SLP395 John Tamny – Inflation & Optimism

John Tamny of FreedomWorks and Editor at Real Clear Markets joins me on the show to chat about his alternative take on inflation, fractional reserve banking, as well as why we should be optimistic about things going forward:

Defining inflation
Debate on Austrian economics & FRB
Is monetary stability possible?
2 years of Hysteria
Optimism for the future

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Sponsors

Stephan Livera links:

Podcast Transcript:

Stephan Livera – 00:00:01:

John, welcome to the show.

John Tamny – 00:00:03:

Thank you so much for having me on. I appreciate it. Fun.

Stephan Livera – 00:00:06:

So, John, I’ve been following some of your work for awhile. I know you are editor over at Real Clear Markets, and you’re also working with FreedomWorks, and I saw some of your articles recently. I thought it would be great to have a chat with you. So let’s just get a little bit of your views on where we are right now in the world and from an economic perspective. As you look out around the world, how are you seeing it?

John Tamny – 00:00:30:

I tend toward optimism. Let’s never forget, an economy is just people, and people grow. And why do they grow? They grow because they want to get things. And I don’t think that’s going to stop any time right now. Certainly I was devastated by what happened in 2020. I thought that the taking of freedom as a way of mitigating the spread of a virus struck me as a very backwards way of approaching it. But broadly, I’m an optimist. I have a book coming out in the fall that makes a case that one of the reasons for my optimism is I think this crash in the cryptocurrency space signals its establishment as the future. In that we’re now seeing a real market push aside what maybe is not the future. And it’s setting the stage for some really good. Stable. Useful currencies. Useful mediums of exchange that will transform how we transact and vastly improve money in general.

Stephan Livera – 00:01:34:

Yeah, and I think as part of all of this, I think the conversation now is very much about inflation, and so we should chat a little bit about that. And I think it’s important to understand different definitions, how people talk about inflation, as well as some of the narrative. So that we could start with just to set the table, let’s say, how would you define inflation? What’s the useful way to think of inflation?

John Tamny – 00:01:58:

I think the only way to define inflation is as a departure from the standard of value for a currency, a devaluation. That is historically what inflation was. Germany had a hyperinflation in the earlier part of the 1920’s because they departed from a standard for the mark. Nowadays, however, in the 1970s, in the US. We departed a traditional standard for the dollar. That was the inflation. People say, oh, higher prices. Are inflation to blame? Say higher prices cause inflation is like saying that wet sidewalks cause rain or reverses causation. Higher prices can be a consequence of inflation. And so you see, right now, most economists define inflation inexplicably as too much economic growth. Well, actually, when an economy is growing, that’s the surest sign of falling prices. Is that deflation? No. When prices are falling, we have more dollars for other things. Prices are naturally stable unless you devalue the currency. And so inflation is a currency devaluation. You’d be hard pressed to find an economist who understands this truth at this point.

Stephan Livera – 00:03:14:

And it’s quite a confusing thing because especially for somebody who is maybe not so savvy, they are just looking at the news and they see the news say and just recently, oh, CPI was 9.1%. Does that mean inflation was 9.1%?

John Tamny – 00:03:29:

And it doesn’t, it cannot thank you. It’s a great question. It cannot be stressed enough that there is an ocean of difference between rising prices and inflation. Let’s say we discover that Honeycrisp apples are in fact a cancer cure that if you eat one a day you’ll never get cancer or heart disease. Do you think demand for them would surge on the way to higher prices? My guess is yes. Inflation no. If we’re spending more on honey crisp apples, logically we have fewer dollars for other goods and services. And so a rising price by definition signals a falling price elsewhere. We have rising prices for certain goods right now, but we have falling prices for broadband, for computers, for all sorts of other things. Inflation is a devaluation of the currency. And so I’ve been one of the few people probably think I’m nuts for arguing that in fact we don’t have inflation right now. If you look at the dollar, the dollar is stronger versus gold, it’s stronger versus foreign currencies. That doesn’t mean as much. Over the last two years, this would be the first inflation in history that didn’t include a currency devaluation, which you have people wondering are they mistaking higher prices for inflation? I say they are.

Stephan Livera – 00:04:49:

That’s a really interesting way to put things and I think it’s also important to put things into context of what other socalled authorities saying, because they’ve been saying for years, oh, it’s transitory. And how do you disentangle the different components of these statements?

John Tamny – 00:05:07:

Well, high prices by definition are transitory. This isn’t me defending the Fed. The Fed’s got all sorts of confusion inherent in its existence and obviously it’s a discussion and of itself. But the best cure for high prices is high prices. So they are transitory by definition. High prices are a summons to production. There are summons also to investment for new ways of producing goods so that you can produce more of them at lower prices. Economic growth is all about making cheap what’s formally expensive. When the 21st century began, a flatscreen TV was out of reach for the vast majority of people. $25,000 today you can get them for next to nothing computers. IBM created the first mainframe computer in the 1960s cost well over a million dollars, very few capabilities. Now we have supercomputers that fit in our pockets. High prices signal lower prices along the way. And so the Fed was right in saying if it’s high prices, yeah, they’re transitory. Inflation is something else. It is a devaluation of the currency. And I think it’s very unfortunate that we’ve taken our eye off the ball and not choosing to understand this because you have commentators around the world, particularly in the US, saying, well, there’s really nothing we can do about inflation. Oh, I don’t know. Germany in the 1920s ended its inflation within a week. It just took the mark out of circulation and issued a stable currency. Very simple.

