What everyone knows is usually wrong. And the narratives surrounding debt are a classic case. In this episode, you'll discover why and how debt IS the most powerful tool for putting your money to work. And why not having and using debt is one of the biggest risks you can take financially.
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What everyone knows is usually wrong. And the narratives surrounding debt are a classic case. In this episode, you'll discover why and how debt IS the most powerful tool for putting your money to work. And why not having and using debt is one of the biggest risks you can take financially.
Also in this episode:
Join the Private Podcast Community
Click here to access free courses and trainings, build new habits, and connect with us and others on the journey to financial self reliance.
Other links 👇
Money mentorship:
Click here to start putting what you've been learning into practice.
Corporate program:
Click here to find out more about our workplace program
Follow us on Instagram:
Click here to see behind the scenes of our business and learn more about personal finance in bite-sized chunks.
Hello, welcome back to the show. We have got a banger for you on this episode, Ryan. We're going to be talking about why hating debt is hazardous to your wealth. Emphasis on the word wealth, not health. Do you want to explain, mate?
Speaker 2:Well, mate, I know I said in the last episode, most people think all debt is bad and the goal is to be debt free. But what if being debt free might not be the smartest goal? Instead, what if saving to be debt free is actually the slower, hard way? And what if saving and investing isn't even enough?
Speaker 1:Well, they're big questions, right? You know what we're talking about here is what if using debt intelligently, what if it's the cheat code that no one really talks about and it's actually the best way to actually put your money to work? You know, you hear that saying all the time. People say I want to put my money to work, put my money to work. But then when you start talking about debt, they're like, oh, debt's bad, right. And you're like well, if you really want to put your money to work, then you probably need to understand debt, and I reckon it's probably the most misunderstood topic in personal finance. What do you reckon?
Speaker 2:Couldn't agree more and like obviously you need to think about what types of debt and we're going to dig into kind of breaking that apart, Like when does it make sense, when doesn't it make sense, and what is good debt, bad debt, all those types of things. But absolutely I think it gets oversimplified and people just assume that you should get rid of all of it and the aim is to never have any of it, and that absolutely is hazardous to your wealth and so we want to unpack that and it's definitely for couples, I think, one of the hardest conversations to have, because it just tends to create a lot of stress, a lot of tension.
Speaker 1:It slows things down, right. Well, you're just wading through that quagmire trying to figure out how we're going to do this together Just makes things so much harder than they need to be. And I think the biggest one and I'll be sort of keen to see your thoughts on this as well is I reckon it just ruins the ride. Right, You're going through this life together, and if you're both not on the same page in terms of the role that debt's playing in your life and you think it's just a burden and one person's OK with the other person's not, I reckon it just ruins what that experience can be. What if it could be a liberator? I just don't think a lot of couples see it that way, because I just hear a lot of vernacular about like, just pay down the more, just got to get out of this part of our lives. What do you see?
Speaker 2:Oh, it's always a matter of perspective. It's, I think about, like exercise you can hate exercise and every time you want to work out you're like Jesus sucks, I hate that I have to do this. Or if you're somebody that loves exercise, obviously doing it every day and getting healthy and fit over time is so much easier. Same thing, I think, is actually true for debt. If you see it as a burden, it will be a burden. If you see it as a liberator, something that can help you get more of what you want, then you will look at it very differently and your everyday lived experience will be different because of it. And it should be better, that's for sure.
Speaker 1:That's definitely how it's worked for Elise and I. Like, we understand the utility of it, like what it's doing for us, and so we have conversations with people other people and they say, oh yeah, how you going with the mortgage or what sort of stuff, like fine, fine. Obviously, we want to change that. We want to pay less of a non-deductible debt, but we do see the role that the mortgage playing for us in all these other areas of our lives and it's not the same, and I think a lot of people get stuck on that because of the way we're sort of conditioned. So we're going to delve into that a little bit in this episode and I reckon the most important thing is, if you want to make this system work for you and swim with the tide, you need to understand that utility, don't you?
Speaker 2:And, honestly, you almost can't get away with not understanding this. Yeah, if you want to actually get more of what you want with time without earning, you know, ceo salary, then you actually need to understand this. You don't have a choice. A big part of this is kind of just revealing what the what I'd say, the 1% know, that most don't, and that's really important truths, and almost there's some realities that you have to accept as part of this exploration that will make you go ah okay, I was missing something and now I'm not, and because of that I have to do something about it, and I know that's a big goal, but I think you'll realize by the end of this episode where that stemming from and the episodes beyond this will be.
Speaker 2:How do we act on that in town? And so let's start with you said before, around different people's associations, where it's kind of come from. And, like I said, people tend to oversimplify here because most people's experience with debt. I guess it all just gets packaged in as one. We want to kind of unpack what debt is demonized. To start with, what do you think the biggest thing is? I think the biggest thing is like, what's been your experience?
Speaker 1:What did you see here and feel as a kid and what associations did you make with the concept of debt? And if your parents treated it like a burden and they were just talking about how hard it was and how annoying it was and the interest rates and how things were just really, really tough, then that just kind of gets baked into your nervous system. And I think that if you've got this concept that debt is just bad and I reckon so many of us fall prey to this definitely for myself, that is just a bad thing. That is just a bad thing. That is just a bad thing Then it can really hurt you when you're really trying to understand how to build your wealth, because you just make that assumption, you set it over there and you don't actually put it into your kind of bigger picture strategy. So it does require a fair bit of unlearning and for me, education is inversely correlated. Education is inversely correlated with fear. So the more educated, the less fear around debt. Agree.
Speaker 2:Yeah, and just to call out like that target or that, over simplification, saying debt is bad, I want to get rid of it, I want to have none of it would probably cost most people hundreds of thousands of dollars, if not millions of dollars, over their lifetime in the opportunity costs of the decisions they're not making or the opportunities they're not pursuing by utilizing it. I know that big numbers, but it's absolutely true.
