{ "episodeId": "SLP153", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "philipp_bagus": { "name": "Philipp Bagus", "role": "guest", "tag": "PHILIPP" } }, "segments": [ { "speaker": "stephan", "time": "00:08", "start": 8.43, "text": "Hi, you're listening to the Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today for episode one hundred and fifty-three, my guest is Philipp Bagus. He's the author of In Defense of Deflation. What are the typical things that people are getting wrong about deflation and why are they getting it wrong? We explore some of these questions in this episode. This podcast is brought to you by Kraken. One of the world's leading Bitcoin exchanges, offering a high quality platform with high trading volume and low fees, no minimum or hidden fees. 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Unchained also offer collateralized loans, so you can put up bitcoins and get USD liquidity without selling your bitcoins. All that bitcoin is stored on chain in dedicated multisig addresses and it is never rehypothecated. I'm really impressed with Unchained, they offer excellent services, they're releasing valuable content and open source tools such as Caravan, so I think you'll enjoy partnering with them for your bitcoin financial services. Go and learn more at Unchained. Unchained Dash Capital dot com. Check out Cyphersafe at Cyphersafe dot io. They're producing the Cypherwheel product. So if you've invested in a Bitcoin hardware wallet and you've got that twenty-four or twelve word bip thirty-nine seed, is it backed up in a way that's fireproof, waterproof, rustproof, petproof, and tamper evident? The Cypherwheel comes in a wheel shape, it's a steel backup product, it masks the words of your seed, it's also got a padlock tamper evident seal so you know if it's been opened Loved ones have access to your bitcoins if an accident occurs. Orders are going out now, so go and order yours at cyphersafe dot io. On to the interview. Philip, welcome to the show." }, { "speaker": "philipp_bagus", "time": "02:40", "start": 159.99, "text": "Thank you, Stephan, for having me." }, { "speaker": "stephan", "time": "02:42", "start": 162.21, "text": "So, Philip, I am a fan of your work. I read, I first came across your work in the, the tragedy of the euro, and I've seen some of your work as well around, in defense of deflation and, some of the articles that you've written as well. Can you tell us My listeners who might not know you." }, { "speaker": "philipp_bagus", "time": "03:02", "start": 182.14, "text": "Yeah, I'm, German, but I work, in Spain. I'm a professor of economics at Universidad Rey Juan Carlos, which is located in Madrid. I did my PhD already here in Madrid, under the, supervision of Jesús Huerta de Soto. And, yeah, I've been a professor at the university for more than ten years. And as you said, my, probably my most known work has been the tragedy of the euro, and I have, I've written a lot on the euro. my main topics are monetary theory and business cycle theory. And my PhD, thesis was on deflation And then it was later published, as a book with the title In Defense of Deflation. So I, I, I have also written a lot on, on deflation, but also on fractional reserve banking and, business cycles." }, { "speaker": "stephan", "time": "03:59", "start": 238.83, "text": "So I had the chance to read In Defense of Deflation. I really enjoyed it. I think it was a very comprehensive look at a lot of these aspects around deflation. So why did you choose that topic to write about?" }, { "speaker": "philipp_bagus", "time": "04:12", "start": 252.14, "text": "Well, there are several- Reasons, one is, well, the-- when I first looked on it, on deflation, it was in two thousand three, when I was, fellow at the Mises Institute, like a spring fellow, I was at the Mises Institute, and, Guido Hirschmann was also looking into deflation, and he, he was there, still there at the time, and he, he recommend-- or he said one of the topics that would, could be interesting would be deflation, and I also started working Very interesting. right before in two thousand two, Ben Bernanke had, had the speech, \"Deflation Make Sure Doesn't Happen Here,\" where he basically said that the US has a printing press, the Federal Reserve, so it can always prevent deflation for ever, ha-ha, for happening because deflationing would be so bad. So it was at this time already, a topic and, and at this, at that time, not much had been written on deflation at all. I mean, still there's not, much written on, on deflation. So one reason was, that, I encountered the topic at the Mises Institute and then not so much had been written on it, and then of course that it's a very, very important topic because This deflation is always, is always the scapegoat, for justifying monetary inflation. Like a few years ago in the Eurozone, it was again that, \"Oh, there's a danger that we will drift into deflationary territory, therefore we have to lower interest rates and have negative interest rates and do quantitative easing here.\" So central bankers, like to, to invoke this, the specter, the danger of deflation to justify monetary inflation with all its harmful consequences. And therefore I thought, it would be interesting to in-investigate it, the topic, and, later then I thought it's, it's important to show That there are many errors about deflation, that it's actually not just, the threat of deflation or the danger of deflation doesn't justify this monetary, infla-inflation." }, { "speaker": "stephan", "time": "06:37", "start": 397.02, "text": "Excellent. And I can see that your work really builds on some of the prior work of other Austrian economists, as you mentioned, Dr. Guido Hulsmann, his work, Deflation and Liberty and The Ethics of Money Production. And also in this book, I see, some influence from Dr. Joseph Schlosser. This Austrian taxonomy of deflation, because there are four causes of deflation, and I believe you listed the same four, but you expand on that a little bit. So can you tell us at a high level? Somebody who's coming to this, and if they haven't read any Austrian economics, and they might have just seen on the news, they might have this question, \"Oh, doesn't deflation drive the economy into recession?