[inaudible conversations] [inaudible conversations] hello ladies and gentlemen. Welcome to politics and prose on this balmy spring avenue afternoon. Forget started if you please sign in you shall have my eternal gratitude and let you know this evening we are recorded and we want to make sure that your questions are recorded as well for posterity. You will see to the side of me theres a microphone so when we have our questionandanswer session tonight, they could we speak directly into the microphone to ask your question i would appreciate. Finally once the event is over i wish if please do us a favor of folding your chairs up and putting them up and once again youll have my eternal gratitude. Charles wheelan is the reason why so many of you are volunteering your afternoon to listen about foreign policy. The best math teacher you never had and formerly a correspondent for the economist mr. Wheeler went on to write statistics and was widely praised for ruthlessly stripping away the jargon obfuscation to produce clear and entertaining explanations concepts to be far more obscure than they should be. I think it takes somebody very smart to make money seems a simple and Charles Wheelan process of starting with the absurdity of the whole premise of the little pieces of paper we obsess over and going on to look at the reason behind money, why money is good and why can go bad reading naked money is to see the economic patterns fall into place. It is time and the mechanisms upon which Global Financial system arrives under intense scrutiny and think the best thing we can do before we attack what the its partners than it. We are fortunate that Charles Wheelan acidulated out for us. He paints a picture of the ex ordinary consensus which is money. Just remember we realize how bizarre those crumpled pieces of paper in your wallet or we will swap it out for brandnew books. Thats a pretty good deal. Ladies and gentlemen, Charles Wheelan. [applause] thank you very much for coming out. You may be disappointed to realize there will be no nudity and this is about getting rich but naked money naked money is the third of what we are describing is the naked trilogy. There will be a box that im told and if you asked me in graduate school never did i imagine i would be here speaking or that i have what written three books all with the word naked in the title but they happened in many ways by accident. I will give you the origin of the series and then i will talk harbaugh this book. They get economics is written as close to by accident as you can when it comes to writing a book. I was trying to write a book on the gambling industry. I was at the time the correspondent for the economist based out of chicago. This was 1997 and for those of you, you may or may not know if you go back to the early 90s in places like iowa it was still illegal to have the bingo game at a church if there was money involved. When you fastforward to the midpoint of my tenure at the economist there were 19 riverboat casinos and myriad other forms of gambling so along with other states in my territory you had an explosion of indian casinos, you have all kinds of other forms of gambling that for spreading at a rapid clip so i figured this would be an exciting thing to write a book about and id written columns about compulsive gambling, casino design, the politics of state governments and Indian Tribes and so on. While i was trying unsuccessfully to peddle this book i was hired to teach a class at northwestern at manoa school of journalism but economic and finance for journalists which i felt would be a great contribution to the field but i couldnt find a book that would be appropriate for journalists. They were over technical long and dense and so on so i called my agent the woman unsuccessfully peddling the gambling and i said let you know more about the Publishing Industry than i do. Clearly there must be a book on economics that expresses how important these ideas are that doesnt get locked down in the math and the graphs. Its really fun stuff. Theres a long pause and she said no theres not that you are going to write it and its going to be called economics for poets and im going to read it. The gambling book was never written. Someone needs to write it this theres not a lot of interest there. The second book naked statistics in some ways was the same. I had taken a lot of statistics classes tonight taking two classes from people who won the nobel prize and they were arguably the two worst classes ive ever taken in my life. In some ways i was even more frustrated than i was with economics because its actually intuitive. If you want to understand why polling works you can figure out all the coefficients and use a lot of greek letters or you can just say you have got a bowl of soup and a mix up properly and take a small spoonful you are going to know what the whole thing takes like. And if you havent girded up like we have been doing lately with internet polls and people not answering their phones it wont take the rest of the pot naked statistics was sort of bored by accident. This book is the same way. Naked money was born out of the identifier three related concepts in the book all woefully misunderstood and not going to go into in great depth but for example we have two president ial candidates both of whom have embraced the Gold Standard when the university of Chicago School of business and if you are interested in economics at all is called the international itm panel. They have a sample of 50 economists. Its nicely ideologically diverse and german this group of economists and what idm does is pull these economists on issues such as trade, does it kill manufacturing jobs . Today thats where the bureau of labor statistics is worth money to spend that when this panel was asked what the United