Rahim Taghizadegan, Austrian economist and author, joins me in this episode to talk about the problems with central banking, and social consequences of fiat money. If you enjoyed earlier episodes on Austrian economics, you’ll really enjoy this one! We talk:

  • Why central banking is a problem
  • What governments are enabled to do
  • Capital structure of production
  • Social consequences of fiat money
  • How to escape the Zero Interest Rate Trap

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Stephan Livera links:

Podcast Transcript:

Stephan Livera: Welcome to the show Rahim.

Rahim : Thanks for having me.

Stephan Livera: So Rahim, I had the chance to read your book and I was looking into a bit of your background. I think you’ve got a very interesting background on your profile you list yourself as the last Austrian, Austrian economist. Can you tell us a little bit about that?

Rahim : Well, yeah, the reason is more unfortunate, is that the Austrian school disappeared in Austria and the last members of the Austrian school, most of them moved to the United States, some elsewhere, but it was only in the US that the tradition has formed again from people really claiming to be members of the Austrian school. And I got to go to the United States quite a long time ago already as a nuclear physicist at the time. And I was studying economics on the side in Austria and I never had heard about Austrian economics. So it just, it grabbed my attention in the United States something I read or heard people talk about Australian economics. And at first, I thought it was the economics of Austria, but then I realized it’s a whole tradition that really had disappeared in academia in Austria. So then I had a chance to learn from the last representatives of that school.

Rahim : And interestingly they were German speaking like Hans-Hermann Hoppe became one of my teachers and there was another student of Hayek who remained in Germany, was Roland Baader, but he didn’t teach at university. He was an entrepreneur and independent scholar, but he got to be my second teacher. And so then I immersed myself in this tradition and I tried to bring it back to Australia. And since then I’ve been teaching Austrian economics at university as well in Austrian and I’m the last one doing that. So that’s how I consider myself the last Austrian economist.

Stephan Livera: Certainly an interesting story. And Rahim, tell us a little bit about Scholarium and the Institute. What’s that about?

Rahim : Yeah, about 12 years ago I founded an Institute with a colleague of mine. And what made it fun an Institute was that we were a bit frustrated at the university. I mean it’s not much better than elsewhere. Mainstream academia in particular in the social sciences and they get the time, there seems to be an economic crisis looming and some Austrian economists really had good timing back then and I was fortunately among them. So that was my impetus to start as research and educational Institute, entirely privately funded by people who saw some real value in it and got some real value out of it during the last economic correction because business cycle theory turned out to be quite useful to understand the dynamics and even to try to apply it for investment decisions so that was the impetus. For Institute it had [inaudible] quite a bit over the time. We now a full time study program and we try to bring back the Austrian school as it was meant to be as an interdisciplinary research programs. We tried to be a loop of ideologies. So it’s really about a deep interest in how the world works and how human beings work. And we combine it with the other traditions that arose out of Austria at the time in psychology and political philosophy and so on, history as well. So that’s what we tried to do, and I think Vienna is a really good place to live.

Stephan Livera: We have this book, The Zero Interest Rate trap. Do you want to set the scene for us a little bit around why you wrote this book?

Rahim : Yes, of course. Because there’s a lot of talk about monetary policy at the moment in Europe, but as well in the United States and we’ve seen the Fed taking the lead before and lowering interest rates and going for quantitative easing and so on after the last economic correction. And the ECB has more or less followed suit. But in Europe it seems to be more traumatic cause more or less the Euro, the whole currency. And the whole project of the European union now depends so much on this kind of monetary policy. And if there’s failure of this project, it’ll have a lot of political implications. So there’s some political turmoil already in the European union, quite a few member States going their own way.

Rahim : We have this huge conflict about a mass migration or coming to the continent. So it’s a lot more politicized, maybe and a lot more crises in different areas seem to be affected here by monetary policy. It’s not too different from the United States, but you also have this kind of polarization in the political debate. But there’s a larger diversity in Europe or more aspects are effected. And that moved us into not only understanding this kind of monetary policy, but also its societal and political implications. And that hasn’t been analyzed so far this deeply. And that’s what we’ve tried to do with this book.

Stephan Livera: So for some of my listeners, they, not all of them were into Austrian economics before getting into Bitcoin. Some of them came into Bitcoin and now they’re learning a bit of Austrian economics. Right. And so for some of those listeners, I would typically recommend that they would read a book like “What Has Government Done To Our Money” by Murray Rothbard and that they should read the “Ethics Of Money Production” by Guido Hülsmann and I think those books together will help give some insight into why we ended up in this problem today. And also I think the “Ethics Of Money Production” by Guido Hülsmann also touches on some of these cultural and spiritual impacts of inflation on society and I view your book, it’s, it’s kind of also touching onto some of those points and expanding on in a further direction. But for somebody who may not be as familiar with the Austrian story around, why is central banking a problem? Can you spell out some of the reasons why an Austrian economist is skeptical of central banking?

