In today’s seminar Saifedean talks to regular attendees about whether increasing a nation’s exports should be seen as a desirable policy goal, and why countries that devalue their currencies don’t necessarily export more. The discussion focusses on the post-war experience of Germany and Switzerland and how these countries grew prosperous through maintenance of a strong currency.
Books referenced during the discussion include:
Gold Wars: The Battle Against Sound Money as Seen From a Swiss Perspective by Ferdinand Lips: https://amzn.to/33Akfve
For a discussion of Ludwig Erhard’s market reforms see: The Commanding Heights: The Battle for the World Economy by Daniel Yergin and Joseph Stanislaw: https://amzn.to/3f7Rlbl
[00:03:39] Saifedean Ammous: Hello, and welcome to another Bitcoin standard podcast seminar! In today's discussion we're going to go over a question that I received from one of the members at saifedean.com. As a reminder, you can join the seminar by becoming a member of saifedean.com, which will allow you access to four online courses that I've taught on Bitcoin and Austrian economics, as well as the receipt of weekly chapters from my two forthcoming books, the Fiat standard and Principles of economics.
So I received a question from Zaher. The question is about the justification of the money. Debasement by arguing that a country that doesn't debase its currency, or that maintains a strong currency will hurt its exports and capital investments. Since other countries are debasing their currencies to make cheaper exports and get more capital investments.
So, this is a common argument that you hear in fiat economics. Fiat economists generally maintain strong faith in the legitimacy of this argument. In their mind, a good way to boost economic growth in your [00:04:39] country is to devalue your currency because when your currency is devalued, that makes everything, all of your stuff, it makes it cheaper.
And so people have to buy more. Well, people will buy more of your stuff. So you will start exporting more. And if exports go up, you know, that's very good in the world of Keynesians. Why? Anybody know why export's are good?
Peter Young: GDP number, go up.
Saifedean Ammous: Exactly, the GDP number go up. Remember, Keynesian economics is just one big giant obsession with getting GDP up and exports is positive on the calculation for GDP, whereas imports are negative.
And so if you devalue your currency, your exports become cheaper. And your imports become more expensive, so your people will start importing less stuff and they will start exporting more stuff. And so exports go up, imports go down, GDP as a result will go up. And of course the Keynesian reasoning here runs in that, it's the level of aggregate spending in the economy that determines the state of [00:05:39] the economy and determines the state of employment.
And so, if you can get exports up and imports down, that means you're getting aggregate spending in your economy up because you're spending less money abroad and foreigners are spending more money in your country. So the aggregate level of spending in your economy is going up and that means output increases, GDP increases, but also it means employment increases and unemployment declines. And of course the other aspect of it, this is the domestic aspect. But then of course, when you look in terms of foreign trade, you get a similar relationship there, which is that lowering the value of your currency will lead to a decline in your trade deficit.
Or an increase in your trade surplus. So if you're running a trade deficit is likely to decline because you've devalued your currency because now your people can't import things from abroad. Whereas if you're running a trade surplus, you're going to amplify the trade surplus because foreigners are able to buy more things from abroad.
So, this is kind of the argument and it's generally, it's very widely accepted and very widely believed. And [00:06:39] in fact, in many cases throughout the last century, when a country would be facing economic problems and economic crisis, Fiat economists would suggest devalue your currency and that will fix things.
And it kind of seems to work. You'll have a recession and you're having inflation and then you have a currency devaluation and the economy will pick up after the currency devaluation. So there is some element of truth there. But I think from the Austrian perspective, I would disagree entirely. And I think the cause of the boom after devaluation is not so much that the devaluation itself is good.
It's that the devaluation allows us to liquidate a lot of the malinvestments that were taking place when the currency was overvalued. In particular, you had a lot of debts and a lot of obligations. And when you devalue the currency, you effectively give a lot of borrowers a debt Jubilee.
And so, because they don't have to spend as much in real terms on debt repayment now, they are able to spend more and then you get more of economic action and [00:07:39] economic production taking place in the economy. So there is that kind of a debt Jubilee aspect to it that is good in a sense, even from the Austrian perspective.
But of course the answer from the Austrian perspective is not that we should have more devaluations. The answer is you should not have engaged in the inflationary policies in the first place that made the devaluation the answer to your problems. In other words, if you're at a point where devaluation is going to solve some of your problems, then you're already in trouble, you've already done bad things.
And the answer is not to have done the bad things in the first place, not to fix those bad things with devaluation. But, let's get back to the main argument, which is that it boosts exports and therefore it's good for GDP. And therefore it's a good policy. And therefore having a strong currency, having a hard currency is bad for exports.
Well, first of all, before we start thinking about it the first first principles and trying to explain why it's wrong, let's just look at a few examples that clearly fly in the face of this conventional wisdom. Three examples that I like to bring up are from the post-World war II era.
[00:08:39] So after World War II ended three major exporters of the world who continued to produce a lot of goods and export a lot had currencies that continue to appreciate throughout most of the period in the aftermath of World War II, not necessarily initially in the first period, but eventually Germany, Switzerland and Japan are my favorite examples of this. If you look at what's happened to Germany during the post-war World War II boom, and of course, a little bit of another aside here is, I know we've spoken about this on the seminar here before an excellent book worth looking into is a book by Ludwig Erhard on the German economic miracle or reading about what Ludwig Erhard did. Ludwig Erhard was the german minister of the economy or minister of finance or something. And he was placed in charge and in power by the U S after the end of WWII. And he was heavily influenced by the Austrian school. He'd studied Austrian economics. And so he had a good free market ideas, which at that time [00:09:39] after WWII, these ideas didn't really exist in Europe.
Basically the classical liberal tradition and the Austrian school tradition had been eradicated out of Europe because the fascists and the socialists in various different regimes had killed or persecuted or chased away a lot of the liberals. And so they'd left. And if you'd lived through Germany in the 1930s, you weren't likely to have a lot of liberal ideas about economics.