Stephan Livera – 00:06:38:

And so when we’re talking then about bona fide inflation, actual money supply inflation or debasement, I think the other important component is to understand there are different metrics of inflation. There are different ways of counting the money supply. So do you want to outline from your perspective, what are the important money supply metrics to think about or observe?

John Tamny – 00:06:59:

It may surprise you. You may want to end this discussion right here, but I strongly believe that once you’re talking about money supply, you’re confused, and that’s not a comment on you. Most people think of inflation in terms of money supply. To me, that’s a wholly mistaken way of looking at it. The reality is that the most circulated currencies in the world are the most stable, the strongest. Well, by definition, money flows signal the flows of goods and services. It’s the weak currencies that are not heavily supplied. Because who would use if I say, I want to buy your microphone, I’ll pay you either US dollars or Argentine pesos. What are you going to take? You know what you’re going to take. Yeah, you want the dollars. The dollar is the world’s currency. And so I think the focus on money supply is wholly backwards. I argue in my upcoming book that this focus on money supply has people misunderstanding inflation yet again. Inflation. You only have a problem of excess money after the inflation. I know that sounds weird. People say, well, no, they print money. It costs them too much money causes inflation. No, it doesn’t. Good money is everywhere. It’s when you devalue the currency when it’s in excess because it’s not as useful as money. And so to me, excess money supply is what happens after you’ve devalued, as in the inflation happen and then there’s too much money. Very different. But that’s what I argue.

Stephan Livera – 00:08:29:

So in that context then, are you also arguing then counter to what many people believe, that as an example, they might say, oh, look, the Fed is raising rates. Just wait until the Fed does a U turn, or that it pivots. I suppose you are also very much against that way of thinking.

John Tamny – 00:08:50:

I think the Fed raising rates is utterly irrelevant. And so we’re hearing people now say, oh, well, you know, the dollar is strong because the Fed is raising rates. Oh, please. The Fed raised rates throughout the 1970s. The dollar was in freefall. They’re saying the dollar is crushing the euro because the Fed is raising rates more than the ECB is. Oh, really? Well, then explain to me Japan. Japan has had much lower rates across the yield curve for decades, and much of that time, the yen crushed the dollar. Inflation is a policy choice the Fed has. And again, it’s going to reveal me as someone who thinks like no one else, probably for the worst. But the dollar’s exchange rate has never, ever been part of the Fed’s portfolio, ever. The dollar exchange rate is constitutionally. The Congress is probably , but it’s something the President has basically had power over. And so if you look throughout history in the US, the Fed was formed in 1913. But the first evaluation of the dollar happened in 1933. FDR did, and he devalued the dollar from 120th of an ounce of gold to 135th. Fed Chairman Eugene Meyer begged him not to do it. In fact, he resigned over FDR’s decision that he was powerless to reverse. In 1971, President Nixon chose to sever the dollars linked to gold. That was the inflation. Fed chairman Arthur Byrne begged him not to do it. He said it was a disastrous choice. He was powerless to stop. Nixon inflation is a policy choice. It’s not something that central banks do. To us, devaluation is as old as money is, and money well predates central banks. So this focus on the Fed right now I find wholly a non sequitur and wholly divorced from what actually causes inflation.

Stephan Livera – 00:10:49:

So if we’re taking that paradigm, do you sort of agree or disagree with that basic, let’s say, Austrian economic argument, that when banks issue loans, they are creating new money and that when loans are being paid back, that money is being destroyed. And so that influence in terms of the inflation in the economy, that influences the inflation in the economy, are you agreeing or disagreeing with that paradigm, or do you just think that’s not the relevant factor?

John Tamny – 00:11:20:

I’m agreeing with Ludwig von Mises, whose book The Theory of Money and Credit, I thought, brilliant, if you came to my office or anywhere I am, I’ve always got numerous books by Austrians around. I strongly believe, and the President of the Mises Institute knows this because I’ve told him I think the neo Austrians, modern Austrians, have wholly perverted, miserable views. The idea that lending causes inflation is absurd. Lending, as Mises said, in The Theory of Money and Credit, people borrow money for what it can be exchanged for. So the more production there is around the world, the more credit there is, naturally. So to pretend that people just go to borrow money, that’s being devalued, as the Austrians presume that banks can just create money out of thin air, it’s beneath a great ideology, a great school of thinking. Why would if that were true, if banks are just in the process of devaluing money, multiplying it, as the Austrians say, why would Apple have over $100 billion of cash? Why would Google? And if they did, wouldn’t investors be selling their stock down, just enraging fashion to get out of a company that has seen its cash holdings eviscerated by what the Austrians claim the banks do. The reality is, banks aren’t relevant in the modern economy. The Fed isn’t terribly relevant. The Fed projects its influence through a banking system that shrinks by the day as a source of credit. Yet the Austrians spend all this time on the banks and the Fed as though they’re these nefarious characters inflating away money. Oh, my gosh. Let’s be serious. The dollar is the world’s currency. If the Fed and banks were as powerful, a fraction as powerful as the Austrians think, the modern ones, the simple truth is that the dollar would not be anywhere around the world yet. In fact, it liquefies just about every global transaction.

Stephan Livera – 00:13:24:

So I’m curious to come in around the cash balances of, let’s say, Apple and so on. Now, I don’t know the exact number, but let’s say they’ve got 100 billion on their balance sheet or whatever. We argue that the reason they’re holding that is because it could be a few reasons. One, it could be they may not see investment grade or let’s say business worthy applications of that money, or maybe they’re holding it in reserve to be able to buy things or to acquire other companies when the opportunity comes.