Rahim : Yes, because we see money as a social device, which will help foster peaceful interaction. And so we are wary of any kind of intervention and prices and the interest rate is a price as well. And the particular money and there’s very few historical laws, but there seems to be one that says almost without exception, I think the only two exceptions in history, the monetary base has been debased by those in control because it’s very tempting. It’s like a hidden tax. So it has been done all around the world in almost every epoch . And one of the main outcomes of this intervention has been the easiness to finance Wars. So there’s been a lot of destruction to this kind of intervention in money in this kind of hidden tax that transfers to the plunderers of society and basically unproductive or even destructive ventures. So there’s a quite of a historical backstory there, but we are now reaching a new terrain.

Rahim : And this turns out to be quite interesting in many senses. I mean, most economists in particular from the mainstream will have found it impossible to reach the kind of state of monetary policy that we’re in right now. And I think the deep understanding of monetary theory by Austrian economists in particular, really from Mises and of course Carl Menger before him helped a lot more in understanding what’s going on and really analyzing it because not much has changed in the idea in the ideology surrounding monetary topics. We are right back at the same discussion that we had in the 19th century between Carl Menger and the representatives of the historical school. And those representatives were mainly following Mr Knapp, professor Knapp who claimed the money is always a creation of the state. It’s just a legal entity. So it’s just by Fiat, it’s a convention set by the state and that’s everything you need to know about it.

Rahim : And mainly of course at the other approach of looking how certain goods are discovered by people in directions to have a higher liquidity, a higher marketability. So he’s looking at really the dynamics of exchange and interaction and the spontaneous discovery of market participants. And it’s not really a story about the history of money it’s a story about the function and the ontology maybe of money. And it’s really important to have that point of view as well. It doesn’t say Knapp was wrong in everything, but of course it’s a negation of this kind of really understanding empathically what people try to do with money. What are the potential uses, functions and problems with money. You don’t get all the parts of the story and it’s basically the people’s side of money and you only get the conventional side and that leads to political hype papers I call it. And then we can see in particular the ECB policy and the EU policies kind of technocratical lead trying to steer things so that they can really understand them and they can really control in the end.

Stephan Livera: And so it’s like you’ve got the charter list, state theory of money, and then on the other hand you have the Austrians who are saying, no, no, it’s actually spontaneous. It’s coming. It’s a bottom up thing. It’s not like we explicitly agreed, this is the most saleable, this is the most liquid. It’s just over time it just emerged. Right. And so we see that and we contrast the Austrian understanding around money and economics. And then you look at what say a Keynesian might be thinking and up until recently and historically speaking, they would have referred to it as the zero lower bound. Right? So what are they referring to when they talk about are the zero lower bound and why are we now actually going past that?

Rahim : Well to Keynes the interest rate was a kind of liquidity premium. So it’s not about zero interest rates neither. And of course it’s a bound, but it seems to be a psychological bound right now. We’ve had the real negative interest rates for quite a while. That’s just means the depreciation of money and purchasing power that people don’t realize. And what the central banks are reluctant to do is to go to nominal negative interest rates because… And I think it’s quite likely that that’ll be a psychological barrier and I mean even for people that have no idea about money, what they understand is nominal values. And if they see the nominal value of the savings decreasing, they might panic, they might withdraw money from the banks, they might go into cash or other assets of course, and of course that’s been going on for a while, but it might may have this self increasing tendency, which then leads to a flight of money and that’ll be really bad for the change rate of currency, which goes first for nominal negative interest rates and it’ll be good for wealth assets again.

Rahim : But yeah, that’s, that’s I think what’s Central Banks are afraid of you get another kind of dynamic which is self increasing by itself and can’t be controlled anymore.

Stephan Livera: Yeah, and interestingly, I note in the book and you talk about central banking and the impact that they have on society and you point out there’s actually a study by, is it Elijah, Brewer and Jalapa Jagtiani showing that commercial banks actually tried to invest money to reach the status of being systemically relevant, which is like a very… In their view, that’s rational. But from the system point of view, that’s very irrational. Can you outline a little bit around what’s that meaning of the systemically relevant and why they try to play that game?

Rahim : Yeah. Because more or less the central bank monetary policy has been, we’ve just produced the fiat money to buy off any assets and they become the last bad bank of the system, buying up all the toxic assets as they call it in order to stabilize the system. But of course thus they create incentives to have more and more reckless behavior. And the focus of big institutions like banks and big corporations and so on, not to do productive work, innovative work, but somehow trick the system and everyone in a way has to trick the system. I mean that’s how you make money by investing is you try to trick the system to try to anticipate what central banks will be doing. thus you render futile, what they’re doing. And then, so it’s like anticipating a second order thing where this increased liquidity, we go in which assets. And you can make a lot of money by being good at anticipating it, but that means that more and more money has less of a productive function. It’s quite kind of a way to just like try to game the system.

Stephan Livera: I think maybe tying back to some of that point around the zero lower bound and so on. So obviously from an Austrian perspective, we’re skeptical of some of these ideas, but someone who’s coming from say a Keynesian point of view, they might think, Oh well see there’s this output gap and we need to lower the interest rate to try and kind of juice the economy or stimulate. And so that is the, that’s sort of like a Keynesian paradigm and we’re sort of stuck in that paradigm. Would you say that’s a fair way to summarize it or how are you thinking of that idea and how would an Austrian come back to that and say, well no, actually that’s not right.