The Nazi system was highly centrally planned system, and it was a socialist system, called itself a socialist system, and it involved government control of the economy. But Erhard had studied under the Austrians and had understood the economic question differently from what most Europeans at that time, and most Americans as well worth remembering, the people in charge of Europe at that period where essentially the state department and the CIA, which was at that time, the office of wartime affairs, I think I may be confusing my alphabet agencies, but in any case, it was a bunch of U S bureaucracies that were also reared on socialist and collectivist economics, particularly from the [00:10:39] FDR period. So Keynesian thinking was dominant at that time. And this guy, I don't know how he got appointed into that job, Ludwig Erhard, but then one day, and of course, after the war, the U S officers who were in charge of administrating those European countries, they were officers that were military officers and they were bureaucrats and they didn't understand economics and all of their administration of Europe consisted of really military style administration of resources.
So in the same way that a military decides how to feed its soldiers, these bureaucrats were thinking in those terms for how to feed the peoples of the European countries. And this perspective, it's a top down perspective. It's the perspective of the government needs to feed the people. And how do we get the government to feed people efficiently?
And the answer that they came up with was we hand out food and we create price controls and we do rationing and we impose all of these strict economic measures to prevent economic output from being hoarded or to prevent prices from rising. It was just [00:11:39] basic box standard, central planning disaster.
And of course, this led to massive problems in Europe. And there were places that had famines and usually these things . Are attributed to the war itself. People think, well, it was just the war that did this, but really it wasn't just the war. It was the post-war central planning of the economy that had a huge role to play in the problems of the post-war European economies.
And then one day, Ludwig Erhard woke up and went to the radio station and unilaterally took the decision of abandoning all price controls and all rationing controls and all wage controls. It was absolutely outstanding how he did it. It's so inspiring because it makes you dream of a day where you could just get on the radio yourself and canceled all of the statists bullshit that's in your own economy. And if only we could do that, if only somebody could manage to get away with doing it, but you know, right now, the statists have learned that lesson and they fortified their socialist mousetraps to be able to catch [00:12:39] any kind of Ludwig Erhard and nip them in the bud.
But at that point there was no German government with any kind of strength and legitimacy. So there wasn't much of a democratic process that he had to go through. There was no king that he had to convince. And the Americans, they had a lot of countries to run, and they had a lot of officers running around trying to run the countries and trying to convince one American officer or a few American officers turns out, worked out easier.
And in fact, he didn't convince them. He did it very Satoshi style. He did it. And then he asked for forgiveness. He didn't ask for permission. The stories mentioned in that documentary film called, The Commanding Heights, which I recommend checking out. In that film they tell the story and the American officers called him and said, you're crazy.
What are you doing? And he said, Oh, it doesn't matter. It's done. It's finished. I've done it. There's no more central planning, no more rationing. No more price controls, no more wage controls. Everybody in Germany can produce whatever they want, sell whatever they want at whatever price they want. And everybody in Germany has [00:13:39] the right to buy whatever they want from whoever they want at whatever price they want.
The only price criteria you need to meet is the one that is agreed to by your customer or by your seller. And that's it. Just with that one radio address, he completely dismantled all forms of central planning and completely unleashed the free market in Germany. And it's astounding because the next day, the factories started running, the supermarket shelves started filling up and the German economic miracle was underway.
And that's why by the 1960s Germany, which lost the war was doing far better than France and England who had won the war. And the reason is that they didn't have Ludwig Erhard. They continued with price and wage controls, and they continued with an enormously interventionists government in their economies, a lot of central planning.
And you can see the outcome, by the 1960s, German cars were being sold all over the world. French and British cars were [00:14:39] not, or at least not as much. And so the German economic miracle was quite successful in launching the German recovery very quickly. And it is ultimately down to the fact that price controls were removed.
And really, you can think about this as being very vivid illustration of how prices work, because when you have price controls, let's say you are a baker and you can make bread. But, if you have price controls, in order to buy all the ingredients for bread and then start up your bakery and offer them for sale, you run the numbers and you realize there's no way that I can pay for all the ingredients and sell at the fixed price that is mentioned by the government and make a profit. So if I wake up tomorrow and I go to my bakery and I spend all day working and I sell all the bread that I make, I'm going to come out of it with a loss.
So what are you going to do? You're going to stay home and you're not going to bake. The same applies for everybody from the Shoemaker to the large car factories. As long as there are price controls, the real alternative to price controls is the price of zero. You just don't bake. You just don't make cars.
You don't make shoes, you [00:15:39] stop producing whatever it is that you want to produce. That you are good at producing and you just get out of business because the business is losing as long as you can't set your price. And so of course, this is bad for you because you're not making money and you don't have income, but it's also bad for your potential customers who are not able to get the food that they need and the goods that they need.
Why? Because they're unavailable on the market. Now, would they like to pay a high price? Probably not. They'd like to pay the lower price, but the lower price, the fixed price is not an option. The reality is either you're going to pay the high price or you're not going to get any bread. And so of course, given that choice, they'd rather pay the high price and not starve if they can.
And then of course, the other thing that happens in the second order effect is that once the bakery is running and the butcher is running and all of these businesses begin to work. Well, they start producing more stuff that increases the quantity of stuff that's available and causes more and more economic production to take place, reducing prices further and further. The best way to reduce prices is to allow economic production to take place. The [00:16:39] best solution for high prices is high prices because high prices will cause large incentive for producers to get out of bed and start making more. And then when they start making more, that inevitably brings the prices down.
So you reward the producers enough to increase the quantity and bring the prices down. So all of this is a little bit of an aside to explain the German economic miracle, but the end result of this was that Germany grew into an exporting superpower by the 1960s and seventies and by the seventies and eighties, the Deutsche Mark was a big threat to the US dollar because the Deutschmark was not depreciating as much as the US dollar because the US dollar could be sold all over the world.
