the Republic of Turkey.

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And that's fine, we can get into conspiracy theories and all that.

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But there're a lot of economic reasons for why he is proposing these things, that we need to consider.

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Which may not necessarily help the Turkish situation, but will definitely help understand why he is espousing the situations that he's in.

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Well, one thing is that, like we just said that he needs to attract foreign investment.

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And in order to attract foreign investment, one way to do that, again, is to raise the interest rates to match the perceived risk premium.

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The other way to attract foreign investment is through currency swaps.

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And Turkey has been doing a lot of this with China.

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This is a part of China's One Belt One Road initiative.

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They are trying to increase their economic and political influence throughout the world.

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Good on them, every country has the right to do that.

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But the way these currency swap deals work is that Turkey and China are swapping their currency.

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And not only they're swapping their currency, but they're also swapping their interest rates.

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And we've got to look at this from the perspective of Erdogan.

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He has an election coming up in 2023, and he's a populist autocrat, so he relies on populism to get him forward.

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And with the economy the way it is, he either needs to improve the economy or find someone to blame.

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And also the 2023 election is actually very important to him, because again, as this moderate Islamist, or whatever you want to call him, but this"theocratic light" person that Erdogan is, it is no big secret, he detests Ataturk, the founder of the Turkish Republic, and more specifically, the secular institution that he built within the Turkish Republic.

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And 2023 will be the hundredth year anniversary of the founding of the Turkish Republic.

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So him being at the at the helm, being able to say at the Centennial anniversary of the Turkish Republic, you know,"I have restored the Islamic glory of Turkey", is something that's very much on his mind.

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So that's also, that's well, one of the reasons why from a rhetoric standpoint, he's really leaning into this whole interest is a bad thing, interest is haram, it is, not condoned in the Quran.

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So there's that.

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But from a functional standpoint, the economy as bad as it is right now because of the current Turkish Lira depreciation, it can actually be a lot worse.

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Because one of the things that Erdogan is doing is that whatever reserves-- Dollar, Euro reserves-- that Turkish government has, they are selling that to prop up the Turkish Lira.

00:17:31.930 --> 00:17:46.559
Obviously they are not doing good job, because the Turkish Lira is skyrocketing, but the point is that they're actually trying to prop up the Turk Lira by selling these foreign reserves, by selling US dollars to at least not make it as bad as it really could be.

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And right now a lot of economists are saying that, oh, well, Turkish reserves are diminishing, it's pretty low.

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But what they're referring to is the gross foreign reserves, the gross amount of US dollars.

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But if you take away the currency swap deals that Turkey has made over the couple years, they actually have a net negative balance.

00:18:10.029 --> 00:18:15.309
So while the gross reserve balance is positive, their net balance is negative.

00:18:15.369 --> 00:18:18.869
And that means removing the currency swap deals that they are having.

00:18:18.930 --> 00:18:23.230
So basically with the currency swap deals, that Turkey has made with China.

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For example, this summer they made a$6 billion, it was worth 6 billion dollars of a currency swap, where basically the Turkish government gave$6 billion worth of Turkish lira and the correspondent Turkish interest to China; and then the Chinese government would give$6 billion worth of Chinese Yuan, plus the Chinese interest rate to, Turkish government.

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And of course, how this works is that you have that foreign currency of your partner, which means now it makes it easier for you to facilitate trade.

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Of course, this is good in the sense that from both standpoints,'cause China is a net exporter, so they want people to use the Yuan so that they will buy Chinese products, and Turkey by, as we just discussed, necessarily being a net importer, they need to buy stuff.

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And if they have Chinese Yuan, they are locked in with that currency, so they can easily facilitate the importing of Chinese goods.

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But another part of this, again, it's not just the principle that's being swapped, but the interest rates.

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And if Erdogan...

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And again, the economy is already bad as it is, and people are suffering, losing jobs, they are already angry, right?

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But it could be a lot worse when Turkey does not have the foreign reserves to sell to prop up the Turkish Lira.

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So essentially, because he is refusing to raise the interest rates, the only way he can get foreign reserves, particularly because of Turkey being a net importing nation, is through these currency swap deals.

00:20:01.319 --> 00:20:09.700
And China, obviously, with the desperation of Turkey is in, China is in a pretty good situation where for the swap, they don't want a high interest rate.

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They're gonna obviously go with Erdogan and say, No, keep the interest rate low, because if we're gonna do these swaps, if you want our Yuan, if you want our foreign reserves, you need to keep the interest rate low, because we want to pay you a low rate during the swap deal.

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So that's another issue it's kind of overlooked right now is that, as bad as the Turkish Lira is, it could be a whole lot worse without the infusion of foreign capital through these currency deals.

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And the only way these currency deals, these other countries are going to give that to them is if they keep the interest low, because it's in their interest to have a low interest.

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So Turkey is in a really messed up position right now.

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Erdogan is stuck between a rock and a hard place, because he really should be raising interest rates to attract the foreign capital needed to kickstart the economy back up, but he can't because he is being held hostage by these currency swap deals, where the rates have to be low so that he can get the foreign reserves needed to prop up the Lira.

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Because if he doesn't prop up the Lira, the situation's gonna go from bad to worse.

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And then from the domestic standpoint, Erdogan also has considerations, where he's replaced the old oligarchy with a new oligarchy.

00:21:45.039 --> 00:21:48.450
And that new oligarchy is in construction business.

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Part of his removing of the old guard, if you will, was giving his cronies cheap investments in construction.

00:21:58.750 --> 00:22:09.119
And this is one of the things that even classic economists would say, is that lowering interest rates means you are obviously not getting as much of return as you would normally want from those bonds.

00:22:09.740 --> 00:22:13.960
So what does that do, that's a capital flight to other assets.

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And one of the primary assets that people give flight to is construction to real estate.

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And with his cronies, the oligarchy that he's created revolves around construction, so for the past decade or so, there's been constant construction projects going around all over Turkey and Istanbul right now.

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There's so many, I don't know how true this is, but people are saying that there's more skyscrapers in Istanbul, than in any country or any city in Europe or America, which is freaking insane.

00:22:47.569 --> 00:22:49.619
And most of these construction projects, they are empty.

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Now, this is another situation that we're seeing in the middle east and China as well, is that a lot of these wealthy investors that wanted to park their wealth, parked it in dubious real estate investments.

00:23:02.279 --> 00:23:09.930
And a lot of skyscrapers or what have you, are half constructed, because they just take the money and run.

