48. The oportunity cost of fiat

In this seminar, we apply the economic way of thinking to figure out the opportunity cost of a century of fiat money. How would the world look like if it had hard money over the past century? What would be the impacts on capital accumulation, international trade, poverty alleviation?

Podcast Transcript

Peter Young: The latest policy announcement in the UK is that we’re going to have a track and trace program come in, that’s going to cost 35 billion pounds. So about 50 billion US dollars. 

[00:03:49] This is after all of the vaccines and stuff. And anyway, I was just reflecting on this figure and this bear in mind, this is just one tiny part of the overall pandemic cost.

[00:04:00] This is just one element of the UK government’s program. Putting aside all of the hundreds of billions in lost GDP and like all of the measurable, non economic costs. And just to put that into perspective, right? The other day I was watching the Lord of the rings films with my family, and there’s an especial extended edition of these films.

[00:04:21] Right. And it goes into all of the like amazing things that had to go on to make this film. There’s a huge orchestra. They had to get someone in to write this original score. And they have people  employed full-time for months in this orchestra. And then they had  top of the range, people, literally the best people in the world who are  musicians, actors, special effects people.

[00:04:42]It was just this colossal operation. And you watch all these documentaries and you just get a sense of  these films are like really great artworks. They’re some of the best films ever made. And you watched the documentaries about how they were made and you just get the sense of how much resource went into them.

[00:05:00] And in the final credits, it just goes on for minutes and minutes and minutes. People like all of these people that were employed in this project,  there’s  a team and it’s like the collapse of this tower. And it’s like a team of 20 people, and this is 10 seconds long. So anyway, afterwards, I was  looking up as  how much did these films cost to make in total and these films in the early nineties, they cost $281 million to make.

[00:05:30] So kind of reflecting on this things that you’ve said Saif about  under the gold standard art was a lot better when we had these great artworks. Then in a Fiat system, you can have lots of  things  that suffer that are like material, but also like lots of the artistic projects will suffer as well.

[00:05:48] I was just thinking that even if you adjust for inflation, just the cost of this single track to track and trace program, which is basically pointless, you could make the whole,  Lord of the rings set of films a hundred times over with that budget. And it’s stuff like that that makes me think: this is just such a colossal tragedy in terms of wasted human potential, like wasted human genius.

[00:06:17]That resource that’s going into that specific project could be spent on other areas of healthcare, it could be spent on education. It could be spent on great artwork. It could be spent on great films, like the Lord of the rings  and just sort of seeing something like, okay, there’s this huge operation.

[00:06:34] This is how much it costs. And this single little bit of government program’s worth a hundred times that it just sometimes helpful to put these abstract numbers into perspective and just think about the colossal amount of resource that is being squandered on this entire pandemic. So I just wanted to share that reflection.  

[00:06:54] Saifedean Ammous: Yes, Peter. But I mean, won’t you think about all the politicians children that are going to have a lot of money, because of all of the contracts, if their parents are going to sign, why don’t you think about that? Why are you so selfish?

[00:07:08] Not only do you want to kill grandma’s but you also don’t want the children of politicians to have money. Why?

[00:07:18] Do you want rich people to keep their tax money? That’s what it is, right? 

[00:07:23] Peter Young: Yeah. Yeah. No, no. That’s, that’s pretty much the knockdown case. I actually, um, biting Labour 

[00:07:31] Daniel Prince: Camera needs to feed his kids. That’s exactly. Uh, you know, yeah. 

[00:07:35] Peter Young: He needs a full-time orchestra paid for three years worth of labor is to run his mansion or whatever the equivalent.

[00:07:45] Saifedean Ammous: Yeah, the amount of corruption that’s going to come out of this , the amount of it’s already come out. Most of it. Uh, well, not most of it, a lot of us come out and a lot is gonna come. Um, and I think it’s, it’s amazing when you think about it as just a massive misallocation of capital from all kinds of productive avenues of business, where people used to work and produce and make things that other people wanted and enjoyed, and  you shut down all of that stuff, and then you move all that capital and workers and office space.

[00:08:17] And well, nobody has offices anymore, but still,  laptops and zoom and subscriptions. You transferred all of that capital to just all this health theater stuff, which is completely ridiculous. It’s built on the principle of hysteria. You’re always looking for something that scares more because the more scared people are, the more contracts you can get .

[00:08:37] So there’s just such a strong incentive to continue to keep pushing the hysteria as well as to continue to profit from it. This is ultimately how I see this thing has developed. It was a golden opportunity for a lot of people to pounce on it. And then they all started reinforcing each other’s narratives and drowning out any kind of other opposites.

[00:08:58] And now it’s gone way beyond what anybody had expected. Like, I don’t think they really imagined the economic destruction that’s going to come out of this. I think it’s going to be epic over the next few years. I’m not sure what’s going on.

[00:09:09] It’s going to be sad, so much waste and destruction so much capital lost.

[00:09:15]Peter Young: Yeah, I was reflecting on this the other day. And I remember a video that I watched. It came out a few years ago and it’s about social media in general. It’s a video called “Look Up” and it went viral on YouTube. And it’s about how people miss lots of their life when they’re looking at their phone rather than engaging with the real world around.

[00:09:37] And the basic premise of the video is it’s this guy. And it shows you what happens when he has this serendipitous encounter with this woman on the street. So he’s asking for directions , and he bumps into this woman and they end up  meeting for a coffee and then dating and then they get married and then it goes through like the whole story of their life, how they spend their whole life together and their retirement and stuff.

[00:10:00] And then, the end of the video, it shows you the counterfactual, which is like he was looking at his phone rather than asking for directions on the street. And it just shows  the woman walking straight past them at the end. And in the first situation, because he asked for directions, he had this entire different wife, this entire like great experience that profoundly changed him.

[00:10:23] And in the second situation, because he was looking at his phone, he missed out on this great profound life-changing thing. And the reason I thought of that is because I think that’s such a good analogy for economics and economic loss in that it’s such a tragedy, it’s a real visceral tragedy when you have waste on such a scale  as we’re experiencing at the moment.

[00:10:50] But the problem is you can’t see what would have happened. You can’t see  all the amazing dreams that were wouldn’t have been realized by people. Or  all the amazing experiences people would have had all the  children would have. I remember when I was at school, you know, I had just such amazing experiences.

[00:11:06] It was like, cause I was so young and everything seemed exciting. Those were really great times. And I can just imagine had I been born a few years later, I would have missed out on that, but no one would ever have known about it.  We’ve deprived, so many people have so much valuable, profound experience in their life.

[00:11:29]We’ll never see what the counterfactual option is. That’s part of the problem that we have as economists. Sometimes arguments come across as really abstract and we sometimes need to  engage with how it’s not just about numbers.

[00:11:43] It’s not just about oh, we think that people should allocate capital to this thing or this thing it’s actually about the kind of Henry Hazzlit the idea of the broken window. Like you never see the things that could have been the case.  I’ll share the video link in the chat just, it’s not related to economics, but I think it’s a really nice analogy for what you miss when you make bad decisions and maybe something to share with people that are trying to understand  how important it is to not deprive people of opportunities by undertaking wasteful interventions in the economy.

[00:12:16] Saifedean Ammous: Yeah, absolutely. I tend to think about that, about the 20th century in general, when I think about the 20th century to try and imagine what would have happened if we had just stayed on the gold standard after 1914, or if something like Bitcoin was invented right then and we just continued in a similar vein to what was going on in the previous era.

[00:12:40] It sounds insane, but I really think, just think about that opportunity cost. So just how much waste has been created by central banking. As long as you’re a statist, as long as you believe in the Keynesian garbage might think that some of that money was wasted.

[00:12:55] You might think that central banks do some harm and do some good. But if you think about it from the Austrian perspective, if you’ve taken the time to think of the implications of capital allocation by a central bank. Well then essentially it’s all waste or more or less. And you can measure the waste in terms of the depreciation in the currency.

[00:13:16] So think of what would have happened if we’d stayed on gold. Let’s not say that we had something with Bitcoins the number go up technology. If we just stuck to golds moderate manual 1%, 2% per year and number go up analog technology. It doesn’t sound too impressive for Bitcoiners today, but it’s enormous when you think about it adding up over a century.

