Princes of Deception: How Central Banks Engineer Economies and Crises

With Richard Werner – 30 Q&As

In 1694, the establishment of the Bank of England formalized a seismic shift in monetary systems, institutionalizing the power of private banks to create money through credit—a mechanism Richard Werner, a preeminent banking scholar, identifies as the fulcrum of modern economic manipulation. Before this, governments issued interest-free instruments, like the tally sticks Werner describes as circulating tax credits in the Norman Exchequer system, which avoided burdening taxpayers with compounding debt. The Bank of England, however, introduced interest-bearing loans, ostensibly to finance naval ambitions, but in reality, it siphoned wealth to private bankers via perpetual bond payments, a dynamic dissected by Joe Plummer in Debt Money. Werner’s empirical work reveals that banks create 97% of the money supply ex nihilo through loan issuance, not by lending deposits, a truth central banks obscure with obfuscatory metrics like M0 and M1. “We don’t know what money is,” the Federal Reserve has claimed, a statement Werner counters with meticulous evidence, exposing a deliberate veil over monetary power. Yet, this was no mere innovation; it was a calculated transfer of sovereignty from state to financial elites, a theme echoed in Financial Vipers of Venice, where medieval bankers similarly subverted political authority.

This system’s consequences—asset bubbles, inequality, and engineered crises—are not accidents but outcomes of deliberate policy, as Werner’s research, notably his Princes of the Yen, demonstrates with Japan’s 1980s real estate bubble. Central banks, wielding tools like “window guidance,” dictate credit flows, inflating casino-like asset markets while starving productive enterprises, a critique resonant in Opposing the Money Lenders. The looming threat of Central Bank Digital Currencies, which Werner calls a “digital prison,” extends this control, endangering freedoms by centralizing transaction oversight. Meanwhile, The Federal Reserve and its ilk shape academic economics to suppress truths about money creation, rewarding compliant scholars while marginalizing dissenters. Central banking, Werner warns, is a scourge that thrives on deception, yet understanding its mechanics, as this Q&A explores, equips us to challenge its dominance. His insights dismantle the myth of inevitability, revealing crises as orchestrated events, not natural phenomena, a perspective enriched by historical parallels in Babylons Banksters.

With thanks to Richard Werner.

Analogy

Imagine a town with three distinct neighborhoods: The Garden District, The Casino Strip, and Central Avenue. Each represents a different aspect of our monetary system as described by Richard Werner.

In the Garden District, residents grow food and build useful things. When the local credit union (a small community bank) creates money by extending loans to Garden District entrepreneurs, new orchards are planted, workshops are built, and innovative products are developed. The money created flows into real productive capacity, creating jobs and genuine wealth. The neighborhood flourishes without prices rising much because new goods and services enter the economy alongside the new money.

Meanwhile, on the Casino Strip, different banks create identical amounts of money but lend it exclusively to casino operators and gamblers. No new production occurs—the same chips just change hands more rapidly at higher prices. Property values around the casinos skyrocket, benefiting existing owners while making it impossible for newcomers to buy in. When lending eventually slows, casino properties crash in value, leaving borrowers underwater and banks insolvent.

Overseeing it all from Central Avenue is the town planning office, which pretends to control everything but actually sets the rules to favor the Casino Strip. When the casinos inevitably crash, the planners rush in with "solutions" that increase their power, claiming no one could have foreseen the disaster they themselves engineered. They also fund the town's only newspaper and university, ensuring that discussions about money creation focus on irrelevant details rather than the fundamental issue: who creates money, for what purpose, and who benefits.

The tragedy is that the town could be all Garden District if the planning office encouraged small community banks to lend exclusively for productive purposes. Instead, they deliberately engineer casino bubbles and crashes to eliminate small banks and consolidate control, while telling residents that economic hardship is inevitable rather than the result of deliberate policy choices.

12-point summary

1. Banks create 97% of the money supply out of nothing. Banks don't lend existing deposits or act as intermediaries; they create new money when they make loans through simple accounting entries. This credit creation theory of banking has been empirically proven by Werner but is actively suppressed in mainstream economics because it reveals where monetary power truly lies.

2. Central banks deliberately obscure the nature of money. The Federal Reserve claims "we don't know what money is" while offering confusing measures (M0, M1, M2, etc.). This obfuscation serves to hide the fact that private banks create most money, allowing central banks to avoid scrutiny while maintaining the narrative that they control the money supply.