John Tamny – 00:13:55:

Well, it could be both those things, but you certainly wouldn’t have now, let’s be clear. The Apple doesn’t have a hundred billion dollars just sitting there. The Apple has, in fact, 100 billion worth of dollar denominated securities. They have interest bearing assets that pay out dollars, which is the same thing. However would they do that? Would they have all these holdings, these cash like holdings, if the Fed and banks were just multiplying away the value of it? Well, I think not, and for obvious reasons. But no, there’s no doubt you’re right that they see opportunity for this money. Otherwise, they’d be paying it back in dividends. But that should tell you something. It should tell you that, in fact, what the Austrians presume, and again, I am a big fan. Everywhere you look, you’ll find books by the Austrians, by me, and I am very friendly. I’ve spoken at Mises Institute, I go on their podcast, all that. But I always disagree with them about the Fed. If the Fed could do what they presume it could do, the US. Economy wouldn’t be worth talking about. And you certainly wouldn’t be talking to me right now, because I’d be working in the fields or something, because there would be no chance to grow economically in a country in which the central bank were routinely just wrecking the currency that we use. That is, oh, by the way, the world’s currency. So the world’s economy would be in desperate straits if the Fed were as powerful as the Austrians assumed. So I don’t get this, and I keep trying to convince the powers that be there that they’re on the wrong track, and maybe someday I’ll succeed. Hopefully, my next book helps.

Stephan Livera – 00:15:35:

Well, okay. I think it’s an interesting disagreement to have. Let’s chat. So I think the multiplication point so, as you were saying, this idea that banks can multiply or create when they loan, they are lending you money into existence, couldn’t we say that’s up to a certain point and that they can only issue they will actually, in practice, be limited by, say, capital requirements, examples, these puzzle requirements and things like that. And that’s only up to a point that they are able to. And part of that is actually, they need to find credit worthy customers to be able to make loans to. So wouldn’t that be sort of part of the argument here, is that they can only issue new money and create new money to a certain point, and that’s just the point that we’re at.

John Tamny – 00:16:19:

But they can’t issue and create new money. I mean, ask any banker, and they’ll tell you, gosh, if only we could just expand our balance sheet in the way that conspiracy theorists claim we can expand it. If they could, why are they routinely being bailed out if they’ve got this power to just create money out of thin air? I would add why, if they’re so capable of just creating money like this, why is it that their market share of total lending in the US. Declines with each passing day if they’ve got this remarkable power? And the problem is the assumption is rooted in this falsehood that, okay, here’s $100. Here it is. Let’s pretend I’m a bank, and let’s forget about any well run bank. Doesn’t require any kind of capital requirements. A well run bank would logically have none. In a poorly run bank, you can’t have high enough capital requirements. Here’s a take this 100 and hand it to someone next to you next door. You lend it to them. No capital requirements. According to the austrian theory, we’ve multiplied we’ve created 300 out of thin air. Oh, please. No, see, I gave you I learned you $100. I’ve got nothing. Now, implicit in the austrian theory is that four people sitting at a table passing around a $100 bill have suddenly multiplied it into something into a multiple of 100. Well, no, they haven’t. There’s still only 100 out there. If banks could multiply in the way the australians assume, once again, the dollar would very quickly become worthless, and no one would want to borrow it because why would you want to borrow something that has been multiplied out of value? As Mises was clear about, we borrow money from what it can be exchanged for. But if the dollar is just being wrecked, no one’s going to borrow it because they’re going to borrow something that they still owe but that they can’t exchange for anything. So they’re going to take on debt for what? You only take in money because you can get things in return for it. And it saddens me that the austrians have fallen for this myth that banks that banks one of the most antiquated industries in the US. And one that shrinks by the day as a source of credit, has this power that it so clearly does not have.

Stephan Livera – 00:18:33:

So here’s how I’m seeing it and you tell me how you’re seeing it differently. So the way I’m seeing it, it’s not that when a bank gives out a loan that they get to just invent new money. The issue is more that both parties are acting like they have access to that money. And the effect would be seen by looking at the let’s say if you put a box around the commercial banking system and you see there are more paper claims than there are actual, let’s say, ounces of gold in the example, but you get what I’m saying, like there are more paper claims than there are actual physical cash and coins and notes and things. And so I think the way I’m seeing it is that there are certain levels to which they can go to because of their capital requirements, because of credit worthiness and things like this. And that’s kind of what takes them to a level that they can’t sort of go beyond. But the inflation or the creation of new money, as I see it, is because as an example, in that example, let’s say John Tamny bank is lending out to Stefan Laverrel and you’re giving me this money in a loan that I can then I theoretically believe that I have the ability to go around and spend that money. It’s my money in my account because I’ve got $100.

John Tamny – 00:19:44:

I’ve transferred it to you. Right, but you have that money.

Stephan Livera – 00:19:49:

Right, but I think the issue is more that let me put it this way. So I think the typical argument as it goes is more like let’s say you’ve got these depositors on one side and then you’ve got people, as in like the warehousing function, and then you’ve got the other people on the other side who are putting up money into a term deposit or a time deposit. And then the modern so the theory goes that the modern fractional reserve banking system is merging those systems. And so the issue then is that because the person on the other side who lends that money into the bank still believes he has access to it because as an example, he’s put money into normal bank account and is able to get interest on that and he’s still got access to that, then it’s kind of like both parties believe they’ve got access to the money. So as an example, if it’s John Tammy bank, a depositor into your bank has put in $100 and at the same time he believes he’s got access to that money. But actually you’ve also lent me $100 and I believe I’ve got access to that money because I’m running around out in the economy being able to send my hundred dollars.