[00:13:39] And then when you think about just all of that money being wasted to go to finance corrupt governments all over the world, spending it on all kinds of insane, stupid nonsense all these wasteful bureaucracies of people getting paid to produce nothing. All the Wars that they can finance endlessly, military spending and all bureaucracies and all private sector companies that survived because of government support.

[00:14:06] And then of course  just downright hyperinflationary graft. In many cases, essentially, an entire country’s  life savings, just get wiped out. Think about all of these, and then think about what would have happened in terms of the counterfactual. You just think of all of that money having accumulated, I think about all the costs of world war one and world war II, or maybe not all of it, you know, without fiat we’d still have had Wars probably, but, they’d have been a fraction of the cost.

[00:14:36] So think about all the destruction of the Wars have financed. Think about all the capital that was wasted. Think about all the lives, all the people, and then take all of that and then run a counterfactual where the world continues from 1914, with 1914 technology and free trade and hard money.

[00:14:56] And just imagine what the world would have looked like in 2020 in that case.  Just imagine how things would have been different if all of that capital had been invested by its owners rather than allocated by central planners. If all of these insane communist regimes that destroyed their currencies many, many times over, if all of these regimes had been forced , or had not existed, or instead of them you’d have somebody who was at least nominally, fiscally, or monetarily responsible, if you had all that it’s astounding to think about what the implications would be like.

[00:15:31]probably no exaggeration to say that the technology that we have today might have been here in the eighties, maybe seventies, maybe even sixties, maybe fifties. I can’t imagine there still being the extreme poverty that we see in the world today.

[00:15:48] Like I think if you got rid of Fiat money and replace it with hard money, if anybody in the world could have a hard money, I don’t see how you could live in a world in which anybody can’t afford a basic infrastructure, basic 20th century infrastructure of electricity, running cold and hot water and sanitation. I think these things would be affordable for anybody. I think it doesn’t matter how low your productivity is.  If you are in the country where your productivity is very low  the lowest paid people in the world. If you look at the, some of the lowest wages world,  it’s not like it’s just destiny from God that these people have low productivity.

[00:16:36] You look at their economy and you’ll see that they can’t trade. They have high import tariffs. And so if you want it to build any kind of capital there, it’s really expensive to import the capital. And so, because you don’t import capital people continue to have low productivity, entrepreneurs continue to fail and nobody can accumulate capital.

[00:16:55] So our trade restrictions are one major issue. Inflation is another major issue. And if you remove those two things, things would be very different. If you didn’t have these crazy governments inflating the money supply of all of these poor countries and citizens in all of these countries could just access a hard money and could just straight to the rest of the world.

[00:17:16]There’s no way that their wages would be as low as they are. And there’s no way that they wouldn’t have been able to save up after a century of the invention of all of these new technologies. There’s no way that they wouldn’t be able to save up for these things because these things have enormous increases on productivity.

[00:17:34] They massively improve their quality of life. The increase in trade barriers in 20th century was to a large degree caused by Fiat because when you had gold as money, most people didn’t really worry too much about the balance of trade between the countries.

[00:17:51]If you bought things from another country, then you got stuff and you gave them gold and they gave away stuff and they got gold. And so who wins from that? Obviously both because they wouldn’t have transacted with it. They wouldn’t have done it. And it wouldn’t cause any kind of systematic danger for your country or your neighborhood that you’re buying things from abroad.

[00:18:18] But, when the money itself different than all countries and both countries have inflationary currencies where the value of the currency is oscillating, the distortions in the value of the currency are going to constantly distort the ability of people to carry out trade.

[00:18:35] And so you’re going to end up with all of these massive problems for governments, because when you’re destroying your currency, everybody’s trying to get rid of your currency. They want to replace it with other foreign currency. So they start buying out of the currency and they start dumping your currency and they start buying things from abroad.

[00:18:53] They don’t want to keep holding onto your currency. So they start importing things from abroad because they’d rather have hard assets. And so the importing  makes your central bank run out of foreign reserves. And so how do you stop your bleeding of foreign reserves?

[00:19:12] You impose the import tariffs or you restrict imports. So when you do that, the idea is in the mind of the horrific Fiat economists of the 20th century, the central bank is losing money because our people are buying things from abroad. How do we stop that? Aha. Let’s stop people from buying things from abroad.

[00:19:33] Well, that will fix it. Well, no, because the reason that you were losing the foreign reserves is not because  people just buying things from abroad. People can only buy as much as money as they have. The reason that you’re running out of foreign reserves is that you print a lot of your currency and the value of a currency is declining and people expect the value to decline further.

[00:19:55] And so they’re trying to get rid of it as much as they can. And the value of the currency is declining and your foreign reserves are what you use to settle your trades with international partners. And so everybody in your country has an incentive to redeem their Fiat tokens, from your central bank. They have an incentive to go and redeem it from the central bank for foreign reserves.

[00:20:19] That’s why you run out of foreign reserves. It’s the same reason that the countries would, or governments  or central banks would run out of gold under a gold standard. It’s not because of anything anybody else does it’s because the central bank issued too many claims on its gold. So, trade restrictions of the 20th century started with world war one  and they were massively exacerbated in the 1930s because of the economic depression and the currency crisis that was happening then.

[00:20:47] And it continued to face all these problems.  And it continued to get worse up until really the seventies when  a lot of countries to learn the lesson and they just couldn’t continue with it, but it’s still pretty bad on that. There, there’s still a lot of custom duties all over the world and a lot of tariffs and it’s just, um, it’s, it’s insane.

[00:21:10] What an enormous wasted it is. You know, you’re taxing people for importing the goods that they need to survive or the goods that they need to produce capital.  The notion of putting a tax on capital is just absolutely incredible. It’s  so destructive. It’s like pouring sand into your engine.

[00:21:30]You want people to have as much capital as they can possibly get and putting a tax on it is just not going to help. It’s going to do the exact opposite. It’s really amazing. hope . To live long enough to be able to see what a Bitcoin world looks because it’s really going to be very, very different.

[00:21:49] It’s going to be a lot of things that people take for granted as just a normal part of our planet and our world. A lot of those things are going to just disappear. And in my opinion, I could be wrong. Of course I have been wrong before and it can happen. But,  I think there’s a lot that Bitcoin fixes.

[00:22:11]Peter Young: On that point, Saif I came across an interesting graph the other day about how you were saying just now that the amount of global trade fell during the 1930s. And I found a graph that shows the percentage of exports as a percentage of global GDP. And if you look at it, it shows that during the 19th century, despite the fact that they really didn’t have very advanced technology at all, you were like relying on boats, going around the world.

[00:22:41] Very slow speeds. The level of international trade as a percentage of GDP was still something like 15%, all the way through to the like 1900. And then it kind of goes up towards the 1930s, as you say it, and then it just like rapidly falls. And it doesn’t come up again to the levels that you saw in about 1920, until, as you’re saying, like the late seventies, which is pretty incredible given how much logistical progress, technological progress, there’s been.

[00:23:12]The reason I was looking at this, I was doing a bit of writing on why global inflation has been so low since the 1990s. And basically my argument for it is that it’s all to do a globalization because there’s been such benefits from free trade internationally that basically all of the bad monetary policies have been offset by China entering the global market and East Asia trading with the rest of the world.

[00:23:37]So there’s, there’s been like a huge jump in international trade as percentage of GDP in the last 30 years. But going back before that, like when you had 1970s stagflation, there was still  pretty low levels of international trade going on as a percent of global GDP. So basically when the U S was printing all of this money, It had to  live with the consequences of that decision.

[00:23:59] Whereas what’s happened afterwards is they haven’t really changed the policies very much. They’ve just benefited from this massive supply side, boom from China liberalizing entering the WTO in 2001.  It’s quite interesting graph. I’ll just share it in the chat. It supports very much the narrative that you were just giving about how Fiat’s economics impacted on refreshing of international trade beyond what you would expect. You’d expect it to balloon as technology became more advanced, but it actually fell quite a lot. So I’ll share it. 

[00:24:32] Saifedean Ammous: Absolutely it.  In the late 19th century the boats that they were using were much smaller than what we have today.