Rahim : Yeah, I think Keynes, if he was alive, he’d be surprised and I don’t think you can really call it Keynesian and all we have now, the paradigm, it’s a kind of new Keynesian mixture with a monetarist ideas and of course a lot of modern monetary theory now coming in lately. So it’s a kind of mixture and I think it’s a technocratic perspective, which for which its own quantitative aggregates of money flows and someone being on the lever and just increasing money there, increasing money there. And so that of course misses the picture. What all this thing is about. While all the economy is about that’s fulfilling the preferences of people and the more you intervene there, the less it fulfills this function and the more it becomes a futile project of just employing people how I pay them slips of money or digital kinds of money which had been spent senselessly and so on.

Rahim : And that’s not what was meant by market economy by the analysts of the Austrian school. I mean Mises gave a very good definition. He found that market economy is where the consumer and the saver decide about the production structure. And that’s like every cent they spend, is a vote that they give on the market. And I think we’ve seen less and less of that. So I wouldn’t call a market economy even, it’s a kind of a mixed economy where more and more of the productive structure is not determined by the preferences of the consumers. In particular, the savers, which of course is the other side of consuming. If you can’t say no, then you’re not really sovereign. And it’s all about the sovereignty of the consumer and to save it. And that’s what’s really worrying me, that we get a kind of reaction to what’s what’s perceived as a market economy perceived as capitalism which in fact is less and less so.

Stephan Livera: It’s very ironic, but people look at the system today and say, “Oh look, it’s late capitalism.” When really what we have is a very strong amount of government influence and interference in the market, for money. Now I think an important point that might be good for you to explain for the listeners is just that point you were making around the structure of production, right? So it’s not that goods are just magically created, right? There’s a structure to that. And can you explain a little bit around that and the role that interest rates form in coordinating that structure?

Rahim : Yes. Most people think that capital is money, but its only of course, part of a structure. Capital is actually a structure. Bohm-Bawerk called it a round about production. So you take a round about way and the structure means a combination of very different aspects and a lot of them are mental aspects, its ideas, its experiences, your talents, which you have to match somehow. As in the puzzle piece you mentioned with the material goods around you, the capital goods around you, the tools, potential tools, but there’s nothing objective about being a tool. A tool is something you perceive as a tool and you know how they’re use as a tool and that forms a quite complicated structure where every person should try to be a best fit as possible as in a puzzle and producing a what people will prefer in the future. And you see it as an inter temporally aspect in that as well.

Rahim : And it’s very important that you have to be, you have to produce before you can consume, you have to have this structure around before it’s even realized by the market that its of any value. So it can be without value its nothing objective that you can see in the material goods. It’s how those tools are used and how in the future people with decide, the results of the use of these tools turns out to be. And this intertemporal coordination is very important because when waste happens, it means there’s a lack of intertemporal coordination and interests… The interest rate is the price for… Or the price enhances this kind of intertemporal coordination in the capital structure. That’s why any intervention with interest rates has a more pernicious effect than a price intervention because usually price interventions with a price for some good. So it disturbs just one market.

Rahim : But if you have intervention and the interest rate, its disturbs the whole intertemporal adjustment of the capital structure. And the downside of that is potential capital consume, which means it feels as if you’re wealthier than you are in the long run and then there’ll be bills to pay in the long run, there’ll be corrections in the long run, which are negative surprises to many people. And that’s of course what’s a crisis about. It’s a whole lot… Its a cluster of negative surprises. A cluster of errors that revealed and an error always means that there’s waste going on. That things that could have been used in a better way have been used up already. And that means poverty to some people. It means frustrations to many people. It means change of life plans in a negative way for many people. And that’s really what do you want to avoid and that’s why there needs to be an intertemporal coordination in the building of the capital structure.

Stephan Livera: Excellent. And so it’s basically making that point that you might have a kind of false prosperity because you think you’re really rich when in reality you are kind of chewing down your capital stock or you are consuming your capital stock in ways that are just not efficient right now I’ve heard the great Bob Murphy make an example. It would be like saying, you’re living in a hut and instead of using normal firewood for the fire, you take your really nice wooden couch and you throw that in the fire, right? That would be a very inefficient way because we’re not allowing the natural way of the market to drive the production and inter temporarily order it in a way that is more efficient for us. We’re actually taking these things and just wastefully throwing them, maybe a modern day example might be something like a company like Uber, right? So there might be a lot of drivers who are not necessarily taking into account the depreciation and amortization costs of their car, but they think they’re earning money out of it and yes, they are earning money out of it, but maybe they’re not accounting for all the correct costs. Is that a good analogy? You would say?

Rahim : Yeah, that’s a very good example. A lot of the capital consumption is actually increased profits taken out of companies. It’s too high a salary is not taking into account depreciation and so on. So yeah, that’s what capital consumption looks like. And then of course a lot of the transfers happening in political systems a lot in the pension systems. Huge problem with that in the European union. So there’s a lot of pre-consumed wealth for which somehow sets your minds and then we are up for some really bad surprises in the future.