00:23:10.569 --> 00:23:12.849
And that situation is no different in Turkey.

00:23:12.910 --> 00:23:23.529
And specifically in Istanbul, they had tons of construction projects, and with the fact that a low interest rate boosts the value of that real estate.

00:23:23.530 --> 00:23:30.720
Because again, there's a capital flight from, from fixed assets, from bonds, to real estate.

00:23:31.500 --> 00:23:38.400
And if Erdogan is going to stay in power, he obviously needs to satisfy his cronies, his oligarchy.

00:23:38.579 --> 00:24:03.160
And with that oligarchy being centered around construction, well, not only do they rely on the low interest rates from a speculative standpoint, because people are more likely to invest in their construction projects, but also again, going back to that revolving debt nature is that they're constantly relying on new debt on new domestic debt in this case, because these are just domestic construction projects.

00:24:03.819 --> 00:24:14.829
And because they're not actually collecting any returns from these dubious construction projects, because they're just sitting there empty, they need to finance their wealth with revolving credit.

00:24:15.170 --> 00:24:21.990
And increasing the interest rates is only going to increase the cost of that revolving credit to fuel their own wealth.

00:24:22.690 --> 00:24:31.660
So that's another aspect of why from a more real politics standpoint of why Erdogan is refusing to increase the interest rates.

00:24:32.920 --> 00:24:46.170
And the other issue, again going back to the populous nature of his political campaign, is that in appealing to populism in Turkey, what Erdogan has done over the past decade or two is...

00:24:46.990 --> 00:24:55.609
He was the former mayor of Istanbul, and it has always been a thorn on his eye that his own city wouldn't support him.

00:24:56.029 --> 00:25:12.480
So what he wanted to do was flood Istanbul with people from the countryside-- supposedly the poor people, the more religious types, the more pious of Turks-- to win, to basically control the seat of local Istanbul politics.

00:25:12.589 --> 00:25:19.440
Because essentially, it's kind of like a"Dune" situation: whoever controls the spice controls the empire.

00:25:20.160 --> 00:25:26.000
Well, same thing is in Istanbul: if you control Istanbul, politically it's much easier to control the whole country, right?

00:25:26.200 --> 00:25:28.349
Because it is the economic powerhouse of the country.

00:25:29.130 --> 00:25:34.269
So he needed his own local people in the government there to facilitate all the things that he was doing.

00:25:35.289 --> 00:25:38.069
And by doing that, well, two things happened.

00:25:39.369 --> 00:25:51.299
One is that he encouraged the mass migration of countryside of rural Turks into Istanbul where Istanbul immediately ballooned in population.

00:25:51.339 --> 00:25:53.660
I think it doubled in population within a couple years.

00:25:54.279 --> 00:25:58.779
And Istanbul does not have the physical infrastructure to handle this.

00:25:59.279 --> 00:26:06.099
So there's the political standpoint of him trying to flood the pious into Istanbul so that he could win those local elections.

00:26:06.640 --> 00:26:13.329
But also there's no other aspect of it, is getting all these people to move to Istanbul, would finance...

00:26:13.330 --> 00:26:25.009
They would presumably move into these buildings, these new buildings there, that his cronies are constructing, and that would fuel the growth of their own personal wealth.

00:26:25.670 --> 00:26:45.359
But because obviously the real estate in Istanbul is already high, because it's a desirable city, and giving sweetheart land contracts to your cronies and then them building apartments and skyscrapers and having rural Turks, presumably move into them-- it's a good operation here that you can cook up.

00:26:45.859 --> 00:26:47.160
Of course, that didn't really happen.

00:26:47.480 --> 00:26:50.319
And a lot of these rural Turks became homeless.

00:26:50.549 --> 00:27:02.359
There's this phenomenon called"gecekondu", which means, it's buildings o r like basically shacks o r s hanty towns, that were put up in the middle of the night where r ural Turks were living.

00:27:02.609 --> 00:27:08.589
So you have like when you go down the highway in Istanbul, you'll see all these random shacks of just people living there.

00:27:08.690 --> 00:27:11.230
And t hese just popped over in the middle of the night.

00:27:11.230 --> 00:27:15.710
And that's what" g ecekondu" means literally in Turkish i s like"put up in the middle of the night".

00:27:16.650 --> 00:27:33.420
So that obviously wrecked Istanbul as the economic engine of the country, because just from a personal or from an individual person standpoint, the fact that the infrastructure of Istanbul couldn't handle this doubling size of the population.

00:27:34.160 --> 00:27:36.099
You look at the average Istanbul person.

00:27:36.450 --> 00:27:48.009
Usually it's kind of like in New York city, where most people in New York live in the outer boroughs, you know, they live in like Bronx or Brooklyn and then you commute to Manhattan to work, right?

00:27:48.010 --> 00:27:51.930
You take the Bridge or tunnels and go to work, and then you take the Bridge or tunnels to go back.

00:27:53.079 --> 00:28:03.809
It's kind of similar in Istanbul, where usually people lived on the Asian side of Istanbul and then would take the bridge to go over to the European side and work, and then come back.

00:28:04.740 --> 00:28:12.200
And it was bad enough that the population back in the nineties for Istanbul was around 8 million, which is the population of New York city.

00:28:12.700 --> 00:28:17.599
Not the metropolitan area, because metropolitan area is larger, but New York city proper is also an 8 million.

00:28:18.220 --> 00:28:21.160
And New York city has how many bridges and tunnels?

00:28:21.660 --> 00:28:22.359
At least a dozen.

00:28:22.539 --> 00:28:23.960
But in Turkey they only had two.

00:28:24.440 --> 00:28:24.440
Right?

00:28:24.789 --> 00:28:29.430
And then all of a sudden now the population of Istanbul is 15 million.

00:28:29.930 --> 00:28:35.150
And just recently they finally built a third bridge, but still it's, it's pretty bad.

00:28:35.410 --> 00:28:37.430
But not just from the bridge standpoint, but just normal.

00:28:37.900 --> 00:28:40.750
It's not like, you know, United States where these are brand new cities.

00:28:41.470 --> 00:28:44.789
Istanbul, Constantinople, Byzantium-- is an old cit.

00:28:45.619 --> 00:28:46.819
It's one of the oldest cities in the world.

00:28:46.880 --> 00:28:50.420
So it's not like you have large boulevards where you can park cars.

00:28:50.869 --> 00:29:05.059
There was actually a Turkish article, were they were saying that if you lined all the cars of Istanbul in the streets, it would exceed by three times the amount of street available in Istanbul.