And U S government was enjoying it's magical printing press, particularly after 1971. And so they were financing all these Wars and all these welfare programs. Whereas in Germany, they had a relatively limited state, and they had little intervention in the economy and they had a lot of economic production taking place and they had a lot of foreigners queuing up and offering top foreign currency and domestic currency to buy their foreign goods.
So the role of the [00:17:39] Deutsche Mark began to increase in global markets as people started to use it more and more because they want to hold it because they want to pay for German exports. And so this became a problem for the U S because the Deutsche Mark is appreciating and the dollar is not appreciating.
And somehow, weirdly this is not mentioned by Keynesian economists, who would tell you that you need to devalue your currency in order to have exports. So how was Germany able to get to this place where their cars were being exported all over the world while their currency was appreciating, or at least not depreciating as much as the other fiat currencies?
The same is true for Japan. And the same is true for Switzerland. The Swiss currency continued to increase in value after the world war. It was still pegged to gold, more or less and continued to appreciate. And, you know, clearly the Swiss people were not starving as their currency was appreciating. And still Switzerland is not a major industrial super power, but it does make a lot of watches and chocolates and a lot of advanced goods as [00:18:39] well. And Omega watches and Bally shoes were not destroyed by the Swiss Franc appreciating. Omega has done quite well. All these Swiss brands, Lindt chocolate and so on all of these, they did pretty well during the export boom for Switzerland, even as the currency was appreciating.
So this calls into question the premise that you need to devalue the currency in order to export. It seems like you can still export even if your currency is overvalued. In fact, the correct way to think about this is that the currency becomes overvalued when you are a good exporter. In other words, if your economy is exporting a lot of things than a lot of people worldwide are going to be buying up your national currency and holding up cash balances in your national currency. Foreign banks are going to have to hold German marks and Swiss Francs and Japanese Yens so that they can give them to their customers when those people want to buy these goods.
So it's the other way around. It's the [00:19:39] exports that cause the prices to rise and cause the currency to rise. And so if your goods are good, that means more and more people are buying them. That means more income is going to your country and your country is exporting more goods. Now it's important to remember, it's not like exporting is the be all end, all of economics.
It's not like you win a prize if you export alot. When you export, you get rid of stuff and you get money. When you import you get useful stuff and you lose money. In both cases, you win. Why do we know that the people in your country are benefiting? And we know that for sure, because they willingly engage in this trade.
If people willingly pay money to import things, we know that the things that they import are worth more than the money that they've paid. And vice-a-versa when they import things, same applies, whatever parts of the transaction they're on, if they're doing it willingly, they're very happy with the outcome.
On the other hand. So there's this one counter to taking apart the Keynesian case, let's do it piece by piece. So we have these examples of all these countries that are exporting superpowers and [00:20:39] whose currencies were appreciating. In fact, another example also are all the countries whose currency depreciate, and yet still don't manage to become exporting superpowers.
So one wonders where are all the Venezuelan exports now that Venezuela's currency has been devalued so horrifically? Where are all the Lebanese products that are flooding world markets now that the Lebanese lira is collapsing? You don't see that a lot. In fact, if you look at the history of hyperinflations, you don't see a lot of exports from countries that are hyper inflating.
In fact, you see the exact opposite, you see entire industries shut down and you see people starving and you see all sorts of horrific things happening. So the logical implication would be that if your currency is devaluing very quickly, then you should be exporting a lot. But then this is a reductio ad absurdum argument. We've taken it to the absurd conclusion to try and figure out, well, where does this break down? Where's the wrong reasoning in this? At what point do we stop thinking of it? Why can we formulate an alternative way of thinking about it? So anybody have ideas why this might [00:21:39] not be the case? Why is it that devaluing the currency doesn't actually help?
Peter Young: So in order to create any kind of product, you need input factors as well as output factors. And if you're say a car manufacturer, you're likely to have parts and materials that come from different kinds of markets around the world. So if your currency is devaluing, that means that anything you import from overseas will also be more expensive in addition to giving you some benefit from the fact that your products become cheaper overseas.
So what matters for a business is whether there is a disparity between the input costs and the final sale price. And that's what the profit is. So even though you're sort of getting a subsidy from the rest of the population, because they're taking on some of the costs of inflation. You still need to buy input factors when you're a export and a business.
Saifedean Ammous: Yeah. That's a great way of putting it. I'd say it's not a general answer because you know, some industries don't even need the external inputs, but it's a very good way of illustrating the unseen side [00:22:39] of the equation, which is all right, it's not just that your stuff is getting cheaper and then foreigners are going to be buying more of you, it's also that foreigners stuff is going to get more expensive. And that means you're able to afford less and less of it. So for most countries in the world, particularly today, much more than in the era of world war II and after WWII much more today, the world economy is far more interconnected and there's very little that is taking place in the world economy that is isolated from international trade. At this point, if you're producing something, everything is produced with inputs from all over the world, try and think about your laptop and think about how many little bits and pieces came from how many different countries in order for it to come together. The inputs and the processes to make all the intermediary goods, building the microchips took place in one country and building the screen to place somewhere else. And they all get assembled somewhere. So it's very naive to imagine that you can just dial down the currency. And of course, in typical Keynesian and modern economists way of looking at things is you [00:23:39] just on the one thing that you're messing with and ignore all the other implications.