Speaker 1:Let's make it real, though, because the numbers are the numbers, yeah, but if it's hundreds of thousands of dollars and you're hundreds of thousands of dollars further ahead than you would be at this stage of your life, otherwise, what kind of choices would you now have that you otherwise wouldn't? When it comes to debt, what kind of opportunities and pathways could you be pursuing that you're not getting to pursue? Because you didn't understand this thing called debt, because you just had this kind of blanket rule which is debt is bad, and I'll never question that rule, and I think so many people fall into that trap, right, it's just like it's bad, it's bad, it's bad, it's bad and it's a rule and I never question it. Just there it is. The best marker for me is the stronger feeling you have about it, probably the less you know about it.
Speaker 2:And I think, on that strong feeling, like you said, people's experience coming from mum and dad's experience, family experience, close relationships and their experiences a lot of that has been impacted by the global financial crisis in 2007, 2008.
Speaker 2:And all the war stories and the language patterns that have actually evolved from that.
Speaker 2:It's so easy just to kind of adopt those things as truths that need to be actually questioned, and so I always encourage people like when you hear that story about you know something that went wrong always try to unpack a little bit, dig into it and go what actually went wrong, Because there was many people that didn't make mistakes and continued on and are very, very well off for having done it.
Speaker 2:And so you always want to get to the source of what decision or what was the actual mechanics of what went wrong, so that you can figure out was it what you think it was or is it just a big oversimplification? Because I know when I hear that I want to understand what actually happened. You know what was the trigger or the decision that was made, and often it is just a decision, a decision to sell at the wrong time or to realize losses, instead of kind of seeing where the things go in cycles and stuff like that, and so a big guard of kind of safeguarding, just adopting those simplifications as truths, is to actually try to understand it a whole lot better as well.
Speaker 1:Do you know what I learned really recently, which blew my mind about the global financial crisis?
Speaker 1:The biggest winner on the planet during the financial crisis was Bridgewater, ray Dalio's hedge fund, and did you know that their strategy was heavily, heavily, heavily backed by debt and they used debt at that time to actually get those rewards?
Speaker 1:They essentially realized what was going to happen, because he's having conversations with the policy makers and they went out and leave it up massively on government bonds and basically bet on the fact that there was going to be a depreciation of that currency, and because they had so much leverage on that bet, which was actually pretty clear, you don't get that much of a return on bonds, but if you use leverage, you can get a great return. So, while a lot of people were losing their shirts in the global financial crisis, ray Dalio made lifetimes worth of wealth by using debt. So it's just so counterintuitive to the narrative. It's a really good example, I think I was like well, it's just not that simple, is it? It's who was using the debt, how was the debt used and then what is the systemic things that kind of played into this, and there's some very, very different sort of conditions and realities between the American real estate market, the Australian real estate market as well, which no one ever talks about either, is there?
Speaker 2:You talk about non-recost loans yeah, that's right. Which basically just kind of call that out, is in America you can just throw the keys to the bank and not deal with the repercussions. If you've got something go wrong, you can't repay it, whereas in Australia they come after you for the difference, basically if there's a loss on the sale.
Speaker 1:Yeah, that's a very different behavior and incentive. It creates a lot more stability in our market than there is in that market. So there's a lot more volatility, a lot more that can go wrong very, very quickly there, whereas people here will give away almost everything else before they give away their home. That is not a small thing. It's actually quite a big thing.
Speaker 2:Well, those repercussions force people to be more diligent, and so you probably don't see the same level of extremities that exist in the US in terms of crashes and burning, as you will see here.
Speaker 2:Because of that specifically which is madness that they don't have it really.
Speaker 2:And on that comment around Ray Dalio, I was actually working the first financial planning firm I worked at. I remember hearing the stories of, basically, when that was all going down. What they actually did for the advisors themselves and some of the clients that we're willing to is they started their double gearing strategies in that. So during it, they went from having debt to doubling down and making sure they had as much as they could during that time Because they were like, well, this is just a cycle, yeah, we have eight to ten of these in a lifetime and they can be opportune times for us. That was a kind of an interesting thing that made me go oh, I want to understand this more as well, because there's people that are understanding it, that are doing or seeing it as an opportunity in rough times, and then everyone else that's fleeing in those times and are being burnt by it. Ultimately, it's just that, always that level of education and understanding. I think that helps you kind of see where you're at in those times and make good decisions during it.
Speaker 1:It's hard, though, because you are working against the years of conditioning and also the experience you might have had and this is just an observation from myself, and potentially I think it's probably wider than just me too.
Speaker 1:If you experienced very conditional, kind of coercive relationships in your childhood, you will be afraid to use debt, you'll be afraid of debt as a concept, because it is the definition of a conditional relationship and it has far reaching repercussions and consequences for you for a long period of time. So I think it's always worth like looking within as well to actually think about that, because, particularly when it comes to couples, it can be where you've got one person who didn't necessarily have that, another person who doesn't know why they're afraid of debt they just are afraid of it, and then that person's fear gets to dictate the financial I guess future and strategy and wealth, because they don't understand it. So it is so worth looking within to kind of really think your way through that and separate that out from the decision with debt, because they're not the same thing, but it's so easy to conflate the service in it 100%.
Speaker 2:And yeah, it's just also the idea of feeling like you owe something to somebody else is just a shit feeling and that's all tied into the use of debt, because it is money that you owe back to the bank or whoever that might be. And I often got that feeling that it's like when somebody's waiting for you, it's like you're late and somebody's waiting for you and it stresses you out. It's kind of this similar feeling that you can get with debt, which is like you owe them, they're waiting for it. Give it back. You know that kind of sentiment and just to quickly bust through that it's always important to recognize it, especially with banks. They don't want the money back. The last thing they want is you to give that money back. They want you to pay interest on it. It's their main product, to make sure that you have it, and they want to give you as much of it as you possibly can. Now, I'm not saying you should do that.
Speaker 1:Which is why in COVID they're like oh, you know what, you can just go on, pause for a little bit, we'll just add it to the end of your loan and what it actually means is more interest later.
Speaker 2:Yeah, yeah, for sure, and so it's like just a quick, subtle challenge on that is they don't want it back. It's a different, totally different thing, and so they want to help you use it in productive ways, which we're going to explore. So family experiences, kind of the first reason my dad is demonized for sure, like people's associations, narratives, those types of things, what else?
