I'd like to welcome you, Thorsten Palait, to our Humble Studio. And it's a pleasure
to have you here from Frankfurt, right? Thank you very much, Mr. Tucker. That's right. I
Come from Frankfurt, it's a great opportunity to be here and enjoy myself greatly.
I should clarify, you're here at the Austrian Scholars Conference, so you get to be around all your friends, your fans, your colleagues.
Yeah, it's good to come together with like-minded people, you know, once in a while to exchange ideas and having a good time.
I think the Mises Institute is doing a fantastic job.
You know, I really enjoy being here and I think it's very much shared by others.
So in Frankfurt, you're not surrounded by colleagues?
Well, I think this is a completely different platform over here.
I mean, this is the epicenter of Austrian economics, people coming from all over the world.
Yeah.
And so it makes it really special to be here.
In Frankfurt, libertarian-minded economists are pretty rare.
So there's still a lot of things to do to win people over.
Now, you both teach at the university, but also work in private consulting as a bank,
as I recall.
That's right.
Yeah.
I work as a bank economist, you know, doing…
Fractional reserve bank, no doubt.
Absolutely.
You see, the problem with the monetary system you're referring to is that it's not only
with banks, it's all over the place because even the vendor next door is dealing with
with fiat money and exchanging goods and services against this paper currency and so the problem
that comes with fiat money is not only with banks or bankers and indeed I try as best
as I can, you know, looking at data, trying to make sense of what's unfolding and coming
forward with hopefully good advice for institutional investors like pension funds, insurance companies,
etc.
Your articles on Mises or do have this nice combination, and this is why I'm always drawn
to them.
I mean, you're a star in any case, but I like the way you integrate high theory, you know,
drawn from all times with current events.
And it's a nice integration, it's seamless really in the way you write and in your work.
Oh, that's very generous.
I think indeed it's a good way of basically conveying the message of the Austrian School
of Economics. If you can tie it in in day-to-day events, if you can make sense out of what's
happening in globalized financial markets, and putting in a chart can be quite helpful
for getting across the message. And you do more than just put in a few charts. I mean,
you're really analyzing very closely what's happening. You follow markets very carefully.
In fact, you arrived here yesterday with a bit of news, actually, and you announced this
This is a bit of news to me. I knew it, but I didn't. What was that again? It was something
about a bond fund failing or something?
Oh, yeah. There was a news saying that one of the largest American bond portfolio managers
would no longer buy U.S. Treasuries.
Yeah, that's right. There was a business page there. I don't even need to read the business
page. I should just get you on Skype and you can tell me.
But later I learned that that was made public, but they have already started dumping treasury
bonds since February, I learned.
But I think it's important to analyze and follow what's really unfolding in the financial
sector, in the real economy these days, because it helps to put to work the splendid ideas
of the Austrian School of Economics.
Well, so you see people leaving the dollar, leaving the U.S. government debt, but where
to go?
I mean, what's left?
I mean, you've got the, you know, as well as anybody about the problems in Europe.
Well, I would say at the moment, we haven't reached a situation where people are really
fleeing out of fiat currencies, be that the dollar, be that the euro or Japanese yen.
But what can be observed is that there are growing signs of people becoming increasingly
concerned about the value of their lifetime savings, of their currencies.
And so, from my point of view, it's really what Hayek and Ludwig von Mises told us about
the fiat currency system, namely that it is not a sustainable economic monetary order,
so to speak, and I think we are at an early stage where the first signs of its...
Well, fiat currencies as we know them have only existed since about 1973, so it's fairly...
Yeah, fairly new, and it's really a great experiment for many mainstream economists,
like Milton Friedman, you know, told us that this is an unheard of monetary experiment,
as he put it. And the Austrians, of course, have a much stronger message to say about fiat currency, namely that it is really an unsustainable monetary arrangement.
How closely do you follow Fed policy?
Very closely. I mean, central bank policies, of course, the Fed is the most important central bank on the world.