John Tamny – 00:20:51:

Yeah, he does have access to it if he can. I’ll explain it to you this way. Are you familiar with NetJets? You know, the private yes, I heard of it.

Stephan Livera – 00:21:00:

Yeah.

John Tamny – 00:21:00:

So you buy a fractional share of a jet in NetJets and what they offer is anytime you need one, you’ve got one. Do you think they have enough jets at any one time for all their fractional owners?

Stephan Livera – 00:21:14:

Of course not. Of course not.

John Tamny – 00:21:15:

Of course not. Precisely. And so, if it ever comes to that point that so many of their owners there’s a run on NetJets, they can go into the market and access jets from other well, so what do banks do if there’s ever a run on them? They have assets to go get the money to fulfill the needs of their depositors. What Austrians seem to want, and they claim they’re so free market, is they want banks to be warehouses. Well, if banks were warehouses, yes, you could do that. But you pay the banks for the right to warehouse your money there, as in there would be instead of getting an interest, you would pay them. Okay, hold my hundred dollars and I’ll pay you a dollar a year. A big difference in putting your money with a bank. By definition, you are banks exist to direct the money. I mean, Mises was so clear about this. In the theory of money credit, the function of banking is to direct savings to those who don’t have near term needs for it to those who do. And so, of course, the money is being loaned out. But if banks could just multiply it just by virtue of being banks again, why do they keep going out of business? Why do they keep needing to be bailed out? It doesn’t work that way. But by definition, the money is being loaned out. But see, if you’re depositing $100 with me, at least for the time by virtue of me paying you interest on it, you are giving me title to that money. If you want it back, you will no longer get that interest. And so there’s nothing untoward about this. And again, if it were a powerful thing, if banks for being banks had some kind of magical power, why is it that they continue to lose market share? They’re just not important in the world we live in.

Stephan Livera – 00:23:10:

Yeah, so I guess my answer then to why are they going out of business and things? Well, in some cases it could be that they’ve made bad loans to people who are not able to pay back. And I guess the answer on the other point would be in the $100 depositor, who’s getting interest? That’s coming back to me is that you don’t see the effect if you only look at one bank, you see the effect if you are looking at multiple like the banking, the commercial banking system. Because as an example, that individual who’s come in and deposited $100 and he thinks he’s getting interest on that, whatever, 0.5% a year or whatever. Fifty cents a year. But nevertheless, the bank is turning around and lending out money in such a way. But here’s the thing, they can’t just do it forever. There’s capital limits, there’s credit worthiness aspects. And I think let’s assume they have.

John Tamny – 00:23:57:

No capital limits, take capital limits out of it.

Stephan Livera – 00:24:00:

So there’s no reserve requirement limits, reserve.

John Tamny – 00:24:04:

Requirements, whatever it is, what difference would it make?

Stephan Livera – 00:24:08:

So there’s a difference between reserve requirements and capital requirements there, right.

John Tamny – 00:24:12:

If banks could then imagine the money multiplier, then if it were real. But it’s not. It’s a myth. Very quickly, if I deposit $100 with Stephan Livera bank, you then lend it out, and then someone else lends it out and lends it out. According to Austrian theory, $100 very quickly becomes thousands and thousands of dollars. Think about that. Who then would borrow dollars and who then would keep their holdings in dollars if the multiplier were real? Because what the theory says is that the dollar is very quickly multiplied out of existence. So Austrians can’t have it both ways. They can’t say that markets are smart and then make an argument like this, which presumes that not only that our market is stupid, but they’re staggeringly stupid, that everyone who holds dollars, which, oh, by the way, is the richest people in businesses in the world, they don’t know anything. But a bunch of academics at the Mises Institute, oh, they know, they uniquely know those dollars. Banks are basically multiplying them out of any work. Oh, please. I mean, this is so beneath the Austrian school and it staggers me that they’ve fallen for this argument.

Stephan Livera – 00:25:24:

Yes, from my perspective, it comes down to capital requirements are being distinct from reserve requirements. So. Yes. There are no reserve requirements. But there are limits on how much they can do because they have to there’s this concept of risk weighted assets and they have to hold a certain except we’re not going to get into the technical details of that. But the point is. There is a limit to how much they can do. And the effect is seen at a multiple bank level. It’s not seen at a single bank level. And I think that’s probably the key difference.

John Tamny – 00:25:54:

Let’s assume no reserve or capital requirements. Do you think suddenly there’d be a run on JPMorgan? I mean, please, a well run bank doesn’t require these things. And the reason for that is basic, as any banker will tell you, if you’re a wellrun bank, your access to capital is endless. And there’s this myth to this day, and Austrians believe it, that, hey, the Fed exists to prop up the banks. Oh, please. Any well run bank would never go to the Fed for a loan. And why wouldn’t a well run bank do that? Because it’s an admission to the marketplace that you’re bankrupt, that you tried every other creditor out there. And they shut their doors to you, so you had to go to the Fed. Any wellrun bank has myriad people lined up willing to lend against good assets. And so this notion that we need capital or reserve requirements is laughable. A wellrun bank doesn’t need them. But to be clear, a poorly run bank, you can’t have capital and reserve requirements high enough because you know they’re going to be making dumb loans. But I just don’t understand why Austrians claim this free market mantle, but then they don’t trust the market for money at all. They just think that it’s bankers and conspiracy, rockefellers and the Fed doing all these things. The Fed people love it because it gives them totally unwarranted prestige and power. The Fed isn’t just a bunch of zero, nobody. Economists and banks, once again, are, by definition, by the fact that they offer such so little interest. They are the least dynamic players in the financial economy. If they were actually taking any real risk, they’d actually pay a high interest rate. They are making the most basic vanilla loans as possible. Yet Austrians would have you believe that they’re actually good at what they do. No, they’re not.