3. Money creation's purpose matters more than quantity. Werner's "quantity theory of disaggregated credit" shows three distinct outcomes from bank credit creation: credit for consumption causes consumer price inflation; credit for productive business investment creates non-inflationary growth and jobs; credit for asset purchases creates asset bubbles and inequality.

4. Banking crises are engineered, not accidents. Werner documented how the Bank of Japan deliberately created the 1980s real estate bubble through "window guidance," then intentionally crashed it to force banking consolidation and break Japan's egalitarian economic system. The European Central Bank has recently done the same in Germany, creating conditions for an imminent banking crisis.

5. Banking structure determines economic outcomes. Many small local banks create a decentralized, stable financial system that lends to small businesses (employing 70-80% of workers). This approach powered China's economic miracle after Deng Xiaoping created thousands of small banks based on the Japanese model. Large centralized banks focus on unproductive asset lending, increasing systemic risk.

6. Central banking enables wealth extraction through interest. The Bank of England's 1694 creation fundamentally changed government finance from interest-free tally sticks to interest-bearing debt, requiring new taxes to pay private bankers. This system transfers wealth from taxpayers to financial elites who receive bond interest payments, creating structural inequality without the debt jubilees that ancient societies used.

7. Money and banking directly impact inequality. Asset inflation from bank credit benefits existing asset owners while making assets unaffordable for others. Interest payments systematically transfer wealth from borrowers to lenders. The current system creates excessive inequality that compounds over time without built-in correction mechanisms.

8. Academic economics is controlled by central banks. Central banks have invested heavily in influencing economics teaching, research, and textbooks to hide the truth about money creation. Economists who "don't touch the money thing" are rewarded with prestigious positions and "rockstar" status, while those asking critical questions face career limitations.

9. Quantitative Easing was invented by Werner but implemented improperly. Werner's original QE concept involved cleaning bank balance sheets (QE1) and forcing productive credit creation through non-bank asset purchases (QE2). When central banks finally implemented QE2 in 2020, they combined it with consumption-focused policies, creating the inflation Werner had predicted.

10. Financial power often exceeds political power. The City of London's sovereign status (where even the monarch needs permission to enter) reveals how financial interests control politics from behind the scenes. Werner argues that historians study political "frontmen" while ignoring who funds them and controls the monetary system.

11. Central Bank Digital Currencies represent an existential threat. Werner describes CBDCs as "a huge threat to mankind" that would create a "digital prison" of centralized control. He warns against digital ID systems as stepping stones to CBDCs and advises opposition "at all cost" to preserve freedom.

12. Future economic conditions depend on monetary policy choices. Werner predicts a German banking crisis within 2-3 years that could trigger a global depression. However, he maintains rapid recovery is possible if central banks use their tools properly to restore bank balance sheets and promote productive lending rather than pursuing consolidation agendas.

30 Questions and Answers

Question 1: What is money according to Richard Werner and why do central banks avoid defining it clearly?

According to Werner, money is something central banks actively avoid defining clearly because the ambiguity serves their purposes. He points out that when pressed, central banks like the Federal Reserve claim "we don't know what money is" - an obfuscation that hides the real answers. The traditional approach uses various measures (M0, M1, M2, etc.) which focus on money that's out of circulation - essentially potential money rather than money being actively used.

Werner believes money can be clearly defined, but the definition isn't what mainstream theories suggest or what central banks want us to use. By keeping the definition nebulous with multiple measures and frequent changes to methodology, central banks maintain control of the narrative while preventing people from understanding that 97% of money is created by private banks through lending, not by central banks. This deliberate obscurity serves to hide the true mechanisms of money creation.

Question 2: How did the Babylonian temple banking system work, and what does it reveal about the origins of money?

The Babylonian temple banking system functioned as a full credit system where kings would deposit their gold treasures in temples for safekeeping. Werner cites a clay tablet from King Nebuchadnezzar II's time that served as a receipt for gold deposited in the Babylonian temple. Interestingly, the king wouldn't have needed such a receipt since no priest would demand it from him, suggesting these receipts served another purpose - they were circulated as money themselves.