World.
And central banks still have a great impact on the price action in the financial markets,
be that in the money market, be that at the long term, at the long end of the yield curve,
their actions affect stock pricing and derivative pricing.
So I try to follow very closely what they do.
What is your sense of, I think Bernanke recently announced that he was going to keep rates
at practically zero because he fears that raising rates would somehow harm the supposed
recovery.
So what's your analysis of that?
Well, I think it's first of all based on a kind of Keynesian thinking where the interest
rate is basically a policy instrument variable which has to be lower to the lowest level
possible in order to stimulate consumption and investment.
And I would say in this context, his assessment is basically shared by most central bankers
around the world.
Of course, from the viewpoint of the Austrian School of Economics, you would clearly see
that this is really the wrong policy because it's a policy against the corrective forces
of the free market.
The economy cannot really get rid of all the malinvestment under a policy which keeps the
interest rates at artificially lowered interest levels.
Artificially, but I mean, is it your sense that if central bankers suddenly began to
treat interest, the interest rate, as just a pure free market price, that we would see
rates skyrocket, or does more have to be done?
For example, the moral hazard built into the system lowers rates lower than they would
otherwise be, right?
In a fiat money system where money is produced through bank circulation credit, as Mises
put it, the market interest rate is necessarily below the level that would prevail under a
commodity money system.
So, by definition, our system suffers from a distorted interest rate level and that causes
And yet, low rates have punished savers.
Absolutely.
I mean, you're absolutely right.
The interest rate is a free market phenomenon, theoretically speaking.
It's expressive of societal time preference.
It's actually a guide which tells us how to save and how to consume out of current income
in order to accumulate capital, in order to improve the future consumption possibilities.
We have a monetary system which basically distorts this important guide stick, you know?
That causes all these boom and bust cycles, the malinvestment.
I think, yeah, the economist Eugen von Boehm-Bawerk, you know, he, back at the early 20th century,
basically, he expressed concern that the interest rate wouldn't get rid of its, as they call
it, moral shade, you know.
People would prefer a low interest rate over a higher interest rate.
And that is, of course, conducive for policymakers implementing policies for pushing down the
and the interest rate.
But it's a problem for investors, isn't it?
I mean, risk-averse investors, once were able to know exactly what to do with their money.
You deposit it and let it earn a nice rate of return now.
Yeah.
What do you do?
Is it a problem for you as an advisor to money funds?
What do you do with your money under these policies?
On the one hand, of course, low interest rates artificially harm savers.
And I may add, we have reached a situation where short-term interest rates are not only
low, but they have become negative in real terms.
People lose money by holding time and saving deposits.
They're getting punished for saving.
And of course, that is benefiting borrowers, you know, because that real debt burden is
getting diminished by this low interest rate effect.
But borrowers benefit from low interest rates, but lenders don't.
Right?
I mean, it's a problem because the low rates have discouraged lending, so you've got a
kind of a stalemate.
I mean, monetary policy, as it is structured today with the government-sponsored central
bank, leads, of course, to a situation in which some benefit and some have to basically
shoulder the cost burden.
We are indeed in a situation at the moment where funding costs are getting lowered through
through central bank policies but to a very low level and that makes, of course, it more
difficult for, let's say, lenders, you know, to provide adequate credit to many businesses.
So you have basically created two problems, on one hand for savers and on the other hand
for the lending industry.
Yeah.
They can't make any money at this racket.
I mean, it's crazy.
That is, now you've explained in many of your articles that we have a kind of that fiat
money inflation and credit addiction. It's like a global disease, right? Do you expect
a conventional response to QE1 and QE2 and all the efforts of quantitative easing? Do
you expect inflation pressures to continue to rise over the next few years or what do
What do you think about it? Apparently, the central banks only have so much power to unleash
a torrent of paper, right? That requires the cooperation of the banking industry. The banking
industry isn't cooperating entirely.