Stephan Livera – 00:27:46:

Okay, so anyway, I think we’ve kind of gotten to our sort of main disagreements on that aspect. Let’s chat a little bit about this idea of achieving a standard of value. So this is something you’ve written about in some of your articles, and you mentioned it just earlier as well. What is achieving a standard of value look like for you?

John Tamny – 00:28:05:

What it looks like is a currency that is trusted as a measure of value throughout time. Historically, gold was used for it. And gold has been its purpose has been wildly perverted over the years, seemingly by all the different economic religions. But markets happen upon gold because it has unique stock flow characteristics that if someone comes into the market with many, many metric tons of gold to sell, their sale of it isn’t going to move gold’s price. And the reason it won’t is there’s so much stock out there. And so historically, money was tied to gold, not because it’s shiny, not because central banks and countries had it in vaults, but because gold was flat. It was a constant. And that was good because the only purpose of money per Adam Smith is to exchange consumable goods. Money flows signal the flow of real goods and services. And so you wanted money defined in terms of something constant so that people could save an exchange and not worry about fluctuations in the currency. And so would gold be the right commodity now? I don’t know. It’s going to be interesting. I think crypto is going to solve this for us, but at least we can say that since the world, since the USD linked from gold in the early 1970s, market players have been searching for a replacement. And they found money issued subsequently insufficiently. Stable. And we know this based on currency markets. There’s 10 trillion worth of currency trading every day. Before 1971, there weren’t markets for currencies at all. And why weren’t there? Well, this currency currencies had a stable value, which is what they should. The only purpose of money is to help us move goods around. So you want to measure that kind of holds its value. And some markets have been searching for this ever since. My guess is eventually we’re going to find it again because that’s what the markets clearly want. Will it be gold? I don’t know. I don’t have an allegiance to gold. I have an allegiance to stability. But that’s what money should be. It should be this very quiet measure. It should be a foot ruler. That’s historically what it was.

Stephan Livera – 00:30:14:

I see. So this is probably another area where we might disagree. Because I think this might be one of those areas where I think the chase for and I don’t know. I guess it depends on what you mean when you say stability. Because I think this is another area where and I think even Mises talks about this idea that we can’t chase stability. That there’s always going to be some level of speculation and that. You know. There may be some supply shock somewhere someday. And that based on that, we can’t really expect that there ever will be such a thing as a stable store of value. So I guess let me just take a minute and just explain, I guess from a Bitcoiner perspective, like here’s how many Bitcoiners are viewing this. So we’re seeing it like the world doesn’t have a good store of value for the long term, because if you kept your money in US. Dollars, even in the US dollar, you’ve lost a lot of value over time. And that’s arguably the best of a bad bunch, or the least bad, or whatever we’re calling it. And so we’re seeing it like this is a period of volatility, but it’s also a period where people are learning and adopting what is a harder money. And so this is part of the thesis, this idea that there are certain qualities and characteristics that we believe that Bitcoin has that set it apart and make it more marketable, more saleable. And over time, we anticipate that more and more people will recognize that idea because let’s say they see it stores their value across time and space better than their alternatives. And I believe that even with this recent Bitcoin price drop, so as we speak today, the price is something like 21000 per bitcoin. Yes, it’s off the high of 69000 last year. But anybody who’s been saving in Bitcoin and using it as their longer term savings has obviously done quite well. They’ve been doing very high percentage returns, well above what they would have in terms of purchase power if they were in the SP or in gold or in the US. Dollar. So it sort of presents this interesting conundrum, then is a standard. So I guess my question to you, John, is do you believe a standard of value is possible? Is monetary stability even possible?

John Tamny – 00:32:13:

Well, I think it is, and I think the markets verified this. Isn’t it interesting? We have Coinbase today. We have all these exchanges for cryptocurrency is good. We have all these exchanges for currency, Government issued currency. If Adam Smith and David Ricardo or John Stewart Mill were around today, they’d say, what? Wait, you’re trading currencies? Why would you trade currencies? Currencies are supposed to be quiet. They are measures that enable the movement of real wealth. And so what verifies reasonable stability is the fact that there weren’t currency exchanges before 1971. What was the point? The dollar had a definition as 130 fifth of an ounce of gold. And global currencies, even the Russian ruble, were tied vaguely to the dollar. Most of them were tied explicitly. But anyway, was it perfect? Was it a foot ruler perfect? Okay, probably not. But boy, the markets thought it was pretty darn perfect because there were not exchanges to basically hedge the movements of the dollar. Bitcoin is not a store of value, it’s a speculation. I’m sorry. I think Bitcoin and these currencies are going to eventually push out government money. Thumbs up. But okay. Stephan I’m remodeling my bathroom. I’ll pay you one bitcoin now for it to do it. One bitcoin in six months and one bitcoin in a year when you’re finished. My guess is you’ll say, okay, which one? The one that went for 68,000 last November? The one that’s I think at around 20,000 right now, or the one that was, what, at 2500 in 2017? One of us is potentially going to lose and lose big in this transaction. That’s not money. That’s not to say that Bitcoin doesn’t eventually achieve stability, but there’s this myth, and I think it’s one promoted by Monetarists and Austrians, and that what makes money good, is scarcity. There’s only 21 million of the Bitcoin. No, I think what makes a currency good is stability as a measure of value. We don’t worry about how many foot rulers there are. We just know that it’s twelve inches. Good money keeps expanding in its usage, in its circulation, precisely because both sides know they don’t have to worry about the money moving around. And I don’t think Bitcoin as of yet has provided anything remotely resembling that, will it? Let’s hope it does. People will use it more.