Stephan Livera: Right? Yeah. I mean we’ll get into some of that. I would also love to talk a little bit around the situation with government bonds. Right? So as you point out in your book as well, I think you even make a point that there are some Argentinian what’s called Methuselah bonds and they’re like a hundred year bond. And yet anybody who has any vague idea of history knows that Argentina has had many monetary problems over the decades. Why would anybody trust a 100 year bond?

Rahim : Yeah, it’s actually the best performing asset. I mean in the last year was the hundred year Austrian bond. Because Austria, of course, has a high a credit rating because the Austrians are perceived to be very good payers of taxes. And that’s basically what that’s about, but in a sense, bonds have become a kind of base money. So it’s like money, but it’s not having the banking risk in it.

Rahim : You just have the state default risk. And once the state really controls monetary policy and you’ve got international organizations coordinating IMF and so on, this risk is deemed to be much lower than any kind of banking risks. And of course any kind of entrepreneurial risk. So when people tend to become wary of maybe underreported entrepreneurial risks, then they go for bonds as well. So we’ve seen this kind of bond bubble, but it’s really just going for base money in a sense, it’s like before the count now that because in the last economic crisis we’ve seen that central banks are taking everything and making everything it takes to buy up bonds when prices are falling down.

Rahim : So it’s perceived as this systemically relevant asset which will always be protected. So it looks like the safest asset and at the same time it produces a high yields, if you see the appreciation of the bonds. So it’s really been a star for investors, and I think in the last few weeks, what’s really been making lots of money is to make the carriage rates, is to get the zero interest money and then buy out bonds with higher interest rates. As in Argentina for example, where you get a few more percentage points and if you have very long credit lines, you basically get free money out of that. And that’s the reason why investors are so happy with those kinds of bonds.

Stephan Livera: So it’s essentially a big leverage play. And we might say that it’s only in this fiat money world that you can achieve that kind of leverage because it’s only in this fear of money world that credit is that available. And if you contrast that with say, a hard money world, there’s not going to be that much credit available and therefore they won’t be able to play these leverage games. Correct?

Rahim : Sure, sure. What kind of real saver, who put his money, there, and just get the upside of a few percentage points and maybe one or two percentage points. But take the whole downside of speculating Argentinian bonds or who knows what and leveraged as speculation, those kinds of things.

Stephan Livera: Right. And when we’re talking about the overarching system of government bonds and funding the government, essentially what we’re… There’s probably two main ways you can lose out of that, right? So one way is that if a government were to repudiate its debt and if you are a bond holder, then you lose out in that scenario or the other way, and probably the more common scenario is that they do repay you, but they’re repaying you back in fair dollars that have gone down in value over time. So can you spell out a little bit of your thinking on that?

Rahim : Yeah, of course. That’s, that’s the way it works. And the likelier way, I mean, it’s only weak States who default. It’s the States of which the debt is held mostly by powerful outsiders and not inside the country. If your citizens are holding your debt then basically you’re free to do whatever you like and to prevent political turmoil usually it’s better to go the hidden way and that’s just inflation, depreciation of the currency. And that’s why States really like this kind of financing and it seems effortless and that’s where modern monetary theory goes basically saying, okay, we are already there. I mean if you can produce as much bonds as you like because you’ll always have the central banks buying it up, if private investors aren’t buying it up, then basically it just means money production.

Rahim : And that’s correct, I think a lot of the analysis of the modern monetary theory turns out to be correct. It’s not because the models are right, its because the world has become like the models and as crazy as the models. So a lot of the analysis is correct that if only insiders hold the debt, you just produce as much as you need. And that’s basically everything you need to know about money.

Stephan Livera: And so the challenge is that most people don’t understand that they’re really just losing a lot of money against the inflation. So they might store some of their wealth in bonds, but then in reality their real purchasing power is just going down over time.

Rahim : Yeah. The big problem is that historically bonds and stocks were inversely correlated so you could play safe and you usually have a mix between bonds and stocks. So you combat depreciation by holding stocks, but you have some safety of the corrections by holding bonds. But that doesn’t hold out anymore because right now bonds and stocks are positively correlated for the first time in history. And that makes it really difficult for the average investor. And of course you’re losing money by leaving it on the bank account, but now it’s not even sure you’ll be protected from next correction. If you go conservatively investing, just trying to keep up with the depreciation of the money, you may lose even more. If all assets go along and correlate. And that’s the big problem in investing right now. Basically, almost every asset is correlated. And that’s why every asset has been appreciating and so people are looking for more and more exotic assets. And that’s also where the Bitcoin story comes in as a one potentially not yet correlated assets and every correction in Bitcoin, which is not correlated to a stock exchange correction is a very good sign for the longterm Bitcoin investor because it may show that it’s inversely correlated, but we can’t be sure about that of course, that we’ll only seen the next correction.

Stephan Livera: And how in your mind does that change the way people think about their cash balance? So right now… When you’re living in a hard money world, then your cash balance is more meaningful because you have more certainty over that, right? Like whether that’s gold or let’s say in enough time people are holding Bitcoin and they consider that their cash balance. But nowadays it’s like you can’t hold too much in your cash balance, they have to keep some in stocks and bonds and so on because they feel like they’re losing pace against inflation.