So we just dialed down the currency and that means that our cars become more attractive for foreigners and our laptops become more attractive for foreigners, and then they buy more laptop and then GDP number goes up and we live happily ever after. It's good for children's fairytales and Keynesian textbooks, but it's not really good for the real world. In real world, the real flip side of the fact that you're devaluing your currency is not just that you're devaluing your exports. You are also devaluing the wealth that your people hold and therefore you're making your people poorer and you're making it harder for them to import more stuff. So effectively, yes, you can get a little bit of a boost of exports but what you're getting that for, the price that you're paying for that obviously nothing is free in economics. There's no free lunch. So anytime some Keynesian gives you an idea about, Oh, well you do this and you get a free lunch look at through your pocket because it's being picked and your exercise, your homework is to figure out how the Keynesian is picking your pocket when saying this.
And so in this [00:24:39] example, what's actually going on is that all of the cash balances that everybody holds in the country are becoming less valuable. So everybody's becoming poorer. And as a result of everybody becoming poor, everything in your country is being put on sale. Everything in your country is being put on sale for foreigners. Devaluing your currency is essentially a subsidy from your country to the rest of the world. It's you telling the rest of the world, if you're the president who devalues your currency, you're telling the rest of the world, Hey, I'm making my people 20% poorer and now you are able to buy their things at a lower price.
And effectively, you're just putting everything on sale. And that means, yes, you're putting export goods on sale, which means that you're making them cheaper for foreigners than you are making them for locals. There are people in your country who could use the car, who would have probably been able to buy that car, but now they can't buy it because it's 20% cheaper for foreigners than it is for them, because they've just taken a 20% haircut thanks to your monetary policy.
And you're also, I think this is an underrated aspect of currency [00:25:39] devaluation, you're also discounting all of your countries if you want fixed fixtures or, all of the stuff that's nailed down in your country, that can't be exported. You're also discounting everything in your country, particularly land. You're putting land at a sale. You're telling everybody in the world, Hey, I've just made everybody in my country poorer. So now's a good time to come and buy up our land. It's a great way to sell your land to foreigners by putting it on sale by devaluing the currency. So, you devalue the currency, there's going to be a lot of people who are going to have to sell their lands to make up for the impact of the devaluation on them financially. And the ability to sell the land is going to decline or the price that you can get for it is likely going to decline because everybody is just taking a 20% haircut.
Or whatever could be 50. So people have less ability to be buying land. And as a result, they're going to have a harder time buying it and harder time competing with foreigners. So effectively what you're doing is that you're putting the country on sale. You're impoverishing people in your country and you're subsidizing foreigners [00:26:39] to come and buy up your country.
Obviously this pleases the Keynesian children, because they look at the GDP equation and they see, Oh, GDP go up, and GDP number go up. All of life is about the GDP going up. But in reality, everybody in your countries poorer a lot of your country's resources have been sold to foreigners and essential imports that your country needs are becoming more and more expensive.
Attendee: Okay. So I have two points. The first one, like when you mentioned that, if you continue to devalue the currency until it is zero, like Venezuela or Lebanon, I think maybe one could argue that debasement of the currency can be somewhere in between. You don't need to debase until it is zero and you don't need to make it appreciate until it is stronger than ever.
I don't have this view myself. I'm just saying maybe someone would argue like this. The second thing is that when we can, we, can we let let's...
Saifedean Ammous: Let's deal with this one and then we'll come to the second one. Yeah, you shouldn't go to hyperinflation, the Keynesians obviously will agree, they tell you hyperinflation is bad, but the onus is on them [00:27:39] to demonstrate why 100% collapse in the value of the currency is bad, but 20% is good. You know, why is it that this thing at 20% is good for the economy, and where is the turning point at which point does it go from being good to bad, is it at 50%, if you devalue the currency 50%, then it's bad? Or is it 40%, 20%? Where in the economic reasoning does it switch from being good to being bad?
And that's, I think the question worth asking. From the Austrian perspective, it's bad at any level, because ultimately what you're doing when you're devaluing the currency is just inflation. One way or the other you're devaluing the currency through inflation. So you're increasing the supply of the money and you're effectively robbing the people who hold money of the purchasing power that they stored in that money. When I held these $1,000, they were one over a million of the total money supply. But then after your devaluation, they are one over a million and a half of the total money supply because we did a 50% devaluation. So I've had my purchasing power robbed from me. So there's no reason to suggest that that [00:28:39] should be a good thing, except if you don't really understand economics and think of it from the Keynesian perspective.
But I think correct answer is this, one point I want to focus on is that you said in your question. You said there are two extremes. You don't want it to go to zero, but also you don't want it to appreciate. Well, the ideal situation would be that your currency does not appreciate when you export.
In fact, the only reason that we had appreciating currencies in the 20th century is because they are crappy Fiat currencies and other currencies were depreciating more. So the reason that the Swiss Franc and the Deutsche Mark were appreciating next to the dollar is because the dollar was depreciating and so people were running away from the dollar to the Swiss Franc and the Deutsche Mark. But in a sound monetary system, the U S and Europe and Germany and Japan, and all of these countries would be on one international money that none of them can control. It's not the dollar, it's not the Fiat system and it's gold or something like Bitcoin.
Or specifically it's gold or Bitcoin, and there is nothing like Bitcoin and gold. It's gold or Bitcoin, and all those countries are running on the same monetary system. So in [00:29:39] that situation, what happens when you export more is that your country ends up with a lot of gold. So there's going to be more physical gold in your country.
There'll be more physical. well, not physical, there'll be more digital Bitcoin held in the private keys, owned by the private keys that are owned by your citizens. But that's it. It's not going to change the value of gold and it's not going to change the value of Bitcoin. And this is perhaps one of the most important ideas about why something like Bitcoin is so important.
We need a complete separation between value of currency and trade flows. This is one of the biggest design flaws of the fiat system. The idea that the value of the currency is affected by how much you buy and sell with the rest of the world. Because this is an unsolvable economic problem, because how much you buy and sell with the rest of the world is also a function of the value of your currency.