\" How, how do you answer that question?" }, { "speaker": "philipp_bagus", "time": "07:20", "start": 439.93, "text": "Yeah, well, first of all, as, as you said, one has to look at the precise cause of deflation, and the-- and here it's also important to point out, of course, that there are different definitions of deflation. Like, price deflation is just falling prices, and- What mainstream economists and the general public fear is price deflation, or when you hear on the, on the news that deflation is coming, what they mean is price deflation is coming. Austrians, also have used another definition, maybe a more precise definition, which is a decrease in the money supply. A decrease in the money supply can cause, price deflation, of course. but in my book, I actually deal with price deflation because price deflation is what, is commonly feared. So, the question is why? Yeah, well, when prices fall We have also always take to into account that we are buyers and sellers. When we are buyers, we like prices to fall. When we are sellers, when we sell our labor services, for example, we don't very much like prices to fall. So, if my buying prices, the things I buy, the food, the gasoline, if these prices fall faster, the buy-- my buying prices fall faster than the selling prices, that is, for example, my wage, Then, deflation is fantastic for me. If it's the other way around, if my selling price, my wage is, or if I sell products is falling faster than my buying prices, the cost, for example, the cost to pro-- to produce the product, then it would be bad. So falling prices per se are not bad for, for someone. It always depends which prices are falling faster, the buying or the selling prices. So there's, a priority, there's no, no reason to say that, falling prices would be bad for an, an economy." }, { "speaker": "stephan", "time": "09:26", "start": 566.21, "text": "Right. And I, I also like the point that you make in the book, which is that much of government today is funded by inflationary fiat. and I think you explain some of the mechanism for this as well, because you, you explain in the book that because of this inflation, there's a constant demand for Government bonds. can you, tell us why is it that inflation helps the government expand its size?" }, { "speaker": "philipp_bagus", "time": "09:58", "start": 597.69, "text": "Yeah, government, has, basically two ways to finance its expenditures. One is taxes. Taxes aren't very People don't like taxes and they, and they see, they see a clear, connection between, increasing in government expenditures and taxes. let's, let's say, let's say the government says, \"Oh, let's increase, pensions, public pensions, by five percent and...\" Yeah, to finance, we just increase income tax also, on average five percent. So then people will-- most, most, many people that are actually, wage earners will probably not like it very much. But if the government just increases public pensions and then gets more support by, by, pensioners, and then finances by issuing bonds, and then these bonds are then monetized by, that is, the money supply is increasing increased to buy these bonds, and then prices increased a little bit, then people will probably not make the connection between, \"Oh, now I have, paid two dollars more at the, at the gas station, and this is because they just raised pensions.\" They will not make this connection, and therefore the resistance against, financing. Government expenditures by, the printing press isn't so high as if it is financed by taxes, because people don't understand the monetary mechanism. They, they don't see that if, when prices-- that, government expenditure, expenditures go up and prices rise, and they don't blame the government for the, the increase in the government expenditures on the rising pri-prices. And it's even more. I mean, if there's economic growth, price- This is what ac- would actually fall. So now if the money, if the government is increasing, spending And, issues government debts, this can ma- this can com-compensate for the fall in cri- fall in prices that would have occurred due to increases in productivity, like, like the internet, new technology, or the increase in the division of labor of China or India starting to produce for, for us. So prices- Thanks to the increase in government spending and the new debt and the monetization of the debt, prices don't fall, but stay the same or increase a little bit. So then people at the gas station will not say, \"Oh, today I, I, I pay the same for my gas like last year.\" But if the government wouldn't have increased pensions and in, had increased government spending, now I could pay ten percent less. So it's hard to see the costs. The cost of government spending are, are much clearer when they are taxes, when there's increase in taxes, and the cost of the government spending, if it's financed through the printing press, is hidden. and how does it work? Well, the government just prints the go- the government bonds and then the banking system buys the bonds and then sells it to the Federal Reserve and the Federal Reserve buys these bonds with new money and this new money then goes to the economy and fractional reserve banks can expand the money supply on top of it and then prices Will be higher than they otherwise would have been, but people just don't make the connection between the government expenditures, the deficit, the issue of government debt And, the increase in prices or the prices that, that are higher than they otherwise would have been, no? Because they don't know how the prices would have been, they, can't make this connection actually." }, { "speaker": "stephan", "time": "13:54", "start": 833.65, "text": "Right. And you mentioned the price inflation and people can't necessarily make that connection. Do you also see a distinction between, say, CPI and asset inflation, so that, you know, the CPI might well be low, measured in a certain way because it's a certain- basket of goods, but then other assets may actually get inflated as well." }, { "speaker": "philipp_bagus", "time": "14:17", "start": 856.83, "text": "Yeah, of course, of course. in the last few years, the inflation has flown mostly to asset price markets, to housing markets, in Europe, for example, to us also, and of course, the stock markets. So, The, the price inflation, inflation in course, but, but the government of course, they define their own basket, the, the consumer price index and change the composition and, yeah, well, these are just, just numbers. The important thing is that the money supply increases. And that prices will be higher than they otherwise would have been." }, { "speaker": "stephan", "time": "14:57", "start": 897.29, "text": "when we speak about the inflation as well, so as in, creation of new money, what I have seen just from what I have read, it looks like in the more naive countries, let's say, just like the Zimbabweas and the Venezuelas of the world, that they just straight up print the money. But in other countries of the world, it's more like the government and the central bank create The environment, the fractional reserve banking environment in which the commercial banks do most of the actual money creation, is that a good distinction to draw in your view or how are you thinking on that point?" }, { "speaker": "philipp_bagus", "time": "15:34", "start": 934.3, "text": "Yeah, you have to take into account that a government like the United States has much credibility. And it creates also, let's say, a narrative of a central bank that is, independent, and run by technocrats, wise technocrats, the best e-economists of the world, supposedly. they are wise, so there's, confidence in it, while in the back way of Venezuela, that actually goes, well, the government says, the govern-- tells the gov-- go- go- governor of the central bank, \"Print me so much money and, I, I need money, so p- just print money and give it to me.