00:29:05.119 --> 00:29:10.890
So lengthwise, there's three times more cars than there's actual streets in Istanbul.

00:29:11.099 --> 00:29:15.369
Which means there's physically no room to park cars in Istanbul.

00:29:15.670 --> 00:29:16.329
And not only that.

00:29:16.630 --> 00:29:28.039
The traffic is horrible, and there are people where normally the commute back in the nineties, it would take you 20 minutes- half hour to go to work, now people literally are stuck up in traffic for two-three hours.

00:29:28.500 --> 00:29:45.240
So if your economic engine, the economic engine of the Turkey is Istanbul, but the people physically can't get to work or get back from work, because they're stuck in traffic literally a quarter of the day, well the productive capacity of your supposed economic engine is severely diminished.

00:29:45.910 --> 00:29:47.680
Plus that doesn't even consider the fact...

00:29:47.710 --> 00:29:49.559
Okay, forget about Istanbul for a second.

00:29:50.299 --> 00:29:51.279
All these rural people...

00:29:51.369 --> 00:30:00.160
Again, Turkey is not like some super industrialized or service economy-based country, like Europe or Western Europe, or United States.

00:30:00.440 --> 00:30:02.430
It's very much an agrarian society.

00:30:03.069 --> 00:30:05.190
The economy, I should say, is very agrarian.

00:30:05.730 --> 00:30:20.230
But what Erdogan did is, by moving all these rural Turks to Istanbul and Ankara-- the capital-- was that they removed the farmers that were actually producing the agricultural base for the Turkish population.

00:30:20.750 --> 00:30:21.859
And again, the Turkish population...

00:30:21.861 --> 00:30:27.740
Turkey is one of the only European countries, whose population has ballooned.

00:30:28.799 --> 00:30:36.180
And so obviously it needs more food, but now you have less farmers, less agricultural workers that actually provide you the food.

00:30:36.599 --> 00:30:38.059
And of course you need food.

00:30:38.089 --> 00:30:40.460
It's not like you cannot have food, like we've already discussed.

00:30:40.799 --> 00:30:42.170
So what does Turkey do?

00:30:42.480 --> 00:30:43.890
They have to import their food.

00:30:43.910 --> 00:30:50.890
So just from a base standpoint, even though, and normally like it's, it's fine, because a lot of European countries import food too, right?

00:30:51.109 --> 00:30:58.170
But those European countries are developed nations, whose economy is not agrarian based economy, right?

00:30:57.819 --> 00:30:59.970
The are service or industrial based economy.

00:31:00.589 --> 00:31:04.880
But Turkey very much being an agricultural-based economy...

00:31:05.150 --> 00:31:11.240
Well, if you're an agricultural-based economy and you can't and produce your own agriculture, obviously that's a big red flag.

00:31:11.339 --> 00:31:13.480
And foreign investors, obviously, can see that too.

00:31:13.690 --> 00:31:19.480
Which provides further political and economic, or societal instability within the country.

00:31:20.009 --> 00:31:27.230
Which further increases the perceived risk premium from foreign investors and further exacerbates, the current issues in Turkey.

00:31:28.410 --> 00:31:34.190
And this is where classical economists will come and say: well yeah, no, duh, that's the whole point of comparative advantage.

00:31:34.191 --> 00:31:42.349
You know, you just go get your import, all your agriculture or all the food that you need from Europe or whatever.

00:31:42.660 --> 00:31:42.950
Okay.

00:31:43.210 --> 00:31:43.980
Well that's good.

00:31:44.599 --> 00:31:48.140
But like I said earlier, there's a time delay with trade.

00:31:48.480 --> 00:31:55.380
And that time delay translates into a real cost in your imports in the form of short-term interest rates.

00:31:55.839 --> 00:32:01.579
So raising the interest rates is going to make it more expensive for your imports.

00:32:01.580 --> 00:32:20.609
So the comparative advantage, while again, this is a classic problem of classical economics, is that it all sounds good in theory, just like with Norden bomb site and the bomb testing in the American ranges, but as soon as you take your bombers over to Germany or Japan or whatever, then you see that your theory doesn't quite work.

00:32:21.269 --> 00:32:37.240
And here it is again with Turkey, is that, okay, yes, comparative economics theoretically exists, but because of the time delay nature of trade finance and the cost of importing, those goods are going to be affected by the interest rates that you're going to have to pay.

00:32:46.380 --> 00:32:48.160
So is there a way out of this?

00:32:49.480 --> 00:32:53.279
Honestly, I don't know because Turkey's stuck between a rock and a hard place.

00:32:53.040 --> 00:33:08.150
Either they keep the interest rates low to keep propping up unprofitable Turkish Lira, or they actually bite the bullet and raise the interest rates, which again, doesn't really help from an inflationary standpoint, but at least it brings foreign investment and, which hopefully they could use to turn the country around.

00:33:08.809 --> 00:33:12.869
Either way things are going to get a lot worse before they get better.

00:33:13.049 --> 00:33:13.910
If they ever get better.

00:33:14.890 --> 00:33:29.380
And Turkey hasn't really in its modern history shown any strong track record of providing evidence to the global economy, that it can lay the groundwork for solid fundamentals of a sustained growth in this economy.

00:33:29.720 --> 00:33:35.019
But you know, hopefully I'm wrong and they can actually, whatever investment they ultimately get, they can actually do that.

00:33:35.559 --> 00:33:38.940
But at least it acts as a warning sign for us in other countries.

00:33:40.710 --> 00:33:52.130
The main lesson that we can take from Turkey is that the immediate impacts of monetary policy, whether it's raising interest rates or reducing interest rates, can provide certain effects.

00:33:52.640 --> 00:33:59.289
What those effects are, can always be up to debate, because frankly, there's too many variables for it to be accurately deduced.

00:34:00.079 --> 00:34:05.160
Monetary policy has always been an equivalent of trying to push a piece of string.

00:34:05.680 --> 00:34:10.599
Monetary policy will never be as effective as the sound fundamentals of fiscal policy.

00:34:10.860 --> 00:34:17.000
Fiscal policy, being the spending and taxation of the Central Government as opposed to the Central Bank.

00:34:17.699 --> 00:34:39.269
And if in the developed world, we've become developed by virtue of the fact of the proper and the good management of, despite our political differences an political turmoils within our respective countries, the fundamentals of the economic growth have always been there, which allowed us to be developed nations.