So it's an indeterminate, infinite loop calculation. It doesn't really work. How do you determine what is the correct value for the currency? What is the correct value of the Euro against the dollar? There is [00:30:39] no correct value. There is no meaning to the idea that the dollar and the Euro fluctuate, the entire notion of foreign exchange between national currencies is an abomination. It's profoundly illogical and it's very destructive.
It's not extremely economically destructive. It should not be the case that the Deutsche Mark appreciates because Germans are exporting or the dollar depreciates, because Americans are importing too much. The same monetary system would separate the monetary policy from the trade flows and therefore the value of the currency is going to remain constant across the world. One Bitcoin equals to one Bitcoin. In Germany or in the U S or in Japan. And one ounce of gold is one ounce of gold in Germany or in the U S or Japan. And you can trade all of these gold ounces with each other. They're all fungible and liquid. And to the extent, and this is the key thing, under the gold standard, to the extent that there was such a thing as a foreign currency exchange rate, the foreign currency exchange rate was like converting from meters to inches, or from kilograms to pounds. The French Franc was a specific number of gold grams and the [00:31:39] Deutschmark was a specific number of gold grams. And so there was an exchange rate between the two coins, but ultimately the value of the gold in both coins was the same.
And you could take one coin from another country, melt it down and sell it as gold. And it would still be gold. This is I think, a great way of illustrating the value of the gold standard and what we lost with the Fiat standard. And this is why Hoppe calls the Fiat system a system of global partial barter. Countries are effectively bartering with one another or people across borders are bartering with one another, because I can't just pay you money.
If you live across the border from me, I have to perform barter operation, where I first buy your currency, and then I buy your things from you with that currency. So the answer is not, you don't want your currency to appreciate, the answer is; you want your currency to be international and free of influence from the flows of trade.
However, if you are in a system where your currency can appreciate and depreciate, depreciating the currency, isn't going to help your exports, or it will help your exports, but it will come at [00:32:39] a very high cost to your economy, which is the destruction of wealth. And what you see in hyperinflation is just the extreme example of that.
If you take it to 100%, then you're destroying a very large chunk of the wealth in your country. You're destroying 100% of the liquid wealth. Everybody's cash balances go to zero and you're destroying a massive chunk of everybody's wealth. And then if you're doing it with 50%, you're just destroying 50% of everybody's liquid wealth.
So it's half a hyperinflation, which is half as bad, but it doesn't make it good. And similarly, 10% of a hyperinflation is 10% as bad, but it's not good. Yeah. You want to go ahead with your follow-up.
Attendee: I completely understood your point. So in relation to the question, how much they will work with respect to the Swiss Francs or the dollar.
So I had a specific example of the Swiss Franc when I was asking that question. So the Swiss Franc can technically appreciate because they have a better monetary policy, I think, than the European central bank. But they continuously try to maintain a sort of constant value exchange [00:33:39] value, like 1.2, one euro, and they seem to work for them and they seem to only care about the exchange value.
That's was Franc exchange value or the euro or the dollar or Yen and they don't care about other like cheaper currencies So I'm only interested in a bulletproof answer when I, for example, I meet the head of the Swiss national bank. And then I say why are you doing this? And then he says, yes, I am trying to keep a constant exchange rate with the Euro because all of our exports or 80% of our exports are sent to the European.
Saifedean Ammous: Yeah. Well, I think, I don't know whether he believes this or not. He's a central banker, so who knows what he believes? I wouldn't put it past them to believe this idea, but in the case of Switzerland, the reason that Switzerland does this monetary policy is not for its own sake. It does it for the sake of other countries.
And the reason that it does it, it's worth speculating about them. We'll get into them, but it's not like this Swiss people would suffer and starve [00:34:39] if their currency wasn't depreciating. The actual impact of this continuing will be the complete destruction.
So first of all, what is the Swiss central bank doing? They've been doing it since the 1970s effectively by selling some of their gold, or by engaging in inflationary monetary policy in order to keep up with inflationary monetary policy of their neighbors. And then after 2011, in the aftermath of the financial crisis for a couple of years there, a lot of people all over the world were using Switzerland as a safe Haven.
So after 2009, a lot of people in Europe, in the U S they'd look at their monetary policy and they'd look at the Swiss monetary policy and they 'd decide I'd rather have my money in a Swiss bank. So they start sending their money to Swiss banks. That's kind of how it was going in 2011.
And then in 2011, the Swiss central bank announced that they would peg their currency to the Euro, and to the dollar more or less. I can't remember the exact announcement that they made in 2011, but the point is that throughout this period, what they've been doing the last 10 years, Swiss central bank has been printing Swiss Francs like crazy [00:35:39] and buying equities in international financial markets. The Swiss central bank is one of the shareholders, one of the largest shareholders of Apple, it buys stocks in all kinds of different companies, all over the world. They buy the European stocks and American stocks and they buy bonds as well.
And they're just printing their money to prop up foreign financial markets. Why are they doing that? It's devaluing their currency. You could say it's to help their exports. I don't buy it. I think the reason they're doing it is that, if they didn't do it, they wouldn't have a problem with exports because what would happen in that situation, if we had a free market where one central bank was pegged to gold, one central bank was on a gold standard and we had free capital flow, what would happen in my mind is that within one year, basically the entire banking system of all other s and the currencies of all other countries would collapse to zero or until they are pegged to gold as well. In other words, what would happen if you told French and German and Italian people that Switzerland [00:36:39] is on the gold standard, but your government is doing QE and it's engaged in all of this crazy inflation and they're bailing out all these bankrupt banks and bailing out all these bankrupt governments.
And we're just going to keep printing. The central banks are just going to keep bailing out the governments and the banks. And, we are giving you negative interest rates, but Switzerland still has a fixed exchange rate with gold. You can just buy gold in the Swiss central bank, and then you can get yourself a credit card and a debit card that's with Swiss central bank, and then you can make payments anywhere in the world with that credit card.
