{ "episodeId": "SLP485", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "jonathan_newman": { "name": "Jonathan Newman", "role": "guest", "tag": "JONATHAN" } }, "segments": [ { "speaker": "stephan", "time": "00:08", "start": 8.49, "text": "Hi, you're listening to Stephan Livera podcast, a show about Bitcoin and Austrian economics brought to you by Swann dot com. Today my guest is Jonathan Newman, he is associate professor of economics and also a fellow over at the Mises Institute. Now, have you wondered about the correct definition of inflation? I'm sure many of us have gotten into arguments about what is the correct definition in terms of what the mainstream says and what do- Austrians think and what is a more precise definition, but actually in this episode, we're getting into a little bit more detail around how even some Austrian economists can disagree on what the correct view of inflation is. So we explore this question in this episode today. The show is brought to you by CoinKite dot com. If you are holding Bitcoin, you've got to make sure you are holding your own keys and not leaving your Bitcoin with a custodian or with an exchange. CoinKite makes it easy for you to do this. Notably, they have the Cold Card, which is their Their well-known product, and you can obviously buy that and use that in various configurations, whether you just directly plug it to your computer, or whether you use NFC, or whether you use a micro SD card. Another device that you should also consider is the TapSigner. This is a device that you can use easily with NFC and with wallets such as Nunchuck. Now, this might make sense for a smaller, lower value setup, or perhaps part of a multi-signature device or setup. And so, if you're interested in any of these devices, make sure you check out coinkite dot com Discount on your cold cards with the code LIVERA. 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Swan dot com makes it easy for you to teach people about Bitcoin and you can You can even gift Bitcoin to people using SWAN. So over at SWAN dot com slash gift, you can gift somebody some Bitcoin and they will receive the gift of not just Bitcoin, but also world-class education and customer support. So SWAN's team can help that person onboard into Bitcoin. They can even email and ask about how to set up a wallet and all of those typical questions that people have when they are new to Bitcoin. So SWAN can make it easy for you to gift to your friends and family. So think about if you have any friends or family with a special- occasion coming up, whether that is a wedding or a birthday or some anniversary or some other kind of gifting occasion, and go and check out swan dot com slash gift. And now on to the show with Jonathan. Jonathan, welcome to the show!" }, { "speaker": "jonathan_newman", "time": "03:13", "start": 192.65, "text": "Hi, thanks for having me, Stephan." }, { "speaker": "stephan", "time": "03:14", "start": 194.05, "text": "So I had a look at your paper that you wrote along with Christopher, and I thought it was an interesting one about inflation. Of course, there are big, big debates all around the world, not just in Austrian circles, but in the broader world, about what inflation is, how should we define it, how should we think about it. I thought it'd be handy to get you on and talk about, talk a little bit about that. So do you wanna just start with a little bit of your motivation, like why did you write this paper?" }, { "speaker": "jonathan_newman", "time": "03:38", "start": 218.33, "text": "Sure The past few years, in like popular media where people are talking about what inflation is and where it comes from, you see in the media people talking about how supply chain issues cause inflation. You even see a lot of people talking about how greed causes inflation, as silly as that is, but of course, you know, going back in the, the history of economic thought, there, there used to be a well-established definition of inflation that involved an increase in the supply of money, especially an increase in the supply of money or, the supply of notes beyond The, the amount of, of gold that existed in the economy. So, so that used to be the definition, but then, you know, since the Keynesian revolution and other changes in the history of economic thought, we've, we've sort of meandered from that idea to the idea that inflation is, is a rise in prices, and, and of course, that is a consequence of inflation, but it's not, inflation itself. So in this paper, we try to, like, we try to settle on a really good definition of, of inflation that's suitable and that, it, it is, it's good and, and it goes along with the rest of the Austrian literature. but unfortunately, there's, there's actually, like you, like you mentioned, there's some debate even between Austrian economists and differences, between Austrian economists, even between the big names like Ludwig von Mises and Murray Rothbard, they had, they had slightly different, definitions of inflation in their works. And so in our paper, we, we talk about how Rothbard's definition is the best for doing economic And the main reason why is because it, it makes use of counterfactual reasoning. It, it compares one timeline with an alternative timeline. and