States would be better off if we went back to the Gold Standard it is the only time in all the years that i followed the survey they answer was unanimous and it was no soot should cause everybody a little concerned that we have every economist on the panel saying one thing and the high proportion of personal president ial candidate saying something else. The book therefore was designed to serve this need and the things it covers her money and if you read something from the beginning of the book its about money. Money is such a strange concept that therell be times when i was working in on the book where farley understood it. At the end of the day is an issue of trust and comes down money works when other people think money will work and then there is banking and banking as we learned in 2008 has inherent frailties saying it will never change about finance is its basically about intermediating lenders and borrowers. You could do that with conventional banks and you could do that with the repurchase market or you can do it with all kinds of institutions but at the end of the day people at nexa capital are giving it away temporarily. They are renting it to somebody else and expect to get a rental rate and the people who needed are borrowing it. A woman called me from Time Magazine today she said is there ever a situation when debt is a good day and . Debt usually is a good thing. To thing. It means you can buy a house before you are 65 and you can afford to go to college and all those people up extra capital dont have zero return. You have problems when all those people would like to get the money back now and all those people who have it cannot possibly pay back even if they put it to good use. If youve ever seen its a wonderful life thats pretty much everything you need to know about the Financial System. While 2008 is still deep in our memories obviously 1929 was fundamentally much worse but the United States is a history of banking crisis beginning at the end of the 1700s. They were panics you had never even heard of in the 1830s, 1860s and the panic of 1807 and it all happened at their core. People suddenly want their money back and you cant give it back to them at the same time. Theres a panic and healthy institutions become unhealthy and so on. The last piece is the Central Banks in the Federal Reserve in particular. The central bank it is the institution with full oversight of the money. Theyre the ones entrusted with protecting the value of that Paper Currency which is either worth nothing or a lot depending on how you look at it. I love the tweet from politics and prose come, if you think its worthless give it to us and we will give you books in exchange. Its not worthless. You cant take your paper money anywhere in washington and wave it around and demand silver or gold but its by no means worthless. Anywhere up and down the strip people will gladly give you a predictable amount of goods and services in return. The central bank is response over at that and also a shares it shares responsibility for treasury and other agencies for oversight of this frail Banking System so they are the ones charged with protecting the system that has at its core this fundamental weakness. Those are the three pieces. I will start with reading a couple of pages from the beginning, what is money and then i will turn to the very end which is what we have learned about central banking and i will paraphrase some of the lessons and then we will have time for questions and answers. Chapter 1, what is money . In 2009 north korea did something unusual even by north korean standards as the high bar or low bar. The nation issued a new currency that lops two zeros off all the bills that one law was declared equivalent to 100 bill currency. This is not a particularly new tricks. Sordid countries in the best of issued new currency is with fewer zeros. The tool for inviting inflation. In 1994 purcell created a new currency to replace the inflation. It would be worth 2750. None of this is inherently good or bad for consumers as long as the old currency can be freely swapped for the new currency to imagine of United States had no dollar bill but instead broke any everything in pennies. The government announced pennies could no longer be used for currency. A product that used to cost 200 would now cost two in terms of purchasing power nothing would change. People lead lots of pennies before would now have lots of dollars. Bank accounts would be easier to convert and everyone would lose two digits. Prices would look lower but in terms of the came later well for rich people would still be rich and poor people would still be poor. Only in dollars rather than pennies. Anyone over the age of six recognized is that 5 is no different than 500 pennies. We would all just carry fewer coins in our pockets and stores would no longer accept pennies but if you discover 300 of them at the cushions of your couch you could take him to the bank and swapped them for dollars. Brazilian teddy or to convert their some european nations said they will forever Exchange Coins for europes even though the country gave up the rich mark for the euro more than a decade and a half ago. North korea is not like other countries. When north korea enters currency reform the governor announced only limited amount of bill currency could be swapped for the new currency, about 690 is the official Exchange Rate and we should take a small detour about the official change rate. You can imagine north korea takes the north korean wand as whatever the great leader says it should be worth in dollars. Most people would much rather have the dollar so at 690 at the official Exchange Rate is worth 35 in the lock market. Anyone holding large amounts of gold currency would see their kimmage wealth destroyed and that was