\" So the impression is That the central bank is totally dependent on, on the government and the, the deficit is completely, completely financed by the printing press and then the, The confidence, in the currency evaporates and there's inflationary expectations in the U.S. or in Europe, It's, in essence, it's not so different. but it's, yeah, they have, created this narrative that, it's The entities, the entities, the Federal Reserve and the government, or the ECB, the governments are more independent, and don't follow direct orders. and as you said, the mechanism is also more indirect than just giving the Central Bank of Venezuela, giving the go-- government, the money. As you said, here there's a deficit in the US, and then the US prints for the deficits papers and writes on These papers, treasury bonds, and then the commercial banks with, newly created money, they buy these treasury bonds. Because they know that the Federal Reserve, except these Treasury bonds in open market operations, buys, buys it, buys, them. And then the Federal Reserve buys them and monetizes them. That is, the Federal Reserve then later, buys these government bonds. So it's not like in Venezuela where the central bank buys directly from the government the, the treasury bonds, the government bonds, but, in the US or in, in Europe, first the commercial banks buy these bonds and then g-give it to the Federal Reserve because the Fed-- they know that or the European central bank because they know that, the- These are the preferred collateral or instruments for open market operations, and they know of course that at the end, the central banks will al-always support the governments. Last but not least, because there are so many government bonds in the banking system that if the, if these central banks wouldn't buy or accept these bonds in open market operations, then the go-banking system would collapse, and then the Federal Reserve and the ECB would have huge losses, losses, and the whole banking system would collapse. I mean, they are so intric- intricately connected, and of course, they all, all know it. So the pro- the process is, more- More complex than in Venezuela, or Zimbabwe, but in the end effect, it's, it's the same." }, { "speaker": "stephan", "time": "19:13", "start": 1153.02, "text": "I also have seen from different talks, and I think I've seen from Dr. Guido Hulsmann's talk, he's mentioned this idea that under a hard money standard, so let's say we were living under gold, that there would be much less role for debt, and it would be-- the debt that we would see would be more like commercial terms or trade credit, right? Things like, \"Oh, I'll give you the...\" These goods and you only have to pay me in thirty days or sixty days, as opposed to what we see today where it's a very common practice to see lending for the sake of even starting a business. What's your view on the role of debt under a hard money standard?" }, { "speaker": "philipp_bagus", "time": "19:53", "start": 1192.52, "text": "Yeah, of course. today, we have, we live in an inflationary age, and everyone knows it, that prices, will increase, will tend to increase in the future and the long run. Housing prices or all, all prices, wages. So in, in this environment, of course, it makes sense to in-depth yourself, because if I know that Housing prices will increase, will keep increasing the next twenty-thirti- twenty thirty years, then it doesn't make sense, much sense to wait and to save money and then later buy the house, but I will rather go into debt. And buy the house now or the apartment now. And, then as there's this, inflation, price inflation, my wage will also keep rising during the next decades, so it will be, become even easier to pay back the debt. So in this scenario, of course, if we live in an inflationary world, then it makes total sense and it's rational to in debt yourself. If we, on the other hand, and it doesn't make sense to save in cash And wait, and only once we have the money, saved in cash to buy the house because, price inflation will devalue the savings. And it's the contrary, of course, if we would live in, in, world of a sound monetary standard where there's a tendency of prices to fall in the long run. if, there's a tendency of prices to fall in the long run, then the real debt burden keeps increasing." }, { "speaker": "philipp_bagus", "time": "21:43", "start": 1302.97, "text": "In time. So, I will rather try to, limit my debts to have them as low as possible, and if I just save in cash Then the re-the real value of this cash will keep increasing. So it's a totally different scenario and a totally mindset that pe-people will develop in, in a sound monetary stan-standard. People will in-depth themselves much less and save, save more, more in cash, in cash. And of course, we live in this inflationary scenario. I mean, you can see it from 1971 when the- Last, connections to, the gold standard when the Barton-Renton root system was, were cut, then price deflation and indebtedness increased, and of course, this allowed the government to in debt themselves a lot more. Because now they can create the, the necessary money to pay their debts without any limits, they aren't connected to gold, anymore. So they, they have free leeway to, to inflate as much as they want and, and, and as markets know this, market participants know that, they allow governments to in debt themselves much more and at much lower interest, interest rates than, Than before, and this has allow-- this has allowed governments to grow, extr-- extraordinary since, since 1971, especially the welfare states increased, to, to large ext-- to large extents because they were financed with debts, and this debt financing wouldn't have been possible, with the gold standard, and, and this, this, welfare state financing wouldn't have been possible Either by increases in taxes because people would have rebelled, for the reasons I explained before. So there's a clear connection between