that's really the best way to, to do economics and, and think about changes in the economy. So that's why we settled on, on Rothbard's definition." }, { "speaker": "stephan", "time": "05:29", "start": 329.04, "text": "Fantastic. And I think this is something where most people, I would say, or a lot, a lot, a lot of Austrian influenced people are probably using the Mises definition, like in terms of how they just think about things. And we'll get in-- we, we should Explain that, but the way, you know, the way I've, I've often thought about it is the Mises style, any increase in the money supply is inflation. But do you wanna explain a little bit about those definitions? So can you give us, you know, the Mises definition and what's the Rothbard definition?" }, { "speaker": "jonathan_newman", "time": "05:56", "start": 356.48, "text": "Sure. In, one, in some of Mises' main works, he defined inflation as an increase in the supply of money in excess of changes in the, the demand for money. So if there's an increase in the supply of money For money, then you have the decrease in the purchasing power, you have the, the, the change in the price level, and so you have those sorts of consequences. And the thing about that definition, it, it's-- I mean, it's that is useful if that's the sort of thing that you're trying to analyze. The thing about that is, is that could apply to a gold standard, it could apply to, cryptocurrencies, it could apply to fiat money, but also to, fiduciary media. So whenever there's any sort of increase in the, in the money That money supply is const-- what constitutes that money supply? If it's in excess of, of money demand, then, then you-- That, that would be, inflation in, the Misesian sense." }, { "speaker": "stephan", "time": "06:54", "start": 414.48, "text": "I see. And then what's the Rothbardian definition?" }, { "speaker": "jonathan_newman", "time": "06:58", "start": 417.84, "text": "So I actually have it right here. So in Rothbard's version, in Man, Economy, and State, he defines inflation as the process of issuing pseudo warehouse receipts, or more exactly, the process of issuing money beyond any increase in the- stock of specie. And of course, by specie he's referring to gold, and for warehouse receipts, he's referring to banknotes. And so here Rothbard is, is, is showing that inflation is something that happens, outside of the market. Inflation is something that happens when the banking system through fractional reserve banking or through, a, a government that's issuing paper notes, if they do that in excess of the, of the total stock of gold that exists, then Then that, in, in Rothbard's view, that counts as inflation. So there's a slight difference there. In Rothbard's version, there's no real reference to the demand for money, and the reason why is because the demand for money will fluctuate or go up and down in the market economy on its own, and so it's, it's best to, to sort of set that aside and just focus on the, the change in the supply of money and what is, what is instigating that. And so from Rothbard's perspective, it's, it's if there's an increase in excess of the, total stock of gold." }, { "speaker": "stephan", "time": "08:16", "start": 496.25, "text": "I see, yeah. So, yeah, so summarizing then, as Mises defines it, it's inflation is an increase in the money supply as long as it's also-- that there's a connection there associated with the increase in demand for money. But Rothbard is putting it in terms of the actual, you know, issuing money beyond the stock of specie. So I'm curious then, and this also kind of veers over into the whole full reserve and fractional reserve debate, and now I'm personally in the Does that mean your opinion might sort of turn based on if you're a, if you're a Hoppian, Rothbardian, full reservist, or you are a Selginite, you know, quote unquote, free banker who believes in, let's say, fractional reserve banking as a legitimate process? I guess does that kind of turn-- Your opinion might turn on this question, right?" }, { "speaker": "jonathan_newman", "time": "09:02", "start": 541.56, "text": "Well, I think that depends on the, the sort of, connotation that you have with the term inflation. So if, if you don't want, your policy prescriptions to Inflation, then I can see how, how that would happen. But, I mean, even, even in like just like an objective, unbiased sort of sense, the, the consequences of fractional reserve banking do result in the, the same sorts of things that happen when there's an increase in fiat money, namely that there's this expansion of claims on, on the base money beyond, beyond the amount of base money that exists. So in that sense, like just objectively, they're, they're similar and they've- Both fall under Rothbard's definition. It's-- so really you would only have that sort of difference or that, maybe that pushback from, from those guys if you, if you just didn't want that, that term inflation to be associated with your sort of desired monetary institutional setup." }, { "speaker": "stephan", "time": "09:59", "start": 598.84, "text": "Yeah. So I guess in a theoretical sense it shouldn't change your view, but in the sense that if you want to be seen as anti-inflation, then you might not like