00:34:39.750 --> 00:34:46.219
Now you can argue about, well, yeah, that was done on the backs of exploiting the Third World and indigenous people.

00:34:47.320 --> 00:34:49.500
And that's a social issue that we can address.

00:34:49.920 --> 00:34:56.659
But the lesson we can learn here is not where Turkey is now, but how Turkey got there.

00:34:57.000 --> 00:35:08.250
And the common theme throughout this entire episode has been to complete absolute mismanagement of Turkey's finances and the structuring of the Turkish economy.

00:35:09.250 --> 00:35:17.409
Specifically the extreme politicization or using the economy as a hostage to ensure political hegemony.

00:35:18.550 --> 00:35:28.159
And that happened because economic decisions were made not for the facilitation of economic growth, but for the consolidation of political power.

00:35:28.739 --> 00:35:33.000
And unfortunately this is what I'm seeing happening in the US.

00:35:33.139 --> 00:35:40.400
And also what we're seeing, definitely in Eastern Europe, but lately it started to happen in Western Europe too.

00:35:41.539 --> 00:35:46.920
And now there's all this talk about raising interest rates in the US, well in EU too, but anyways.

00:35:47.360 --> 00:35:50.960
'Cuz they're saying, oh, the economy's overheating, the inflation is rising.

00:35:51.860 --> 00:36:00.110
The same shit that's going on in Turkey, they are saying is happening in the US and the rest of the first world.

00:36:00.590 --> 00:36:02.110
So they're saying, oh, we've gotta raise interest rates.

00:36:03.050 --> 00:36:10.429
And hopefully this episode has been kind of a warning sign to at least pause and consider: Hey, should we really be raising interest rates?

00:36:10.619 --> 00:36:16.389
Because if we reference back to the Curtis LeMay effect, it's not just about what the theory says.

00:36:17.329 --> 00:36:19.260
It's about what the conditions on the ground are.

00:36:20.039 --> 00:36:37.380
And we went back and forth about Turkey said, okay, the theory says we should raise interest rates, but actually theory is wrong, because for various different reasons, mostly the time delay in financial transactions, and in reality we should actually be lowering interest.

00:36:37.789 --> 00:36:49.289
And when you look at this broadly, I shouldn't say conventionally, but you know, broadly speaking, raising interest rates actually raises inflation and lowering interest rates lowers inflation.

00:36:49.731 --> 00:36:51.329
Going back to that espresso analogy.

00:36:52.030 --> 00:36:55.210
But then again with Turkey, that's not really the issue.

00:36:55.230 --> 00:36:57.730
The issue is they need to get their investments in order.

00:36:58.360 --> 00:37:01.360
They need to get some injection of capital.

00:37:01.750 --> 00:37:03.400
They basically need an emergency shock.

00:37:03.940 --> 00:37:15.119
And right now presumably the easiest way to get that emergency shock or fusion of currency, of money, money flow, cash flow into their economy is through foreign investment.

00:37:15.800 --> 00:37:21.389
It's kind of like what they say, like dieticians would always tell you, oh, you know, sugar is bad, sugar is bad.

00:37:21.860 --> 00:37:26.150
Well, sugar is only bad, if you're in a First World sedentary diet.

00:37:26.650 --> 00:37:34.909
If you are starving for resources or, you know, if you're feeling a little woozy, sugar is actually the best thing for you, because it's the best way to get immediate energy.

00:37:35.170 --> 00:37:43.059
Now, of course, if you just rely on sugar, then obviously of course that's bad, because all that immediate energy is going to turn into fat, and you are going to have all these other problems and whatnot.

00:37:43.239 --> 00:37:57.539
But for initial shock of energy, sugar is obviously the best thing, which is why they say for the elderly, they always recommend that you carry like little tin can of hard candies, so that if whenever they get lightheaded or woozy, you just pop in one of those hard candies and then you're good to go.

00:37:58.119 --> 00:38:04.050
And I remember like my grandmother would have a tin can of these little sour candies.

00:38:04.510 --> 00:38:09.489
And then she would pop it anytime, if she felt a little woozy, when she needed a little bit of energy.

00:38:10.230 --> 00:38:16.090
So with Turkey, yes, I did say Turkey should raise interest rates, but not to combat inflation.

00:38:15.650 --> 00:38:20.760
It is to encourage the foreign investments, so they can actually get some cash flow.

00:38:21.099 --> 00:38:40.519
And hopefully Erdogan, I mean even though he won't, but you know, that's neither here nor there, but hopefully he would take this foreign investment to actually do something sound for the Turkish economy so that they would have the solid fundamentals as a base to exercise the economic policies that he espouses.

00:38:40.521 --> 00:38:53.079
Which is lowering of the interest rates to keep inflation low and increase economic prosperity, and I guess in his terms, you know, bring a rebirth of the Ottoman Empire, which he seems to be obsessed about.

00:38:53.699 --> 00:39:01.590
But so the methodology may be the same, but the desired effects are different.

00:39:02.210 --> 00:39:05.070
So I still stand by that: the theory is wrong.

00:39:05.340 --> 00:39:08.949
It's just that this time the blind squirrel has found it's nut.

00:39:10.050 --> 00:39:15.500
And we, again, we have to remember that the end goal here is not to combat inflation.

00:39:15.820 --> 00:39:18.780
I mean, obviously you want to combat inflation, but again, that's not the end goal.

00:39:19.159 --> 00:39:22.539
The end goal is to do what is best for your citizens.

00:39:23.360 --> 00:39:32.539
And just like with LeMay, the end goal is not to prove whether the Brits were wrong and that high altitude or low altitude bombing is the best way to go about.

00:39:33.119 --> 00:39:38.130
The point is to rain destructive firepower on a country's...

00:39:38.550 --> 00:39:43.289
on your enemies' manufacturing capacity, and ultimately to win the war.

00:39:43.289 --> 00:39:44.210
That's the end goal.

00:39:44.429 --> 00:39:46.369
And that's what we should be focusing on.

00:39:46.909 --> 00:39:55.969
So when it comes to United States, or I guess the first world in general, we gotta look at what are the economic realities on the ground are.

00:39:57.360 --> 00:40:04.719
All these things that the conservative economists are saying, it's like, oh yeah, we have to raise interest rates to slow down the economy, because the inflation is going high up.

00:40:04.909 --> 00:40:05.199
Well.

00:40:05.201 --> 00:40:05.400
Yeah.

00:40:05.510 --> 00:40:05.800
Okay.