Speaker 1:comes to mind. Well, I reckon the second one is financial education, right, so much here. There's probably two parts of this is a lot of people, like you know, for us. You talk about podcasting, the sort of information that's out there, people who are kind of talking about their portfolios, and especially in this fire crew. They talk about where they are now tip of the iceberg, but how they got there is not as clear. And I reckon this is where Aussie Firebug so good right, he talks very clearly about how he built the capital base to actually build his portfolio and a lot of it comes down to levering up at a time where he absolutely could, building that capital base with debt and then consolidating it and transferring it across into equities, building an income from there. So it's just not always clear because you're just seeing the tip of the iceberg. You never see the journey with people. You see that pattern as well, 100%.
Speaker 2:It's a hard one to actually get across because, oh, you said there. You said he used debt. Conversation is actually how he used properties, or what a few properties, to be able to then sell those, have equity, to then transfer it across into his portfolio and start it. What was it? Maybe like four or five on a grand, and so he had a real kind of solid base where he was starting from. And there's always these comparisons of, like property versus shares, shares versus property, what's better, and no one actually realized that actually got a whole lot less to do with the assets themselves, but how much debt you can use to buy those assets. And so, getting beneath, where that wealth has actually come from. Has it been the assets themselves or has it been the use of debt to buy bigger assets than they could otherwise afford on their own? And how the system basically works in your favor when you do something like that, and so I think that's a huge one like actually going well, where did that come from and where is the majority of that being made?
Speaker 2:The other one on financial education is you know there's a lot of thought leaders in that space. You know your Dave Ramsey's, your Ram at Satie's, even your barefoot's. These types that create quite categorical rules and tell people what to think rather than teach them how to think, and usually it's easier to basically say just here's a really prescriptive way of doing things Pay down your debt, get rid of that first, then build a cash cushion or whatever that is afloat, and then invest everything you can beyond that point into X, and it's just this gross oversimplification that actually comes with a massive opportunity cost in terms of what else they can be doing to speed things up, and so I think it's easy just to accept those rules as well, and that's why they do it. They're trying to pin you onto the masses there.
Speaker 1:There's a much, much bigger market for someone giving you a clear cut rule, right. Then there is for somebody to actually teach you how to think for yourself. How do you think religion got to be so big? I'll tell you what to think. I'll give you the rules. I'll give you the commandments to stick with this, right? So much easier to sell that than it is to go. Okay, here's how to think about it, and I guess that's what we love about our audience, right? You don't listen to this podcast if you want to be told what to think. We know, that's smaller. We like that. That's fine, are you sure?
Speaker 2:I prefer it.
Speaker 1:There is a time, I think, for rules. There is a time for ways to guides and think. So it's not a categorical they're bad. What I'm saying is there's just a greater financial incentive to oversimplify things, to make it a very simple formula for people, same thing with, like, what we say with the automations and stuff like hey, here's the simple thing, just do the one-time set and forget and then run. It just kind of confirms what other people want to believe, which is this is really simple. I don't have to do anything, king, and somebody else can tell me what to do. And, by the way, if it doesn't work, I can blame that other person.
Speaker 2:Yeah, it's basically taxing people. It's giving them an ignorance tax, which is I only need to do this and I get everything else's noise. And as soon as you do that, you become ignorant to the other opportunities that exist and the tax that you're paying is not knowing or not exploring the other opportunities that exist and you keep it within those boundaries.
Speaker 1:That's my one gripe with the way these people position it. I hate the fact that the barefoot investor says the only money guide you'll ever need. I think that's so not fair, like it's not fair on the person. It's not actually in the person's best interest to think that, because I know so many people that read that book and then just stop thinking for themselves and they just never, ever had an original thought and the things that they end up coming up with. You're just like God.
Speaker 2:That ignorance tax is so large now because you've been told what to think and now you're done 100% and nobody likes paying tax I think that's probably capture right Dead is demonized because one our family experiences, where it actually comes from, our associations with it and what that imprint is on the way we feel about it as soon as we hear it, the financial education who we hear from and the nuances of how people got to where they are, but also those categorical rules. Let's dig into why it's actually hazardous, why not having debt is potentially dangerous for you. The big thing here is you can't save your weight of wealth.
Speaker 1:Why is that you can't save your weight of wealth because the money that you're saving is broken. It doesn't work the way that it possibly could or should. We'll just very quickly go back to we cover this in the series we did with Bitcoin but the three mechanisms of money and any form of money. It must have these three mechanisms to some degree. It's a unit of account, which means it's a way we measure value. We know how to measure it together. It's worth this. This is worth this. This is what we're going to do.
Speaker 1:Then it's a medium of exchange. It allows us to move that value from person to person. The last one is it's a store of value, which means that it allows us to transfer value across time. I've got my value that I've captured and collected for my work. I want to store it and I want that to move across time so that if, in a year's time, I want to use that value, I get to use it the money that we use for our currency to create by a government that says that is money. It works great as a unit of account when they don't mess with the interest rates too much.
Speaker 1:It works fantastic as a medium of exchange, but it sucks as a store of value. It absolutely sucks. In the last 10 years, the amount of money that's in our economy has almost doubled. That means that the value of every dollar has almost halved. Really, to explain this and really go into it, because it really is true, you can't save your weight of wealth. Because of this one fact, it's not a good store of value. We came up with a bit of a thought experiment. Do you want to walk through this? I think it's worth knowing and I think we can build on this as we go.
Speaker 2:For sure you hear the term economic pie quite often. We're going to use an apple pie for this sort of experiment. Let's say that there's 10 people in the economy and they've got a dollar each. It's a $10 economy, if you like, if an extra $10 appears out of nowhere. Now you've gone from having one tenth $1 of the $10 to having one twentieth of the purchasing power. Before your $1 was 10% of the purchasing power. Now you've only got 5% of the purchasing power. The question is, what does that do to the price of the pie and with that each slice for?
Speaker 1:that matter. It's going to go up, isn't it? The price of that pie is going to go up, you think, the total price of the pie.