Rahim : Yeah. Even nowadays a cash balance is defined as being in bonds its of course as a regular investor and it’s usually cash means being in a monetary funds and those are short term government bonds actually. And we’ve seen that those assets are protected or even better protected than the bank accounts. It’s like a limitless guarantee by central banks and it’s how almost every investor keeps cash nowadays. So the meaning of cash has totally changed.

Stephan Livera: Right. And I think you make a great point there as well. And this ties into the point around government debt because this whole architecture and scenario that we’re living in today, it helps fund government debt because now we’re holding something that helps the government basically palm off its costs onto the rest of society. Can you articulate a little bit there around why this bonds system now and this fiat money world helps fund a lot of that government welfare and warfare States?

Rahim : Yeah. Every government bond is a claim on future tax payments. So if you hold the government bond, you’re actually holding a claim against yourself, on your future self and your kids, your grandkids. If you have methuselah bonds. So that’s really challenging and morally challenging in a way so more or less the market seems like its not really a market. My teacher, Roland Baader called it money socialism, that is kind of Money socialism forces you to hold claims against yourself as a cash balance. That of course is great for government financing its never been as easy as that. Even in times where there’s no real economic growth, our governments are overflowing in tax revenue and decreased financing costs for the debts already. So they have lots of money on their hands and of course they are eager to take over more and more functions of the market economy and of a functioning society. And that’s another really bad downside of this kind of zero interest rate policy. It leads towards a kind of statism where the state is seen as the gap filler in every kind of way. Not just output gaps, but every kind of social gaps of market. Dysfunctioning apparently, which of course is money socialism, dysfunctioning and so on. And we should be really wary of that.

Stephan Livera: And as we have seen over these last few decades, you make this point about interest rate asymmetry and so you’re saying that the rates are being lowered more sharply than they later have been raised in each cycle. So can you elaborate on that?

Rahim : Yeah. This is like the interventional Spiral that we’ve seen in politics is always easier to go one way then repeal all the errors you’ve made before and it’s a bit similar with increased interest rates, decreased interest rates make more people and politicians dependent on easy money and it’s really hard to withdraw a drug from a dependent, from an addict , so it’s more or less the reason why it’s more difficult to increase interest rates. The market already anticipates lowering interest rates then even a stagnation of interest rates is like a sign. So you have to increase the dose, higher and higher for easy money to just keep the thing going. And it seems out of the question right now in Europe to increase interest rates because the tensions are not decreased in the political area. And everyone is afraid, of course that the Euro may fail and that Brexit was only the first big challenge.

Rahim : And with now with the UK going out of the European Union, we have a majority of the more Southern, more spendthrift countries in Europe, and of course it’s not at all in the interest, to have increasing interest rates because, the spending amounts going on and have a Greece-like correction happening there as well. And of course Italy is already threatening to leave the Euro project to have their even more depreciating currency they had before to make it even easier to continue with an unsustainable system, they’ve become used to.

Stephan Livera: You’re right. And I think also another point you make is that, it’s like a monetary hot potato and each fed chair is passing on to the next… Central bank leader is passing it onto the next one and saying, “Okay, now it’s your problem, you deal with it. “

Rahim : Yeah, definitely. But that’s short termism and we see it in politics, I mean obviously the monetary politics as well. And actually the whole point of central banking is to combat the short termism of people on the markets. So he should have a more long term oriented monetary policy, but it’s kind of hot potato… Monetary policy of course is the definition of short termism. We can increase interest rates, so we just keep on going and see where it goes and see how the next one would cope with it. And we’ve had a change already to Miss Lagarde in Europe or which was quite a well observed shift and Miss Lagarde is quite intelligent proud person, very pragmatic, democratic, personality, a French politician. And what every central bank is trying to do is to come up with more innovative ways to avoid going for negative nominal interest rates and do whatever it takes to come up with ideas to produce liquidity without the markets realizing it, without people anticipating it and somehow still keeping in control. So obviously Lagarde is really interested in digital currencies and I think she’ll go for the kind of a central bank digital currency way, which is the hottest idea among central bankers right now, who think they somehow can copy the success of Bitcoin and make it their own and use the hype surrounding it and the coolness and innovativeness surrounding it to somehow hide behind. They’re very uninnovative, very uncreative kind of monetary policy

Stephan Livera: And with this monetary policy, I think it’s also… We have to talk about the social consequences now listeners who have read Guido Hülsmann’s, “The Ethics Of Money Production.” There’s a chapter there about this and I think your book, Rahim actually expands on some of these ideas and puts them almost into more context for today of what are some of these social consequences that we are seeing. Because usually when you have a low interest rate, what should that normally signify? Versus when we’ve got an artificial low interest rate. And can you expand a little bit on what some of the social consequences are for us in society?

Rahim : Yeah, so a lot got credit, goes to Guido Hülsmann who is a very esteemed colleague, German speaking as well of mine. And in his Ethics of Money Production, he pointed out the distortions, societal distortion by inflationary policy. Yeah, of course. We’ve gone from there and much deeper now in our analysis in not only looking more detail how these effects look like, but also we’ve seen differences, it’s not just inflation that’s going on. This is kind of really interesting zero interest monetary policy going on, which is unlike past inflations. So it differs a bit in the detail. There are more kind of interesting, paradoxical tensions happening within society, than it would be with out right inflation going on. And we’ve looked into debt in more detail and we could analyze a lot of the polarization happening right now in politics, but also in society, it’s really correlated to the kind of monetary policy in a zero interest rate on the market, questioning if that could ever arise, if we’d have a tendency towards a zero interest rate, it means that people would not distinguish between future and past.