You know, I come from a country where we learned our lesson very well in terms of increasing
the paper money supply. As you know, in the 1920s, 1923, the Reichsmark was destroyed
through hyperinflation, and maybe that is because Germans are still traumatized by inflation
and hyperinflation.
Whereas the Americans, I think, got traumatized by the Great Depression, you know, you guys
are afraid of deflation.
And that's a good way to look at it, yeah.
But having said that, our monetary system is such that the central bank can increase
the money supply at any point in time in any quantity desired.
You wouldn't need the cooperation of the commercial banking industry for doing that.
And what I'm trying to say is, if there's a political willingness to increase the money
supply and increase inflation, you get more money and more inflation.
A central bank can, for instance, start buying bonds against issuing new money.
It can buy bonds from banks, from insurance companies, or even from private individuals.
They could even buy other assets against issuing new money.
So the system is really one in which the money supply can be increased and inflation can
be orchestrated if there's a political willingness to do it.
And also, I mean, that I think is the greatest danger if there is false economic theory which
promises that increasing the money supply is going to improve jobs and output, the risk
is clearly greatly increased that policy makers would reduce to such a policy.
Bernanke thinks that he can just turn it off if it gets to be a problem.
I mean, technically speaking, of course, the central bank has a monopoly in this fiat money
regime to increase the money supply, to determine the money supply.
And of course, they could drain in any kind of money issued.
But of course, as you know, once the money has been expanded, has been provided to the
economy, it will hurt people once it is redeemed.
And for political reasons, and when you look at monetary history, it becomes obvious that
mostly once the money supply has been increased, it's never getting reduced.
It's worked out through higher prices, so to speak.
Right. I can't think of a single case where a central bank has ever deliberately deflated
maybe in...
No. Certainly not because they were created for increases in money supply.
You studied Weimar and the hyperinflation at length, right? In fact, you have some family
stories about this. So you have a family memory even. Wasn't it rather sudden? I mean, there
wasn't a whole lot of warning going into that hyperinflation, was there?
Well, I think, you know, that was the period of great revolution, you know, after the end
of World War I. Basically, America brought democracy to continental Europe, the monarchy,
you know.
I expect a thank you.
Well, let's leave it open at this juncture.
So, there were many problems with the larger consequences of the war period and Germany
had to pay reparations through the Allied, made Germany to hand over industries and gold
and other stuff.
In late 1922, early 1923, there was the occupation of the Ruhrgebiet, the industrial area of
Germany through French and Belgian troops.
And the former chancellor, the German Chancellor Wilhelm Kuno, calls for passive resistance.
He basically called upon all civil servants and industrial workers to go home to prevent
the Belgian and French troops to obtain any any goods and you know any any real
stuff and he promised to pay the wages with newly created money and there the
problem started people people I mean it was politically orchestrated inflationary
process which then got out of hand because prices started rising and so
people were talking economists were talking there were too few money around
This is the shortage of money. It's very strange, isn't it?
These days, I think they call it Hafenstein momentum, because Rudolf Hafenstein, that was the Reichsmark president,
and it led to this catastrophic collapse and complete destruction of the Reichsmark.
What percent inflation? Do we have figures on this?
It's astronomical. I mean, it became scrap money. And I think Mises was really referring
to this episode when he wrote about the cracker boom. Because at the end of that period, as
from late summer 1923 until November, things span out of control.
Right. And that's precisely the point, that it's out of control, right? And so you can
People can have every intention of trying to prevent such a calamity, but at some point
inflation expectations kick in.
Exactly.
Then the money demand breaks down.
People try to exchange their paper notes or their money against real assets, and that
is what Mises called the crack-up boom.
So it's a very interesting thing to read about because, wow, one can't entirely rule out
such a future for the dollar?
I mean, in a sense, the German hyperinflation was special.
First of all, it led to a complete destruction of the Reichsmark.
The money was really dead and had to be replaced by new currency.
Right.
Whereas when you look at, for instance, Latin America, they had hyperinflations in the early
The currencies were greatly debased, but they were still used as money.