[00:24:40]you look at modern shipping containers, it’s a marvel of engineering and capitalism. It’s one of those things that I write about in The Principles of Economics textbook, because it’s amazing the degree of advancement and just how big the boats have become. And how advanced they are.

[00:25:00] And also the amazing specialization, the amazing standardization of the shipping container. The fact that the shipping containers now are standard size all over the world and they’re easy to put into the large ships and they’re dropped on top of each other.

[00:25:16] They fit perfectly. The ships are designed to hold them perfectly, and then they’re immediately just transferred onto a truck. And then the truck moves with them and takes them once they hit land the truck continues the journey. The degree of specialization that this allows us is incredible.

[00:25:32] And the fact that while this technology was being developed during the 20th century, the level of trade around the world was declining, and the percentage of GDP that was attributed to trade was declining is really an excellent illustration of this opportunity costs of Fiat that we were discussing. Think about it from the perspective of third world countries,  poor countries in the 20th century,  these countries where, you look at the world in 1900, the closer you were to Britain and the Northwest Europe where the industrial revolution was starting, the closer you were to there, as well as the US the more modern capital, more engines you had.

[00:26:13] And so you had steam engines and then, internal combustion engine engines, and these things completely transformed life. These things gave us enormous amounts of power to dedicate to the things that we do. And that was just a great boon for life everywhere. And so you can see the changes in life expectancy and in standards of living , infant mortality and all kinds of measures of wellbeing.

[00:26:41]They witnessed a dramatic shift around that period when these technologies were being popularized and becoming more and more popular, and you see that it happens as these technologies spread. By the early 20th century, it was really  most of Europe and the U S and what have to do the advanced countries.

[00:27:02] Those were the places that already gotten these engines. And these technologies, the rest of the world was just beginning to get them, but in small quantities, and obviously, you can imagine how much benefit it would be to put an engine on a boat and move it somewhere that doesn’t have an engine and then have the only engine in town.

[00:27:21] I mean, just imagine how profitable that is. Be the only person in a town that is able to run a pump with an engine. It’s just enormously increasing of the productivity of people and that’s what was happening and what was spreading. People were making more machines, trading them all over the world, buying them and importing them all over the world.

[00:27:40] And then 1914 it happens. And when 1914 happens, all of that begins to slow down. And basically the way that I like to think of it is that if your country hadn’t imported industrial capital before 1914, then you were stuck in the 20th century Fiat paradigm where your central bank is managing your economy, restricting your ability to save, restricting your ability to accumulate capital and restricting your ability to import and export because of all of the restrictions that they’re doing, because they’re mismanaging the currency.

[00:28:13] And as a result of all of that countries didn’t really have a chance to industrialize and accumulate capital properly. And the ones that did relied heavily on trade. It was a massive setback for the majority of the countries of the world. It’s a huge, huge, huge cost. If you think about just how much more progress and productivity these places could have had, if they could just import technology freely from the West and how much, obviously better off people in the West would have been as well of course, by trading with people in other countries. It all came to a grinding halt in 1914, Hayek draws this distinction between the countries that had hard money and had advanced capitalism, essentially  had a gold standard and they had an advanced banking system and they were integrated into global markets and integrated into the gold standard globally.

[00:29:03] And were importing and exporting. These were the maybe 30, 40 countries or so  in the early 20th century. And then after that,  if your country hadn’t built a gold standard central bank, well, then you never basically went on a hard money standard.

[00:29:22] And then you had all the 1930s and all the inflation went on there. And then you had the 1940s and the war and the world was shut down. And then in the fifties and sixties, you went on a dollar standard where you had the IMF and the world bank. Always ready to lend people money whenever they go bankrupt.

[00:29:42] So you never had governments with a strict, strong budget, a constraint that forces them to behave properly. And as a result, these countries, if you hadn’t had the gold standard before 1914, you had a lot of trouble in 20th century because you had never accumulated and started with the process of capital accumulation on a gold standard in a capitalist system and an international trade system.

[00:30:09] It was a huge drain. I think.

[00:30:12]Peter Young: Yeah, you can see it, it starts to fall. It keeps going up and it starts to fall in 1914. It’s exactly around. I think the general point where there is that  you would expect to just to keep going up, because if transport’s improving, distance becomes less important and you would expect that just to grow as a percentage of overall GDP, but it’s quite incredible really that it didn’t actually go beyond the levels it was in 1914,  until I think it’s the late seventies it looks like. Yeah. That’s the point where you start to see the beginning of globalization. You got the opening up of China in 1979, and then you get  the fall of the Soviet union in 1990, and then you get  various trade agreements.

[00:30:52] There was an important trading agreement in 1987. And then the  Doha round in 2001. I think one sense in which the world has got more libertarian and capitalist is international trade. It definitely has in the last 30 years. Whereas actually the thing that’s confusing is that western governments have become… 

[00:31:13]My thesis on it is that basically after the second world war Western governments became more and more socialist until about the 1970s. So if you look at the actual percentage of government spending as a proportion of total GDP, goes up rapidly from after the second, but falls obviously after the second world war, because there’s the military spending.

[00:31:33] And then it goes up again and again, like over the next 20, 25 years. And it basically stays there from the 1970s and moves around a bit, but basically stays in the same area like around 40%, 35% in the US 40% in the UK, 45% in Scandinavia, 50% in France, maybe like around those kinds of figures stays there from the seventies till today.

[00:31:56] So there’s not actually a lot that’s changing domestically in terms of  the actual state’s role in the economy. But what is changing is that these countries in the West are the advanced economies, but they’re suddenly able to access huge amounts of cheap goods from the rest of the world, from Eastern Europe, from China, from other countries.

[00:32:17] And my theory on this is that that is actually what has helped to maintain this weird economic era that we’ve lived, where there’s been all this government spending and inflation has been a lot lower than it was in the 1970s, for example. My working theory is that there have been like two forces in the world, but the domestic level within Western countries, we’ve basically maintained a high level of socialism since the 1970s, but we have actually liberalized in terms of international trade.

[00:32:48]That’s only got so much mileage in it because if you’ve got a world in which there’s  the relatively capitalist West, and then suddenly  all of these other countries come in and provide the huge economic boost, all the former Soviet States and China, then you’re going to get  a boost as they develop.

[00:33:08] And as they send you cheap stuff and as there’s that disparity in living standards, but that’s now kind of coming to an end for a number of reasons.  Because  those countries are now getting pretty developed and they’re not going to do the sort of cheap work we’ve been used to them doing.

[00:33:24] And also their demographics are changing quite rapidly. In China their working age population is now declining. It’s been growing for the last 30 years and it’s now starting to decline and their number of elderly is going up. So there are lots of reasons to think that there might be a reckoning, we might actually have to come back down to economic reality and deal with the consequences of domestic policy in our own in Western nations anyway.

[00:33:49]That’s my take on it in terms of the way that this international trade story has influenced the domestic policy and in Western advanced economies. 

[00:33:57]Saifedean Ammous: broadly agree with you.  It’s a very good indicator of how things work, but, where I might disagree with you, when you say that, now that these poor countries are getting richer, so we might not be gaining, we might not be witnessing these gains from trade in the future.

[00:34:12] I think ultimately the gains from trade are not driven by the fact that your trading partner is poor. They’re driven by the fact that specialization, division of labor leads to an increase in productivity. It’s a common statist and Keynesian misconception to think of it as, if a rich country is training with a poor country than the rich country , has taken advantage of the poor country.

[00:34:31] But I don’t think that is the case. I think the trade is mutually beneficial. The story of Jeff Booth and we’ve had Jeff Booth here in the seminar before I think makes a very compelling point that it is really ultimately technological development that has been driving price deflation over the past few decades.

[00:34:47] I think he’s got a very good, strong case there, because if you think about it, the extent of deflation happening in,  electronic and informational goods is startling. You know, things are just constantly getting cheaper and that’s allowing people an enormous increase in their productivity.

[00:35:03]People think that an iPhone is worth $600 or a thousand dollars. So you pay it and that’s $600 to GDP, but they don’t even think about it as a tool in terms of how much it increases your productivity. So over the past 15 years that we’ve had an iPhone and had smartphones all of us have increased our productivity massively.