00:40:05.800 --> 00:40:08.400
Broadly speaking inflation is increasing.

00:40:08.420 --> 00:40:09.559
Yes, that is absolutely true.

00:40:09.900 --> 00:40:17.750
But inflation is not just some, one off measure and inflation is about too much money chasing too few goods.

00:40:18.090 --> 00:40:20.429
So you just can't focus on the"too much money" part.

00:40:20.690 --> 00:40:23.269
You have to also focus on the"too few goods".

00:40:24.190 --> 00:40:36.510
You know, it's kind of like with the Marvel Cinematic Universe where Thanos has got the Infinity Gauntlet and his whole deal was that the Universe is overpopulated, it's overcrowded.

00:40:37.800 --> 00:40:41.780
So there's a lot of starvation a nd suffering, because there's not enough resources i n Universe.

00:40:42.079 --> 00:40:43.059
So what's his solution?

00:40:43.449 --> 00:40:46.099
He's going to kill half the people in the Universe.

00:40:47.340 --> 00:40:58.769
A nd I, I feel like that's a very classical economics way to think about things, because yeah, sure, you can definitely solve t he starvation and suffering problem, but of course what you're d oing is, you k ill half the people.

00:40:59.710 --> 00:41:01.409
Little one, it's a simple calculus.

00:41:02.289 --> 00:41:04.730
This universe is finite, its resources finite.

00:41:05.650 --> 00:41:08.929
If life is left unchecked, life will cease to exist.

00:41:09.909 --> 00:41:10.889
It needs correction.

00:41:11.150 --> 00:41:12.369
You don't know that!

00:41:14.070 --> 00:41:16.090
I'm the only one who knows that.

00:41:16.869 --> 00:41:20.519
At least I'm the only one with the will to act on it.

00:41:21.889 --> 00:41:23.280
There is another way to do it.

00:41:23.579 --> 00:41:29.920
If you have the power to kill half the people, Hey, Thanos, why don't you consider the doubling of the resources of the Universe?

00:41:30.260 --> 00:41:41.440
Or for the pedants out there, doubling the productive capacity of the Universe, and accomplish the same exact thing: end suffering, but without actually, you know, waxing half of the population.

00:41:42.300 --> 00:41:52.119
So you could either be like Thanos and attack the"too much money" part of the inflation equation, or you could be a little bit more benevolent and attack the"too few goods" part.

00:41:51.920 --> 00:41:55.710
And what's been going on for the past two years or so?

00:41:56.750 --> 00:41:57.710
The COVID pandemic, right?

00:41:57.710 --> 00:41:59.670
And we have supply chain disruptions everywhere.

00:41:59.809 --> 00:42:03.190
And we can get into arguments and debates on what are the causes of that.

00:42:03.190 --> 00:42:04.630
But that's immaterial at this point.

00:42:04.860 --> 00:42:14.619
What matters is that we have a lot of supply chain shortages and that's what's causing the inflation-- it's the"too few goods" part.

00:42:14.960 --> 00:42:24.940
And of course other people will bring out some metric that they pulled out from some random statistic from the Fed and say, well, no, that's actually not true, because of this or that.

00:42:25.500 --> 00:42:33.340
Look, we can debate all the different statistics that you want, but it's kind of like voodoo fortune telling by throwing the chicken bones on a trash lid, trying to tell the future.

00:42:34.119 --> 00:42:39.730
Because the statistics that matter, are the statistics that are relevant to your citizens.

00:42:40.309 --> 00:42:42.610
And you could look at household debt, for example.

00:42:43.230 --> 00:42:44.690
And that has actually been pretty flat.

00:42:44.719 --> 00:42:51.329
Despite this high rate of inflation, household debt has been relatively flat.

00:42:51.590 --> 00:43:05.559
And even, we heard about this during the stimulus checks is that, there were reports about how the stimulus checks that came, most American households were using that to just to pay down the already pre-accumulated debt.

00:43:06.300 --> 00:43:08.320
So if debt is not increasing...

00:43:08.320 --> 00:43:17.789
You know, this was the thing back during the Clinton years, was that household or private, whatever you want to call, it was increasing, it was going through the roof.

00:43:18.130 --> 00:43:20.510
And therefore they had to raise the interest rates to cool down.

00:43:20.809 --> 00:43:31.829
And sure, you might remember, during those years, the Clinton years, much to the chagrin of a lot of GOP, they hate to admit this, is that, you know, we had a field day in the economy: everything was going amazing and great.

00:43:32.289 --> 00:43:36.380
During those years, people were living on their credit card.

00:43:37.039 --> 00:43:38.980
The bond traders on Wall Street...

00:43:39.179 --> 00:43:58.329
'Cause my mom was working in Wall Street, so she would have all these stories about how they'd be like comparing dick sizes, they'd be comparing their credit cards, and be like, oh look, I got the Amex black card! Or it's like, oh no, I got the visa! Well, I mean, it doesn't matter: if you got the Amex black card, nothing beats that, but you know, everyone would say, oh, oh, let me get the bill! Right?

00:43:58.530 --> 00:44:00.289
Everyone was trying to one up each other.

00:44:00.349 --> 00:44:03.929
So when the restaurant bill would come, they'd be like, oh no, I got it, I got it.

00:44:03.931 --> 00:44:07.969
And they would like drop down their credit cards, like flopping their dicks on the table.

00:44:08.449 --> 00:44:20.000
It's like, oh, look at mine! I got visa platinum! Like, oh yeah, well check this out, Bam! I got my Amex black card! Because that was the whole cultural environment back then.

00:44:20.710 --> 00:44:25.320
Private debt, real household debt, whatever you wanna call it, was going through the roof.

00:44:25.340 --> 00:44:33.000
So of course, back then it made sense: you wanted to raise interest rates to cool down the economy, because people were spending like crazy.

00:44:33.420 --> 00:44:53.670
But again, you look at statistics now: household debt has, in some sense in some metrics has been decreasing from, again, the story about the stimulus checks going towards paying down debt, but just broadly speaking, definitely in the us and more broadly in first world is that household debt has been relatively flat.

00:44:54.190 --> 00:44:58.469
I mean, I say"relatively", because obviously it increase, but it's the first world, of course it's gonna increase.

00:44:59.309 --> 00:45:00.710
We don't need to be little pedantic about it there.

00:45:00.809 --> 00:45:03.710
And of course, more importantly, business borrowing...

00:45:04.349 --> 00:45:05.550
Because that's the other side of this, right?