Well, what's going to happen? All of the money is going to flow out of all of those countries straight to Switzerland. And the only way that those countries can stop that at that point would be to get on the gold standard themselves because eventually the world economy can continue to operate with a Swiss central bank. You could run the entire planets economy with one Swiss central bank based on the gold standard. And then the individual Swiss banks will be conducting international clearance amongst themselves. So, this Swiss bank has its branches in [00:37:39] Germany. And the other one has branches in Brazil. And when a Brazilian importer wants to buy something from Germany, the Swiss bank of the Brazilian importer pays the Swiss bank of the German exporter And it's all settled in Swiss Francs and the goods move around. There's no reason why that can't happen.
We could run an entire global economy based on the Swiss Franc as a reserve and the Swiss Franc doesn't even need to appreciate. Well, it will appreciate a little bit. What happens is that as people start dumping their currencies, moving their money to the Swiss Franc, if the Swiss Franc is backed by gold, all that the Swiss central bank does is buy more gold.
So Swiss central bank buys up more gold and keeps stashing gold in all of these enormous gold safes that they have in Switzerland. And then the money supply in Switzerland continues to rise and the money supply in other countries continues to collapse. This is what would happen. This is why Switzerland doesn't do it.
I don't buy the idea that they're doing it because they're worried about their chocolate exports not being competitive against other people's exports. People will still buy quality goods and they'll pay for them whatever the exchange rate [00:38:39] is as long as they can afford them. And so you could say if they are doing it to protect their exports, it's because they're doing it to protect the banking system and people connected to the banking system all around the world from becoming destitute and not being able to afford a lot of the Swiss products, but the Swiss market itself can handle all of the extra money that comes in. And if you really want to look into this, I highly recommend going over the book Gold Wars. I never tire of recommending this book. I absolutely love it. It's a great, great book. It's been out for a couple of decades now, and it was hugely influential in my way of thinking and hugely influential on me for writing the Bitcoin standard.
You'll see, there is a lot in the Bitcoin standard that is inspired by Ferdinand Lips, the author of Gold Wars. And that book was written by a banker, a Swiss banker who died in, I think, around the year 2000 or so, 2000 to 2010 or something like that. The book was written in the nineties and he lived through the post-war era in [00:39:39] Switzerland.
And this is basically the last person who lived under the gold standard and the last caller who wrote about the gold standard having lived in it. Reading this book feels like it's almost a book from a parallel universe of what would have happened in the 20th century if we'd stayed on a gold standard.
And you realize that the reason Switzerland is Switzerland is because they were on the gold standard in the 20th century. And that the shocking realization is that a lot of the planet could have been Switzerland if it had stayed on a gold standard. And this guy, he understood the importance of gold and he saw the world lose its mind in the World Wars and go crazy because it abandoned the gold standard. And he saw Switzerland remaining as the last bastion of hope in the world. The last place that maintained hard money. And he saw the planet bring all of its money to Switzerland in the post-war period because Switzerland had gold had a safe banking system.
And then he saw this gold standard being taken apart. And he discusses why gold standard was taken apart. And it's very clear that it was not a Swiss decision to [00:40:39] the benefit of the Swiss people. It was international pressure that was brought onto the Swiss people. Quite simply, as I was mentioning earlier, there was just simply no room for a Switzerland on a gold standard in a world that wanted to run on a Fiat standard. Switzerland was the escape valve. Switzerland was the way in which everybody could escape their local government and go put their money in Switzerland. They had bank secrecy and they had a free market in banking and they had a gold standard. So nobody had any reason to keep anything more than their pocket change in their national bank account.
And everybody who had any amount of money, any appreciatable amount of money in that period did everything they could to get themselves a Swiss bank account. The best testament to this of course is all the crazy Keynesian and socialist world leaders who destroyed their countries and raped and pillaged their populations financially by implementing criminal Keynesian ideas in their countries.
And, they themselves, who would as soon as they take any money from their country, as soon as they rob any money, they would send it to a Swiss bank account. All those people needed and wanted [00:41:39] Swiss bank accounts because Swiss bank accounts were gold, it was hard money. It was basically analog Bitcoin.
It was the closest thing the world had to Bitcoin. Switzerland really was analog Bitcoin. And the Swiss banking system was essentially analog Bitcoin. But it had the single point of failure. And that's what led to it falling apart. Ultimately it couldn't withstand the international pressure that was brought on this country to devalue.
It's not like Swiss exports were suffering, there were no demonstrations by Omega and the Bally and Lindt out in the street, they didn't send their workers out to demonstrate at the central bank and demand that the central bank devalue their currency so they can sell more. The pressure came entirely from abroad.
It was the European countries and the US that needed Switzerland off the gold standard so that they can continue with their inflation.
Attendee: In chapter five and six of the Fiat standard, you kind of dissect Fiat from a different angle. Really you describe how it's pretty impressive, how it [00:42:39] evolved and what it accomplished, which I think is a interesting take, because when you look at it that way, that is true. It is pretty amazing how it evolved. I get the impression reading those two chapters that you don't see hyperinflation coming. Am I reading that right?
Saifedean Ammous: I think I'll put it this way. Definitely writing this book has made me reduce the odds that I would attach on hyperinflation happening.
And this is what you're going to see in the latter chapters, which I'm about to get into right now. And the third part of the book. I've just finished the second part of the book. So the first part is the Fiat protocol and how Fiat works. The second part is Fiat life and the effect of Fiat.
And then the third part is on the Fiat killer and the fiat liquidator and that's Bitcoin. And what Bitcoin does to Fiat. And the point that I arrive at is that I think if we're going to be getting hyperinflation, the hyperinflation is going to be independent from Bitcoin.
And I'm leaning more toward the fact that like Zimbabwe in Lebanon and Venezuela, they didn't get their [00:43:39] hyperinflations because Bitcoin was available. They got their hyperinflation, the old traditional way. They earned it by voting for criminal idiots in charge who think that you can solve all of the world's problems by printing money.