This system reveals that banking and credit creation existed long before physical coinage. The temples were giving loans, conducting cashless transactions, and facilitating transfers within a credit-based system. Most significantly, when governments (like the Babylonian king) issued these deposit receipts without actual gold behind them, it represented an early form of money creation through credit - an insight into how rulers could acquire resources without physical gold by leveraging trust in temple institutions. This pattern of government-controlled money creation would repeat throughout history.

Question 3: What are the three theories of banking that Werner identifies, and how do they differ?

Werner identifies three competing theories of banking: the financial intermediation theory, the fractional reserve theory, and the credit creation theory. The financial intermediation theory, currently dominant in economics, holds that banks are merely intermediaries that take deposits and lend them out - they don't create money. This theory allows economists to exclude banks from macroeconomic models.

The fractional reserve theory (mainstream until the 1960s) states that individual banks are just intermediaries, but the banking system collectively creates money through the money multiplier effect, though the explanation is "convoluted." The credit creation theory, which Werner empirically proved correct, states that each individual bank creates money "out of nothing" when they make loans - they don't lend existing deposits but create new deposits when extending credit. This third theory explains how 97% of the money supply is created by private banks, not central banks, a fact central banks prefer to obscure.

Question 4: What empirical test did Werner conduct to prove which banking theory was correct, and what did he discover?

Werner conducted the first empirical test of the three banking theories by taking out a €200,000 loan from a cooperative bank in Europe while documenting the entire process. He had the BBC film the transaction and had bankers present to observe and confirm what happened. The test was designed to determine where the money for his loan came from.

Werner discovered that the money for his loan did not come from deposits, reserves, or any transfer from inside or outside the bank. The bankers confirmed in writing that they simply added the amount as a new deposit in his account without checking their reserves or transferring existing money. This empirically proved that the credit creation theory was correct - banks create money out of nothing when they make loans. The results were published in his highly downloaded papers "Can Banks Individually Create Money Out of Nothing" (2014) and "A Lost Century in Economics" (2016).

Question 5: How did goldsmith bankers transition from storing gold to creating money, and what moral hazards emerged?

Goldsmith bankers initially provided secure storage for gold, giving receipts to depositors which eventually began circulating as money since they were safer to transport than gold itself. The first transition occurred when goldsmiths noticed few people withdrew their gold, leading them to secretly lend out some stored gold at interest. This violated both their deposit contracts and religious prohibitions against usury, creating the first moral hazard.

The truly transformative step came when goldsmiths realized they didn't need to lend physical gold at all. They would have borrowers sign loan agreements, then immediately "deposit" the borrowed gold back with the goldsmith, receiving a deposit receipt they could spend. This practice issued fictitious deposit receipts with no actual gold backing them, constituting outright fraud. The business model became extremely attractive: goldsmiths earned interest on money created out of nothing, faced minimal costs, and could expand the money supply at will. This profitable deception became the foundation of modern banking.

Question 6: What is the origin of tally sticks in the Norman Exchequer system, and how did they function as money?

Tally sticks originated in the Norman Exchequer system established by William the Conqueror to collect taxes from the land-owning barons (not ordinary people, who paid no taxes). The Exchequer, named after the chessboard-patterned cloth used for calculations, was both a tax collection system and a high court where sheriffs were summoned twice yearly to deliver taxes. When taxes were paid, the sheriff received a wooden stick with notches indicating the amount paid.

These sticks were split lengthwise, creating a "stock" (short piece) that circulated and a "foil" (longer piece) kept in the Royal Treasury - a primitive public/private key system. The split wood grain created a unique pattern that prevented forgery. These tally sticks functioned as tax credits or receipts that could be used in future tax payments, effectively becoming money. The government could also issue tally sticks when purchasing goods, creating a system where money was issued without interest. This system lasted for centuries until banker interests established the Bank of England and began phasing it out.

Question 7: How are bank deposits legally classified, and what does this reveal about the nature of modern banking?

Bank deposits are legally classified not as deposits at all, but as loans to the bank, making depositors merely general creditors of the bank. Werner points out that in law, especially English law where modern banking developed, there is no such thing as a "bank deposit" - the tables are turned where the customer is actually the creditor and the bank is the borrower. This is even included in the fine print of modern banking agreements.

This legal classification reveals that modern banking is built on a fundamental misrepresentation. When banks "lend" money, they aren't lending customer deposits but are purchasing the borrower's promissory note (their loan contract) and creating a new deposit in return. The bank's liability from this purchase is then misrepresented as a "customer deposit." This system allows banks to create money through accounting entries rather than lending existing money, explaining how they generate the 97% of the money supply not created by central banks.