Speaker 2:what's that now? $20? Yep, and your $1, it gets you half the slice that it had before. Before you had a good meaty little bit that at least you walk away with a good sugar high. Now you've got the dregs.
Speaker 1:That's why I used to pay $0.50 for a Coke and I now pay $3. Not because the Coke got better, it's the same fucking formula. It's because the money got worse.
Speaker 2:That's the point the more money that is created, the less value is held in the existing money that has already been created, and so the less it does for you, the worse it works essentially. And so when you say, over the last 10 years, the amount of money in our system in Australia has increased by over 90%, which means that, like you said, the dollars that you had in your pocket 10 years ago, it went from $1 and now it's $0.50 in terms of what it can purchase for you. But that money hasn't changed. That's how the price of other things have changed because there's more of it, which hopefully that's simplified in a way that connects for you, that drops for you, because it's actually that simple at the end of the day. That's how the mechanism works.
Speaker 1:Yeah, coming back to those three mechanisms, so the money is still a decent mechanism of change. I can still use it to pay for the Coke or the pie or whatever it is. This still works as a unit of account, but as a store of value it got me it's measurably worse, a lot worse, and so that's why you can't save your way of wealth because you can't save fast enough, as the money's created. The money's been created faster than you can save, and so I think that's a really important point to get. Unless you're some kind of absolute rockstar athlete that makes multiple millions every single year, you're not going to be able to save your way of wealth. It's never going to happen. You're actually losing every day. Every day, the value of your money is being eroded by you, by people who are making decisions without you about how much your money can buy.
Speaker 2:Yeah, okay, so we've established that your money decreases in what it can purchase for you with time, because more of it is getting created each and every year and because of that you have this diminishing of purchasing power on the existing dollars that you have. But let's just kind of unpack how money is created. What's the first way that this happens?
Speaker 1:So this is interesting, right? I think probably no one ever talks about this. How is my credit? How does it come into existence? And we just kind of think it's a government thing, and it's not quite true. The predominant way that money is created is actually by commercial banks, when they ride alone. So why do banks do this? Banks do this because it's easy to make money off money that didn't exist, and now you've got a magic money printer, number one. The second way they do it is because they want to increase the velocity of the savings they actually hold Worth. Really understanding how banks started, right?
Speaker 1:Banks started because gold was money and at a certain point it becomes very expensive, very dangerous, to store your gold in your house, because you become a target for theft and burglary. So people were like, well, we need a safe place to store our gold. And so they started giving it back to the goldsmiths and saying can you guys store our gold for us and I'll pay you for it? Now, this is interesting, right. You used to pay the bank to store your money. You used to pay the bank. Now, at some point, this changed, and I'll tell you why this changed. Because the goldsmiths at some point realized that they could actually lend out the gold and give it to other people in between time and they could actually make an interest rate on that. They could actually make an income from people's gold. And this is when they started trading in receipts of gold, because it was just too expensive to actually move the gold. It was too clunky. So what they said is we're going to keep the gold in the vaults, we're just going to give you the receipts. And people just started trading with the receipts. So what they started doing was actually giving out more receipts than they were gold, because they realized we could actually make money on this without actually taking too much risk, so long as people don't turn it up and expect all of their gold at once. And that's kind of how banks started.
Speaker 1:Now why did you used to have to pay? Because they were performing a service for you, which was keeping your gold safe. Why do you now get paid for them to store your money? Because they want to have as much of it as possible. They want to have as much as possible because they can use it to lend it out to other people as well, because it's not just the money that's created, it's the money that you save as well. That's lent out into the economy, and so you're getting paid because your money is being used by them to create more of a fee. And here's what's interesting, right? You pay this much of an interest rate. What do they pay you as an interest rate? There's always a difference between those two, isn't it? That's why you've got to make a margin. It's a pretty good business model when you think about it. They're doing pretty well for themselves in the long run, aren't?
Speaker 2:they. And so it's interesting, like that claim on the gold right. They could then get to the point where they could create more claims. There was this decoupling of what gold actually exists and the amount of claims or receipts. As you said, they don't match anymore, and so eventually, with time, it becomes this place where there can be a whole lot more receipts or claims on that gold than there is actual gold. And that's where the world is at today. It's kind of like a gym where you've got the memberships and you can have a lot more people be signed up than what it can actually handle at one point in time.
Speaker 2:As long as they don't all show up on the same day at the same time to do bench press, then it all falls over, then it all falls over, then everyone's cracking the sads yeah, nobody wants that. And so the same thing is true with the banks. If everyone goes to say, hey, I want my money back, guess what? The bank doesn't have it. That's what you call a run on the banks. And you saw, greece a few years ago had to freeze the ATMs because people were worried they had a run on the banks, so we were trying to get the money out. Silicon Valley Bank more recently.
Speaker 1:Yes, this is exactly what happened and it probably leads us into central banks and their role. Right, Because individual banks were doing this and periodically they go too far, they take too much risk, which is exactly what happened with Silicon Valley Bank. And when they take too much risk and people go to get their money out, it all falls over very quickly. Now watch what happens afterwards. Who steps in to fix it? The central bank. So really, what happened was all these banks were sort of realizing hey, we can make money from doing this, but every now and then one of us is going to fuck it up. So why don't we create a centralized authority that comes in to clean up the mess when that happens? And we're going to call it a central bank.
Speaker 1:So the perception is that central banks run the economy, but in actuality, it's actually the commercial banks that run the economy, the central banks. They're actually cleaning things up when things go wrong. Yes, they have the ability to sort of change interest rates, but mostly they're reactionary, and you can see that with the way they've reacted with COVID. We're going to stimulate. Oh, we stimulated too far, Now we're going the other way. So they're mostly reactionary to what's going on in the real economy and how many loans are written at the commercial bank level. And that's not exactly how people think about it. Most people think that a central bank is part of the government. Not true at all. More closer and more owned by, more controlled by, commercial banks than the government, and that's why they can make these decisions independent of the government.
Speaker 2:Yep, the key thing there, right, is the central bank is created to create stability in the markets, stability in the economy and to make sure things don't go too far in certain directions, but obviously to clean up messes as well, and a big part of maintaining stability is their focus and their aim is to maintain.