the end of the sound money, well Let, let's say, a more, a sounder monetary standard than we have now, that was the Bretton Woods system, where there are at least still some links, to gold, and, the inflation rate after the nineteen seventy run and the rate that the government grow-- ha, ha, has grown and the expansion of the welfare state, so it's clearly connected." }, { "speaker": "stephan", "time": "24:16", "start": 1456.13, "text": "With that idea of living under a, a hard money standard. When we're also saying that there wouldn't be so much debt, is another way to reflect that just to think that the interest rate that you pay would just be much, much higher than what people pay today, or is that An imprecise way of thinking of it." }, { "speaker": "philipp_bagus", "time": "24:36", "start": 1475.73, "text": "Yeah, what's, what's for sure is that now interest rates are manipulated, by central banks artificially downwards. So, I mean, negative interest rates isn't something that would occur on a, on a free market or a sound monetary standard. So now, interest rates are artificially low, and in a sound monetary stan-standard, they would be, higher, yeah, that's for sure." }, { "speaker": "stephan", "time": "25:07", "start": 1507.15, "text": "Yeah, and I'm curious as well with that because Well, depending on which theory of interest you, subscribe to, as I understand, Mises has the PTPT, the Pure Time Preference Theory of Interest. I'm not sure exactly where you sit on that particular question, but it might also be true to say that just generally speaking, if society has a very low time preference, right? They're very patient, then they might be more willing to accept A lower rate of interest, but that would be distinct or contrast with today, where we have this artificially low interest rate. It's almost like the central bank and the existence of the money, the government money, intervention is to make it look like, you know, we have low time preference when really we don't necessarily because of all the inflation. What's your view on that?" }, { "speaker": "philipp_bagus", "time": "26:02", "start": 1562.25, "text": "Yeah, most certainly, you're correct. The people, yeah. I mean, this is exactly what happens in the business cycle, no? There's a deception that, time preference is lower than it actually is, so there will be more investments. Entrepreneurs are deceived, they think there are more real savings available than there really is. but people don't, actually have not lowered their time preference, they don't save so much, they have a much higher time, time preference, and of course also, this monetary system that is inflationary and, incentivizes you into go into debt. Increases time preference. People don't have to wait, anymore. They just in debt themselves, and everything becomes much faster because you have to service your debt, because you're very highly indebted. W- while this would be much different in, in a sound monetary standard, where you're not so much indebted and you're more independent." }, { "speaker": "stephan", "time": "27:11", "start": 1630.77, "text": "Yeah. And I think another question that I think a listener might be thinking at this point is if they are an entrepreneur and they have- Have been accustomed to this current fiat inflationary world where it's a, it's a common practice to go and get a business loan before you start a business, or there is a lot of credit flush around the world and there's VC, you know, venture capital money, flowing around the world, they might be thinking, well, hang on, is that a problem now? Because now people won't be able to do their own businesses because they can't get credit? Or, and I guess what, is it more like we would be living in a different monetary- order such that you would be more inclined to save up in cash and then start your business rather than everyone requiring a loan to start their business. Yeah, exactly." }, { "speaker": "philipp_bagus", "time": "28:00", "start": 1679.75, "text": "Look, when, when, when everyone gets easy credit, then you need a, ne-need this credit. And of course, if everyone gets an easy credit, then prices will be higher, you know? Prices will be, bidden up. If, if a-anyone can bid, for resources or for capital goods, using this money created by banks out of thin air, then the prices of, of this, of these capital goods will increase. If we go to a sound monetary standard, then the prices of all these goods, and capital goods will decrease, and it will be much easier to, to purchase And because you don't have this, competition of, of this money that is created there and is, trying to purchase the, these goods. So, yes, you would probably, finance much more with equity, your investments in the sound monitor standard, and less, with debt. And there would be less malinvestments because at the end, the investments that can be done are limited by, by the real savings available, and creating credit out of thin air doesn't increase the real amount of savings. So if we would have a sound monetary standard, the investments would be limited to the real savings available, and this would be probably, channeled th- through, equity, much more th- Through equity investments and through," }, { "speaker": "stephan", "time": "29:44", "start": 1783.73, "text": "through loans. And one other question on that, because right now when businesses do longer term contracts, they typically build in some kind of CPI term to say, okay, we'll build in two percent or three percent inflation in the cost of whatever I'm buying or selling. If, if we were to flip that, and let's say we were living in a hard money standard or sound money standard, and we were living in a deflationary world, do you believe businesses would try to build in some- Kind of deflationary clause to say, \"Oh, okay, actually, because we're anticipating that the price will fall two percent every year or something like that, would they try to, you know, did they, or do you know if they did build in that kind of thing, when people were living under a gold standard?