that definition because, you know, as you're saying, the Rothbardian view, because Rothbard was an- Anti fractional reserve banking, and this view is sort of more aligned with his definition where, you know, I mean, to make a simple example, a silly example, let's say there's a hundred pieces of gold in the economy, and there's, you know, a hundred and fifty tickets that are paper claims for those hundred, you know, those fifty-- what we're talking about is that fifty difference is fiduciary media, and, you know, the creation of those tickets, let's say those extra fifty tickets above and beyond the hundred, you know, gold ounces or gold pieces," }, { "speaker": "jonathan_newman", "time": "10:41", "start": 641.13, "text": "that So you're, I think you got it exactly right. So if they, if they don't want that term inflation associated with their view, then, then they, they might push back against this. Otherwise, I, I think, I think it works. one, one of the key similarities between an increase in fiduciary media and an increase in fiat money, is that it's, it's something that runs, counter to, to the, the choices by market participants. So in, in the case of fiduciary media, and I know that, I know I know there are all sorts of arguments, going against what I'm about to say, but in the case of fiduciary media, that's an increase in the supply of money that may or may not be, matched by a change in the demand for money, but it's definitely, at least it's not certainly matched up with the supply of savings and people's desire to save. So our, our point in the paper is that there's this mismatch between what market participants choose and how, how the money supply might react to people's change in preference Inferences. And the definition that Rothbard offers really does, really does distinguish those two outcomes or those two processes." }, { "speaker": "stephan", "time": "11:51", "start": 710.94, "text": "I see. And so let's put it this way, and this is maybe coming to a similar kind of conversation that maybe readers might have learned from reading Gary Hull's \"The Ethics of Money Production,\" right? So there's this notion that as, you know, new money is created, la-- under a free market scenario, right? Not government scenario, there is some, you know, legitimate, purpose in that, you know, in the pre Bitcoin world, let's say. that, you know, there are people trying to produce gold, like literally trying to go out and mine and refine it and produce it and make gold coins and, you know, and so on. And I think the important point that you spell out in the paper as well is this, is, you know, they paid a cost for it, right? It wasn't just ex nihilo, I'm the government, I'm, I'm, you know, Darth Vader, pray I don't alter the deal any further, style, right? It, because, because those gold producers actually went and" }, { "speaker": "stephan", "time": "12:42", "start": 762.39, "text": "thing, as opposed to in the fiat arena, it's just today, it's dollars, it's numbers on a bank account, it's numbers in a database somewhere." }, { "speaker": "jonathan_newman", "time": "12:50", "start": 770.3, "text": "That's right. So the, in, in the case of any sort of market-produced money, the market is going to choose a money that has some sort of constraint on its production, otherwise, otherwise the, the money would, would just very rapidly lose value. And really, the, the only reason why, fiat monies don't lose value as fast as they would is be- Because of the interventions by the state. So, if you have legal tender laws, if you have all sorts of other things that are sort of propping up this, this system, then it can maintain itself at least for a while. But of course, as we all know, all fiat monies are gonna end in disaster. but in the case of, of gold or like you said, in, Bitcoin, the, the sup-- the supply of it has some sort of constraint. I'll, I'll, I'll mention gold since that's what we talk about in the article To pay for factors of production, they have to pay employees, they have to buy the land, they have to do-- they have to buy capital goods and drilling and mining equipment, so they have to buy all these things just to get the thing out of the ground. And so what that means is the, the supply of gold on the market is constrained by prices, and very specifically the prices of those factors of production. But, I mean, since, what matters is the relative prices of these things, it means that there will, there will only be an increase increase in the supply of gold in a, in a pure gold standard if the market actually desires it, if, if prices are such that it is profitable and productive to increase the supply of gold." }, { "speaker": "stephan", "time": "14:25", "start": 865.22, "text": "I see. And I guess to be clear, none of this contradicts the sort of original insight that any supply of money theoretically can serve the role of money, right? It's not that, you know, because this is another common confusion, right? A lot of people believe that, oh, in order for the economy to grow, the money supply Supply has to also grow, and that's not true, is it?" }, { "speaker": "jonathan_newman", "time": "14:45", "start": 884.73, "text": "Oh, not, not true at all. And that was a part of the original