00:45:05.809 --> 00:45:14.139
Is you have the private individuals with their own private consumption, but then you also have the economic powerhouse of a country, which is its businesses.

00:45:14.440 --> 00:45:18.539
And business borrowing in recent history has been the slowest it's ever been.

00:45:19.119 --> 00:45:26.980
So you can see here that not only from the private side, but even from the business side, the economic growth has been slow.

00:45:28.079 --> 00:45:39.329
And this is even despite all those, you know, they made a whole big fan fair, the Democrats, about, oh look, we passed this huge COVID relief bill, and this is all great, it's going to help businesses out and everything like that.

00:45:39.389 --> 00:45:42.650
No, it didn't do shit, because, I mean, you can just look at the numbers yourself.

00:45:42.719 --> 00:45:56.639
It's that even without offering of all these cheap loans for the pandemic business, borrowing is still at a, I shouldn't say all time low, but as far as recent history is concerned, like last decade, business borrowing is, we'll just call it, anemic at best.

00:45:57.380 --> 00:46:05.920
So raising the interest rates on a already flat private and business debt metric is going to do little to no good.

00:46:06.519 --> 00:46:15.829
And again, when you talk about how the fact that businesses rely on low interest rates to finance their operations, that's only going to hurt the first world.

00:46:16.329 --> 00:46:20.269
So again, the problem is not easy credit, because we already have easy credit.

00:46:20.860 --> 00:46:22.710
Both households and businesses have it.

00:46:23.090 --> 00:46:29.349
So we do have this cheap and easy money, which presumably means that we have plenty of money available in the economy.

00:46:30.130 --> 00:46:39.380
But if we have all this available money for us and the economy is still slow, well then the only other option that we have to consider is the supply side.

00:46:39.380 --> 00:46:41.260
Which of course makes sense, given the pandemic.

00:46:41.659 --> 00:46:52.900
And everyone knows it, anyone trying to buy a car or GPU, or PS5 can readily attest to the fact that the supply chain is in shambles right now.

00:46:53.829 --> 00:46:59.409
And of course we can also go into the fact about labor force participation rates and unemployment.

00:46:59.469 --> 00:47:01.849
Or more importantly, underemployment.

00:47:01.851 --> 00:47:10.929
Because this is another way that classical economists will try to get you: they'll point directly at the unemployment rates and completely ignore the underemployment rates, right?

00:47:10.940 --> 00:47:28.000
Because the people, especially in the United States, how a lot of your benefits are tied to being employed, people are in such a bad position right now, they'll just take any job they can get their hands on, just so they can get insurance or some sort of other type of federal or local benefit.

00:47:28.659 --> 00:47:30.840
And that doesn't mean that they're gainfully employed.

00:47:30.400 --> 00:47:39.800
It just means that they are in such bad conditions, that they're essentially reduced to what I would consider, you know, one level above slavery or an indentured servitude.

00:47:40.500 --> 00:47:52.510
So you should always be careful when the economists say, oh, look at the employment rate! Because unemployment rate is a bullshit statistics, and you have to look at the overall labor market participation rates.

00:47:52.889 --> 00:48:00.949
We can go into a separate long-winded conversation on difference between U3 versus U6 unemployment, but that's a story for another time.

00:48:01.090 --> 00:48:03.750
So, the labor force participation rate is down.

00:48:04.210 --> 00:48:07.750
And then even in business circles we like to talk about capacity.

00:48:07.820 --> 00:48:12.019
There's this obscure statistic called capacity utilization rate.

00:48:12.519 --> 00:48:15.380
And that's been down by over 3%.

00:48:16.340 --> 00:48:20.940
Capacity utilization rate is just a fancy term, broadly speaking, for your industrial sector.

00:48:21.639 --> 00:48:53.800
And with that down, when we're talking about supply chains, because obviously those two are inexplicably linked together, and that industry is very reliant on supply chains, and so when you have supply chain reductions or disruptions that affects your industrial capacity, and also from the financial aspect of it, again, one of the biggest sectors that are heavily reliant on short-term financial instruments, you know, short term loans and what have you facilitating trade finance is the industrial sector.

00:48:54.139 --> 00:49:02.880
So the industrial sector being down by 3% or so, which doesn't sound like much, but in economics terms, it's a big fucking deal, as Joe Biden would say.

00:49:03.539 --> 00:49:04.039
It matters.

00:49:04.300 --> 00:49:10.480
And we can't just blindly or arbitrarily say, oh yeah, let's just raise the interest rates, because inflation is high.

00:49:10.550 --> 00:49:12.349
There's a lot more that goes into that number.

00:49:13.050 --> 00:49:19.630
And it's not just about inflation, because inflation inherently means two different things: too much money chasing too few goods.

00:49:19.929 --> 00:49:29.030
All these metrics that I just spent all this time ad nauseam talking about, is pointing to the fact that, Hey, we do have enough money in the economy.

00:49:29.099 --> 00:49:30.750
It's just that we have too few goods.

00:49:30.751 --> 00:49:32.659
We need to increase the productive capacity.

00:49:33.039 --> 00:49:34.579
We need to increase the goods.

00:49:35.340 --> 00:49:41.340
Anecdotally, Ronald Reagan would famously say, oh, are you better now than you were four years ago?

00:49:41.409 --> 00:49:45.380
Just go around asking people, how is their disposable income?

00:49:45.570 --> 00:49:47.820
Most people would say that yeah, their disposable income is shit.

00:49:48.599 --> 00:49:50.059
But can I really blame...

00:49:51.239 --> 00:49:59.530
In some sense, you can't really blame the Fed for saying these things, because they are mandated to stabilize the economy.

00:49:59.719 --> 00:50:07.809
They have the dual mandate of maintaining a low unemployment rate and stable prices or as most people would say, low inflation.

00:50:08.550 --> 00:50:14.199
So, not to sound cliché, but the old adage goes, if have a hammer, then everything starts looking like a nail.

00:50:14.579 --> 00:50:23.400
And the fed, they only have one way, one effective way to regulate the economy, and that's the raising or lowering of interest rates.

00:50:23.719 --> 00:50:27.639
Well, if the interest rates are already at zero, there's only one thing left to do and that's to raise it.

00:50:27.739 --> 00:50:32.079
So from their mind, obviously the only thing they can really do is raise the interest rates.

00:50:32.179 --> 00:50:38.000
And when you have theories saying, oh well raising interest rates will lower inflation, well, it's an easy choice for them.