\"" }, { "speaker": "philipp_bagus", "time": "30:29", "start": 1829.05, "text": "no, no, they didn't not. and I think that they probably wouldn't not. Why? I can tell you why, because, if they foresee that prices will fall, the reason that they foresee this A long tr-long term trend in falling prices is because of productivity increases. So if there's a increase in productivity through, by capital accumulation or innovations That allows more goods to be produced or better goods to produce, that means the prices will fall in the long term, but that doesn't necessarily mean that the wages have to fall. Nominal, nominal wages have to fall, because, if there's this capital accumulation and innovation, that means that the productivity actually of, of workers, will also increase. So then the increase in real wages would be, would be justified, by, by the increase in productivity. So there would be no, probably no need to actually have nominal wages to fall. While of course you, it might be necessary in some cases, but, but in others, if, if the falling prices is actually caused by, because workers have been more proactive. then at least part, part of it will be justified, and it will be just like a natural dividend, to, to society that prices, of course, consumer good prices continuously fall." }, { "speaker": "stephan", "time": "32:05", "start": 1924.88, "text": "Yeah, that's really interesting to think about because most of us are, obviously, most of us have grown up in this inflationary world where you're used to people having to negotiate with their employer to get increases every year just to keep pace, but in this world In the, in the, you know, sound money world, it might be more like your real purchasing power is actually increasing every year, even if your nominal wage stays the same." }, { "speaker": "philipp_bagus", "time": "32:31", "start": 1951.44, "text": "Exactly, yeah." }, { "speaker": "stephan", "time": "32:33", "start": 1952.68, "text": "So let's talk a little bit about some of the, causes of deflation, because I think, as you do in your book, and also as, Dr. Salerno spells out in, his article, an Austrian taxonomy of deflation, there's sort of like four different types or causes, and it's sort of like two of them are good and two of them are, you know, might be seen as bad, let's say. and I think the first one was growth deflation, that we, we were sort of speaking to Well, can you, just tell us a little bit about those different causes of deflation?" }, { "speaker": "philipp_bagus", "time": "33:06", "start": 1985.58, "text": "Yeah. The first of all, there's growth deflation. again, I talk here about price deflation, why prices fall. One reason why prices fall is that productivity increases, that more goods and services are, produced or better goods and services, and," }, { "speaker": "philipp_bagus", "time": "33:24", "start": 2003.83, "text": "Then there's a tendency of, prices, consumer good prices, to fall, and this, this growth deflation can be caused by innovations, technology, internet, information technology, it can be caused by increase in the, the division of labor the international division of labor has increased a lot in the last thirty, forty years, because, like forty years ago, we didn't have any products, produced in China, and probably now, your, your computer, my laptop, they are all produced in China. So the, the international division of labor has increased a lot, and of course, capital, capital accumulation is another cause. For, for productivity increases and, pri-the, that prices fall for price deflation. Again, this is, This should be the natural result of a market economy. A market economy has a sound monetary system, a sound monetary standard, and their prices in the long run. tend to fall. It's naturally, naturally it's good, it's of, of course it's good, because prices fall because p- there's more wealth," }, { "speaker": "stephan", "time": "34:41", "start": 2081.17, "text": "there's more goods produced, so it's very positive. And then, cash building deflation. Now, this is more around what are the level of cash balances that we are all holding, what is the uncertainty that we all face, and if we are increasing our cash balance, what, what does that, what does, what does- Does that mean a cash building deflation?" }, { "speaker": "philipp_bagus", "time": "35:04", "start": 2104.23, "text": "Yeah, it means that people think that they have, don't have enough, enough liquidity or enough cash, so they, they demand more, more money. To hold. So how, how can, how can I in-increase my cash balance? First of all, I, I can buy less than I did last month, right? For my salary, I, for my wage, I, I buy less, or I can sell more." }, { "speaker": "philipp_bagus", "time": "35:32", "start": 2131.94, "text": "and if people sell more and buy less, then prices, tend to fall. and when prices tend to fall, actually They achieve, let's say everyone, wants to have a higher cash balance and everyone is, buying less and selling more, then the result will be that prices fall and that they actually achieve what they want. Because if they, they hold the same nominal amount of money but prices fall, that means that the real cash balances, that is what they can buy with the nominal, amount of cash that they hold, increases. So it's also beneficial because it, satisfies the needs and the wants of, of people that want to have a higher, hold a higher real cash balance, Which they sometimes want when e- uncertainty increases." }, { "speaker": "stephan", "time": "36:30", "start": 2190.36, "text": "Yeah. And I like in the book as well, you spell out here you actually disaggregate some of these different components, and you spell out even inside this concept of cash building deflation, you can even disaggregate it further and talk about, okay, there's things like wealth storage demand for money and speculative demand for money. So, could you tell us a little bit about those concepts, wealth storage demand and speculative demand for money?" }, { "speaker": "philipp_bagus", "time": "36:56", "start": 2215.57, "text": "Yeah, the wealth storage, demand for money is, that people want to store, well, as the, as the word says, want to store their wealth, in money because it's, very liquid and you can transport it over time. the speculative, demand for money is that you demand the money actually because you think that the price of money will increase, the purchasing power of money will increase, and thereby you actually speed up, what you think that will happen, because the demand of money then, increases the, the increase, increases the tendency of prices to fall and the purchasing power of money to increase." }, { "speaker": "stephan", "time": "37:44", "start": 2264.21, "text": "Fantastic. and now let's talk about some of the quote-unquote bad deflation types, if you will. So we've spoken about growth deflation and cash building deflation, and I think, for listeners, you, if you also read, Dr. Gert Hofmann's, essay, Deflation and Liberty, he sort of spells out why those might first seem really bad. But actually, it's more like, and it, it's more like the economy is kind of self-correcting itself out. but Philip, could you tell us a little bit about bank credit deflation? What is that?" }, { "speaker": "philipp_bagus", "time": "38:16", "start": 2296.16, "text": "Yeah, bank credit deflation