sort of rhetorical tricks that were used to, to get the, the Federal Reserve started. So the idea was that we needed an elastic currency, that one that could expand and contract with the economy, specifically, expand. So like, the idea is that if the economy grows, then the needs of trade grow, and therefore we need additional money. but of course, that, that's not technically true because prices can Can adjust. So since prices can adjust, then it, it means that any, any supply of money will do, with the important asterisk, as you mentioned, that it's any supply of money that is selected by the market. So, so if, if it's profitable to produce additional gold, then you can, you can do that, and that, that might, that might mean that you don't have to have all of the price adjustments that, that would have happened without the increase in the money supply. But the point is, it's the market that chooses. It's, it's Economy, through all, all of the im-important interconnections in the structure of production, through everybody's preferences, being revealed through action, it's the economy deciding should we increase the money supply or should we change prices. So in, in the case of a, of a gold standard, any, any increase in the supply of gold, it doesn't have the inflationary consequences that the, that an increase in the, in fiduciary media or in fiat money would have. And the reason, the reason- Why that, that we pinned down in this article is because market participants select it, market participants decide to go through and do it and, and purchase the factors and, and produce the additional gold." }, { "speaker": "stephan", "time": "16:23", "start": 983.14, "text": "I see. And so is there any-- Do you have any comment on why that might be? Like, why would they demand more monetary units? Or is that, you know, unanswered or, you know, we don't really fully know?" }, { "speaker": "jonathan_newman", "time": "16:35", "start": 994.51, "text": "Well, so we, as, as economists, we can sort of take a step back from, from those sorts of questions and it doesn't, it doesn't really matter Do it, or if they, if they produce additional gold, then their, their actual reasons for doing so don't really matter. in the case of a, of a, a gold standard and a gold producer, all that, all that has to happen is that it's profitable to do so. So what that means is they can produce more gold than, than they have to spend to produce it. So suppose they have to spend a hundred ounces of gold, a-and in so doing, they purchase factors that allow them to produce a hundred and five ounces of gold as, as an And that's a five ounce increase in the supply of gold, but since it was based on that price difference, it means that the, the, the market, the rest of the economy was okay with that sort of thing, that that's a value productive thing. and to, to sort of drive that point home, we actually relied on another contribution from Rothbard, that's, called demonstrated preference. So i-in that case, the, the increase in the supply of, of gold is, is based on the demonstrated preference reference in the unanimity principle, such that everybody that's involved in the increase in the supply of gold and the, the spending of it and the receiving of it as income was preferred by market participants, like it be-- because they went through and did it on their own. But in the case of, of fiat money and also fiduciary media, it's-- that's not, it's at least not as clear. There's not a, there's not a connection between the changes in the supply of those and the preferences of, of market participants. So, so I- I know that's, that's-- I'm sort of like wiggling through your, question there. it's, they, they, they might want, they might want to mine more gold simply because it's profitable to do so. They might, want more gold simply because, of just the size, or, or like the convenience of the size of coins and the convenience of, of the, of what can fit into a bank vault. all sorts of considerations can go into that. but, but you're right that at least Money will do as long as prices can adjust in general." }, { "speaker": "stephan", "time": "18:46", "start": 1126.11, "text": "Yeah, yeah. And I like the point that you made that, the gold, you know, in that scenario, let's say the world was on a gold standard, the gold manufacturer is operating on a personal gold standard, right? He's thinking, can I outlay this one hundred pieces of gold to get one hundred and five pieces of gold? Like he's profitable in gold terms. And obviously for Bitcoin listeners, then in a Bitcoin world, it would be like this Bitcoin miner is thinking, I'm gonna outlay, you know, Bitcoin or, or whatever, right? so it's the same kind of thing. He believes he can profit in Bitcoin terms, and that's the important point. And then I think the other point you were making is that when you distinguish between market chosen money, chosen voluntarily by the people, and then the fiat political money, where basically it's a, it's a political decision, it's a policy choice, and so there's a big distinction there. And I think this is probably the other point you were making, which is that in that scenario of actually free market money, so- own money. Producing more money, it, it, it's still socially beneficial, whereas in the fiat money world, it's more like, it's sort of more in the value extractive sense because maybe the government is kind of taking resources from, you know, Jonathan to give to Stefan or from one person to give to another because that's kind of where we're getting into more like the Cantillon effect or the Mises effect, particularly, right?" }, { "speaker": "jonathan_newman", "time": "20:03", "start": 1203.47, "text": "Right. So you're, you're right that, a lot of the, previous authors would say that, so, so actually let Some, some people would criticize the gold standard and say, \"Well, if it-- if any supply of money will do, then isn't it wasteful for us to, to increase the supply of gold, to dedicate resources into mining more gold?