00:50:38.349 --> 00:50:44.159
Because when everyone around you is saying, oh yeah, high altitude precision bombing works, well then yeah, you're going to follow.

00:50:44.161 --> 00:50:48.469
It's easy to go on and follow on and say, oh yeah, we should totally do high altitude precision bombing.

00:50:49.150 --> 00:50:56.070
It takes a big man to step forward and challenge the prevailing wisdom to do what's right.

00:50:56.780 --> 00:51:01.869
With the Fed's dual mandate their job is to control and affect monetary supply.

00:51:02.090 --> 00:51:05.510
So the only thing the fed can do is affect monetary policy.

00:51:05.630 --> 00:51:17.860
Which when we're talking about inflation being too much money chasing too few goods, well obviously they have no bearing or no effect on the"too few goods" part, because they are a Central Bank.

00:51:17.860 --> 00:51:21.579
The only thing they can do is address"too much money" part.

00:51:21.800 --> 00:51:22.739
So if you have inflation...

00:51:23.360 --> 00:51:31.210
And in their mind again with the hammer and the nail analogy, well the only thing that they can see is, oh, there's too much money in the economy, we need to constrict it.

00:51:31.630 --> 00:51:35.090
Or in other terms, too much money chasing too few goods.

00:51:35.519 --> 00:51:37.889
Well, too much money is the demands part.

00:51:38.269 --> 00:51:40.250
And too few goods is the supply part.

00:51:40.630 --> 00:51:43.889
So the only thing that the fed can do is affect demand.

00:51:44.309 --> 00:51:48.760
And that's why classical economists always say, oh, you've got to reduce demand to reduce inflation.

00:51:49.340 --> 00:51:56.559
But the Fed, all they can do is affect the demand side, vis-à-vis, monetary policy.

00:51:57.539 --> 00:52:05.159
The supply side, which is the"too few goods" part, can only be affected by the actual government in question, the Central Government question.

00:52:05.380 --> 00:52:11.150
And this is one of my main problems with classical economists or specifically...

00:52:10.391 --> 00:52:17.269
I shouldn't shit on all classical economists, but a major subset of them is supply s ide economics.

00:52:17.829 --> 00:52:21.389
B ut supply s ide economics makes no sense, because...

00:52:21.949 --> 00:52:26.150
I t's pretty much popularized by Ronald Reagan, he was really big into supply side economics.

00:52:26.489 --> 00:52:31.019
But he also famously would say that the problem with the government is t he government.

00:52:30.661 --> 00:52:48.139
He said said that the scariest words i n the English language to hear is"I am from the government and I'm here to help." Well, you can't say that stupid quip and then also be a s upply s ide economist, because as I just established here, the only entity that can a ffect the supply side is the government.

00:52:48.599 --> 00:52:57.610
So you're either gonna have to be a supply s ide economist and pro b ig government, or say I'm against big governments and I'm going for the demand side.

00:52:57.719 --> 00:53:02.969
Obviously it's a marriage of both, because it's a balance between"too much money" and"too few goods".

00:53:02.971 --> 00:53:05.530
It's a balance between the demand and the supply.

00:53:05.710 --> 00:53:12.000
But the Fed can only do the demand side, where it's up to the government to address the supply.

00:53:12.001 --> 00:53:19.320
And if the government doesn't address the supply, well, the Fed ends up taking control of the economy and the only thing that they can do...

00:53:19.320 --> 00:53:23.199
Again, I don't want to blame the Fed, the Fed is just doing what it's trying to do.

00:53:23.280 --> 00:53:24.480
I mean, I actually, I can blame the Fed.

00:53:24.481 --> 00:53:34.000
They could just not do anything and say, and actually educate people, just educate the public and say, look, this is not a demand issue.

00:53:34.001 --> 00:53:37.719
This is supply issue, but that's, you know, regardless, that's besides the point.

00:53:38.099 --> 00:53:50.789
The point here is that if the government abdicates its responsibility in addressing its own economy, well then the only thing left to do is to rely on a Central Bank, right?

00:53:50.500 --> 00:54:08.340
And if you only look at the money supply part and ignore the productive capacity side, well, you end up just like Turkey, where we just spent this entire episode, talking about the gross mismanagement of the Turkish economy by Erdogan, by the Turkish president.

00:54:08.920 --> 00:54:18.099
And in this case, especially in America, I wouldn't say well, I mean, I would say, the United States government has grossly mismanaged the United States economy.

00:54:18.480 --> 00:54:24.460
But in this case, it's not in a malicious sense as it is with Erdogan, but it's just an abdication of responsibility.

00:54:25.090 --> 00:54:27.289
Ever since George W.

00:54:27.289 --> 00:54:37.050
Bush left office, we've had over a decade of political gridlock, leading to the abdication of the government's management of its own economy.

00:54:37.659 --> 00:54:51.480
Which has led to such a fragile state of affairs for our productive capacity and supply chain, that all it took was some guy in China eating a bad bowl of soup to send, the world's greatest economy into a complete and utter disarray.

00:55:00.239 --> 00:55:05.480
But we can't just get on Twitter and start shouting at each other, because a that's not going to help with changing the discourse.

00:55:06.019 --> 00:55:15.630
But more importantly, the point here being that lately the West is starting to use, or the Western politicians are starting to use the economy as a political weapon.

00:55:15.820 --> 00:55:18.190
Just like Erdogan has been doing so in Turkey.

00:55:18.590 --> 00:55:19.869
I mean, again, this is the whole point.

00:55:20.070 --> 00:55:31.300
The reason why we've had, we've enshrined that Central Bank should be independent, because the management of the economy should be relatively independent from political squabbling.

00:55:31.449 --> 00:55:39.340
Well, here, now we have it not necessarily on the monetary side, but definitely on the fiscal side, we've lost that independence.

00:55:39.400 --> 00:55:45.099
Or at least, I should say, the bipartisanship or coalitionship, if you are European.

00:55:45.101 --> 00:55:46.500
I don't even know if that's a real word.

00:55:47.199 --> 00:55:57.929
But this is a dangerous path to be on, as Turkey has readily demonstrated, but we just can't shout on social media to affect this change.

00:55:59.030 --> 00:56:13.280
So the thing about Curtis LeMay is that, okay right now, ex post facto from a historical perspective, we're looking and talking about Curtis LeMay and his career and the fact that he had during World War II and saying, oh my God, look at him, he's such a genius.

00:56:13.679 --> 00:56:17.280
And all the things that he did, he's such a great man, yadi yadi yada.