Question 8: What is Werner's "quantity theory of disaggregated credit" and how does it improve upon traditional monetary theory?

Werner's "quantity theory of disaggregated credit" improves upon traditional monetary theory by distinguishing between different types of credit based on how the created money is used. Unlike the traditional equation MV=PY (money times velocity equals price level times output), which treats all money as functioning identically, Werner replaces "M" with "C" for credit and adds subscripts to differentiate between credit flows for different purposes.

His theory identifies three scenarios for credit creation: (1) credit for consumption, which causes consumer price inflation; (2) credit for productive business investment, which generates non-inflationary growth, jobs, and wealth; and (3) credit for asset purchases, which causes asset inflation and price bubbles. This disaggregation solves the "velocity decline" puzzle and "missing money" mystery in economics by explaining that much bank credit goes into non-GDP transactions like real estate and financial asset purchases. Werner's theory provides a more accurate model with stable relationships, enabling better prediction of economic outcomes.

Question 9: How did the Chinese monetary system described by Marco Polo differ from European systems of the time?

The Chinese monetary system described by Marco Polo in the 13th century (under Kublai Khan) was based on paper money rather than gold or silver coins that dominated European thinking. Marco Polo was shocked at how "simplistic" European monetary thinking was compared to the Chinese system. In China, Kublai Khan issued edicts several times a year requiring everyone to bring their gold to the government treasury, where they would receive paper money in exchange.

This system represented one of the first fiat currencies, where the Khan accumulated all precious metals while the population used paper for transactions. Marco Polo described it as highly efficient compared to European methods. When he returned to Europe, he couldn't convince people to adopt similar systems. The Chinese system demonstrated that money could function effectively without being made of precious metals - a concept Europeans struggled to accept, still believing that "gold and silver is money" for centuries afterward.

Question 10: What caused the Japanese real estate bubble of the 1980s according to Werner's research?

According to Werner's research, the Japanese real estate bubble of the 1980s was deliberately created by the Bank of Japan through a policy called "window guidance." Werner interviewed loan officers who had been active during the bubble period, then branch managers, then strategic planning departments at major banks. All confirmed they had been aggressively pushing real estate lending despite recognizing it was creating a dangerous bubble. When asked why, they all said they were "following orders" that ultimately came from the Bank of Japan.

Werner discovered that key officials at the Bank of Japan, particularly someone nicknamed "the Prince" (who was preselected to become a future governor), had directed banks to dramatically increase real estate lending. This created astronomical land prices - at one point a small plot near the Imperial Palace was valued equal to the entire state of California. The bubble was created intentionally as part of a strategy to later engineer a banking crisis that would force consolidation of Japan's banking sector from 23 major banks to just 3, and to break Japan's egalitarian economic system which the central planners considered too successful for ordinary people.

Question 11: Who were the "Princes of the Yen" and what role did they play in Japan's economic history?

The "Princes of the Yen" were high-ranking officials at the Bank of Japan who were preselected decades in advance to become future governors. Werner discovered these individuals through his research in Japan, noting one particular official named Fukui who was called "the Prince" in the 1980s. These officials operated like a cartel based on loyalty, with future governors chosen 30 years before they would take office, ensuring control remained with a select group.

These princes deliberately engineered Japan's asset bubble in the 1980s by directing banks to increase real estate lending, then intentionally crashed the economy by reversing policy. Their ultimate goal was to reduce Japan's banking sector from 23 major banks to just 3 and to break Japan's egalitarian economic system which they considered too successful for ordinary people. Werner documented this in his bestselling book "Princes of the Yen," which outsold Harry Potter in Japan for six weeks because it revealed the truth about how the Bank of Japan had deliberately caused decades of economic suffering.

Question 12: How did Werner explain the mystery of Japanese capital flows in the 1980s-90s, and what did it reveal about real estate bubbles?

Werner solved the mystery of Japanese capital flows by identifying the connection between Japan's real estate bubble and its massive overseas investments. Previous economists, including Jeffrey Sachs, had concluded there was no link between the two phenomena, reasoning that if Japanese landowners were selling property to get cash for foreign investments, they would be selling to other Japanese people, keeping the money within Japan.