Speaker 2:They've got this target, which is keep somewhere between 2% to 3% inflation. Positive growth in the economy essentially is a reflection of that, and so they're always making decisions to make sure that the price of things are actually going up. And how do they make sure the price of things continue to go up? Well, they have to make sure that there's money that's moving around in the economy. That is, the volume of transactions basically makes up the calculation of how much inflation and how much productivity exists. And so they're in this position where they're incentivized to continue to create more of it, because as soon as they create more of it, they continue to push and maintain this positive growth as an economy, if you like. And so it's a bit of a jarring thing, because that means that it's all geared towards making sure the value of our existing money goes down.
Speaker 1:Yeah, just very slowly, so you can't necessarily perceive it on a day-to-day basis. But if you keep looking at it on a year-to-year, decade-to-decade basis, it's actually quite clear. And we actually got a glimpse into this in COVID. When they stimulated hard, you actually saw how quickly money got devalued because the price of things has gone bananas. Now, remembering what we said before, it's not that those things got better, it's that the money got worse, and the money got worse because a lot of it got created.
Speaker 1:I think this is really important to understand how that whole thing works, because whenever that's happening and they're stepping in to do something, they're saying we need to provide liquidity, we need to make sure that things the game keeps going. What is happening there is that decisions are being made about the value of your money and how much it will and won't buy you, and what they're trying to do now is put the cat back in the bag, because they went too far when it came to COVID, which is why our rates are really high. They're trying to slow down the creation of new loans. They're trying to slow down the amount of money in the economy because they just created way too much and it kind of got out of hand. So we were talking about an interesting analogy with this. To really sort of simplify it in a way that you can kind of conceptually understand. Do you want to talk through it? Because I think it's a good one when we talk about who are the players, who's the ball boy, who's the referee when it comes to this game.
Speaker 2:Yeah, well, the way we think about it is, the commercial banks are the players. They're the ones playing the game and ultimately making the decisions, the ones provoking from all the things that are happening. Your central bank is like the ball boy and they have to go get the ball when it gets kicked out of bounds. And sometimes they can slow down the game by taking their time in giving that ball back. And so you start to see some of the moves they're making recently is very much on that front slowing things down. And then the referee is the government. They're the one creating the rules, enforcing the rules and making sure that there's an element of fair play, at least at the perception level.
Speaker 1:Perceived Perceived. It's interesting at the moment you look at all these banks talking about how they've had like breakout years in terms of profits and that sort of stuff. It's funny stuff coming out from the B2 to advocate on some of these recent reports with the NAV and the CBA and this sort of thing. Yeah, there's one thing we just didn't quite touch on that I want to add to this as well is that central banks they provide liquidity where they create extra money when things go wrong. So Silicon Valley Bank happens and they create extra money. That happens at a base level and they put it back into the banking economy. Eventually it makes its way into the real economy and this is a real world through loans written eventually, eventually.
Speaker 1:The other way that central banks create money is they fund government spending. So government sells a bond and what the central bank does is it buys that bond and it exchanges it for money, and so those are the two ways that central banks sort of create money as well. It's important to know that. So when you're seeing central banks balance sheets go up, what you're essentially seeing is a shit ton of new money is coming into supply, and there is a hilarious, hilarious graph that I've got and I can share this in the show notes where you can actually look at US central bank and you can look at how the balance sheet has this continued to grow bigger and bigger and bigger.
Speaker 1:And you can see as well when they're predicted that they're going to start selling off their assets and sort of trying to get the money back out of the market. And every time they try to sell them off and in their words, the words you'll hear is taper. Whenever that happens, there's a period of time where they try to do it and then boom, it goes back up again. They actually end up with more on their balance sheet, more money in the supply, because every time it happens, essentially what they're trying to do is, I guess, slow down that credit based system. But a credit based system has to expand or it collapses, and that's the nature of the beast, isn't it?
Speaker 2:Yeah, and just to like simplify that even further, that's like me going to the kitchen table, getting out a piece of paper and writing bond on it and then giving it to the central bank to say, hey, this is worth 100,000. Can you give me 100,000 for it and I'll pay you the interest on it. They do have. They do pay the interest on it, which is a whole nother thing. But they've just created something and said this is worth something and then gave it to the central bank.
Speaker 1:Guess where they get the interest payments from Tax and other bonds and other bonds.
Speaker 2:And creating other bonds.
Speaker 1:Yeah, this is what's really interesting like the government doesn't actually need your tax because they can have money whenever they want it. They need your work, they need your productivity, they need your effort to have the economy running and to have things move in a certain direction. So it's kind of a big misanimate to think that oh, all my tax is what gets the roads built, not actually how it works. Really. The function of tax is to make you go to work for money. It's to make you do work, because without tax there is no use of the money. If you didn't have to pay tax in the dollar we use, you wouldn't go to work for money. Yep.
Speaker 2:And even just coming back to the commercial banks for a second, the ones playing the game won't go too deep on fractional reserve banking but essentially with every dollar that they have they can turn into eight or nine dollars in terms of loans, because they can loan that money out, they get put back in the bank, they can load it out and they take titles, they can load it out and they bring it back and basically they can multiply one dollar into nine, which is called fractional reserve banking, and that's where a lot of the expansion of the amount of money in existence comes from.
Speaker 2:But what's interesting to note and the reason why really they're the players playing the game and probably winning the game is they benefit when rates go up and they benefit when rates go down.
Speaker 2:When rates go down, they have more people who want to take out loans and can based on serviceability, and so they can lend more things out. And it tends to be the price of things go up, so price of properties, for example, so titles that they can hold against, and security and serviceability from a borrower's perspective go up. But then if the central bank increases interest rates, like they have recently, then there's this lagging function where they can increase interest on the loans on your mortgage, for example well before they increase the savings rate on money that's deposited in the savings account in the bank, which is why these banks, in the last 12 months last financial year, declaring huge profits, because there was this period where rates went up, they oncharged it and charged more for the loans that they had outstanding, but then didn't pay that instantly on a savings account, and so their margin between those two was dramatically higher, which is huge at the scale at which they operate, and so they are winning both ways, that's for sure.