00:56:17.699 --> 00:56:23.000
But you have to remember that at the time that this was all going on, he was going against the grain.

00:56:23.079 --> 00:56:24.760
He was going against the conventional theory.

00:56:25.440 --> 00:56:30.880
And as far as the economists are concerned, he was in the heterodoxy, as opposed to the orthodoxy.

00:56:31.619 --> 00:56:43.630
And ultimately economics, as well as military theory as well, it's a social science and it implies convincing or affecting change with people.

00:56:44.610 --> 00:56:50.590
And during the time of Curtis LeMay's career, he didn't make too many friends.

00:56:50.099 --> 00:56:52.429
As a matter of fact, he made a lot of enemies.

00:56:53.050 --> 00:57:00.789
And in retrospect, he was proven, right, but of course, people that were interacting with him at the time, obviously didn't know that.

00:57:00.989 --> 00:57:02.429
And people did not like him.

00:57:02.431 --> 00:57:03.739
And he made a lot of enemies.

00:57:04.039 --> 00:57:16.900
And despite raising up to the level of Chief of Staff at the Air Force, which is the highest position that an officer in the Air Force can achieve, he was not taken seriously by the civilian leadership by the president.

00:57:17.159 --> 00:57:35.530
And this was readily evident during the Vietnam war where during the commencements of the Vietnam war, after the Gulf of Tonkin incident, basically, it authorized LBJ, president Johnson, to essentially carry out the Vietnam war.

00:57:35.309 --> 00:57:41.570
Curtis LeMay was a big advocate of, okay, well, we basically got to bomb them into the stone age.

00:57:41.849 --> 00:57:48.719
There's a misattributed quote about him, saying that we can, we're gonna bomb the North Vietnamese back to the stone age.

00:57:49.239 --> 00:57:52.880
Of course, LeMay later on in certain interviews said,"No, I never actually said that.

00:57:52.960 --> 00:57:59.000
I just said, we have the capacity to bomb them back to the stone age", but you know, whatever, that's neither here nor there.

00:57:58.760 --> 00:58:15.670
But because he was so against the grain, he didn't follow conventional theory, others in the military leadership convinced president Johnson, convinced LBJ, to go with what we call a tactical bombing or bombing with fighter aircraft.

00:58:16.250 --> 00:58:18.710
And obviously Curtis LeMay, he was completely against this.

00:58:18.929 --> 00:58:23.429
He would say, flying fighters is fun, but flying bombers is important.

00:58:24.130 --> 00:58:44.619
And nowadays military historians would look at this and say, yeah, it was pretty stupid to go with fighters, because the whole point of fighters is their aerial maneuverability and loading a bunch of bombs on them weighs them down and slows them down, which negates the whole aerial prowess of these platforms.

00:58:45.119 --> 00:58:59.250
And of course, we know all through history of countless POWs during the Vietnam war of how many fighters got shot down by anti-aircraft and anti-air artillery fire by the North Vietnamese.

00:59:00.070 --> 00:59:09.320
And despite his powerful position, and despite all his success that he's had in his career, the United States essentially ignored the sound advice.

00:59:09.559 --> 00:59:13.400
I wouldn't call it advice with LeMay it was more like an over demand.

00:59:13.619 --> 00:59:20.679
But either way, the United States ignored the advice of its highest ranking Air Force general.

00:59:21.659 --> 00:59:37.119
And it wasn't until he retired and about eight years and a president later with Richard Nixon in 1972, when finally Nixon said, you know what, this whole piecemeal bombing that we've been doing in the Vietnam war is stupid with fighters.

00:59:37.289 --> 00:59:38.559
Let's just bring in our bombers.

00:59:38.561 --> 00:59:56.590
And this is a famous operation Linebacker, more specifically operation Linebacker II, which is a seminal moment in modern Air Power history, because it showed in a lot of sense that the United States could have won the war if the Air Power was managed properly.

00:59:57.530 --> 01:00:06.139
So with operation Linebacker II we finally did strategic bombing, which is what LeMay wanted eight years ago.

01:00:06.480 --> 01:00:19.699
And only then did the North Vietnamese capitulate, or I'm using quote,"capitulate", and actually come to the peace table and sign a treaty, which is what we wanted at that point, which is what we wanted to do to end the war and get out.

01:00:20.400 --> 01:00:27.130
And even though LeMay was right, because of his blow hard nature, people didn't listen to him.

01:00:28.030 --> 01:00:31.889
The point here is, that being right doesn't mean you're going to be heard.

01:00:33.019 --> 01:00:39.769
Being right and having the track record the past performance, showing that you're right, doesn't mean you're gonna be heard either.

01:00:41.440 --> 01:00:45.550
You know, as they say in Wall Street, you don't get what you deserve, you get what you negotiate?

01:00:46.769 --> 01:00:48.710
So who knows what would've happened.

01:00:49.150 --> 01:00:52.630
This is a good historical"What if" scenario to kind of think about.

01:00:53.110 --> 01:01:06.420
You know, as Einstein would say, do the"gedanken experiment", what would have happened in the Vietnam war, had LBJ listened to Curtis LeMay and actually started with strategic bombing from the get go.

01:01:07.429 --> 01:01:10.619
Maybe United States would've actually won the Vietnam war.

01:01:11.719 --> 01:01:25.849
And this is the parallel that I want to bring back to the current situation with the economy is that we don't want the Fed to raise interest rates with the assumption in that raising the interest rates is going to combat inflation.

01:01:26.119 --> 01:01:35.329
Because as we just explained, what in reality it's going to do, is destroy the already fragile recovery from this COVID pandemic recession.

01:01:35.710 --> 01:01:40.369
And what we don't want to be is just like with Curtis LeMay, is eight years from now say"I told you so".

01:01:40.150 --> 01:01:49.480
So the challenge is being like Curtis LeMay and taking the theory and seeing how it applies to the real conditions on the ground.

01:01:50.380 --> 01:01:58.199
But simultaneously, the challenge is not to be like him and actually be heard, so that we can avoid another eight years of needless suffering.

01:02:05.050 --> 01:02:18.030
If you would like to comment on this podcast or on the topics covered within it, or you'd like us to raise a new topic in our next episode, please feel free to leave us a message or voicemail on www.codbsm.com.

01:02:18.030 --> 01:02:21.710
That's Charlie Oscar Delta Bravo, Sierra, Mike, dot com.

01:02:21.710 --> 01:02:31.699
Thank you for listening and see you at the party, Richter!