[00:35:23] I have a lot  stuff that I don’t need to own and buy and use and have in my house, because as it is now, all in, the phone, you no longer need to buy all kinds of different things that are now essentially apps on your phone, a lot of physical things that you had to buy are now apps.

[00:35:42] So that’s an increase in productivity and the phone might sound like it’s expensive, but if you think about what the alternatives are in terms of what the phone allows you to do…  try and do what a smartphone allows you to do with analog alternatives. And you’ll see that you’ll end up paying a lot more money, and you’ll only be able to get a small fraction of the things that you can get done with an iPhone, vastly inferior user experience. 

[00:36:11]So if you think about just how much the iPhone has increased living standards,  that would have shown up as price deflation  and yet the central banks that are out there fighting it.  There’s always that trap of people thinking that what they’re going through is unique historically.

[00:36:25] And I am wary of that, but I think Jeff Booth does have a very strong point that it is different now than what it usually was because, we saw what it was like in terms of productivity increases under a gold standard. When you have the gold standard,  prices went down by maybe one or 2% per year or so, but that was industrialization.

[00:36:46] That was engines. Engines were very expensive and very hard to move around and returns on industrial technology are enormous compared to agricultural technology, but I think that returns on information technology are even larger. The printing press improved people’s lives massively, but, the smartphone was an even bigger jump and much more quickly,  in the first 15 years of the printing press, I doubt 10,000 people had read books that came out of printing press.

[00:37:15] It takes a lot of time to build printing presses, back then, and to make, a lot of copies out of them. But, within the first 15 years of the smartphone, billions of people have access to mountains of information and done an enormous amount of good things for themselves  using this technology.

[00:37:33] So I think Jeff does have a point in that probably deflation right now would, if we had a hard money, it would run probably significantly higher than one or 2%, maybe four, maybe 5% per year or 6% per year.  Of course, should be wary of using these kinds of aggregate measures that there’s no such thing as 5% inflation or 5% deflation, even 5% price inflation, because it’s not like all prices are going to change  uniformly.

[00:38:00] So, if we find a way to make TVs much cheaper than TVs will be 20% cheaper next year, but we probably won’t find a way of making gold much cheaper. So it’s likely  we’re not going to get a 20% decline in the price of gold every year. Like we would with TV and similarly goods that have a high component of labor in them will likely not decline in price as much because you can’t just make as much extra labor. 

[00:38:32]So you would expect the prices of the goods that you have, some of them will drop much faster than the others and it’ll be hard to decide what the average is, but I think, it’s fair to say that without monetary inflation we’d have a dropping price level if you want it to think of it in terms of price levels, but things would just be constantly getting cheaper and people would be saving much more.

[00:38:53] But yeah, you’re absolutely correct in that. I think that the globalization is a big part of it as well. In terms of the trade. I think it’s really helped with this massive increase in global economic growth because this is what would have happened.

[00:39:07] Like if you think about it  from the late seventies until today, this period of massive increase in growth also witnessed massive increases in global productivity because of the spread of trade, because China was importing enormous amounts of capital and China was investing in accumulating enormous amounts of capital.

[00:39:25] That’s what has increased Chinese productivity so much over the last 40 years. And so trade is an enormously important part of that. The danger here is not so much that maybe the Chinese are going to get rich and then we’re not going to have trade. The danger is more monetary insanity leads to Inflation on the one hand and, or on the other hand leads to rising trade barriers.

[00:39:49] That’s really the danger here. If you think about it. So if you start getting more trade barriers and I got to say I’m pleasantly surprised, considering  what I had expected when the whole Corona crisis situation started around last year, I would have expected in my mind, all these shutdowns were going to cause much bigger disruptions to world trade. 

[00:40:13] So far it hasn’t been as disastrous as I had imagined it would be, but  they still have time rise up my expectations or fall to my expectations. It still might get worse, but I think, we haven’t seen that much protectionism. And in fact, one slightly, maybe positive, depending on how you look at it.

[00:40:34] One way of looking at it is that the Corona situation does not seem to  have led the world down the path of more government bitter fights and diplomatic crises and governments going crazy at each other. It hasn’t happened yet. It hasn’t been like the great depression.

[00:40:51] The 1930s is when governments started unloading on each other and closing off borders for one another. Strangely enough, it hasn’t happened. We’re so used to things being bad until things getting worse, that we can’t imagine how things could be worse, but I can here’s one way things could actually be worse.

[00:41:11] Imagine if there was a trade war on top of all of it. Imagine if not only people were restricted from movement, but if good started getting restricted from movement, I think we’d witness high inflation. Definitely. We’d witness enormous social disturbances with rising costs and also disappearing job opportunities.

[00:41:29] A lot of people work in import sectors all over the world, and that would be massively devastating if you started getting more and more closures. So hopefully that doesn’t come to pass. Hopefully. Let’s keep our fingers crossed, this stays the case. 

[00:41:42]Peter Young: Yeah. Just to clarify my point on the difference between wealth levels.

[00:41:47] I totally agree with what you’re saying in that trade is a hundred percent mutually beneficial. My job used to be working with British companies selling into China. And the thing that’s kind of made me nervous about that whole trend is that the reason why I made the point about China gain getting stronger and getting better at technology and stuff.

[00:42:10] It’s because the classic dynamic between the UK and China is the UK sells like high-level expertise and technology to China. And then China sells us  loads of cheap manufactured goods in exchange. And the thing that I’m worried about is that basically the UK and other Western countries have been able to become complacent in the last few decades, because they’ve actually had this like big headstart over China, so they can sell them all this great technology and stuff, and then they can get this cheap stuff in return.

[00:42:46] But the problem we’ve got is that because countries like the UK and France have said, we’re perfectly happy to just shut down our entire economy and pay everyone to stay at home in their front rooms, while China is surging away and building everything at a breakneck pace. 

[00:43:04]You look at the things we actually sell to China, most of the UK is exports or stuff like cars. They’re just going to make those in China. One advantage that the Europe and America have over China is that they can make large aircraft, but China is now pushing away making its own larger aircraft. And that will be another thing that goes like one of the UK is big exports to China is the Rolls Royce engines, which have got this special piece of  IP in them where they’re like the best engines, but that’s not going to last forever.

[00:43:32] So if you look at the big items that are actually allowing the UK to export to China, we already run the huge trade deficit with China, because China’s coming in and China’s own policies devalue its currency. So trying to sort of giving stuff away the rest of the world in exchange for our fiat money.

[00:43:49] And it’s also doing stuff like buying property in the UK and other countries. I totally agree that free trade is mutually beneficial, but I just kind of worry that as the gap closes, there’s less and less stuff that these countries that have been sending us loads of cheap stuff are going to actually want to buy him return. 

[00:44:08]That’s what makes me say the thing about the trends coming to an end, because I know it’s really hard to sell stuff to China if you’re a UK company, because now their technology is so good that need to have something really specific.

[00:44:22]That’s kind of where my concern is coming from rather than a sort of in principle idea about how trade has been official with one party over another. I think it’s definitely beneficial for both. 

[00:44:34] Saifedean Ammous: Yeah, it is. Of course it’s important to remember the current global trade system, because it is run on Fiat, it has a massive distortionary effect. And I think the one that you mentioned is very important, which is that China is effectively subsidizing the rest of the world to buy their stuff. When China buys US dollar treasuries and when China buys dollars and backs its currency with them and keeps buying these more and more and more of them in order to keep the price of its Yuan down, effectively what they’re doing is they’re printing Yuans, using them to buy dollars in order to keep the Yuan cheap so that they can make their own industries attractive to the rest of the world.   They’re effectively  subsidyzing the rest of the world.  They’re effectively impoverishing the people of China in order to allow the rest of the world to buy things at a cheaper cost.

[00:45:26] If they didn’t do this, if they’d let their currency float, their currency would appreciate significantly. And yes, that would reduce exports. But  it would also massively increase the living standard of Chinese people because now Chinese people’s currencies value goes up. So they’ll start buying more of the Chinese products and foreigners will start buying less because Chinese stuff becomes more and more expensive.