Stephan Livera – 00:34:40:

So I certainly take your point that it’s not very stable, and it is definitely the vast majority of Bitcoin users are not denominating their services in Bitcoin. There are a few exceptions I could name, but let’s not go into those because they’re so small as a percentage. But generally speaking, today, nowadays, if we were doing that kind of transaction, we would probably price it in US dollars and just convert at the time of transfer. That’s generally how it would be done today. But certainly I recognize your point. I take your point. It’s quite volatile. But I think maybe this comes back to our disagreement about whether it’s even possible to have a stable store of value. But for what it’s worth, I do believe over time, with further adoption, it will reach that point once it’s sort of closer to, let’s say, terminal evaluation or at least some kind of something approximating the markets that bitcoin is chasing after.

John Tamny – 00:35:34:

Right.

Stephan Livera – 00:35:34:

So in one sense, you could say, okay, is bitcoin going after the gold market eleven or twelve tree, or is it going after the market for broad money? That kind of thing. So I think those are probably the main points, probably, of our disagreement there.

John Tamny – 00:35:46:

Yeah. But let’s assume that what you say is true, and I hope it’s true. No one would love a stable private crypto what do you want to call a currency more than I would that just holds value? But look at the people, and you’ve alluded to it. Look at the people who are buying bitcoin. They’re not buying money. They are speculating on scarcity that’s going to give them a big return in the future. You have Michael Saylor thinking bitcoin are going to 1 million. Well, if it does, okay, great. Hey, good for you. You’ve made a lot of money. If so, but please don’t insult me by saying, well, that makes it money. No, that makes it a speculation for the reasons you’ve acknowledged. The simple truth that a bitcoin going to the moon is not going to be useful as money. So if people think that scarcity on its own is a way to store value, hey, good. And there’s lots of people do it with art, they do it with all sorts of things, but money does. Good money that’s heavily circulated, is flat. Now, if the view is that gold isn’t the answer to money that’s stable, hey, that’s fine with me. I’m dying for the markets to come up with something even more stable than gold as a trusted measure in the market. But let’s be clear, at least for now, that this wasn’t sunspots or government decree or its shininess that caused gold to be used as money around the world. The reason it was used was because the markets happened upon it. And markets happened upon it because as a commodity, it’s the most stable commodity in the world. Gold doesn’t move per se. What moves is the currencies in which it’s priced. And so to this day, it tells the truth. The dollar has been a lot weaker in the 21st century, and gold has revealed that you can’t say that for bitcoin. You really cannot, at least not yet. It doesn’t tell the truth in the way that gold does.

Stephan Livera – 00:37:40:

So I think even there, maybe we disagree as well, because I think it’s probably also fair to say we saw a lot of inflation and by that I mean the money supply kind in 2020 and 2021 and that was precisely when we saw bitcoin make this big move up. And so I think even though maybe it’s still early to say on whether in terms of the definition of generally accepted money, early to say whether bitcoin is that obviously it’s not generally accepted money is not the price, it’s not the unit of account for the world, though it is growing. I think more and more people are adopting it as their savings and I think what we are perhaps longer term looking out and I don’t know when. But I think longer term it looks to me more like people are going to go to run to the US dollar compared to. Or at least sorry. I think in the short to medium term I think people are running to the US dollar because it’s the least bad of the fiat moneys and you can’t easily send gold around the world right. Without using a custodian. But I think long term bitcoin is the only decentralized answer because unfortunately gold gets captured and it becomes custody into vaults and those vaults and with the combination of things like legal tender laws, capital gain stock laws, it stops people actually transacting with gold. Whereas I believe in a bitcoin context we may see as an example with countries like El Salvador, Central African Republic that have one has legal tender law and the other is pushing towards a legal tender law, other countries that have no capital gains tax laws, we may see it happen earlier in some of those countries. But I’m also curious to get your view on that aspect of it as well. What’s your view then on the US dollar compared to other fiat currencies out there in the world today?

John Tamny – 00:39:20:

I suppose in a way my view is irrelevant. The markets view the dollar as the best of them, but if you look at it in the 21st century when it began, a dollar about 1280 of an ounce of gold roughly today, if I was one, 1800. Clearly the dollar has been devalued a lot in the 21st century. Is it money supply related? Again, I think this focus on money supply is so pointless. Could the Argentinian central bank increase supply of pesos? Oh, please, not a chance. There’s no interest in them. When Argentinians import goods from around the world, do you think they pay pesos? No, they pay dollars. And so it’s the most trusted, least inflated currencies that are circulated the most. By definition, to say the opposite is to say that producers actively take that which is being destroyed and they don’t. Legal tender laws, I think a focus on them kind of misses the point. Think about it. In Iran, North Korea and Venezuela. Three quote, enemy countries the US. The dollar is the currency of choice. Any business done in those three countries is denominated in dollars. Do central banks provide these? No. No. Money finds. Money supply is a natural market phenomenon. There’s this myth that the Fed pumps up the money supply. Oh, please. If it can, why doesn’t it pump it up in East St. Louis, in West Baltimore and Compton, California? They could sure use the money there. But see, they couldn’t, because money naturally flows to where it’s going to be, where there’s production. And so the fact that the dollars around the world is a sign not that it’s perfect, but that it’s viewed as better than the other currencies. The next most circulated is the Euro. The Swiss franc is somewhere in there, which is another currency that kind of discredits the money supply theory. What there’s 9 million Swiss, yet the frank is the fifth most circulated currency in the world. What does that tell you? It tells you that money supply is a consequence of its trust. The Franc is a global currency because producers on both sides of the transaction view it as a useful way to move goods back and forth. People should, in my mind, focus more on the quality of the currency in terms of holding its value, not its supply.