Werner's insight was that Japanese landowners weren't selling their property at all—they were using it as collateral to obtain bank loans, which created new money that could flow overseas. The banks created credit based on rapidly appreciating land values, allowing for unprecedented capital outflows. This revealed how bank credit creation using real estate as collateral can drive international capital flows and create economic distortions. Werner's model, published in 1994, was the first to explain both the surge in Japanese capital flows and their subsequent collapse when the real estate bubble burst and lending dried up.

Question 13: What is Quantitative Easing according to its inventor Werner, and how did his original concept differ from how it was implemented?

According to Werner, who coined the term, Quantitative Easing (QE) was originally conceived as a two-part solution to Japan's banking crisis following its real estate bubble collapse. QE1 involved the central bank purchasing non-performing assets from banks at face value to clean up their balance sheets. This interbank transaction between the central bank and commercial banks would repair the banking system without causing inflation because it didn't expand money in the broader economy.

Werner's QE2 concept differed significantly from later implementations. He proposed the central bank should purchase assets directly from the non-bank sector (like real estate to create public parks in Tokyo) to force banks to create new credit. While central banks ignored this proposal for decades, claiming they couldn't implement it, they suddenly adopted this approach in 2020 with massive asset purchases from the non-bank sector. However, they combined it with helicopter money and directed it toward consumption rather than productive investment, leading to the significant inflation of 2021-22 rather than productive economic growth as Werner had intended.

Question 14: What are the three different scenarios that can occur when money is created through bank credit?

When banks create money through credit, Werner identifies three distinct scenarios with different economic outcomes. First, when credit is created for consumption, it leads to inflation because more purchasing power chases the same amount of goods and services, driving up prices. This is what happened in 2021-22 following the massive money creation of 2020.

Second, credit for productive business investment leads to non-inflationary growth because the money is used to reorganize inputs and create new products and services. This increases the supply of goods along with the money supply, preventing inflation while creating jobs and wealth. Third, credit for asset purchases (real estate, stocks) doesn't appear in GDP statistics but causes asset inflation and bubbles. This creates a Ponzi scheme dynamic that continues as long as credit for asset purchases keeps expanding, but inevitably collapses when credit growth stops, leading to banking crises as asset prices fall and loan defaults cascade.

Question 15: Why does Werner consider many small local banks better than a few large banks for economic prosperity?

Werner considers many small local banks better for economic prosperity because they create a decentralized system of money creation that's more aligned with productive economic activity. Small local banks are more likely to lend to small and medium-sized enterprises, which typically account for 70-80% of employment in most economies. These smaller firms can't access capital markets because the transaction fees are too high for their borrowing needs, making local banks their only external funding source.

In contrast, large banks need to do big deals to be commercially viable, so they prefer lending to large companies or financing asset purchases rather than productive small business lending. Werner points to Germany and China as examples where thousands of small local banks supported strong economic growth. When China wanted to develop rapidly, they went from a Soviet-style mono-bank to thousands of local banks, creating "5 million loan officers" making decentralized decisions about productive lending rather than "5 people at the central bank." This decentralized approach reduces systemic risk, promotes more egalitarian wealth distribution, and allocates capital more efficiently.

Question 16: How does Werner explain the puzzle of "declining velocity" or "missing money" in traditional economic theory?

Werner explains the puzzle of "declining velocity" or "missing money" by pointing out a fundamental flaw in traditional monetary theory's quantity equation (MV=PY). The standard theory assumes all money circulates in the economy for GDP transactions, but Werner's research shows this isn't true. His quantity theory of disaggregated credit demonstrates that much bank credit is created for non-GDP transactions like asset purchases (real estate, stocks), which don't contribute to measured economic output.

When economists observed money supply growing faster than nominal GDP in the 1970s-80s, they couldn't explain where the "missing money" went, leading to unstable velocity measures. Werner solved this by replacing the single equation with two: one for credit used in the real economy (affecting GDP) and another for credit used in asset transactions (affecting asset prices). This disaggregation provides stable relationships in both equations and explains why traditional models broke down. The "missing money" wasn't missing at all—it was flowing into asset markets rather than the productive economy.

Question 17: What is the relationship between banking and state formation according to the historical examples in the text?

According to the historical examples, banking and state formation have been deeply intertwined from ancient times, with monetary systems often developing alongside and supporting governmental power structures. In Babylon, the temple banking system enabled rulers to issue credit instruments bearing their names, creating political legitimacy while funding state activities. The Norman Exchequer system established by William the Conqueror similarly integrated tax collection, money creation through tally sticks, and governance.