Rahim : And it’s only thinkable in a very theoretical way. It’s people who have a very ascetics lifestyle and they really forsake the present life and wouldn’t care about retaining anything for themselves. So they’d be willing to give up all their savings, all the money for basically nothing because they say it’s better someone else have it, better it’s used elsewhere than for myself. So there’s no kind of inclination for consumption. And of course we see is totally different picture at the moment is increasingly consumerist society, but still the market gets the signals as if there’ll be so much money available for investments because no one wants to consume. And as if there was money for an infinitely long term investment periods available.

Rahim : So you get a very strange distortion of the productive structure, which shows a big mismatch with the actual preferences of the population without people really realizing it. And that’s a lot of tension happening there. And a lot of the capital consumption happening, for example, the increase in burnout rates among employees the increase of seemingly bullshit jobs as David Graeber calls them and he doesn’t really analyze it. So he just coined the term and of course gives his kind of anticapitalist reasoning for it, but it doesn’t make sense if a market economy is about matching the preference of people, it wouldn’t make sense that you have people going voluntarily for jobs that don’t make sense. You can only explain that for this kind of distortion of the production structure. And of course the depth has become a way of life for people. So they become really dependent on going on with paying the rates, which are of course are anticipated for the future as if the present would go on as it is, which means they keep their job, they keep the purchasing power and the house retains its value and so on and so on. And that kind of leads to a way of life that’s really dependent, a debt servant in a way. And it makes people very reluctant to go out of their way to be critical. And you have a lot of these yay sayers running along and they… And there’s even a change in mentality happening.

Stephan Livera: You’ve really put it well there when you were saying it’s almost like the quote unquote signal is that we’re all ascetics and we don’t need that much. But then in reality what is driving is the complete opposite where it’s complete consumerism and in your book you spell out some nice examples of it might be good to talk through some of those just to help make that a bit more real for people. And you pointed out here there’s this whole phenomenon now with travel and Instagram and airline miles, so airline miles are a huge thing. Everyone’s got a credit card and they’re all talking about travel hacking and so on and what’s actually paying for all of those airline miles?

Rahim : Yeah, actually the bank is buying the airline miles. And they see it as a kind of a trigger spending. So by traveling you try to copy that kind of consumer heavy consumerist lifestyle and they hope, of course you’d get a very cheap flight, but then you continue spending and trying to get the perfect Instagram photo from the infinity pool as everyone else gets it. So it’s an avalanche of spending happening there and it’s of course credit card companies making money and not only on the fees but also on the overspend on the overdraft and on really high interest rates. I mean the last remaining high interest rates out there by people consuming too much and not really anticipating that increased consumption and going over overdraft on their credit cards, and so on. And of course that’s short termist consumerism, which I don’t think consumption is bad per se.

Rahim : I don’t think traveling is bad. We just try to understand why is it happening to such a large amount by becoming so ubiquitous. Why is it so obvious? Why is more and more of advertisement going for that kind of consumer spending? And that of course you can only explain by explaining where the money comes from because in the long run, the fool and his money is parted always, you spend more than you take.

Rahim : You’ll be just shut out of the market as a consumer, you don’t have any more sense, any more votes to spend on the production structure, but of course there seems to be an infinity of new votes being edited to this kind of voting process and that explains why more and more entrepreneurs try to go for this scale up per consumerist markets and where there are a lot of paradoxical business models where he don’t have the actual consumers spending the money but he pays with the attention spans and so on. Then you try to go all this big word, hidden way round about way of getting most money out of the consumerist scheme that’s happening and travelling is one of the fields where it’s happening.

Stephan Livera: Right and I think you make a good point as well that lot of the actual revenue for airlines now comes from those frequent flyer programs because everyone’s trying to chase those points and then it’s like the revenue is coming from the credit card companies almost. And now another point I wanted to touch on, you mentioned this as well around the business model, because in the normal capitalist world, the entrepreneur is trying to serve the consumer, but one point you make in your book is that actually now entrepreneurs are sort of serving lenders and egos. Many of them have this desire to leverage the reputation of being a serial entrepreneur and they try to get bought out by some really even bigger company and they’re sort of surviving off of that.

Rahim : Yeah, yeah. That’s, there’s one of the main problems that it’s not really a market economy when you don’t have the link between serving a consumer a real consumer and serving him longterm, if you want to have a longterm business, a sustainable business by getting leveraging as much as possible first, and of course by leveraging you have all these kind of potential laws being even more extremely in force. Being number one really plays out if you scale on the global scale. So, and then of course entrepreneurship changes in the way it’s a what an entrepreneur is like, what it is perceived like, what are the most popular entrepreneurs who are deemed to be successful. Of all the attention by the media is very short termist, you don’t look at track record. You don’t look into if someone who’s really been in the business for long term serving customers.