[00:45:52]So there is this aspect of it. Then of course there is the deeper problem and a deeper issue of in geopolitics is all of those treasuries that China is holding and what happens to them?  This isn’t a very sustainable arrangement because, are they going to just keep buying more and more treasuries forever?

[00:46:09]As this goes on, the reverse story in the U S and in the West is a story of… I go back and forth on this. I can see both points  on the issue of deindustrialization. Some people make the claim that the industrializations leaving the U S and Europe for the same reason that agriculture used to be a big part of their GDP. And now it’s a small part and industrialization is going to become a smaller part. And ultimately what really matters is the knowledge economy and its information, the real economy is information economy.

[00:46:43] And if you think about it when you’re buying an iPhone, an iPhone is one of the most important products that you buy today, the majority of the cost of the iPhone is not going to cover the manufacturing that is happening in China. It is going to cover the intellectual work that happened in San Francisco,  or wherever their headquarters is in California.

[00:47:06]If you’ve got graphic designers and software engineers and people designing the Apple, designing those products, do you really need to have the assembly plant? I’m not saying this in the sense of we don’t need the assembly plant workers.

[00:47:21] I’m saying if it happens in a free market that a country ends up having a majority of its population moved toward these higher productivity jobs, like designing the iPhone rather than producing the iPhone. I’m not sure that is a bad thing. So I could possibly think that maybe this is just a fact of increasing productivity, that there’s more productivity.

[00:47:47] There are higher productivity jobs in this information economy, the design and the engineering rather than the manufacturing. And that’s where the richest countries of the world are heading because that’s where their workers are heading. Your workers have the best education, the highest levels of human capital.

[00:48:04] And they’re naturally going to gravitate towards the highest paying jobs, which are the highest productivity jobs. And that will end up deindustrializing your economy. I’m not entirely sold on this. I can see the point to some extent, but I think the issue is in this world, in which we live today, I don’t think this is really the case because, It isn’t the free market that’s driving that de-industrialization, it is as natural as the Chinese central bank accumulating treasuries.

[00:48:32]This is the flip side of it. The reason that the U S doesn’t manufacturers, because China is accumulating treasuries. And so things that are made in China are much cheaper for Americans than things that are made in the U S.

[00:48:43] And so all manufacturing is moving to China. Well, not all, but more and more manufacturing is moving to China. So I’m not so sure that this would be the case if we had a hard money. If we did have a hard money, I would expect me to see some of this. We’d see a lot of the U S and European economies head toward knowledge jobs, but I would imagine you’d still have a lot more manufacturing jobs.

[00:49:07]I don’t quite buy the strategic interest story that you need those jobs at home because otherwise you’re dependent on foreigners. I don’t think this is applicable for the vast majority of industries, it could maybe be applicable for defense industries and some important things here and there where you don’t want to rely on foreigners, perhaps.

[00:49:27] But I think for the vast majority of goods in an economy, the best way to make yourself robust to, circumstances and problems is to have as much global trade as possible going on so that you have a lot of channels for trading with the rest of the world and are able to, if anything goes bad, you have many reasons, places where you can get things from.

[00:49:50]It’s not so much that we need industry because we need to have our steel produced domestically. I’m not so sure that’s all that important. don’t think the problem here is that industrial jobs are necessarily better. I just think the issue is that a lot of industrial jobs would still exist on a free market, but they don’t exist on a free market anymore.

[00:50:10] Not because of the market choosing that they weren’t worth it, but because of this fiat imbalance that is taking place because the US dollar is the global reserve currency. And so the US government can just print a lot of that money and hand it out and provide cheap credit to Americans and allow Americans to essentially live off the printed money.

[00:50:32]This is the driver of the de-industrialization, the fact that Americans can access credit so cheaply and the fact that they have a relatively generous welfare state that allows them to escape the need to work being so pressing. You combine those things and the inflation and the fact that the Chinese are devaluing their currency and the fact that the US government is constantly flooding everybody with credit, you can speculate on real estate, you can speculate on stocks.

[00:51:00] You can speculate. There are a lot of bubbles going on. And a lot of these bubbles, in the US they beat nominal inflation for many people, because you’re at the front of the Cantillon effect, you’re in the driving seat. So you’re able to get the fresh printed money very quickly with a freshly issued credit.

[00:51:23]And then you can flip real estate or flip stocks or  do all kinds of different things and make enough money not to have to work. I think if you cut off the easy money faucet, and you don’t have China subsidizing global trade with its easy money faucet, I don’t see how a lot of Americans don’t end up working blue-collar jobs.

[00:51:46]If you remove those two interventions than the market, I think a lot of Americans would end up having to work real jobs. And I think those jobs would be attractive. You’d have a higher living standard in China. You’d have a higher wage in China.

[00:52:01]In the US  you’d have a lower amount of credit available for people. So credit would be harder to come by,  you’d have a lower amount of financial bubbles. If you want it to work, you’d have to get a job. So I think we’d get a much better balance in that.  Chinese people would consume more, American people would produce more and, both countries economies would probably benefit from, well, not probably, I’d say definitely they’d benefit from a dose of hard money, hard medicine.

[00:52:28]It’s very difficult to think about these counterfactuals because there’s so many moving parts, but all of the long-winded preface in order to go back to your question to say, I think it’s the fiat that’s causing these imbalances of trade. So the fact that the US and the UK might not have a lot to export.

[00:52:44]I see why you would consider that to be the case, but, I don’t think it’s trade that drives that. I think it’s Fiat that drives it. And the question is how much has the move toward the information economy been a product of market reality versus Fiat reality, basically the interventions of Fiat money and then the impacts of Fiat money on the economy.

[00:53:04]Peter Young: Yeah. I agree with what you’re saying about industry. There’s not anything inherently good about blue collar jobs and industry and manufacturing. I guess what I’m saying about China is that I think that China is really going up the value chain and actually doing a lot of high IP stuff, like companies like Huawei,  doing some very impressive stuff.

[00:53:24]Same with DJI drones, they make,  Alibaba, Wechat these are really good software companies. agree with the principles. I just think China  is actually doing very well in that sort of stuff now. The thing  that I’m sort of hesitant about with the technology kind of argument is that technology is obviously a product is like an indogenous thing rather than an exogenous thing.

[00:53:45]It’s kind of, you need to have an explanation for why technology accelerated and it could be  just an accident that we stumbled across computers. But I do think there’s something in the fact that the reason why the US was able to go up the value chain is because they were able to take lots of bedsheet manufacturing, do it in China.

[00:54:06] And so they were able to make the iPhones way cheaper than they would otherwise be able to, if they manufacture them in the U S and therefore expand their business and therefore innovate faster.  So that would be just something that I’d add on historically why we have had the low inflation, but yeah, I totally agree that there’s massive distortions because of the Fiat market.

[00:54:25] In 2007, eight, I think it was, China’s trade surplus with the rest of the world accounted for 9,5% of global GDP. So every year it was sending 9,5% of global GDP to the world and just getting pieces of paper in return and all those goods were flooding into Western markets. I agree with your analysis completely, that’s not good for the Chinese people. It’s good for exporters. If you’re just sending your real stuff overseas and only getting paid for in return, then that’s not good as a long-term arrangement. So yeah, I agree that it’s fiat that’s causing   the strange imbalances that we observed.

[00:55:04] Saifedean Ammous: Yeah, I agree. And I think this is probably going to be the major story of the next five years. Well, who knows? I used to think that that would be the case 10 years ago, and it’s still not the major issue, but, you’re hearing all of these noises about the great reset and a new Bretton Woods.

[00:55:21]Every couple of years you hear people talking about a new Bretton Woods there’s always somebody who’s out there trying to get a new Bretton Woods going, obviously because new Bretton Woods means somebody new and gets to print some money.  But I think things are kind of coming to a head in this situation.

[00:55:38]China’s GDP has increased massively. And their productivity is going up. it’s a matter of time, I think, before they demand and move toward a more financial system that allows them a larger degree of global seigniorage. They probably don’t want to continue to live in this situation where they need to be buying more and more treasuries in order to be trading.

[00:56:02]And I’m not sure how happy they are with this arrangement. From a US perspective, you could think, well, this is great for them because they’re having to develop the industrial capacity. They’re encouraging their exports. And in the long run, this is just going to lead to them, having a much bigger, much better industrial capacity than we do.