\" And that's one of the questions that we address in our paper. and so Rothbard, his answer to that was, \"Well, Roth-- excuse me, gold has other uses besides its use as money.\" So, so even if, some of it will enter into the money supply, the fact that we're, we has other uses, it's still socially beneficial. It's not a waste for us to, to increase our gold mining. And while I think, I think that's true, I, we wanted to be able to generalize this to any sort of market selected money, including in the case where, Bitcoin or other cryptocurrency is selected. And the reason why is because it's not, it's not as clear that there's alternative uses for some of those things besides its use as a medium of exchange. And so we wanted to be able to say, well, even, even in those cases, it Supply to increase as long as market participants decide to do it, as long as it's voluntarily chosen. And that, that's where the demonstrated preference aspect comes in, is that if market participants decide to, to have, to have this, monetary institution where it grows algorithmically or it, it grows by, people, participating in, mining, i-if market participants decide to do that, then they have chosen, they, they have demonstrated a preference for, for that increase in the- The supply of money, i-independence of all other things that, that a, a government might do. So, a-and of course, like you said, in the case of, of fiat money, it's totally independent of the market. It's, it's, it's somebody's decision to increase or decrease the supply of, of money, usually increase. And the reason it's usually increase is just as you said, it's, it's because it's a method of, of, of extraction of resources from the market. So you can think about the, the market as this," }, { "speaker": "jonathan_newman", "time": "22:12", "start": 1332.39, "text": "Tons of stuff, and the, the government has a few different options of how they can acquire those, those things from the productive economy. They could tax it, which is very-- or tax people on the market, which is very unpopular, people don't like taxes, or they can print up new pieces of paper money that they can then spend into exist, spend into the economy and acquire resources that way. So you're absolutely right, a-and it's because of that huge categorical difference between those two inflation are those two processes that we decided to, to say, \"Well, let's call in-- this one inflation, the one that's, outside the market, the one that has those sorts of, of consequences, we'll call that inflation, but the one that belongs to the market and is where changes in the supply are decided by market participants, we, we can still talk about an increase and decrease in the supply of money, but may-- but maybe draw a line between them and say this one is inflation and this one isn't.\"" }, { "speaker": "stephan", "time": "23:12", "start": 1391.79, "text": "I see, yeah. And let's get into this effect, the Cantillon effect, and also the Mises effect, which is a specific, you know, I'm reading that as a specific type of Cantillon effect, right? Now, as I understand it, it's kind of, it's, it's the insight that money isn't neutral. It matters who gets that new money first. And so when we're talking about the production of new money, I guess you could sort of say the, the guy who's making that new money first, and maybe the first few people who he spends it with, they're kind of Winning in, in the Cantillon effect, right?" }, { "speaker": "jonathan_newman", "time": "23:45", "start": 1424.95, "text": "That's right. So the-- and that's the reason why the government is able to do that extraction, that expropriation from the market, it's because the-- whoever spends the money first gets to lay claim to those goods and services that are produced by the market before prices rise. So they, they get to, to get those things, and then everybody else has to-- well, not everybody else, but as, as the new money is spent, obviously the purchasing power of, of the money unit decreases. Prices rise, and so everybody that's later in that chain has to pay for that original expropriation in the form of higher prices. And so this is, this is why, inflation is sometimes called an inflation tax, it's because, it's because whoever spends it first gets that initial benefit, other, other early spenders also get to, to re-receive higher incomes before prices rise like at their own grocery store, but then later on in that chain is As I