The text reveals how monetary systems reflect hierarchical relationships, with Werner noting that the Norman system involved sheriffs physically collecting taxes from landowners (though not from common people). The City of London's special sovereign status, exempt from royal authority since William the Conqueror's time, demonstrates how financial power can transcend political power. Modern central banking continued this pattern, with the creation of the Bank of England in 1694 coinciding with new tax systems to pay interest on government debt, transforming how states finance themselves and reinforcing the connection between money creation, taxation, and state power.

Question 18: How do central banks influence academic economics according to Werner?

According to Werner, central banks have strategically controlled the economics profession to hide the truth about money creation. He references a 2009 Huffington Post article titled "How the Fed Bought the Economics Profession," describing how central banks have systematically influenced academic economics, teaching, and publications. This control helps them obscure the reality that private banks create 97% of the money supply, maintaining a narrative that serves their interests.

Werner shares an anecdote from economist Bernard Lietaer about his fellow MIT doctoral student Paul Krugman, who warned Lietaer, "Don't touch the money thing... you won't get invited to the important dinners." This illustrates how economists are incentivized to avoid questioning monetary fundamentals. Those who "play ball" are rewarded with prestigious academic positions, publication in top journals, central bank governorships, or status as "economics rock stars." This influence has enabled central banks to promote theories that exclude banking from economic models, making it impossible for economists to explain banking crises or challenge central bank narratives about money creation.

Question 19: What role does double-entry accounting play in modern money creation?

Double-entry accounting plays a crucial role in modern money creation by enabling banks to disguise the creation of money out of nothing as a legitimate transaction. When a bank extends a loan, it simultaneously creates an asset (the loan) and a liability (the deposit in the borrower's account). This balanced expansion of both sides of the balance sheet makes the transaction appear proper while concealing its true nature.

Werner explains this process as "fraud" because in reality, there is no pre-existing money being transferred. The bank creates a fictitious deposit receipt with no actual deposits behind it. Double-entry accounting allows banks to misrepresent the accounts payable liability arising from purchasing a borrower's promissory note as a "customer deposit." This accounting sleight-of-hand makes it appear as if something of value was transferred to the borrower when in fact new purchasing power was created from nothing. The seemingly legitimate accounting entries mask the reality that 97% of the money supply is created this way.

Question 20: How did the Bank of England's creation in 1694 change government finance?

The Bank of England's creation in 1694 fundamentally transformed government finance by shifting from interest-free government money creation to interest-bearing debt. Before the Bank's establishment, the English crown could issue tally sticks directly as money without interest. These government-issued tax credits had functioned effectively for centuries, allowing public spending without accumulating interest-bearing debt.

The Bank of England, a privately owned institution, changed this system by requiring the government to borrow at interest rather than create its own money. This change was explicitly tied to new taxation, as the Bank's founding act introduced new taxes to pay the interest on government debt. This established the pattern of taxpayers bearing the burden of interest payments to private money creators, a system that continues today. Werner notes this shift favored banking interests who now received steady interest payments from the government, while simultaneously eliminating competition from government-issued, interest-free money like tally sticks.

Question 21: What is "window guidance" and how was it used by central banks?

Window guidance is a policy where central banks directly instruct commercial banks on their lending activities, controlling both the quantity and direction of credit. In Japan, Werner discovered the Bank of Japan used window guidance to force banks to dramatically increase real estate lending in the 1980s, deliberately creating the massive asset bubble. Bank officers told Werner they were aggressively pushing real estate loans, even to non-customers, because they were "following orders" from headquarters, which in turn were following Bank of Japan directives.

This credit guidance tool allows central banks to shape economic outcomes by determining which sectors receive credit. Werner reveals it was used similarly by the European Central Bank, which pressured German banks to increase real estate lending from 2009-2022, creating an asset bubble they subsequently burst by raising interest rates. Window guidance represents central planning of the economy through the banking system, allowing central banks to create boom-and-bust cycles for specific purposes, such as forcing banking sector consolidation or breaking economic systems they consider too egalitarian.

Question 22: How do central banks use banking crises to consolidate the banking sector?