[00:56:24]We’ll be left holding pieces of paper and they’ll have all the world’s industry. While Americans,  are still doing degrees in human rights and all this essentially Fiat education in the education system. You could think of it that way, but also a massive cost for the Chinese people.

[00:56:44]But again it’s a great boon  for rich people in China. If you’re an industrialist in China, this works great for you because you’re exporting more. There is that aspect of it that the dollar system is beneficial to elites in those countries.

[00:56:57]Perhaps they have a strategy of using this system for a while and then shifting towards something else, because I think they can’t be enjoying the reality of just continuing to have to keep their currency down in order to export to the US and the rest of the world. So I suspect with the introduction of the whole central bank digital currency thing.

[00:57:20] And with the Yuan now the Chinese central banks essentially introduced their digital currency and it’s already operating in some places. It’s not very big yet, and it’s still restricted so that people can only buy small amount of it. But I can see how this can serve as a springboard toward a new international reserve currency the Chinese CBDCs (Central Bank Digital Currencies)..

[00:57:52]One thing that can happen is that they start spreading outside of China and then if they started spreading outside of China than anybody in the world can get a Chinese  CBDC account on their iPhone. And then you can trade with people in China and with other people who  use CBDC’s internationally.

[00:58:10] And not have to go through the entire US banking system. So you can see that this could be one thing that they’re trying to do. And I suspect that is an aspect of that. So you can imagine countries or institutions and businesses that trade extensively with China might benefit from downloading this app and buying some Yuan and then running their own Chinese CBDC node.

[00:58:35]You can see how that happens and you can see how it can take the share from the US dollar. So there is that kind of emergent, decentralized way in which they could undermine the dollar with the central bank digital currencies. But there’s also the centralized top-down IMF World Bank way of undermining the dollar which is probably what we keep hearing about when people talk about the great reset and so on.

[00:58:58]And I  know, we’ve discussed this in an earlier seminar. There’s potential for increasing the voting share of China in the IMF. And then by extension increasing the amount of the Chinese currency in the basket behind the SDRs.

[00:59:14]And then perhaps rebalancing global trade around a central currency issued by the IMF or some supernational entity, perhaps they’ll make some new global central bank or something like that. And that entity would issue a CBDC central central bank digital currency. It’s like a currency that’s only accessible for central banks, but it’s a digital currency so that all the world’s central banks can use that currency to back their own domestic CBDC’s. 

[00:59:52] I think this is probably the way that fiat is going to go next. I think this is what the Fiat protocol devs are going to choose in their next hard fork. I can see this being the scenario that comes along,  international central banks get together, the major central banks of the world get together. And basically they create this new currency that is backed by their own currencies and is redeemable in them.

[01:00:21] And so they have to maintain their own exchange rate against it. The most likely it’s going to be  the dollar, the Euro and the Yuan. The question of what percentage backing each one of them has out of the 100% of the currency  is a pretty big question because that essentially reflects how much seigniorage you have.

[01:00:41] I think we could get something like this, the Euro, the US dollar and the Yuan as a global central banker. The three central banks put a bunch of their money, a bunch of their digital currencies in this new international central bank or in the IMF. And then the IMF issues, central bank digital currency backed by that. Their currency will be backed by those three nations currencies and all the other central banks would use that currency to back their own currency and then trade it with one another.

[01:01:16] And then, national central banks can issue their own central bank digital coin backed by that. And so the Brazilian digital real are you guys doing Real now? Or where are you at the currecy?  Is a Real that what you call them, call it Max? 

[01:01:31] Max: Yes.

[01:01:32] Saifedean Ammous: Real, yeah. Yeah. 

[01:01:33] I was there in the days of the novel Cruzeiro they’d had the Cruzado and the Novo Cruzado and then they moved to the Cruzeiro and Novo Cruzeiro. Right? Is that the sequence? 

[01:01:43] Max: That was the worst decade of the country. You were very, very, very lucky. Yeah.

[01:01:49] The whole hyperinflation thing. I mean the worst part of history. Either.

[01:01:57]Saifedean Ammous:  I was there. I remember the supermarkets and  the people going crazy or the hyperinflation and all the new currencies being introduced all the time. But yeah, so you guys are cool with a new currency, so shouldn’t be too much of a problem to have your shift.

[01:02:11] You know, you’ve done Cruzado novel. Cruzado Cruzeiro Novo Cruzado well, get prepared now for the all new singing and dancing and all digital novel Hayao. And this new Real will be backed by that currency. And so the Brazilian central bank would have say $1 trillion worth of that currency. And then it can issue its own digital currency it can get its own seigniorage  by issuing a larger number of its own domestic currencies and continuously inflating that to finance the government and then your local, your Novo or Real or whatever it’s going to be called is only workable in Brazil.

[01:02:52] So you can’t send it to an international phone.  I guess there has to be some kind of restriction on your ability to send central bank digital currency to other countries, because if there isn’t, then basically national central banks are done. If national central banks can’t restrict your ability to trade their currency with other countries, then there’s no one way that they can maintain any premium over the price of those things. So it’ll be interesting whether they can get away with it, whether it works or not. Obviously, as somebody who thinks about economics, when I think about it, I just think this can’t work, but then again, Fiat money also can’t work, and look at it turning 50 in a couple of months.

[01:03:35]Max: This is already very much in play at the early stages. We don’t have a new currency. We don’t have digital Real but there is a new thing they introduced which is  alongside the usual transfer from my bank to your bank within the country, now the central bank introduced a new technology, which is controlled by them by the central bank.

[01:04:06] And there is a new kind of electronic transfer with a different name. At the surface, it’s still looks like I’m sending money to you. It’s between my bank and your bank, but in reality, the central bank is doing the whole thing is collecting data. The central bank knows everything you buy.

[01:04:30] Everything so far, it’s optional. You can send money using that technology. If you want so far, it’s optional. There are some advantages it’s much faster. You can do this on weekends and so on no fees, but we know what this is all about, right? So the next step is going to be, well, this is no longer optional and they can control pretty much everything.

[01:05:01] So only among Brazilian banks. We can do that. I think that’s the next step. And it is going to turn out, being something along the lines you sketched. 

[01:05:15] Saifedean Ammous: Yeah, I think we’re going to be heading in that direction. Everything I was saying so far, speculation is basically the shape of the base layer of the Fiat 2.0, so Fiat 1.0 is, well, yeah, well, I guess 1971 is not really 1.0, 1.0  was 1914. We had about 15 broken launches since then. Maybe 1971 was a Fiat 3.0 2021. or 2022 or whatever. It’s whenever it’s going to come, it’s going to be, let’s say call it fiat 4.0. 

[01:05:51] Yeah, I think the base layer is the question.  How is Fiat going to evolve and what is this going to mean? The way that it seems to be going and the way you’re describing it is that basically everybody just gets their wallet at their central bank and your central bank has its wallet at the world bank.

[01:06:08] That’s a huge thing. I mean, that’s basically the Gosbank. This is basically the communist central bank of the Soviet union. That’s the model. Everybody had a bank account with the same bank and the implications are devastating for the banking sector, I think.

[01:06:25] And devastating for people who don’t think that that 1978 Moscow is their idea of fun. Devastating for people who think that economic calculation is important. And for people who understand economics in general, and for people to understand the failures of central planning, but it’s good for one thing,

[01:06:49] everything is good for it’s good for.

[01:06:56] Bitcoin.

[01:07:01] I mean, if something can be better than Michael Saylor as an advertisement for Bitcoin, it’s going to be what central banks are going to do. If you thought on Michael Saylor did a great job. Wait until central banks basically bankrupt their banking sectors and give you a digital wallet at your local central bank with full surveillance and easy money that’s constantly being inflated. 

[01:07:24] It’s kind of really fascinating to see how this has gone to go.   And you know what, circling back to the issue of deflation that you discussed, Peter here’s an interesting counterpoint to what I was saying, perhaps.  Maybe what makes this sustainable is that governments today have a lot more leeway for seigniorage than they did before because of the deflation, because of what Jeff Booth says, because inflation has gone up so much because prices are dropping so much. Real prices would be dropping in a free market so much,  central banks learned their discipline in the 1980s. In the 1970s, they messed up in the 1980s, they got their act together and started being a lot more careful about how they manage inflation and the triumph of the monetarists and the friedmanites was on kind of saying that you need to have two, 3% inflation.

