This is very very important and you can only really understand it if you understand the psychology of bankers. Imagine that you're a director of a bank and you have got uh loans out to businesses in this environment and you know that quite a number of the businesses which you have lent money to cannot handle higher interest rates because they are we well we I mean we could be really blunt and say that they're zombie companies which you've been keeping going because you didn't want to write off your loans. um they


could be merely businesses which um in better times thrive but when they get a a drop in in in sales then immediately uh they start running into overdraft. So um when it comes to um you know that sort of liquidity money uh do you really want to provide liquidity into an economy which you can see is beginning to turn down because interest rates are going up? The answer is no. The the other thing is that uh quite a lot of your activities and particularly since uh the 1980s have um been increasing in


the financial sphere. So um you've got a lot of exposure to financial assets. Rising interest rates, what does it do to their values? So that's another area which you're probably going to try and cut back on. Um so this is a time to be very nervous. And um if you were caught let us say with COVID and of course I mean COVID completely unexpected what happened everybody um their sales stopped their cost continued you know their borrowing increased. So um you know you you you suddenly find that you


are overleveraged in a market which suddenly is beginning to decline. Now that for a banker is a frightening position to be in. So what do you do as a director of the bank? you want to cut back as much as you can. And the thing that was interesting, and I I can't remember whether this came up, um the last time we spoke, but Jamie Diamond um he said that two weeks ago, I likened the economy to uh being in a storm. I've upgraded that now. As far as I'm concerned, we are in a hurricane. Now


that is the most senior commercial banker in the world giving you a heads up that he is going to start contracting his balance sheet. Do not ignore that. And nor will all the cohort of bankers around the world. They will know exactly what he said. And if they hadn't already arrived at the same conclusion themselves, they have been told by Jaime Diamond that this situation is getting worse. Therefore, contract your balance sheets. It is inevitable. And this is the cycle of bank credit. I mean, you


know, we've had this um ever since records really began. It was particularly violent in the first uh half of the 19th century. It smoothed out a bit after the the 1844 bank charter act, which was a major piece of legislation. Um and uh of course, this is the thing which led to the postwar slump. Uh it led to the 1930s. I mean this happens every 10 years on average and we are now what 13 14 years since the last um slump the last bank credit cycle downturn which um was essentially financial in nature and uh that was that


led to the Leman failure. So, you know, it's time we had another one, I'm afraid. And if you are a director of a bank, you will be very aware of all these dynamics and you will feel very very exposed. And furthermore, where you have counterparty risk to the Euro zone and the Japanese um financial markets, you will know that their um your counterparties in those markets are even more highly leveraged than you are. I mean it's an average of the G the G Sibs average in the Euro zone is around about


20 times. The average in um uh in Japan is around about 21 22 times. So you know I mean it's just incredible the leverage in these foreign banks and that's where the failure is likely to come from first. So what do you do? I mean when it comes to everything you just want to just batten down the hatches and to hell with it. If you're going to, you know, just get get your loans in as much as you can, cut your deposit base as much as you can, reduce that uh ratio of balance sheet assets to uh equity and protect


your shareholders. >> Um are we beginning to see in the actual data um these deleveraging steps on behalf of the banks? Is that is that is that already beginning to appear in the data that you monitor? It's it's only really evident in um slowing down of the growth. I'm talking sort of worldwide rather than specifically the slowing down in the growth of broad money supply which is comprised basically of bank credit and everything which is slightly more liquid. So uh yes we are seeing


signs of it slowing down but we haven't yet really got the signs that this is really going to crash. Um but I have no doubt that in my own mind that that is the direction in which it's going. So, you would think that banks would would tighten lending policies mean meaning they'd be letting fewer loans they'd be making fewer loans right now given their concerns. You would think they would probably call any loans that they could, right? Just they're not having them out there. Um I guess this is the type of


behavior that you're expecting to see a lot more of over the coming months. Correct. >> Yes, that's that's absolutely correct. In fact, you can see it already in um uh the is figures issued by NASDAQ on uh margin debt for financing financial positions or positions in financial assets. I mean that has been contracting very sharply in in recent months. So it's it's really kind of recognizing um you know what causes people to reduce their loan positions. I mean essentially