Central banks use banking crises to consolidate the banking sector by first creating conditions that guarantee a crisis, then using the resulting collapse to justify reducing the number of banks. Werner learned in 1989 that the Bank of Japan wanted to reduce Japan's large banks from 23 to just 3, and they achieved this through a deliberate strategy: first using window guidance to force banks into excessive real estate lending, then abruptly changing policy to burst the bubble, creating widespread loan defaults and bank insolvencies.

Once the crisis occurs, central banks position themselves as essential problem-solvers while claiming banks made mistakes that necessitate consolidation. They advocate using taxpayer money for bailouts rather than central bank balance sheets, adding unnecessary costs. Werner describes this as "the arsonist pretending to be the firefighter" - central banks create catastrophes, then offer solutions that increase their power and control. He notes the European Central Bank is currently engineering a similar consolidation in Germany, aiming to dramatically reduce its thousands of small local banks despite their economic benefits.

Question 23: What was Deng Xiaoping's approach to banking in China, and why was it successful?

Deng Xiaoping's approach to banking in China focused on creating a highly decentralized system with thousands of small local banks rather than maintaining the Soviet-style mono-bank system. When Deng came to power in 1978, he deliberately studied successful economic models, visiting Japan and analyzing Germany's banking system. Japanese experts advised him that having just one central bank was inefficient and that he needed decentralized money creation for economic success.

The approach was remarkably successful because it replaced centralized decision-making about credit allocation (formerly by "5 people at the central bank") with decentralized decisions by "5 million loan officers" evaluating loan applications from small firms. This created a diffused process of productive money creation that powered China's economic transformation. By channeling credit primarily toward productive business investment rather than consumption or asset purchases, China achieved sustained double-digit growth, allowing national income to double every 4.5 years and enabling the country to move from developing to developed status within a generation.

Question 24: How does Werner distinguish between asset inflation and consumer price inflation?

Werner distinguishes between asset inflation and consumer price inflation based on where newly created money flows in the economy. Consumer price inflation occurs when credit is created for consumption purposes, increasing purchasing power chasing the same amount of goods and services. This is what happened in 2021-22 following the massive money creation of 2020 combined with stimulus programs encouraging consumption while supply chains were disrupted.

Asset inflation, by contrast, occurs when credit is created for purchasing existing assets like real estate or financial instruments. This money doesn't appear in GDP statistics since no new value is created when ownership of existing assets changes hands. Asset inflation creates bubbles and increasing wealth inequality as asset owners benefit while non-owners face higher costs. Werner's quantity theory of disaggregated credit separates these phenomena, showing how banks can create massive credit expansion that doesn't appear in traditional inflation measures but nevertheless distorts the economy and eventually leads to financial crises.

Question 25: What connection does Werner make between banking practices and inequality?

Werner connects banking practices directly to inequality through two main mechanisms. First, when banks create credit primarily for asset purchases rather than productive investment, it drives up asset prices, benefiting those who already own assets while making them increasingly unaffordable for everyone else. This "asset inflation" directly increases the wealth gap between asset owners and non-owners, representing a transfer of purchasing power from the general population to a small group of asset holders.

Second, Werner points to interest-bearing debt as a fundamental driver of inequality. He notes that "we've adopted the system with interest but we don't have a solution to the massive inequality that compounding interest creates." Interest payments systematically transfer wealth from borrowers to lenders, "taking from the many" to give to "the few who receive coupons and government bonds." Historical systems like Babylonian debt jubilees (cancellation of debts when a king died) addressed this problem, but modern economies lack such corrective mechanisms, allowing inequality to compound over time through interest payments.

Question 26: What explains the 2020-2022 inflation according to Werner's analysis?

According to Werner's analysis, the 2020-2022 inflation was directly caused by central banks' massive money creation in 2020, particularly through purchases of assets from the non-bank sector (his QE2 concept). In May 2020, when he saw the data showing unprecedented levels of money creation, Werner predicted "significant inflation" would appear in 18 months - exactly what occurred. This creation forced banks to expand the money supply dramatically, while government stimulus policies directed this money toward consumption rather than productive investment.

Werner explicitly rejects the common narratives blaming the pandemic, supply chain issues, or the Russia-Ukraine conflict for the inflation. He states these factors were "not relevant" compared to the monetary expansion. The central banks implemented precisely the type of QE2 Werner had proposed decades earlier (purchasing assets from the non-bank sector), but instead of directing it toward productive investment as he had recommended, they combined it with helicopter money and consumption-oriented policies. This combination of massive money creation and consumption-focused spending inevitably produced double-digit inflation.