Speaker 1:Yeah, and just to sort of tie this all together and come back to that analogy for a second, you might be thinking what's my role in this game? We've got commercial banks are playing this game. We've got central banks who are the ball boy who makes sure the game gets going, and we've got governments that actually are kind of setting the rules. Like, where's my role? And the thing is it's kind of up to you, right Like you can be a player in the game with commercial banks or you can speculate from the sidelines. Now, if you play the game well, you could be a big winner, but if you play poorly you might lose. It's just a question of skills and smarts. That's sort of what we're saying here, right Like these skills and smarts can be acquired, so you can win or lose as a player, depending on how you play. But there's only one way you can really lose and that's just to sit on the sidelines losing your savings to inflation. Because if you look at what we're saying and how this all ties together, is the incentive to create more money is so great that it only ever goes one way. There have been over 700 fiat currencies in existence throughout history and the direction is always the same and it is always towards more money over time. So even though right now they're slowing things down, it doesn't mean they've stopped creating new money. They're still creating new money and you need to understand that.
Speaker 1:So that's why you can't save your way to wealth, because even if, as your money sits, still it's losing its purchasing power. It's just how fast it's losing its purchasing power. Right now it's still losing its purchasing power. It's just that it's losing its purchasing power slower than it was two years ago. That's so important to understand. You're not winning because you now got a big amount of money in the bank account and your interest rate looks great and the number looks bigger than it did two or three years ago. You're still losing. You're still losing. So so important for you to understand that. So that's why you can't save your way to wealth. The second part of this is you can't save and invest your way to wealth either, can you, moniz? Let's talk about that point, because I think a lot of people think that investing itself is the panacea and then that's going to get it right. For me, that's going to mean we're going to be fine, but it's not enough, is it?
Speaker 2:It's not. And the caveat here is, unless you're earning a really good salary and we're kind of coupled these things together, it is quite hard, because, no, you can't. People look at the number getting bigger in the account or whatever that is, and the value of the shares or whatever it might be, and they think they're getting ahead. But here's what tends to get missed the difference between nominal and real growth, like money on a screen, versus what that money buys for you. Yeah, your shares might have gone from 100K to 110K, but the house you want to buy went from a million to 1.1.
Speaker 2:And the thing that always gets missed so many people just think if I can make a 10% return and inflation is 7%, then I'm getting ahead. I'm able to buy more, because I earned 10,000, and inflation was only 7,000, in terms of that change at 100,000,. Whatever it is, the thing that always gets missed is tax, because if you sell your shares, you now have to pay $3,000 in tax, and so have you actually got ahead or are you actually at a break-even point, or maybe even going backwards, and so it's an interesting one where you go. If I can make a 10% return, inflation is only 7%, it's positive, but as soon as you take into consideration that you have to pay tax on that gain, then you haven't actually got ahead in terms of what your money can buy for you. That's challenging.
Speaker 1:That's actually a bit of a pill to swallow. It's like a grand illusion. That number on my screen just got bigger. I must be wealthier. Well, it actually depends on what you're trying to buy. So again, yes, look at your interest rate. It's gone up. It looks like it's got high up.
Speaker 1:But here's the most important thing the CPI that everyone talks about, because you were price index. That's not the inflation you need to be worried about. The inflation that you need to be worried about is asset price inflation, and that's what sets inflate at a far greater rate than these things. And this is what's so important, because the way money is created and where it goes to it's not evenly distributed. So, coming back to that pie analogy, right, the $20, you went from $10 to a $20 economy. Here's the thing the extra $10 didn't get distributed evenly amongst all the players. It went to one group of people, and this group of people are anointed as winners and everybody else is anointed as losers, and the winners have that same label and that label is credit worthy.
Speaker 1:So if you're the kind of person that can get access to that new money sooner, guess what you do If you understand this. You get it out of cash and you get it into something else as quick as you possibly can, because you don't want that money to be losing its purchasing power. You want to put it into something that's a better store of value than money itself, and that's why stocks, that's why property, that's why things like Bitcoin go up in relation to money because money is a melting ice cube. But if you buy something that's harder to create than money and that other people want, then it'll store its value better.
Speaker 1:So if you think about a good stock, it's hard to get Apple stock. There's not much of that floating around. That's why it's better than money. Property is the same thing. It's hard to create new land and that's why it's a better store of value than money. Bitcoin's the same thing. So this is why the real winners and losers kind of really show up over time, because the winners understand that I've got to get my value out of money and I've got to get it into something else that's a better store of my value, that can move my value over time much better than money, because money sucks at that and that's ultimately asset inflation.
Speaker 2:Right? It's that really tight coupling of if more money gets created, then the gods are on the, I guess, smarter about. Getting it out of the money itself and into an asset means that the price of those assets goes up because there's more money competing for those assets and existing within those assets at that point, and so as soon as new money gets created, the price of assets go up because the smart money finds its way into those other assets very quickly and then obviously you've got those become the winners and then the ones that were on the lag, they become the losers because the price of those assets gets further and further away, which we're seeing right now after COVID shown a massive spotlight on it in terms of saying you know, first home buyers experiencing that in going geez, the house I wanted was worth 750 and now it's worth 1.1. Geez, that happened quick. And that's a reflection of that mechanism in play straight away, that system working against you.
Speaker 1:You really need to think about this for a second, because we got a window of time where the curtains were opened and we really got to see how the game is being played and who's winning and losing, because the folks that did have debt against harder assets than money were the ones whose net worth went bang and everybody else who was trying to save for the same assets basically just kind of fell way behind, way behind. It's so important to understand that, because that's why we say you can't save you out of wealth, because you just can't like as that money gets created, and if it gets created at faster and faster rates, it's so much harder for you to save enough fast enough to get there. So you've got to get your money out of savings and you've got to make it work as hard as possible. And that's why debt becomes so, so valuable, because it allows you to own a bigger asset base sooner and benefit from the more money being created at a higher, higher level.