when you have a really overheated market and everybody's optimistic it's not um the people locking in gains because actually their psychology is we want more. So um you know inevitably what occurs at the peak of a market like that when the loan books start tightening is that it is the banks driving it not the traders. And um I mean clearly it's not a pure argument. I mean there's a bit of both obviously but I would say that predominantly the banks um the brokers would be calling in loans rather than


the opposite. So when you see um you know sort of positions starting to turn sour I think that they would tend to move very very quickly on the margin in order to try and close positions down. So, it's an interesting um issue because we tend to think of margin loans only really being on the bullish side, but we do know that um hedge funds have been betting against it and have recently been squeezed, which is why the equity market has been so strong in the last month or 6 weeks. So, you know, either


way creates a loan situation which would be reflected in the NASDAQ figures. But by far the bigger determinant is the use which the public apply to that money in terms of its use value. So um to give you an example, if they decide to abandon the currency completely in exchange for goods and services, then it becomes completely worthless despite um you know the shifts in the quantity of money which may or may not happen. And I think that at some stage we are likely to see this played out in quite dramatic


form. And the reason I say that is that when you get a very severe contraction of bank credit, it inevitably leads to banking collapses. It is the responsibility of a central bank to try and ensure that these banking collapses do not happen and they do not affect members of the public. So what you're going to see is you're going to see the currencies being debased um in order to protect the financial system if I could put it that way. And I've, you know, I've said this so many times until I'm blue in the face. The


prime example of this was John Law in 1720 France when he issued credit in order to purchase shares, support shares in his Mississippi venture. Um, and it got to the stage where it no longer began to work. The shares declined despite that. But what happened was that he ruined the currency in the process. And we have a comparable situation today where the central banks will try and keep the whole of the financial system operating which basically is not just keeping the banks open for business but


also stopping financial assets from falling in value. And now that's going to require enough money printing to either destroy the currencies through quantity alone or more likely destroy the credibility of the fiat currencies that they create in order to try and support markets. And that I think is really where we're heading with this. We are in a situation where the major banks are very highly leveraged and when that happens and things start weakening in terms of the outlook as far as bankers


are concerned then they start reducing their balance sheets. Now the reason this matters is that GDP is actually driven by bank credit. It is the spending of bank credit the amount of cash spent which because you've got two elements of credit in the economy in terms of circulating media. You've got dollar notes and coin which are token coin. They're not real. They're not real coins. And you got bank credit. And if you take out the overseas portion, and funny enough, I was looking at the


numbers this morning, you can pretty much have the level of cash notes on the Fed's balance sheet as liabilities to arrive at a cash figure for the domestic US economy. Now, that being the case, then 5% of it is cash. 95% of it is bank credit. So, what happens when you get a contraction of bank credit? GDP contracts. Now, bank credit feeds not just GDP, but it also feeds the financial sector, the exchange of financial assets, the ability to hold on to financial assets. So, it does two very very important things. But if we


concentrate on GDP for the moment, a contraction in bank credit to take them back to more normal times, I think means that it should in theory mean that GDP contract by something like four, five, maybe $6 trillion. Now that's a massive hit. That's a massive hit and that is without anything happening from abroad because we've got systemic risk from abroad as well. So um I think it's terribly important to understand what this GDP number is. It is not a reflection of economic performance,


economic prospects, economic progress, whatever the Keynesians and the macroeconomists believe. It's not that. It is actually just the sum total of transactions funded through bank credit. And if you get a contraction of bank credit, you're going to get a contraction of nominal GDP, which if it doesn't match because it won't match because it is also contracting the financial sector. So that I think is the most important thing to understand. And what it means is that the slide in GDP,


which we're only just beginning to see, is going to be considerably worse than anybody expects. If your priority right now is not chasing returns, but protecting what took decades to build, I've put together a private road map linked below. If your priority right now is not chasing returns, but protecting what took decades to build, I've put together a private road map linked below.