And when you vote for criminal idiots like that, you destroy your currency. They just keep printing money excessively. And then until the currency is destroyed. And the more you look at it, you know, there's only been 60 cases of hyperinflation in the 20th century. So in the last 100 years, since the end of world war one, there's been, I think 60, maybe 58, depends on... Steve Hanke has written on this. He does the hyperinflation tables and yeah, it's something in the range of 60 cases of hyperinflation. If you think about it, we've had something like 100, 200 countries during this period and each one of them has been around for a hundred years. So that's something like 10,000 country years.
So 100 countries over 100 years, that's 10,000 years in which hyperinflation could have [00:44:39] happened. And yet we only had it happen in 60 years. That's actually a surprisingly good track record. I'm not saying hyperinflation is fun or easy. It's obviously catastrophic and terrible, but that's not a very bad record.
It's not like all national currencies are constantly hyperinflating at all times. It takes a lot to get national currency to hyperinflate. It's really, it takes really, really, really, really powerful levels of dysfunction and criminality and corruption in order to get a national currency to hyperinflate.
And Lebanon is a good example of this and Zimbabwe and Venezuela. Like you have to have a bunch of crazy, crazy, crazy socialists in charge of a country for quite a while in order to completely destroy the currency. And so I think this is the case with most countries right now. I think this isn't the case with most countries right now, yet in that, for all of their horrible policies that you can point to in most countries, they're still not Zimbabwe level.
There's still not Venezuela level and they're still not Lebanon level in most places. So I can see [00:45:39] why this thing can work. And I think the key factor in why hyperinflation doesn't happen as often. And I mentioned this in the chapter is the fact that Fiat money is credit. Fiat money is debt.
It's not paper. A common misconception is that people think that feed money is just paper. Fiat money is papers in as much as Bitcoin is Open Dimes. Some Bitcoin are put on Open Dimes, but the majority of Bitcoin are not on Open Dimes, probably. We don't know for sure, but I'd hazard to guess and say, they're not on Open Dimes.
They're not on physical bearer instrument, Bitcoins. The majority of Bitcoin are digital and the majority of dollars are digital. So what creates Bitcoin is the process of mining, but what creates dollars is the process of lending. And the process of lending is obviously done by banks. Banks are the ones that are lending out money, but there is a corrective to that process.
There is a fundamental pressure valve that is always releasing the pressure, not always 60 times out of 10,000 it hasn't, but usually it's out there releasing the pressure and reducing the pressure for hyperinflation [00:46:39] because when you engage in excessive credit creation, when you engage in excessive monetary expansion, yes, you will make more dollars, but you will also make bubbles.
And you'll also make credit bubbles and housing bubbles, and stock market bubbles. And these things come crashing down and when they crash down, that leads to the supply of the currency declining, and that kind of protects you from hyperinflation. So the fact that you're constantly have these business cycles where there's an inflationary period of credit expansion, where money is being created and there's inflation in the money supply and rising prices. And then you have the deflationary period where there's a collapse in the money supply and a collapse in lending and a decline in prices. That game, as long as you don't reach Venezuela and Zimbabwe levels of dysfunction, that game can go on for many, many decades and we've seen it go on for a century practically since world war I You could say since 1971 50 years, if you want remove, because up until 1970, there was still some semblance of gold [00:47:39] redemption available. So still 1971 to 2021, that's still 50 years, which is no joke. So it's managed to survive but having said that I'll counter with one point, which is that the dynamics of inflationary credit are in and of themselves likely to turn you into a Venezuela and Lebanon and Zimbabwe. So the fact that anybody who's in power can have so much control over the money supply by being able to issue credit to whoever they want to issue credit for because the central banks are not independent and can be influenced by politics That on its own is going to lead to the corruption political process and the corruption of the central bank and the corruption of the banking system. And eventually you could say that maybe it's an inevitable outcome that everybody's going to get Lebanoned at the end. You can see the dynamic from a political economy perspective, but at least from an economic perspective, I think there's a good reason to expect Fiat to just continue to trudge along with high inflation, without hyperinflation. And so we can continue to have five, 10, [00:48:39] 15% inflation of the money supply every year.
Which is what we've been having mostly. And the CPI is going to constantly continue to give us decent numbers for prices, but a hyperinflation, I think is a different animal. That answers your question Nathan?
Attendee: Yeah, just to comment, I've re-read those four or five and six this weekend. And after reading them a second time, I wish Peter Schiff would read those chapters.
Him and Rickards I think would have a difficult time arguing with those given the angle, you come at it with. It's a pretty tight argument. It's just simple logic.
Saifedean Ammous: Yeah, but, you know, I think Rickards and Schiff are not very interested in... I mean, they're really set in their ways and you know what they say, it's hard to convince somebody of something when their paycheck depends on it and their paycheck, their business is selling gold and selling Doomsday stories.
And in fact, you realize this is a pretty big industry out there because hyper inflation is a very scary thing and there's a lot to suggest that it might [00:49:39] be happening. And therefore, a lot of people are worried and a lot of people want to listen to anybody who tells them that this is a scary thing.
And I have the solution for you. And so a lot of people sell gold and silver based on this idea. And a lot of people make money from selling the gold and the silver, but I still think it's in Fiat world it's still good to have gold because I think the probability of... I'm not saying the probability of hyperinflation is zero by any means.
It's definitely not zero. It could happen tomorrow, anywhere. Well, not tomorrow, not anywhere perhaps, but it can happen over the next couple of years with a little bit of bad luck and a little bit of political dysfunction, it can still happen. So I think hedging with gold is a smart idea in general, in the pre - Bitcoin world, at least.
But the opportunity costs of thinking of Fiat as just, Oh, they're just printing money and the supply is going up and therefore it's going to hyperinflate and therefore I'm staying out of all the markets and holding gold, that kind of position has massively underperformed the markets over the [00:50:39] last five decades.