said, then there are losers, there are people whose incomes haven't risen and might not ever rise, but they have to pay the higher prices. So this, this sort of imbalance in the way money is introduced into economy, as you said, is called the Cantillon effect. In the, in the case of the Mises effect, which is a particular, version or particular type of the, or, yeah, an instance of the Cantillon effect, it's, it's when the money enters the economy through credit markets and has an effect on interest rates and therefore causes all sorts of changes in the production decisions that entrepreneurs make. And this, and this of course is what, Mises, it was this line of thinking that allowed Mises to, to talk about the business cycle. So if, if there's that increase in the, in the supply of credit that changes interest rates, then production gets lengthened, there's an increase in consumption as well. we have a bunch of people tr-changing their, production decisions in such a way that can't be completed. So There's only a certain amount of resources in the economy, and if you try to change the structure of production, i-in-- by lengthening it, then those new projects that you start won't be, you won't be able to complete them, at least not profitably, and the reason why is because of the simple scarcity of resources. So normally the way, the way it works is, people decide to set aside resources, they save, and then those are the resources that entrepreneurs can then use to, to undertake different production projects of different lengths. And the, the length and the, and the size of these projects is gonna be determined by the, the supply of those resources. And the critical, the, the balancing act is seen through interest rates. So like you sort of see that, that careful setting aside of resources for production and then entrepreneurs using it, you see that through, the interest rates that emerge on, on the time market. But, but when, when the supply of credit is increased beyond real savings, then you get all of the distortions. So- So, I know I've been talking a while, but let me make one more point here. Though that business cycle, is started when you have inflation as defined by, in our paper. However, if there's an increase in the supply of gold with additional gold mining and a gold standard or any market selected money, that doesn't start the business cycle. So that's yet another reason why we wanted to draw a, a big clear line between this increase in the supply of money and this in- Increase in the supply of money. One of them is inflationary, causes the business cycle. The other one is, is an increase in the supply of money, but it's, it's through a, a typical market process." }, { "speaker": "stephan", "time": "27:21", "start": 1641.4, "text": "Gotcha. Alright, so there was a lot there. Let me just rewind or re-replay and summarize that for listeners. So I think the basic insight here, as we said, there's the Kondratieff effect, which is kind of the general effect of understanding that money isn't neutral, where you put it first matters. And then a subset of that is the Of what we call Austrian business cycle theory, and that's based on this idea that interest rates in the normal free market might be at a certain level, but actually with government intervention into the market for money and central banking, lender of last resort, capital gains taxes, legal tender laws, implicit, explicit bailout guarantees, et cetera, they artificially shift the interest rates that entrepreneurs are able to get when they're trying to get their projects or get funding. And so then what happens is this process of- Malinvestment, meaning projects are undertaken or started or commenced that can't be seen to fruition because the resources required to complete them aren't available, because the-- I think, in the literature it's referred to as artificially lengthening the structure of production, right? That it's people have sort of overreached in a way. They thought they could undertake this project, but actually they couldn't because the resource, the real resources required to undertake that project, whether they are physical or whether they are labor- They just weren't available. And so that's why, you know, that's this process of Austrian business cycle theory, and that's kind of in a colloquial sense where we see these bubbles being blown up and popped over time as a result of fiat money and fractional reserve banking. How do you think that goes as a summary?" }, { "speaker": "jonathan_newman", "time": "28:58", "start": 1738.3, "text": "Oh, that was, that was an excellent summary, thank you." }, { "speaker": "stephan", "time": "29:02", "start": 1742.03, "text": "Well, yeah, so I think a-as, yeah, so we're talking about this idea that it's-- I think it's also probably a good point to, to spell out here as well, how ethical or moral consideration versus how much of this is a value-free economic consideration. That even if we discarded the ethics component of it, is there still this economics component that we can talk about and make a point about that? What do you think?" }, { "speaker": "jonathan_newman", "time": "29:28", "start": 1767.98, "text": "Yeah, that's an excellent question. We, we tried really hard