Stephan Livera – 00:41:40:

Got you. And so I guess bringing it back to the questions around the economy and people talking about high CPI prints and things like this, in your view, are you anticipating that to continue on longer, or are you anticipating more like a return to some kind of normalcy sooner.

John Tamny – 00:41:58:

Then later, I think a return to normalcy. I don’t know if you read Adam Smith’s Wealth of Nations, but even if you didn’t, you’re probably familiar with the Pin factory example that he uses, and it’s early in the book. He observes a Pin factory in which one person, working alone could maybe, maybe produce one Pin per day. But several specialized workers in this factory working together, doing a specific job, could produce tens of thousands per day. And to think of that in terms of prices around the world right now, we had, in 2020 this massive taking of freedom around the world. Unemployment in the US is 25%. It staggers the mind to think what people were doing to survive in poorer parts of the world. But the point of all this is that the world was remarkably integrated economically. Bangladesh was the world sewing machine. All this integration only for it to be eviscerated by governments. Is it any surprise that prices are higher today? When you broke up trillions of commercial relationships or interrupted them that were developed over decades, and people say, well, demand is outpacing supply or supplies outpacing demand. There’s no such thing. Demand is a consequence of supply. What we’re witnessing right now is that you can’t shut down a global economy and then turn it back on like this. Of course, prices are higher today because it’s much more expensive to produce in an economy that’s not integrated in the way that it was in 2020. And so the miracle was the prices that prevailed in March of 2020. What we’re experiencing now is, I would argue, another miracle that prices are actually still this low after what they did. And so my guess is that over time, as private commerce always does, it’s going to bail out idiot governments that chose economic contraction as their virus mitigation strategy. And so that’s why I’ve made the argument all along that this is not inflation. Higher prices born of command and control are not inflation and so gradually the supply chains will be reconnected in a way I know that they’re not actual chains and you’ll see prices get back to where they were but it takes some time. And so to me I think the end result is going to be that people acknowledge that this was not inflation, this was global producers desperately trying to get back to where they were before their connections with each other were broken up by foolish politicians.

Stephan Livera – 00:44:34:

So I’m curious as well then. Probably a little more towards the optimist side than the pessimist side but for the sake of an interesting discussion. There are alternative views out there and I think one interesting view that I’ve seen is Peter Zion and he’s written this article. This book and he’s out there doing these interviews and talking about this idea that there are these big factors going against the world and that for most of us. We’ve lived the best life that we up until now and actually it’s going to be not that great going forward. And so he’s got two main arguments and I’m curious what your views are. So I think one of them is around demographics. So basically he’s saying, look, there’s a lot of these countries that are very aging populations, right? Like Japan is probably the extreme end, but there are other countries who are just demographically they don’t have that young talent and young people. And then the other aspect is he mentions is this idea that look, America is still important but declining in its relative importance and therefore it won’t be the world policeman anymore and it won’t keep the seas safe for people to ship things and therefore because of this there may be hard times to come. So I’m curious John, do you have any thoughts on that? Any responses to those kinds of ideas?

John Tamny – 00:45:45:

Utter nonsense. Utter, utter nonsense. What was the discovery of coal? I don’t know when coal was discovered but the view was that this discovery was the equivalent of giving every able bodied worker 20 able bodied assistance. As in the productivity surge from coal’s discovery transformed it. Well, think about where we are today. We’re on the verge of robots and other forms of artificial intelligence more and more saving us from the labor we used to do. Future productivity is going to stagger us. The ability Jeff Bezos could start amazon today from a retirement community simply because he could bring on coders and basically work beside them around the world, watching them as they work from all points around the world. This notion of demographics is rooted in this idea that our human capacity to produce is static. In fact, it’s anything but that. And it’s anything but that because we keep developing new technologies that are the equivalent of the creation of millions of new hands and trillions of new hands doing for us what we used to do for ourselves. And so, in fact, Zion gets it backwards. What we’re headed toward, that birth rates are slowing is a natural consequence of the fact that automation and productivity is going to do so much for us that we used to do. And because of that, if you look at countries, it’s the countries with the highest birth rates that are the poorest. The richest ones have very low birth rates, but the productivity of their citizens is about to skyrocket because once again, the technological advances will mean the addition of literally trillions of new hands into the economy. They quite literally just work all day, 365 days a year, seven days a week, never take a vacation because they are automated. And then being automated, they’re going to free up the humans to do things that we never thought possible. And so, no, I’m staggered that people still believe there’s a limit to human ingenuity. In fact, it grows and grows all the time.