[01:08:19] At that period 40 years ago, let’s assume that deflation was at 2% a year or 3% period per year. Technology was improving by two, 3% per year. And central banks were causing inflation by two, 3% per year. That’s about four to 6% per year of GDP in seigniorage for a government, which is not nothing.

[01:08:46]That’s a lot just from seigniorage from inflation. And of course, if you massage the statistics a little bit more than it’s not going to be a two, 3% inflation might be a little bit more, so you could get yourself a nice five, six, seven, 8% and live off of them as a government. And this is what they’ve done for the past few decades.

[01:09:06] But maybe now let’s say  if deflation is at 6%, let’s say if economic growth is such that every year things would be getting  6% cheaper, then central banks have a lot more leeway and they’ve got a lot more leeway in essentially expropriating the citizens because now, they were reared on you get your four to 6% and then you get two to 3% price inflation.

[01:09:31] Now, if they just do four to 6%, they’re going to get negative 2% inflation or zero inflation. So that means in order to get two to 3%, they need to go six to eight so they can get more inflation. So there’s more room for seigniorage right now. There’s more room for extracting seigniorage from their economies because of the increases in productivity.

[01:09:55]Maybe they manage to pull this off that your central bank currency depreciates every year by two, 3%, and that allows your government to make a good eight, nine, 10% of GDP in seigniorage. And that allows them to finance all of the stupid bullshit that they want to finance and you keep using their shitcoin.

[01:10:19]What do you guys think?

[01:10:20]Peter Young: What do you think that central banks became more disciplined in the 1980s?

[01:10:32] Saifedean Ammous: Because the 1970s happened.  

[01:10:34] Peter Young: They didn’t substantially increase interest rates. In the first couple of years of the eighties, you had the Volcker hikes, but then afterwards interest rates are pretty similar in the 1980s in the US at least to what they were in the 1970s.

[01:10:49] And then they continue to fall. So why is it you say that central banks actually exercise more discipline? Why don’t you attribute it to other factors like the globalization?

[01:11:02] Saifedean Ammous: Well, because I guess that’s the gold bug in me speaking throughout the 1970s, gold went up from $35 to $800. And then in the 1980s, it went down from about $800  by 1990. I think it was around 200 or 300, something like that. So it was still massively up over the price initially in 1970.

[01:11:26] But it was no longer a threat.  Once Volcker raised rates, he managed to stem the danger of a US dollar collapse by preventing the rise in the price of gold, because the way things were going with the continuous rise in the price of gold… well, I mean, actually now that I think about it, maybe ultimately the rise in the price of gold was not going to go anywhere or do anything because you still can’t settle gold internationally without governments and governments weren’t going to let you set up an alternative bank account. So it doesn’t matter how much you pump gold.  You can’t pump it much because you can’t actually use it as money when you want to trade internationally and more and more of the world is focused around international trade these days.

[01:12:13] So if that’s the thing that maintained the dollar status then yeah, maybe inflation didn’t, um, Then maybe it wasn’t inflated, but inflation went down and I don’t think so. No, I think inflation, I mean, even price inflation by any reasonable measure was much higher in the 1970s, all over the world.

[01:12:32]Peter Young:  I’m not denying that. The bit I was just questioning and I maybe I’m wrong. Maybe it’s an incomplete understanding on my part. Inflation was clearly a lot higher than the seventies and the eighties, but it came down in the eighties after the initial couple of years and people often say, look, inflation came down, central banks became more disciplined and that’s shown by the fact that inflation came down.

[01:12:56] If you look at actual central bank policies in the 1970s and the 1980s I just shared a graph, showing the federal funds rate in the 1970s and 1980s, it went up in like the first two years of the 1980s. So the Volcker rate, right. But then beyond that, it came down again. And it was pretty similar and the level was it wasn’t the 1970s.

[01:13:16] It wasn’t a lot higher, the federal funds rate. And then the federal funds rate continue to fall afterwards. So it went to even lower levels then it was at the seventies. And so my question I was researching this and I was trying to work out why it was there was such a difference between the 1970s and 1980s.

[01:13:35] And I couldn’t find a decent explanation in terms of what the central banks actually did. It seems that their only thing they did, because they weren’t doing the big QE programs, they were just changing the base rate. But you can see the base rate in terms of the federal funds graph. And it doesn’t seem that different in the eighties, which is why I’ve started to look at these supply side explanations for why inflation came down rather than the actual central bank policy, because it doesn’t seem to me that either on the government side or the central bank side, there was actually that much change in policy.

[01:14:08] Saifedean Ammous: Okay.  Before we get to the supply side I want to ask you about these, but I think I’ll say that the actual rate itself is not all that important. Or let’s say the magnitude of the rate is not that important. I think the direction is what’s more important. If you’re dropping it down that’s likely causing more inflation.

[01:14:29] If you’re raising it, then it’s causing more inflation. But what matters here is the direction, rather than the magnitude. In other words, 6% could be inflationary if you had 3%, then you went and decided to raise it to six. It could be deflationary. If you had 9%, then you dropped it to six. I think it’s not so much the magnitude as much as it is the direction, but I’ll also say that it’s also not so much the federal funds rate itself that controls money creation, the money supply.

[01:15:02] It’s largely about lending criteria about just how much lending the banks are doing. That’s what ultimately matters. And so, you’d want to look at what’s happening with credit creation and comparing that. However, I think you also have another good point, which is that I remember looking at money supply metrics,M2 metrics for the US during that period.

[01:15:26] Yeah. Yeah. You want to do, do you have them? 

[01:15:30] Peter Young: Oh, I know what you’re going to say, which is that they don’t slow down. There’s no, there’s no actual slowing down with them, which is the other thing on the tap, because I was like expecting to be honest with my initial assumptions, to see that you get to the eighties and you see the slowing down of the monetary expansion.

[01:15:47] And that would be like, all right, this is why inflation came down. I probably have a graph I can get up.  But that’s what I was anticipating you were going to say that, M2 doesn’t really slow down. It does slow down in the early nineties slightly, but then it keeps going up again.

[01:16:04] Saifedean Ammous: Yeah. I remember looking into this and I remember we don’t see the uptick. We don’t see the crash in the 1980s that would be advertised.

[01:16:16]I don’t have it on right now, but I remember looking at it, I think, are it doesn’t slow down. So that’s an interesting question then. Why is it that inflation slowed down in the 1980s?

[01:16:32] Peter Young: I think it’s simple. I think it’s supply side factors as in, as in the globalization happening. Globalization and technology that we talked about earlier. I just think that when you look at the level of international trade picking up in that graph that I shared earlier, going from like 12 or something, and then just shooting upwards, like 25% where it is today. And then you look at the technological innovations that that enabled and how those were kind of harder to regulate, like all of like IT and stuff by that is sort of harder to capture wealth from when you’ve got industry, you can, you know, where it is, you can tax it, you can regulate it.

[01:17:14] And a lot of the nature of IT is that it’s unregulated. My working hypothesis and I’m not claiming to be a world expert in this, but my working hypothesis is that you need to look at something external, other than the central bank policy, in order to explain why there was such a dramatic shift.

[01:17:32] And it seems to me that entering of China into the global economy, the fall of the Berlin wall and the collapse of communism around the world. And then all of the international trade that that allowed and the international division of labor seemed to be. And the other thing actually, demographics, because if you look at what happened in China, China had this double boost from liberalizing really dramatically in the 1980s, and at the same time, it had this demographic dividend  because of their mad policies in the 1950s, they had the great leap forward.

[01:18:10] They killed about 30 million people died from the leap forward. And then they had the one child policy and restriction of births. They basically ended up having this very high elderly population and then their dependency ratio just fell really dramatically. It halved between 1980 and 90 and 2010.

[01:18:30] And so I think that explains why China’s growth was so dramatic that they not only had this really profound shift in policy. They also had this demographic dividend and they, at the same time, they were also this didn’t kick into it big time until like the mid two thousands. But they did have the very large deficits as well, trade deficits.