Question 27: What is the special status of the City of London Corporation, and what does it reveal about financial power?

The City of London Corporation maintains a unique sovereign status separate from the United Kingdom, revealing the supremacy of financial power over political authority. Werner explains that when William the Conqueror invaded England, he mysteriously never attempted to conquer London despite it being the obvious prize with all the wealth. Werner suggests the City likely funded William's invasion in exchange for maintaining its independence - an arrangement that continues to this day.

This special status is demonstrated by the fact that the British monarch cannot enter the City of London without permission, as it's not part of the sovereign's domain. The City maintains an unelected representative in the UK Parliament who attends all meetings to ensure no laws are passed against the City's interests. This arrangement reveals that financial power often supersedes political power, with Werner suggesting that throughout history, historians focus too much on political "frontmen" like Caesar or Napoleon without examining who funded their rise to power and who really controls the monetary system.

Question 28: What are Werner's views on gold and Bitcoin as alternatives to the current monetary system?

Werner views gold positively as a long-established alternative to the centralized monetary system, suggesting it remains undervalued despite recent price increases. He believes gold should be worth around $10,000 per ounce rather than $3,000 given the massive money creation since 2020. He notes strange occurrences in the London gold market and gold derivatives, indicating that schemes to suppress gold prices are beginning to break down.

Regarding Bitcoin, Werner sees it as "attractive as a concept" but advises caution. He suggests people should invest in Bitcoin but be prepared to cash out into gold during what he predicts will be a massive upward price surge. He warns that after this run-up, central bankers will likely attempt to shut down Bitcoin through regulatory clampdowns. Werner believes Bitcoin still has "a good run ahead of it" but people should remain vigilant about potential government actions against it as central banks move to preserve their monetary control.

Question 29: What dangers does Werner see in Central Bank Digital Currencies (CBDCs)?

Werner sees Central Bank Digital Currencies (CBDCs) as "a huge threat to mankind" that must be opposed "at all cost." He describes them as part of a broader agenda by central planners to increase their control and centralization of power. Werner characterizes CBDCs as a "digital prison" that would give central authorities unprecedented control over individuals' financial lives.

He explicitly connects CBDCs to digital ID systems, advising opposition to digital IDs as an "intermediate step" toward implementing CBDCs. Werner's warnings reflect his broader critique of central banking, seeing CBDCs as the ultimate expression of centralized monetary control - a system that would eliminate the remaining freedoms and privacy in the current financial system while giving central planners direct control over every transaction in the economy. His advice is unequivocal: these systems represent an existential threat to freedom that must be resisted.

Question 30: What financial crisis does Werner predict is coming, and what policies does he recommend to address it?

Werner predicts a massive German banking crisis within the next 2-3 years that could trigger a global economic collapse comparable to the Great Depression. This crisis stems from the European Central Bank's deliberate creation of a German real estate bubble from 2009-2022 (mirroring the Japanese strategy decades earlier), which they then burst by raising interest rates. He suggests this is part of a plan to consolidate Germany's banking sector, eliminating thousands of small local banks.

To address banking crises, Werner recommends central banks immediately purchase non-performing assets from banks at face value (QE1) and force credit creation through non-bank asset purchases directed toward productive purposes (QE2). He emphasizes this should be done without taxpayer money since the central bank can create the necessary funds. Additionally, he advocates for banking system reform toward decentralization with many small local banks, proper regulation ensuring credit flows to productive business rather than asset speculation, and abandoning the centralization agenda. Werner warns that how authorities respond will determine whether we face years of depression or rapid recovery.

I appreciate you being here.

If you've found the content interesting, useful and maybe even helpful, please consider supporting it through a small paid subscription. While 99% of everything here is free, your paid subscription is important as it helps in covering some of the operational costs and supports the continuation of this independent research and journalism work. It also helps keep it free for those that cannot afford to pay.

Please make full use of the Free Libraries.

Unbekoming Interview Library: Great interviews across a spectrum of important topics.

Unbekoming Book Summary Library: Concise summaries of important books.

Stories

I'm always in search of good stories, people with valuable expertise and helpful books. Please don't hesitate to get in touch at unbekoming@outlook.com

Baseline Human Health

Watch and share this profound 21-minute video to understand and appreciate what health looks like without vaccination.