to, to be very clear in the paper that we are making a value-free distinction here. So we, we are just trying to describe the different ways that the money supply can increase, either through fiat- Set money through fiduciary media or through gold standard, gold production in a gold standard. So we, we look at all of these different ways that the money supply could increase in all of these different institutions, and we just talk, talk about how in, in one set of cases there are these sorts of consequences, and in, in the, the market case, in the example that we use, most often in the paper is with the gold standard, there, there are a different set of consequences. And so that's why we draw the- The line between this case and that case, as I've mentioned. how-however, you're absolutely right, it is, it's very-- you, you have to be really careful to not let, ethical considerations creep in. I mean, I, I do think that there is, a, a good way to bring in ethics to, to talk about the ethics of money production, like, like Hulsmann does. you mentioned his name earlier, but we, we wanted to, to make just, we wanted to make a distinction for the It's supposed to be a value-free science where we're looking at the world, describing the way that it works. However, you're absolutely right, I, I, so personally, out, outside of me being an economist, I, I definitely think that, like the fiat money system that we're under today is unethical. I, I, I think that the, the way that the government uses fiat money to, to, as like a, the surreptitious, the subtle tax on everybody else, I, I don't think that that's a, a good thing to do. Sorts of, of, of good ethical norms and, and values, that I have. But in this paper, we really did try to just describe, we tried to be as objective as possible in saying, \"Here are the economic consequences in this case, and here are the economic consequences in this case, and here's, and here's how they're different.\"" }, { "speaker": "stephan", "time": "31:30", "start": 1889.96, "text": "Got it. So, yeah, so essentially the answer is, in this paper, it is value-free. Like we're explaining the problem of inflation in an economic sense, even disregarding the moral and ethical question Questions and concerns, right? And I think this is probably an important thing to understand, because sometimes people can conflate. So you may be an Austrian economist, y-yes or no, you might be one or you might not be one, but you could also be a libertarian and you might not be a libertarian, like the, the sort of ind-their distinct concept, even though to be fair, many Austrian economists are also libertarian in their thinking, they're not necessarily the same thing." }, { "speaker": "jonathan_newman", "time": "32:03", "start": 1923.27, "text": "Yeah, w-w- one comment on that. So, I mean, theoretically, one could be an Austrian" }, { "speaker": "jonathan_newman", "time": "32:12", "start": 1932.49, "text": "Hate everybody and have, you know, maybe terrible ethics or like a, a, a very strange set of ethics that, that allows you to, to, to, to be mean to people or something like that. And in that case, a-as an Austrian economist who und-- who understands man, economy, and state and, and human action and all these big tomes and has done all the reading, i-if you're, if you're like that, then you, you could come to the conclusion that, well, yeah, of course we want, fiduciary media I want to hurt people, I, I want people harmed, I don't want economic growth, all, all those sorts of things. So, so I know that's sort of like a weird example, but that does highlight the, the step that you have to make to go from the, the value free to the, to the policy prescriptions. And the step that you have to take is you have to, you have to have a set of values, in there or You have to have a set of values on the way to say, \"Well, we have these conclusions from just doing economics. Now, how do I achieve my desired universe? How do I achieve the, my desired, state of affairs in, in the world?\" And, in most, in most cases, people are, are not misanthropes. They actually do care about their fellow man, and what that means is Austrian economists do typically, end up being libertarians because they're gonna advocate for policies that, are laissez-faire that involve, no or very low amounts of, of government intervention. and so, and so that's why there's that correlation. But I, I do think, not just in Austrian economics, but in all schools of thought, a lot of people start to think the other way around, where they start to, they say, \"Well, I have this worldview, I, I, I want a lot of government, and therefore I'm gonna agree with, with this economic school of thought. Therefore, therefore, Keynesianism is good because I want a strong, powerful government.