[01:18:51] So to me, these sorts of factors seem to be the things that are actually really significant and would push down. You think about it on a common sense level. Living in Britain, when I was growing up, everything was made in China, all the things that lay around the house, they’re like all the electronics they’re all made in China.

[01:19:11] And. Before they were made in Britain or made in Europe, and that’s just going to have such a deep, a deflationary effect on price. And so to me, I can look at the U S numbers. I’ve scratched my head over the U S monetary figures in the U S interest rate things and try to say, well, why is it then the inflation rates came down so much.

[01:19:35] And to me, like, this is just a stronger explanation because, because even what you were saying about like the rate of change, being important from 1981, going onwards, the rate of change is always down. It’s like a big downward slope in terms of the federal fund rate. And so unless I’ve missed something which I may have done, I can’t see what it is.

[01:19:58] That’s actually changed dramatically in Western central bank policy that would have resulted in that deflation. So. I tend to go for the fact that it include that it’s something to do with the factors that I listed. 

[01:20:16] Saifedean Ammous: Yeah, I think, yeah, that’s a good point. There’s a huge narrative about Reagan, conservatives, and Thatcher introducing free market reforms and fiscal discipline, monetary discipline.

[01:20:28] And I’m not entirely sure that that holds up and Rothbard was pretty savage toward the Reagan and Thatcher regimes. Ultimately if you look at it from a libertarian perspective, who’s not interested  in the tribal battles of politics where everything, the other side does is bad and everything our side does is good… From that perspective,  what happened with the Republicans is so they cut the spending or the Thatcherites, they cut spending, and they cut red tape around a few emotionally charged and I have a few industries that were important and for their opponents, essentially. So the constituents were more like lead to be in their opponents base, labor unions in the UK or something like that. But, there was no decline in spending. There was no decline in debt and they still gave a ton of money at the spending, but it was other causes. It was mainly military and other kinds of recipients. They made a big deal out of cutting welfare for poor people but gave a lot of welfare for corporations.

[01:21:30]It’s stupid fiat politics where money being given to my side is good for the national interest, but money being given to the other side is evil corruption, and we must stop it. But yeah, if you look at the numbers, there’s not much of a difference. Maybe what was happening was that there was the threat of a collapse.

[01:21:47] And this was just the scenario that comes to my mind. Now, maybe in the seventies, inflation was getting overstated by the fact that people were dumping the dollars because they were buying a lot of gold because they thought gold could upend the dollar, but then the gold market crashed. And then when gold crashed and then Gold’s price declined.

[01:22:08]People stopped buying gold and stopped putting the money in gold and they started holding more cash. When gold went up 30 X in 10 years, and still didn’t monetize then maybe the failure of it to monetize is what made it basically become irrelevant.

[01:22:27] And then people started moving back into the dollar. And without that panic of the 1970s, without people in the seventies, and maybe it was just normalization, you had a lot of inflation in the seventies and people had never experienced that. And then in the 1980s, when they stopped buying gold and stopped buying silver, silver was another big one at that time.

[01:22:50] And silver was even higher back then than it is today.  When the Hunt brothers tried to monetize it, but maybe, once silver and gold were no longer realistic alternatives and people who tried to monetize them ended up not making are very well. Maybe that then just killed the incentive for others to dump the dollar and, I guess domestically and internationally, more and more governments accumulated more and more dollars. And that is what prevented the inflation from showing up too much in prices. And then people get normalized to it. So, you know, after a decade of experiencing six, 10% per year, you find four or 5% in the 1980s and it starts to look,  reasonable.

[01:23:34] And then people start thinking, Oh, well this inflation thing is not so bad. 

[01:23:39]Peter Young:  I’ve actually got the figures on the Reagan and factor thing you mentioned. Cause I, I wrote a little piece on this, Because I also heard like the basic narrative that everyone says is that Thatcher came in and she made these drastic cuts and be like they did with the conservative government from 2010 to 2015, they said, Oh, we’re going through this period of austerity, but government spending didn’t actually decrease at all.

[01:24:03]Under Thatcher, we did have a slight decrease in government spending, but it was from 50% of GDP to 45% of GDP by the time she left. So it’s still it was a really high level. And under Reagan it was actually an increase in federal spending, or total us government spending federal and state from 37 to 39.

[01:24:25] So I was looking at this and I was like, how does this fit? The narrative that these like conservative leaders came along and they introduced fiscal discipline. It just doesn’t bear out in any of the data. That’s really what got me on to thinking there must be something else going on here to explain why we have seen such low inflation in the last few decades.

[01:24:47] Saifedean Ammous: So Thatcher was in power, I think from 1980, until 91. Am I correct? 

[01:24:53] Peter Young: 79 til nine feet. 71 until 1970, 79 to 19. Yeah. 

[01:25:00] Saifedean Ammous: That’s 11 years. So looking here when she took over, it was at 49.7 and it did rise for the first couple of years when she was in office, but then she dropped it and then she left in 1990.

[01:25:16] At which point it was 44.7. So yeah, she knocked a nice 5% off of it or 10% of it. 

[01:25:27] Peter Young: Yeah. But, but it’s not really the kind of level of. That’s going back to what it was just like in the sixties or something. It’s not really the sort of thing that would like give you inflation was high in this, in, in the sixties, like reasonably reasonably high, like three or 4% if I recall correctly.

[01:25:45] But yeah, it’s like, there was quite profound shift from the nineties, like down to two to 3% and then our state. And it’s like, why did that happen? Looking at spending and central bank policy doesn’t seem to offer much of an explanation to me. 

[01:26:00] Saifedean Ammous: Yeah. I’m with you on that. Yeah. I think we should look into this and maybe have another seminar about it.

[01:26:05] And I’m looking to, people have written on this, maybe host some of them for this to have a discussion about it sounds quite interesting. 

[01:26:14] Atendee: Quick question. Have you looked at how the CPI is calculated? Because I know it’s changed over time. So right now, basically all of the high inflationary items are left out fuel housing.

[01:26:26] I just wonder whether the figures are adjusted for these hedonic adjustments, which have been taking place recently. 

[01:26:34]Peter Young:  In the UK, they have changed the figures slightly that they used to have something called the retail price index, which had more of a focus on things like housing.

[01:26:42] They now use consumer price index and retail price index is slightly higher. Personally, I do think  that is clear that inflation has come down by no matter how you, you can say that the houses have gone up and stuff like that’s true. But I think it is true that the cost of living, uh, has not risen as much in, in like monetary terms in general , as it did during the seventies.

[01:27:06] And maybe before that so that’s my personal view. I do think that requires an explanation. I think the figures are flawed, but it’s like the extent to which they are flawed. I don’t think it’s just a statistical illusion that the seventies was really inflationary and now it’s not, but I do think that was a lot.

[01:27:25] It was a lot higher than. 

[01:27:28] Saifedean Ammous: Yeah, I agree. Obviously the inflation is nowhere near as tame as Fiat enthusiasts would like us to believe. But when I say that, I mean price inflation specifically. I mean the seventies were wild. You know, the price of a barrel of oil went from $2 to, I think it was $30 by 1980 or something like that.

[01:27:49] And it’s hovered around an average of around 40 for the past couple of decades, 40, 50, 60. So, the amount of change between 1970 and 1980 is much larger than everything that has happened from 80 until 20 almost. I think you’re right, Peter, that there is some supply side, but I don’t think that explains the whole story because it’s not like the world changed so drastically and  it’s not like we moved from Fiat to Bitcoin in 1980 and there wasn’t that big of a transformation. We didn’t invent the engine in that year.

[01:28:25] We didn’t invent the car or anything so drastic. I think there is some of it. There’s definitely something to that. And I think the growth and trade with China’s is definitely true, but I think might just simply to be something about what was happening in the 1970s and just collapse in confidence in the currency that led a lot of people to dump the currency very quickly.

[01:28:49] And that accelerated the process of devaluation and price rises and necessitated a faster money printing by the central banks. I’m not so sure, but I’m guessing here. I don’t know.

[01:29:01]All right, well this has been very interesting. Thank you guys for joining and I will see you on Thursday. Take care.

[01:29:10]Cheers. Take care, guys. Bye.