happens, after An artificial boom when, when banks, fractional reserve banks have expanded, credit have, have created new money and loaned it out at art-- at, at artificial low interest rates, then investment projects appear to be profitable that didn't appear or that aren't profitable at higher interest rates. So there's an artificial boom, people start these new projects even though it's not justified by the real savings around, because, it's ju- the projects are just financed by these By this money created out of thin air, by this bank credit, so we are have an artificial boom, more projects are started than there are real savings around, and sooner or later this will be become obvious that not all projects can be, successive, successfully completed, and there will be a bust. And then, in the bust, what happens in the bust? Well, these, Investment projects, some must be liquidated, which means that some companies will go bankrupt. This means that There will be losses for the banks that financed these projects. And when the banks have losses, they," }, { "speaker": "philipp_bagus", "time": "39:54", "start": 2394.01, "text": "Yeah. Well, when they, when they have losses, what they will try to increase, or they will become more prudent, they will try to increase their reserves and their equity ratio. How do they do that? By restricting credit. by not renewing old credits, o-old credits, lines, or when cre- when, when loans are paid back, they don't give new loans. at the same time, of course, bank clients, depositors, when there's a bust, they, they look at the bank and see oh, the bank has, has losses, shall I not rather get my money from the bank or stop refinanc- refinancing the bank? So for all these reasons, in a bust, in a re-recession, the banks, are in a difficult situation and they restrict credit, that is, they don't- Don't give out more credits. So, and this is the bank credit contraction, in a fractional reserve banking system, the banks can create new loans And when these new loans are paid back, or when they, when they create these new loans, they create new money and the money supply increases, and then when they-- when these loans are be-- paid back And the, the banks don't give immediately a new loan, then the money supply shrinks, and this happens typically in a recession. That the banks, when loans are paid back or aren't paid back because, companies go bankrupt, then they don't give out new loans immediately, because they want to increase their reserve ratio and they want to increase their equity ratio. They be-- they become more cautious. So the-- and this happened, of course, after the Great Re-recession, that banks didn't give out new loans, huh? When old new loans were paid back, they didn't give out new loans, which means that the money supply then shrinks. The, the bank credit deflation makes the money supply to shrink. And when the most supply then shrinks, then we have, then we have price deflation as a consequence, and then we can actually have, kind of a deflationary spiral because when then prices fall Then, indebted companies will get pro-problems to pay back their, their debts that are nominally fixed, and they will go bankrupt. The bankrupt that will be, will mean more losses for banks. More losses for banks means that they have to restrict credit even more. That means that the money supply falls even more, prices fall even more, there will be more problems for indebted players and more bankruptcies. So, this is a famous- This deflationary spiral, I, I think, well, I see a positive this kind of deflation because it speeds up, of course, the recovery, it makes, overly indebted companies fall faster, go bankrupt faster than they otherwise would. It has a purging effect, it has a cleansing effect, It makes, people become more cautious to save more, and more savings are also necessary for, for new sustainable, projects and, for, for a recovery. and, yeah, it could also take down, very indebted players, with it, that go bankrupt, which would be more, many, very positive. You know that the mo-highest indebted player in our economy is, is, is the government itself, so it would have get into the problems as well. So all these are positive, effects, and we have also taken into account what is the alternative. The alternative is to re-inflate. Reinflates the same thing and prop up this malinvestments, and then the lending and the, the, the malinvested resources would continue. I, I mean, the, the problem in, in, when the bust comes is that the resources are located where they shouldn't be. They should be relocated as fast, as fast as possible, and the bank credit deflation speeds up actually this pro-- this process of re-allocating Dedicated the, the resources, after the financial crisis, unfortunately, was done, the wrong thing. It was re-inflated, and this, the mine supply was re-inflated, and the recession, lasted much longer than it should have lasted." }, { "speaker": "stephan", "time": "44:45", "start": 2685.31, "text": "Right. And this is what typically people are scared about, if you see the news and they say, \"Oh, no, deflation is bad,\" this is the, this is normally what they're thinking of. But as you're saying This is actually part of the corrective process, and I think it's also an important point to note that it's not that the productive assets out there are being destroyed, they still exist, right? Like the tractors and the computers and whatever, they still exist, it's that they just need to be repurposed to where, you know, the market consumers want them to be repurposed to, correct?" }, { "speaker": "philipp_bagus", "time": "45:21", "start": 2721.05, "text": "Exactly. one may have the We, conceived idea that bankruptcies are something bad, but bankruptcies aren't something bad in itself. They're actually very, very important in a free market because A bankruptcy, basically means that, the scarce reso-resources of society have been employed in a bad way. they have employed, you know, to, to produce products that people don't want. They want, consumers want other products more, more urgently. and the losses are a sign that is, means stop this, stop doing this, close this business, reallocate the resources to produce something that are, that is more urgently needed. So, and that-- this is then what happens in mass, in, in a recession, because before there has been this malinvestment caused by this, bank credit inflation, the artificially low, interest rates, and then the bank rescues speed up, the reallocation of resources. The, the alternative is to maintain these, these malinvestments, these businesses there and continue to waste these resources. th-this, this would be, this is horrible from the point