Rahim : It may be a success story that’s a one year old and the next year it may be known as a fraud to everyone and build just as big a story. So we have this kind of Theranos-like scams increasing, where you try to leverage your personality as a startup entrepreneur and you try to take out as much as possible of that. It means access to venture capital, access to legitimacy, attention and so on. And I don’t think it’s bad per se to have an entrepreneur who is focused on the most short time span, attention span consumer. I think that provides value to a lot of people of course. But it’s bad if we have this kind of density, the whole focus of being an entrepreneur shifts to the field because then I’m afraid of long term consequences and the perception of people.

Rahim : And maybe you have more and more young people saying, “Oh, I don’t want to be an entrepreneur’s it’s like being a scammer or something, I want to do something serious.” And maybe that’s one reason why a lot of millennials say they’d really like to work for the States, for government jobs. They’re looking for government jobs, not only because they seem to provide a long term stability and safety, but also because they seem to be more moral, seem to make more sense and so on. And I think that’s really a worrying sign we’re seeing here. It’s not those young people are statist per se. It’s they react towards the market economy, distorted jobs that they find on the market.

Stephan Livera: Yeah, and as you say, it’s like subsidizing of the president by the future and it’s like these capital consumption entrepreneurs are just arbitrating from the future to the present.

Rahim : Yes, definitely. I mean they, they’re just doing what they’re supposed to, it has all the signals, signals that were sent to them. And in a sense I don’t blame entrepreneurs, there’s still entrepreneurs creating lots of value. And of course having this kind of value in entertainment is amazing, It’s an expression for artists and the best artists of our time, of course right now are in this kind of short term entertainment producing amazing series for TV or streaming and so on. So there’s a lot of value created for people. It’s just, I don’t think it should be in a larger proportion. I would like to see more creativity going to fields that really bring forth humanity in the long term and so on. And this kind of arbitrage is really distorted, it’s caused by the distorted signals sent to market and first of all by the distorted interest rates.

Stephan Livera: Mm, right. And actually you talk about another idea that we might be seeing an increase in political correctness as well and that there’s more conformism as a result of separating the short term benefit from long term consequences and social costs. Can you elaborate a little bit? What are you getting at there?

Rahim : Yeah. More and more people are living in bubbles because the whole life that happens in bubbles than educational institutions in a way are separated from the real world and are as well beneficiaries of this kind of monetary policy. There has been a boom in educational institutions, also private education but of course certified by the States, as a kind of fake market happening there and then going on from your educational institution until you’re in your mid twenties already to a job in a big corporation or something like that where you’re insulated from really serving consumers as well because those are not sustainable structures. They are bubble structures so you remain in the bubble for a very long time.

Rahim : You’re remaining in the bubble, being insulated from real consequences, from real people and of course fosters this kind of mindset which…. Just focus on your level and the place you’re working at and you realize this kind of egoistical institutional interest where you in and of course that helps along and then you have the conformist pressure of course that I mentioned before by probably being in debt already by starting out a life in the United States, even starting being in debt by spending time the educational institutions, in Europe, it’s more government debt that [inaudible 00:47:36]

Rahim : So it’d be your future tax spending that has to cover it anyways. It’s not that different, the situations a bit more obvious in the United States, but then less obvious at the same time because this kind of credit financing is subsidized by a large degree in an unseen, understood degree by most people. So similar systems where instead of different fields, you see these misalignment and mismatches. So being separated from reality and being a conformist leads to this kind… of thinking that pervades even universities right now, where you have mostly… They call it the middle part… The middle sector at the university, administrators, staff really running things and they are small mind bureaucrats basically going along indebted bureaucrats, spend time in the same educational institutions, never being out in the real world and just cling onto the jobs and cling on to every kind of power they can get. And so I don’t think it’s about ideology, if you have this political correctness in campus right now. It’s About conformist trying cling onto power, having something to control other people with and trying to assume a kind of administrative responsibility to construct a kind of safe haven around people and just perpetuate that kind of bubble there in and get more and more people and money spent in those bubbles.

Stephan Livera: And I think we’ve got to talk about the devastating impacts on savers. Now you have a great example in your book where you talk about this Baker analogy, right? And so this idea is, okay, imagine we had a price control of zero for bread. Well, it’s not, that bread would be free, is that less people would become bakers, right? So it’s that like, why would you be a Baker if you’re not going to get anything for it? And now you say, well, in this analogy, what about savers? Because if you give people basically zero return or a negative return to saving, what does that do to saving? It just annihilates them. The harvest is not enough of the amount that they’ve saved. They have to now consume their seed. Can you articulate some of your thoughts on that?

Rahim : Yeah, that’s a prediction by Keynes actually, turned out to be correct, but what wasn’t correct was what he thought would go along with it. It’s the euthanasia of the saver, that’s what we called it because he thought that the saver and the hoarder is really an unproductive part of the economy’s basically old people holding onto the money and not investing it. And that’s a very wrong point, a very wrong interpretation of the economy because you have to hold liquidity to have this intertemporal coordination between future into the present going on. So you need always people providing liquidity to the markets and holding onto liquidity on the markets without any negative impact for people. And in order to make investments in particular, long term entrepreneurial investments, you need to have liquidity available because you can’t do these investments in small pieces. You need to, you can hoard in small pieces, that’s why hoarding is that important to the small saver. And that basically was the way to go on the saving in the past. This kind of saving has disappeared as a lot of pressure has disappeared because it doesn’t make sense anymore. Of course there are still old people trying to save their way, but they lose all of the purchasing power.