exactly the point to the point. And i think government has become increasingly intolerant of blackmarket activities outside the countrys official russianbased economy. Lackluster traders were sitting on large batches of cash. The stroke of the government 10 or whatever the Supreme Leader does de palma get legislation the government confiscated most of that illicitly it that illicitly akin weighted wealth. Of course many ordinary North Koreans hoping to avoid starvation during the winter and also keen bladed large stocks of cash after the announcement of the currency reform the sparse news that leaked out of north korea made reference to quote chaos in markets in rail stations that savers to swap swapo paper new. North koreans took 21st two convert their old currency to new currency. The writers they new york or in one day all your money was lost. People were taken to the hospital in shock. The north korean government took value and rendered it worthless. Thats a very curious power. One side note there are a lot of koreas but my Research Assistant over the course of the book developed a fascination with north korea and the last time i saw him finishing up the book he said im going to north korea. Ive just got to get there. I said you know now might be good idea. He did disappear for a long stretch and the next time i heard from him i got this hand addressed envelope in my mailbox and inside was the north korean wand notes along with the story of how you smoke without Andy Kim Jong un posted stamp which not everybody gets. But he did escape the country with his 5001 note. Okay back in the United States last i checked back to the north korea. Juan which is more curious was juxtaposed against what happened at exactly the same time. In response to the financial crisis the Federal Reserve is aggressively injecting liquidity into the Financial System. The concept of liquidity will be explored but the Federal Reserve is doing everything in its power to lower Interest Rates from struggling banks businesses and consumers would have easier access to credit after the real estate bust. Heres the part thats almost north korean in its weirdness. The Federal Reserve accomplished its task by creating new money from nowhere. Theres a windowless room at the Federal Reserve bank in new york where traders created new electronic money and use it to buy billions of dollars in financial assets. In january 2008 and january of 2014 the fed injected roughly 3 trillion in new money. One minute the money did not exist, the next minute the trader acting at the best of the fed. Bonds by private institutions and pay for those securities by transferring electronic funds to the countenance selling firms, new money. That is the sound of a guy sitting at his computer in new york creating a billion dollars and using it to buy assets from citibank. Click, click, 2 billion more. While north koreas Supreme Leader was taking money with die when rendering it useless the fed was doing the opposite creating money out of nothing. Neither the north korean yuan organized it dollar dollars have any Intrinsic Value. One cannot take either currency to the government issued it and demand something tangible in return which is gold or rice or cooking oil. At least. At least then it states you would not be sent to labor camps were asking. North korea could wipe out money and the United States could created because money in both countries is just paper are increasingly bits and bytes on a computer screen. That brings us to the third wacky thing going on at roughly the same time north korea was destroying money and United States was creating it. American prisoners for conducting many of their transactions using pouches of macro, yes the oily fish. Prison inmates and that states are not allowed to use cash. So they typically typically have accounts at the commissary where small items can be purchased with no cast circulating. A good deal the commissary can be used as liquidity. As its been the case throughout history this kind of commerce becomes easier whether there is an informal agreement on a single account such as cigarettes and the item that has emerged as the Gold Standard for trade in american prisons of the federal smoking ban blue cigarettes out of the pouch of macroor the mac. It comes in it pouch ripping cans. Macroi alsos tune chicken oysters in part because the mackeral happens to sell for 1 dollar at the canteen so its good that you need to think in terms of dollars well amused using macs. Unlike the dollar or the. Juan the macrohas interests. Its always needed. In fact the north korean or american economies ran on macro me the supreme Supreme Leader of the Federal Reserve could have done what they did. You might get arrested if he tried to trade it with a winter coat but you can go and the basement eat it during a political famine. Government government could try to confiscate all the mackeral but thats a morgue difficult task. Similarly the United StatesFederal Reserve cannot instantaneous generate millions of pouches of macrowhen none preview is existed. No one in a windowless room at the fed can push a button have pouches of macroshow up. Click, click thats the sound of no macrobeing created. So we have the series during concept of money. Money just depends on confidence. Consider the case of indian rubies. According to the Federal Reserve bank of india and the soil ruby is legal tender songs that has to wouldnt have serial numbers. Thats the same thats true with u. S. Currency. As long as there are two serial numbers its fine which is why you are willing to accept it. The same in india if you present a crumpled dirty work toward go to an indian bank the bill must be replaced with a crisp new one yet on the streets of mumbai you will find it difficult to get anyone to accept a tor