So in a way, the German hyperinflation was special.
It was a perfect destruction, basically, of the currency.
Yeah.
You are a little bit unusual as a monetary thinker and economist in the sense that I
get the sense that your true heart is with Mises' gold standard.
Let me start by saying there are certain physical properties a medium has to fulfill, certain
requirements have to be met by a certain medium for serving as money, and gold and silver and
Obviously, they lend themselves very... It's homogenous, it's scarce, it can be minted,
transported. Having said that, I think precious metals can do a great job as far as the money
function is concerned. When it comes to the gold standard, personally, I would think privatization
of Money Production would be the way forward.
And I could imagine that this is something Mises, which is in the Misesian tradition.
Going for a gold standard would actually imply that you impose a certain medium, namely gold,
as money.
Or just convert the currency and define it in some way.
And but you wouldn't allow the free market forces to decide which kind of medium should
serve them as money, should serve people as money.
So I think the way forward would really be the privatization of money production and
let the free market forces to decide which money they would like to use or which monies
they would like to use.
There's also the sheer implausibility of having enlightened rulers that would suddenly go,
Oh, the problem is, we've got this paper money, we need to change the dollar to be in gold.
I mean, that's not going to happen.
I mean, the prominent role of the gold standard can maybe be explained by the fact that, at
least until the early 1970s of the last century, the US dollar was still defined in gold and
that was considered as a kind of natural monetary order and therefore many writers, including
Ludwig von Mises and Murray Rothbard always kept referring to the gold standard.
But I would say complete privatization of money production would do the trick.
And I could imagine once there's this kind of freedom in the choice of currency, people
would decide, well, let's go for gold or silver or copper, whatever, as the ultimate means
of payment.
And with digital communication and the globalization of commerce, it seems like it's a much easier
undertaking.
to have private currencies and it might have been even in the 19th century or 10 years ago, you know?
Yeah, I mean, the technological progress really would argue in that direction.
And you can see all over the world, I mean, the holdings of gold and silver are increasing, you know,
be that in physical terms or be that through exchange traded funds or other investment vehicles.
In the United States, the government is quite frequently clamping down on digital currencies,
for example.
A new business will start while we're holding your gold, and it starts to flourish, and
as soon as it starts to flourish, the place gets raided by the Justice Department.
I think that maybe there's a half a dozen cases of this just in the last few years.
I mean, at the end of the day, governments want to have control of the money supply, you know,
and it's not easy to basically forecast a situation in which you would have, on the one hand,
a government-controlled fiat money competing against, let's say, free market chosen currencies.
The government will always try to dominate in the field of money, as long as people
ascribe to that kind of monetary order. Once people, and that is something which Mises always pointed
out, at the end of the day it's all about public opinion. Once people want something different,
that is basically the leverage for change. Yes. In fact, just last week I think we saw
It's the news that a particular state, Utah, the United States, is legalizing the production
of gold and silver as legal tender.
I'm not sure what it all means, but it's very interesting.
When you look at monetary history again, there were so many experiments with money, but let's
I would say the underlying trend development was, or from my point of view is, that sooner
or later people come back to the ultimate means of payment and that is called Ensilver.
Now you have a book out in German, right?
Yeah, it's called Geldreform, in English it would be kind of currency or monetary reform.
Okay, well that's a very start of a good translation, we've got the title so far.
Well, I must say, I set to work already, so let's see what comes out of it.
Is it a big book?
It's just 200 pages in German, and we try to keep it as short as possible because it
should reach many people, also laymen and not only economists.
Well, as you translate, remember to turn every one sentence into three.
Just for Americans.
Yeah.
Okay.
If it becomes a blockbuster, I'll certainly make use of your advice.
Thorsten Pellay, thank you so much for visiting with me today and thank you for coming all the way to Auburn.
Thank you very much, Mr. Tack, for the invitation. It was my pleasure.
www.fieggen.org