of view of, of consumers, from point of view, view of consumers, it, it is Important that the bankruptcy actually occurs. The bankruptcy takes the resources out of the hand of, let's say, the bad entrepreneur and gives it to people who, entrepreneurs who supposedly or have the chance to do some, something better with these resources. And as you said, these res-resources through the bankruptcy, these res-resources don't disappear, 'cause they are still there, they just change the owner. A bankruptcy is just a change of- Of the ownership of the res-resources. They change, they are in the hand of, of a fiat, of a bad entrepreneur, and then they, they go into the hand of another entrepreneur that has a chance to recombine these resources in another way, in a more productive, in an innovative way to produce things that con-consumers want more urgently." }, { "speaker": "stephan", "time": "47:44", "start": 2863.91, "text": "Excellent. and let's talk about that last one, fiat deflation. So what is fiat deflation?" }, { "speaker": "philipp_bagus", "time": "47:51", "start": 2870.81, "text": "Yeah, fiat deflation is when the- The government causes price deflation. Yeah? And, this is what I would say is the, it's, it's bad because it's caused, caused by the government, it's caused by, by coercion, you know? The others are voluntary, they are caused by voluntary reactions. Gross deflation is caused by voluntary actions, cash bearing is voluntary, actions. bank credit deflation is actually, let's say it's, and the deflationary spiral is It's, it's a free market reaction against," }, { "speaker": "philipp_bagus", "time": "48:29", "start": 2909.29, "text": "against, i-intervention into the, into the free market, no? Against, against the aggression. But now fiat deflation, as, as the name indicates, it's by government fiat, it's done by the government. This can be-" }, { "speaker": "philipp_bagus", "time": "48:46", "start": 2925.6, "text": "there are several, several types how the government can cause prices to fall. The, the most simpler one is just that it decrease prices to, to fall. It just says that all prices have to be lower ten percent." }, { "speaker": "philipp_bagus", "time": "49:01", "start": 2940.71, "text": "That would be, or, yeah, or let's say they, they put in maximum prices that are lower than the free market prices, no? For, for everything. And the other type is like coercive monetary deflation that the government actually confiscates and- Destroys money. Why would it do that? Well, o-obviously it doesn't occur so often, but sometimes, it, it, it does, because There has been a strong in-inflation in the first place, and then they want to destroy this, inflation," }, { "speaker": "philipp_bagus", "time": "49:41", "start": 2981.28, "text": "to, to get the, the money out of the way, some- and sometimes It's al-- it has also been done when, in the past there had been like a connection to gold, for example, and the redemption rate, and then the re-redemption rate had been suspended, like in the US Civil War And then they had inflated the money supply, and then they wanted to go back to the same redemption rate as before, and they could only do it if they destroyed at least part of this additional money that had been created to finance the Civil War, and they did it by issuing bonds and then, yeah, destroying this money." }, { "speaker": "stephan", "time": "50:25", "start": 3025.46, "text": "I see. So in that way, it's like a confiscatory tax almost, but just through another means. okay, so- one other topic that I think is ke- I'd be keen to touch on is this concept of, \"Oh no, there's a, you know, the economy is in a quote-unquote liquidity trap.\" How, how do Austrians answer that point?" }, { "speaker": "philipp_bagus", "time": "50:46", "start": 3046.21, "text": "Yeah, well, the liquidity trap, trap, argument says, well If there's a price deflation, this mean that, that makes, the interest rate, the, too fall because the deflationary expectations are priced into the interest rate, and there's this zero bound that interest rates can't be, at least this was the argument before, the interest rate can't be lower below zero. That means that when we are in the liquidity trap, then the, center bank loses its power to stimulate the economy by By increasing, the money supply and decreasing interest rates. But the Austrian answer to this is that we don't want this. We don't want the government actually to stimulate artificially the, The economy through monetary policy. So, and therefore this, this isn't an argument against, against deflation, because, we don't want the government to- To, to manu-manipulate the money supply in the first place." }, { "speaker": "stephan", "time": "51:59", "start": 3118.89, "text": "Right, right. and I'm also keen to just discuss if you have any examples that you can share in terms of what does a growth deflation look like? And I think in the book you have the example of the US from 1865 to 1896. Are you able to tell us a little bit about what, what that looked like and, you know, how that might differ to what- What we are all used to, you know, today in twenty twenty." }, { "speaker": "philipp_bagus", "time": "52:28", "start": 3147.61, "text": "Yes, actually, in most places in the nineteenth century, there were long, long periods of price deflation. The American deflation from eighteen sixty five to ninety six was one of the, one of the longest, prices, I think, they fell more than thirty percent, continuously. And of, and of course, it wasn't a, it wasn't a problem for the economy, it wasn't a problem problem for economic growth, actually it's the other way around. Prices fell because of extraordinary economic growth, of extraord- extraordinary increases in productivity. So prices fell continuously over more than three, decades, and, people got accustomed to it. There was, no problem. There was, in, in fact, there was tremendous economic growth. of course, this is very different to what we are accustomed to right now. No. And of course there were, there were of course also, yeah, there were, there was also kind of, conflicts in this period, because as I said before Price deflation isn't a problem for the economy as a whole, because when prices fall, as I said, buying prices fall and selling prices fall, so it depends if my buying prices fall faster than the selling prices, if I'm a winner or a loser. So if my buying pri-prices fall faster than the selling prices, I'm a winner. But there will be also people who are in the opp- if, if I am a winner, then there's also a loser because his se-selling prices fall faster than his buying prices. So there, this means that deflation, price deflation always, implies a redistribution. It