Stephan Livera – 00:48:04:

Yeah, and I’m inclined to agree more with you as well. But I think for the sake of a discussion, I think it’s an interesting counterpoint to the optimist case, let’s say. So if we are optimists, what are some of the, I guess, time frames that we’re thinking? Because obviously we’ve been through over two years worth of hysteria, basically, and it’s only now that it seems that the world is mostly opening up, with certain exceptions, that, let’s say China and maybe a few other places. What’s your view on that, if you had to speculate a bit about how long until things normalize?

John Tamny – 00:48:42:

It’s such a good question. And I still think in time, future historians and future centuries will look back on this and say this was when the world panicked in a really tragic way. Imagine taking away freedom as a virus mitigation strategy. Historians will marvel at the abject stupidity of what politicians did. And you ask a good question. China. To this day, people in Shanghai face the threat of lockdowns. It’s terrifying. That is the bad news and it is really horrifying news. I remain optimistic. And I remain optimistic because even amid this, I think what we’re going to see is that when we saw it, could they have locked down this way in the year 2000? Not a chance. And why couldn’t they have? Technology wasn’t near advanced enough to enable people in the US and around the world to work around these hideous government decrees. And so what it tells me, and I will never excuse the lockdowns, I think they’re a tragic mistake on too many levels to count. But what I think is going to happen is notice what technology did. It enabled a lot of the world, not all of it a lot of the world to work around government decrees. And that’s a beautiful statement about where capitalism is taking us. It will increasingly be the case that we can work around politicians, and because of that, add even more to future growth, add exponentially more if politicians can’t control what we do for the future is even brighter than perhaps you.

Stephan Livera – 00:50:22:

And I think, yeah, that’s really great to think about. And I’m curious as well your thoughts around, let’s say, the narrative that exists, right? Because rewind the clock to early 2020, a lot of people were panicking, and it was seen like, oh, this is what the world must do. Of course, those principled libertarians were saying, no, this is wrong. We should not be locked down. This is a bad idea. It’s both ethically wrong and in practice, a bad idea as well. Even if we excused the ethical component of this, I’m curious, your view on will the record be corrected in the future? Will that view be seen as correct? Or do you believe that sometimes propaganda wars can be fought and it can be seen like that? It was socalled necessary?

John Tamny – 00:51:03:

Well, I’ve got to do this. This was the book I wrote about it when politicians panicked. But that’s why it’s one of the major reasons I wrote the book. In fact, you can find it on YouTube. I gave a speech to the Mises Institute seminar in Colorado Springs saying that we’ve got to win this argument. That what a tragedy would be if history books say that a virus shut down the global economy. No. In fact, panicky politicians did. The virus had been spreading for months, and people were adjusting in the US. The red states, you know, the mouthbreather states full of people who don’t believe in science and all that, precisely because they weren’t locking down right away, joining the hysteria. The people within those states were buying masks for good or bad. They were getting hand sanitizer. All the things they’re doing it on their own. Markets work. The people are the market. And so there was real fear out there of a virus. The virus is real. I’m not denying that it’s real. What I will deny to my graves is that you need to wreck people’s lives. You need to destroy the economy to fight the spread of a virus. In fact, free people are most important when a virus is spreading because they teach you how to avoid getting it or how to get it and get your immunity. They also teach you when you’re free, you learn how to open your business. You learn how to operate best practices with a virus spread. It’s also got to be remembered that economic growth itself is the biggest enemy that death and disease have ever known. Because economic growth produces the resources for scientists and doctors to come up with ways to turn today’s killers into tomorrow’s afterthoughts. Let’s never forget that in the 19th century, pneumonia was the biggest killer in the US. Alongside tuberculosis. Now it isn’t. Why is it? Why are they not? Because of economic growth. Rich people directed their wealth towards scientists and doctors and they came up with cures for that which used to kill us. And so we must win this argument A because freedom is a virtue on its own, but B because what a tragedy if the result of this is that pathogens, which are a part of life and always have been, are going to lead to the shutdown, the taking of our freedom every time. We cannot let that happen. The truth is on our side. And the one other thing I’ll add, I hate to be long winded, but I worry I have been, is that I keep telling I told Tom Woods at Mises, because I’ve done a lot of interviews, book at Mises. I said, if we’re going to make this a statistical argument well, and only kill people in nursing homes, which is for the most part true, obviously there are exceptions. We’re going to win the argument, but lose the longterm debate. The only longterm debate is the freedom is its own virtue. Anything else implies that politicians have the right to take our freedom if something really threatens us. In fact, they don’t. And the more threatening something is, the more reason there’s no reason to take away freedom. Because if something could kill you, do you need to be forced to take precautions? I know I don’t. And so we must make this argument about freedom and we must make it over and over again because we can’t let this happen again. It was a tragedy in the US, but it was really awful what it meant for the rest of the world, the hundreds of millions rushing towards starvation around the world as rich countries took a break from reality. This can never happen again.

Stephan Livera – 00:54:21:

Well said. I think that is an important message, this idea of freedom being its own virtue. And definitely, I think with our disagreements about fractional reserve banking to the side, I think we definitely are on the same page about the hysteria and what has to be done about it. And this idea of pushing for freedom and capitalism and genuine bonafide free markets as opposed to the sad version of it that we had to endure for a couple of years. But nevertheless, I think that’s probably a good spot to finish off. So, listeners, make sure you find John online. Let me just find his link. So you can find him on Twitter @johntamny and find him. He’s an editor at realclearmarkets.com. And he’s also over @FreedomWorks, so I’ll put all the links in the show notes. And John, thank you for joining me.

John Tamny – 00:55:06:

Hey, Stephan, thank you so much for having me on. Great show. I really appreciate the opportunity.

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