Speaker 2:So if you really do want your money to work hard for you and you're not using debt, then you're not making it work hard for you, and hey, I recognize that like that can feel pretty tough right now, particularly when, obviously, interest rates are where they're at and the turbulence and everyone's feeling it and you're hearing a lot of talk about it.
Speaker 2:It's always important just to recognize there's a difference between the weather and the climate. You want to think about those two quite differently the debt from a weather perspective right now, today's weather debt does feel dangerous for a lot of people. Interest rates are higher and a basic kind of question is this how it's always going to be, but the climate is actually quite predictable. When you look back and you look at everything we've just talked about and everything that's happened, it is all still going in the same direction, which is there's still more money getting created, the same effects coming to play, where the value of your money is losing its purchasing power because of all of those things. So it's always important, like when you look at the state of play, the point in time right now, are you making decision based off the weather or based off the climate? And for the most part, you want to be making decisions based off the climate.
Speaker 1:Yeah, coming back to the example, we gave around the pie, the $20 pie, and I made the point and I want to say it again what you got to realize is when that extra money comes into that economy, it actually doesn't come in evenly.
Speaker 1:It doesn't get given evenly to everybody. It gets given to credit worthy people, because credit worthy people, if they're smart, most of the time they're going to be using that money to go and take it out of savings and they're going to go and turn it into assets and that's why the price of assets balloons and that's what creates the big gap between the haves and the haves knots. So if you want to be on the winning side of that trade over time, then what you've got to understand is it only overgoes one way and that is towards more money in the supply over time. When those interest rate things happen, there's always winners and losers, but you just got to keep zooming out, and zooming out and zooming out and realizing they're like on the balance of time. The people that win are the people that know how to wield the weapon of debt. That's just as simple as it is.
Speaker 2:Yeah, and even just coming back to the weather for right now that does feel like there's a bit of rain cloud sitting over us it's important to note that if you do zoom out and you look at the climate right the cost of debt, the interest rates, cannot be greater than what you expect to earn from the investments that you're buying in general for people. Because if that's true, if the cost of debt is 10%, but you think you can only earn 5% from what you're investing in, no one's going to do it. In fact, the people that have already borrowed to buy those investments, they're going to undo what they've done to clear the loans because they're losing money every single day because of it. And so if interest rates go beyond that point of what you anticipate to return from the investments you're buying, whatever that might be, then the whole thing unwinds. People start selling, you start selling, you should, and when everyone starts selling, the price of everything comes down and obviously that looks like a collapse. The property prices are all falling, everyone's losing their shit, and that's when you've got the central bank. The ball boy comes in and makes sure that they correct it by reducing the interest rates to make sure the game keeps going, and so it's always important to recognize that.
Speaker 2:Yes, right now the weather is a little bit grim. I'm looking out the window here. It's pretty rough in Victoria, but economically, from an interest rate perspective, it's pretty tough. But it is just the weather and it actually can't stay can it?
Speaker 1:No, so go back to global financial crisis. What happened? $700 billion of stimulus happened. Yep, go back to COVID. What happened globally? $20 trillion worth of stimulus happened.
Speaker 1:This is why it's so important to understand the history of this organization. They're always going to choose inflation over deflation, inflation, rising in prices over deflation, and it's always about the lesser evil. What's the lesser evil we can deal with? So the lesser evil right now, today, as we record this, is people are feeling the pinch. It's okay, because we need to make sure that we retain confidence in the currency and that don't feel like everything's getting away on them. We need to actually get on top of this, because if we don't get on top of this, we're basically locking in a permanent wage cut for people because their money's buying them less. So we need to actually show them that we're doing the work.
Speaker 1:But if we go too far and we actually do start to see this whole thing online and we see a whole lot of property come onto the market, then guess what we're going to do? The complete opposite of everything we said, and we're going to do that as very quickly as we possibly can. And that is actually the whole history of central banks Oops, we stimulated too much. Oops, we tightened too quick. Oops, we stimulated too much. It's actually just the way it always happens, because actively managing an economy is impossible, but that's what we do. So you just sort of see that that lesser evil is always going to be inflation, because deflation is the worst possible thing for a credit based system, because if that happens and you let it happen for too long, then the whole world's done. The whole way the whole world works, is done.
Speaker 2:And so, because of that, over time, the amount of debt that exists in the system means that it has to get cheaper over time. And so, if you use the example of someone buying a house in Sydney, a person buying a million dollar house in Sydney 10 years ago might have borrowed 900,000 to get it. That same house might cost 1.8 million. Now they're not borrowing 900,000. They're going to have to borrow 1.7. And so the amount of debt that's required to buy the assets because of that asset inflation, because new money got created, because new debt got created just means that debt itself has to get cheaper over time, because there's more of it that needs to be serviced. And that exists at a personal level. It exists at a government level as well, and so the really big thing to take away from this is in a credit based system, savers lose, and those who borrow and buy assets they're the ones that win. And so we probably want to give that some nuance though, too, just to really kind of help that sink in. Because, again, the money that's in your bank account it's competing with that new money is getting credit. It's gonna buy you less with time. It's getting you less of that apple pie, but those who are borrowing money from the bank and buying assets with it.
Speaker 2:What they're doing is saying well, I'm not just going to use the money I've got, I'm gonna take money that I will get in the future and I'm gonna bring my future savings.
Speaker 2:Instead of saving 10,000 or 100,000 a year for the next 10 years, I want to get that saving, I'm gonna bring it forward and want to use it now to buy assets much sooner at today's prices, before asset inflation can take effect. And so it's making a decision Do I want to pull forward future savings, which is borrowing money that I haven't yet earned, that potentially have to pay back? Pull that forward and buy at today's prices and pay the interest on your debt, interest on that loan instead, or pay the cost of those assets costing more over time, and that's what you call an inflation cost, an asset inflation cost, and Historically, look at the next last 10 years absolute last 20 years to the cost of debt has been a lot less than the cost of inflation. And so it's a choice which one do you want to pay the interest on the debt or the asset inflation, the cost of it going up and your money buying your Less ultimately, the way I think about this and what I was featuring.