means, it doesn't mean that the economy as a whole is getting, Poorer or it's a pr-problem for all, but for some it may be a problem. And these are, and especially one group that, loses in the price deflation are of course the debtors." }, { "speaker": "philipp_bagus", "time": "54:44", "start": 3283.98, "text": "the debtors lose and the creditors win. No, it's not a problem for the economy as a whole because exactly what the debtors lose, the creditors will win. but of course, the, the creditors, will protest. They, they will say this is horrible, we have to do something ag-against price deflation, because, and they will invent theories about, deflationary spirals and liquidity traps, and they-- the, the point of course is that this, debtors, to-- historically has been very well organized. because big business, banks, they are, they have been the big debtors, and of course, the government is the biggest debtor of all, of all, and they, they have the common interest of, Getting out of a priced deflationary scenario and get into priced inflation. And the creditors, or the people who, who would win in a priced deflation, which are the creditors, and all people who hold, hold money, all people who hold money, they gain through the increase in purchasing power, they aren't so well organized, they don't have a lobby group that, that, defends them. So this explains why, We have this in, in the media and in, in general, we have this fear of deflation and that we live, in a world of, price inflation because the people who win in a price deflation are much better organized and much closer to power To government power, then those people who win in a price deflation, actually, a- actually power itself, the government itself, wins in a price inflation, and loses in a price deflation because it's, it's a bigger debter, debter, and that you can see also in the thirty, thirty years, after the Civil War, that there were, that there were conflicts. the people who were highly indebted said this would, was horrible for them. Of course it was. they would have been better off if they, they would have had price inflation because they were debtors, but they were portray-- portraying it as if, as if, if would, it would be a problem for the US economy as a whole, and it wasn't. It was a, a time of tremendous economic growth, and it may be that the relative position- Wealth position of the debtors decreased, but o-overall wealth, increased tremendously in, in, in these years." }, { "speaker": "stephan", "time": "57:27", "start": 3446.61, "text": "Fantastic, I really like that insight about, the political strength, if you will, of the campaigners on the inflation side versus the deflation side. And I think maybe just to summarize for, if you were to talk to the typical man on the street who hasn't necessarily studied Austrian economics, he is probably- Confusing growth deflation with bank credit deflation, right? So when they hear on the news, they think, \"Oh, deflation is bad,\" they're probably thinking of bank credit deflation, whereas those who are more in favor of a sound money are fa-in favoring that hard money, sound money idea because they want the benefits that will come from growth deflation, wouldn't you say?" }, { "speaker": "philipp_bagus", "time": "58:10", "start": 3489.59, "text": "Yeah, most certainly. Most certainly. The point is that central banks, they don't make this dis-distinction at all, or central bankers, they, for example, like a few years ago in the eurozone When, price deflation was coming close, close to zero, it wasn't even negative, and it was the inflation of what they measure, that is CPI, with their, in their terms. they were saying, \"Well, we're getting close to this territory threshold, so we have to inflate.\" But They sh- they didn't even ask if this was caused by bank credit deflation or growth deflation. I mean, if, if it would be caused by growth deflation, most reasonable pe- reasonable people would have to agree, \"Well, this is fantastic. This isn't a, this isn't a problem at all.\" So, yes, one should decide be- between the two, in- Again, gross deflation is good for everyone. bank rate deflation is, yeah, hurts. It hurts, but, it speeds up also the recovery process, right?" }, { "speaker": "stephan", "time": "59:21", "start": 3561.19, "text": "Yeah, so it's a corrective, yeah. I really like the way you've, explained that. I think it was really, helpful for my listeners. Philipp, did you have anywhere, in terms of, if my listeners want to follow more of your work, where can they find you online or read any, other work? Works by yourself?" }, { "speaker": "philipp_bagus", "time": "59:40", "start": 3580.41, "text": "Well, my website is philippbagus dot com and my Twitter name is, yeah, I'm on Twitter also, philip, philippbagus, at, yeah, philippbagus my Twitter name, yeah. So if you want to follow me, you can also, also do that. And on the Mises side, of course, I have, we, Mises website, I also have, there are all the stuff that I publish with Mises there." }, { "speaker": "stephan", "time": "01:00:06", "start": 3606.94, "text": "Fantastic. Well, thank you very much for- Joining me, I've really enjoyed chatting with you. Thank" }, { "speaker": "philipp_bagus", "time": "01:00:11", "start": 3611.55, "text": "you very much," }, { "speaker": "stephan", "time": "01:00:12", "start": 3612.29, "text": "Stephan." }, { "speaker": "philipp_bagus", "time": "01:00:12", "start": 3612.65, "text": "I" }, { "speaker": "stephan", "time": "01:00:12", "start": 3612.73, "text": "also enjoyed it very much. He's brilliant, isn't he? Really great explanations on deflation, and I think it's just such a commonly misunderstood topic, especially amongst the no coiner types out there. So make sure you share this episode and think of it when you're trying to explain it to those kinds of people. Also, just a quick note with Ministry of Nodes, me and my co-founder Katan, we are available as well if you're a listener and you are More interested on the economics aspect of it, but maybe you're struggling on the technical aspect of Bitcoin and you want some tips and guidance on how to secure your hardware wallet and private keys and how to set up your Bitcoin node. We are available as well, you can also book us in for just a private consultation and we can just help you out over a Zoom call and basically just pay us what you think we're worth, right? So if you wanna get in touch, you can find us at ministryofnodes.com.au or just give us an email, ministryofnodes at gmail.com. As usual, the show notes and the transcript for this episode will be at stephanilivera dot com slash one five three. Thanks for listening, and I'll see you in the citadels." } ] }