If you'd just bought any stock. Well, not any stock, but if you bought stock indices, you'd have outperformed holding gold. So yes, there's a risk of the stock market could crash. And there's the risk that this could happen. But this again, takes us to the back to our discussion of the precautionary principle. Yes.
If you hold 100% gold, you're 100% protected from hyperinflation, but. At what costs are you buying this precaution? Gold is appreciating over the last 10 years at a price at around 2% next to the dollar. So it's not appreciating properly. And if you just buy index funds or if you buy not even index fund, if you, if you buy, um, you know, you'd have outperformed gold.
If you'd bought real estate in most places, real estate appreciates more than gold right now. So it took me until I had to write the Fiat standard until I started realizing this, you know, when I started thinking of Fiat in terms of as a technology and how it functions only, then did I understand no, the winning strategy in a Fiat system, whether Fiat is going to continue to inflate [00:51:39] or hyperinflate, the winning move is the Michael Saylor strategy.
What you want to be doing if your money is hyperinflating, you want to borrow that money. Or even if it's just inflating, you want to be borrowing the money that is losing value. So you want to be short that currency. That's how you protect yourself from fiat collapse. In fact, you know, people in Lebanon, I know some of my friends, the ones who had big debts, they made out like bandits from this hyperinflation, because I have a friend who owes a million dollars in real estate. He owns two houses. And he owes $1 million in liras for these housing loans. And so when the Lebanese lira collapsed now, he, owes something like $100,000 for both houses.
So he just got 90% of his debt wiped out and he just needed to pay 10% of it now. And he still gets to keep the house. So whether it's inflation or [00:52:39] hyperinflation, you want to be short, your Fiat currency. That's the winning move. Holding gold is not the winning move. Holding gold is good as a hedge. And I'm talking here ignoring Bitcoin.
I'm talking about the Fiat world pre-Bitcoin. Before I found Bitcoin, I was a gold bug and I thought the winning move was holding gold and that proved to be not a very smart idea. Oh, well, you know, in the first few years where I was a gold bug, it wasn't so bad. There was a big bull market in gold, but the best way to go about it is to actually borrow the Fiat currency.
And then you have obligations in a currency that is being devalued. So your obligations are constantly being devalued and the faster the inflation, the less the obligation, and as Saylor says what rich people do. And this really is the cheat code that rich people utilize is you borrow to buy hard assets.
And your assets appreciate while your debts continue to depreciate. And if you run your business well [00:53:39] enough, then your business appreciates enough so that you don't even need to pay off your debt. You just keep rolling over your debt because the debt keeps declining in real terms. And the debt service keeps declining over time so that you don't even need to pay it off.
You're just paying off the interest on the debt and you just continue to roll over the debt. If you remember, in the episode that we had where we had the discussion with Saylor, he said, the goal is to die with a lot of debt. It sounds completely counter-intuitive to everything that decent people are taught everywhere in the world, but you're playing this game, whether you like it or not.
The only question is, are you the one subsidizing the borrowers or are you the one being subsidized? And of course, before Bitcoin, it was much harder to play that game because you had to have assets and wealth in order to be able to borrow. And so you had to have a business in order to be able to borrow against it.
You have to have land or real estate or something that you can borrow against, but now it's basically easier because anybody can do it by just stacking sats. Get on an exchange and buy some Bitcoin or [00:54:39] call your local Bitcoin dealer and buy some Bitcoin and you are executing the Michael Saylor strategy.
And if you have a mechanism to be getting a cheap debt, then you're borrowing, you're short Fiat and you're long Bitcoin. So it seems to be working out fine, as long as you're protected from the liquidations and you have good enough margins because of Bitcoin's volatility, it seems to be working out for a lot of people.
Attendee: It is an ironic system since it's based on, like you said, everything that we were mostly taught not to do, which would be to be in debt. Like I'm very uncomfortable with being in debt, but you have to work with the system and it's a crazy system that it is based on debt. And that value is completely, it's not really that valuable, but it is based on debt.
Right. That's where it comes from. And so you kind of have to participate in that until something changes, I guess.
Saifedean Ammous: Yeah. I reiterate what I said when we had a discussion here and I think it was episode 26, where we were discussing fiat debt and Bitcoin. [00:55:39] And you know, this is not investment advice.
I'm not advising people to act one way or the other. I really don't know whether this is going to work out well, and I don't feel comfortable suggesting what is the right choice of action in this case. I will say, however, the case for it is that you're engaged in this game anyway. You can't just hold cash and say, I don't want to play and I'm holding cash. You're holding cash. You're holding a liability, essentially other people's debt. And you're allowing other people to take on subsidized debt. That's one hand. And you can't just hold gold because gold doesn't really appreciate much. It doesn't increase much in value. It's good as a hedge, but it's not keeping up with price inflation.
And, um, yeah, it looks like that's the case, but again, of course, the counter to that is the high volatility with Bitcoin. The fact that Bitcoin is highly volatile means that this is extremely dangerous as a strategy. You can get wrecked and wiped out and so be sure not to get wrecked.
Attendee: Right. You have to have huge margins. I don't, I [00:56:39] mean, I guess, yeah, this, the patient is forced. You're going to be forced to participate. It's just out. Yeah, exactly.
Saifedean Ammous: All right. Well, thank you very much guys, for joining and I will see you in the next seminar on Thursday, where our guests is going to be Rahim Taghizadegan the last Austrian Austrian economist. He's an Austrian economist who is actually Austrian. Well, I shouldn't say the last, I should say the latest. There will hopefully be more. Um, and so, yeah, we'll look forward to chatting with them about what it is like being the last Austrian Austrian as well as his project, free private cities.
So it should be fun. All right. Take care guys. Thank you.