Speaker 1:As you were saying, that is like you trying to save to grow your wealth. Imagine if you're swimming in a river and you've got to beat the current. The current is Inflation. The current is the price of things and how fast it's moving. Right, you've got to beat that.
Speaker 1:If you're in that river and you're trying to save, saving is like you trying to beat that current. If you are fully clothe with jeans, shoes and Like a coat, that's you trying to beat that sort of that speed right. If you're thinking that Saving and then just buying assets is enough, that's just like you swimming at the pace of the current. Like that's you matching the pace. Yeah, if you use debt, that's like you putting on flippers. Now you can get ahead of the current and actually grow, protect that kind of purchasing power, because that's the game, right, we're trying to go faster than that level of inflation.
Speaker 1:That's kind of the way I'd sort of think about it. Who do you want to be? Do you want to be the person who's struggling in the overcoat and the jeans and the shoes? Do you want to be the person who's like just keeping up, or do you want to be the person who's a head of? I know what I want to do. I want to increase the purchasing power of my money as quick as possible, so that I can have more choices, not less and that wasn't easy for you, right?
Speaker 2:because there's an element of Accepting that that's the reality we're living, because so we just be like, fuck that, that sucks, I don't want to have to deal with that. But then there's a level of acceptance that has to come with Recognizing that that is the only tool that allows you to get the system on your side. It's the only way to make that whole thing, all those problems that exist, actually be on your side. It's a very hard thing.
Speaker 1:I actually hate it. I don't like it. I think it's stupid. I think a credit-based system, the way it works, is stupid. But we have to play the cards where dealt and you can sit there a rail against the system for as long as you like guess what? Nobody gives a shit, the world doesn't care. You can be right on the sidelines and losing, or you can actually get the result that you want. So I remember this conversation through COVID where we're really delving into this and very deeply understanding this. We had like a two and a half hour kind of conversation about this, like it was almost like all these roller coaster of emotions like this sucks, this is stupid. And then at the end of it, I'm like doesn't matter. That's why, for me you know I did both it was like well, I'm buying a hard, hard asset with Bitcoin and I'm getting into debt because I want to win both ways. Basically, I want to win from the way things are and I want to profit from the way things could be.
Speaker 2:Basically, Someone has to pay it, someone has to deal with the price of that problem. Right, you can be the one staying there holding the whole potato in your hand that is melting the skin your hand. Or you can say well, I'm gonna give that to the bank by taking our loan, and Obviously they're then gonna pass it on to the person that's saving in the bank. So it is a bit of a harsh reality there, which is you've got to give that to somebody else, but do you want to be the one there holding the whole potato that is melting your hand or do you want to pass that on? And that's ultimately the decision you have to make. That decision of using debt is ultimately that in itself.
Speaker 1:That's the value of financial education. Right there, isn't it? You're either gonna pay that in your tax and not know it, or you can pass that on to somebody else who doesn't know it.
Speaker 2:Yeah, which sucks because it feels zero sum, doesn't it?
Speaker 1:It does I mean. But again, like, what are you gonna do? I'm a better person because I'm paying the interest tax, even though I know it. That's stupid. Why do two people have to suffer? One less could suffer if they're educated, which is why we're putting this podcast out, because we want less people to pay the interest tax that's true, and I think if you're the one educating yourself, then you would assume you're better at allocating resources, maybe.
Speaker 2:So maybe it could be better. I'm thinking about that Kerry Packer video where he's like, well, I'm better off using my money than the government You've got somebody else probably. Don't say man. I think we've cut a lot here. So I've kind of established that the system is broken and that's the only way to actually make that system be on your side.
Speaker 2:And we do need to look beyond just that, over simplification that can have with debt which is that is bad and Really recognize it. We're not necessarily talking about all debt. We're talking about it being the only tool. It was. You know. We do want to get rid of the mortgage. We do want to pay off the mortgage. We want to get rid of that one because when you do Taking that line out about of your cash flow every single month that 3000 a month for 25 years or whatever it is Taking that line out about looks very different your daily, monthly lived experience is a whole lot better.
Speaker 2:So we do want to get rid of that. We do want to clear credit cards. We do want to clear. You know those other loans aren't helping you buy assets, but when it comes to debt that helps you buy Assets that can grow in value and, importantly, earn an income. Earn an income that covers the cost of those loans, that is a totally different story, and the aim isn't to be debt-free, it's just about having is, I guess, having the right amount not having too much that it causes friction for you in your life and stops you from getting what you want, but also having enough to make sure that you are handballing more of the asset inflation cost off, essentially away from your own balance sheet and there's not only one way to use debt as well.
Speaker 1:We are going to focus a little bit on property in this series, because it's an area that we haven't sort of covered, but in the next episode, what we're going to talk about is all the different ways you can use debt to grow your wealth, because it isn't just lead wrap on a whole hebu property debt recycling. There's a bunch of different ways you can actually use this sort of stuff. So we're going to go through some of those different options, just so that you can kind of widen the lens before you start to focus on, okay, how do I want to use it? That's what we're going to do in the next episode. Go into those before we sort of move into okay, how do people use debt with property, because that's the one thing we haven't really talked about in this podcast, isn't that?
Speaker 2:and I think just to add to that is how you can pass on the cost of that debt. They're interested paying on those loans to somebody else, so how can you use it to get more of what you want without having to pay for it? Yeah, beautiful.
Speaker 1:If you liked this episode and you want to make sure that you're on top of the next one, because it's going to be dropping pretty soon, just make sure you subscribe to this podcast, because you'll get a little ding on the Spotify app or wherever you listen. That is going to be coming really, really soon, so absorb everything you can from this series. Really, take some time to think about this. This is obviously going to be. It could be a bit of pill to swallow, but it's worth really kind of thinking about it, contemplate again, realizing, okay, what I want to do this with this information and how I'm going to use it to proceed and move forward in my money loss.
Speaker 2:And if you do, I think the future you will thank you dearly for it. As I mentioned in last episode, this can lead to a very different outcome in terms of what life looks like for you later down the track. Absolutely so hopefully see you.
Speaker 1:The next episode to the next one.