Stephan Livera: So I guess in terms of where we’re at and where we’re going, what are some of the potential ways out of this zero interest rates trap?

Rahim : Well likeliest way is really the modern monetary policy way, and that’s just really go without any kind of remain independence of the central banks is just make the treasury produce all the money they need and then just have the state fill all the gaps. So with private employment disappearing and that kind of economy, and I think it will be triggered by losing trust in money. You have a decrease in investment, decrease in division of labor, and you basically go into full blown socialism. It’s not direct socialism, it’s a new kind of socialism. But I’m not that pessimistic because I think we have… So that’s the way where it goes policy-wise, but that’s not, I think necessarily the way it goes on a global level because every step you take in this direction increases the signaling power of the distortions on the market.

Rahim : So people react to it, to go towards other assets. So immediately if you pursue the kind of policy you need to have strict capital controls, you have to control every kind of spending and assets. And that of course becomes obvious for people. And you have new assets coping with that, new entrepreneurs coping with that. I think one of the main reasons Bitcoin has appreciating that fast as no asset in the past has, it was really the best performing asset in history so far was due to Chinese capital controls. Because the Chinese of course have been going on with the same kind of monetary policy, but they have that communist party in power which deems to be more able to control people. So they have really tight capital controls and Bitcoin has been one way, which really in the proven way has allowed people to kind of escape these kind of capital controls and shift the savings out of the Chinese system.

Rahim : And I think we’ll see an increased value of those kinds of assets and those kinds of solutions. And then of course makes futile a kind of monetary policy, it’s happening. It may even mean that people go out of government money fiat money and start counting in new assets and so on. Try to keep the savings out of the system and even try to keep part of the investment out of the system and so on. So that increases the pressure. And I don’t think a heterogeneous political area like Europe can really keep up with that kind of pressure because you’re always too slow if you have to coordinate with being, different nations, different nation States. So of course I think if they pursued a kind of monetary policy further it will… They think that they are easing up the pressure and the conflict potential, but actually increasing it on a long term.

Rahim : So we’d rather have a destruction of the Euro in the whole European process then continuing this kind of monetary policy. So I think it’ll become obvious, the failure of this kind of monetary policy. And I think the jurisdictions that can hold out, that realize the potential and really offering a money that you can save in will be the winners of this kind of shift that’s happening right now. And of course within Europe, right next door to Germany, we have Switzerland, we have Liechtenstein with their own currency. And their central bank of course tries to keep up with the inflation rate of the Euro because people are used to somehow have a stable money and they just look at the fiat money they compared with, but it’s already crazy what the Swiss national bank has to do in order to keep up with the depreciation of the other currencies.

Rahim : So they’re one of the biggest investors in Facebook right now, for example, because they just keep up buying dollar assets and they keep up buying Euro assets and of course they buy up the best performing assets and [inaudible 00:00:55:25] are not stupid in a way, but it becomes more and more absurd that we have central banks then buying all those kinds of assets to just keep up with the depreciation of the other currencies. So there might be a stopping point, they might go for two different Swiss francs, one Swiss francs that’s may stop depreciating and so on. And we see, it’s a really interesting time to be alive. I think we’ll see a lot of entrepreneurial solutions. I think we will see a lot of jurisdictions stepping out of line with other jurisdictions. So I’m really optimistic in the long run that this kind of distortion may have a natural end.

Stephan Livera: Right. And I guess just to summarize the way I’m thinking of what you’re saying, it’s like as the central banks continually accumulate more and more of well known large public companies, it’s almost like a nationalization of some of these big companies. And as someone like say, Hans-Hermann Hoppe would point out that it’s just increasing the politicization of society because now you can’t just run a business, you have to run the business, and that business is also very highly influenced by the government. And so it’s kind of like a backdoor nationalization or backdoor creeping statism over time. And so we really are faced with that choice of do you want to save in the government money and be a part of that whole government system or are you going to start saving some assets outside of that system, whether that’s gold or Bitcoin or some of these other ways of kind of doing that.

Stephan Livera: I think we’re coming to the end of time, but Rahim make sure you tell my listeners where can they find you and I think for my listeners, I do want to recommend, definitely recommend reading the book. I think there’s a lot of great insight in terms of social consequences of fiat money as we’ve discussed today. So Rahim, make sure you let them know where they can find the book and find you.

Rahim : Thanks a lot. It’s The Zero Interest Trap, it’s called. You can find it on Amazon and I hope in bookstores around and only a few of my books have been translated to English. Another one was the Austrian School For Investors, you may want to check that out as well. Apart from that, I’m mainly speaking and writing, lecturing in German, but you can find some YouTube videos in English as well, a few of the lectures I did in English.

Stephan Livera: Fantastic. Well, thank you very much for joining me. I’ve really enjoyed chatting with you.

Rahim : Thanks a lot. Bye. Bye.

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