\" But, I The same sort of criticism could go the other way. So like, suppose you're a good, a good libertarian, so if you started from libertarian principles and then decided, \"Well, I, I, if I'm a libertarian, then obviously Austrian economics is correct,\" that's also incorrect. You shouldn't go that direction. so you, you really should start with the objective science, just describing the way the, the economy works, and then let that lead you to your value conclusions, to your policy prescriptions." }, { "speaker": "stephan", "time": "34:32", "start": 2072.23, "text": "I say, yeah. And so- So another interesting, interesting concept that might be good for you to help explain for us is this concept of the social rate of time preference, because I think that's also an interesting idea when we're trying to distinguish between, you know, money creation of one kind versus money creation of another kind." }, { "speaker": "jonathan_newman", "time": "34:50", "start": 2089.96, "text": "Sure. So, time preference just refers to, the way that we, prefer present consumption. So we all, we all prefer, the present to the future, just by, by our, our nature actually. So the fact that we're human And we exist in time, it means, it means that, any sort of delay in consumption means that we have to keep feeling the, the sort of, the discontent that we have with not having our end met. I know I'm sort of getting all philosophical, but the idea is that we don't like to wait. We don't like to wait for our, our satisfactions, to, to occur. And because of that, we have, we have a positive rate of time preference. We're gonna place a premium on the present and a discount on the future. So, Rothbard talks a lot about this in, in, Man, Economy, and State, and so, and so does Mises in Human Action. They, they talk about how, the, the way that the market comes together, market participants come together with these different rates of time preference, is it's harmonious and it's value productive. And the reason why is because there's somebody who has a lot of resources but has a lower rate of time preference, and there's somebody who doesn't have a lot of resources but has a higher rate of time preference, and, you know, Don't have the money today, they can interact in credit markets. So the, the person who has money available to lend, they can, according to their own time preference, they can lend the money, and the people who want to borrow can borrow the money, and we get a market price. The, the point being that we get this, interest rate that balances the preferences of, of borrowers and lenders. Rothbard makes the important point that there's, an even more extensive and, and more important time market in the economy with production itself. So if you think about, factors as, as being, something that's not consumed today, but it's something that we use to make consumption goods that we can enjoy tomorrow. It means that all entrepreneurs, when, when they're purchasing factors of production, they are delaying consumption as well. So there's, the point is that there's an interest rate that emerges in just production in general, not, not just in, loan markets. And so what we get is the social rate of time preference. So the, the, the economy as a whole settles on the price of In, in this market, and we call it the interest rate in, in economic theory, and of course, there can be all sorts of differences in loan rates and rates of return and production, but the point is that there is this underlying, rate that people are considering when they're deciding on, delaying consumption. So I'm not gonna consume today, and instead I'll consume tomorrow." }, { "speaker": "stephan", "time": "37:24", "start": 2244.04, "text": "Yeah, and I guess maybe it's like a loose analogy, but it doesn't exactly fit, but businessmen might evaluate projects based on what's called IRR, internal rate of return. And so- It's sort of meant to reflect a little bit, like they call it cost of capital, but as you said, that's not the only type, but it's kind of loosely reflecting, people are trying to reflect for that idea as well, because it's kind of the idea of net present value of money as opposed to, you know, money from five years from now or whatever. And so I guess with the creation of new money, so I guess, you know, it all comes back to what we were saying around, did you pay a cost for that new money or did you just I think that sort of ends up being like the moral of the story or one of the morals of the story, in terms of where you landed, in terms of the, let's say, the conclusion of this paper. And it also seems to me, as I read the paper, at least to me, it seems like fractional reserve banking is responsible for a lot of it also, right? Like if we were to imagine hypothetically we lived in a full reserve banking world, and, you know, whether it was a fiat full reserve banking world or a gold banking full reserve world or a Bitcoin full reserve Impact our, like, the interest rates, as an example. Do you think, for example, interest rates would be higher than they are today, like on average, just because it's like the government is-- in the, in the world today, the government is really suppressing those interest rates to give itself, you know, cheap debt, right? So, you know, do you think we can reason that way, or do you think it's more like really it, it, it-- at the end of the day, it still matters what is the time preference of that society? Do you understand the" }, { "speaker": "jonathan_newman", "time": "38:56", "start": 2336.46, "text": "question I" }, { "speaker": "jonathan_newman", "time": "39:04", "start": 2343.97, "text": "The, the central bank can influence the money supply, so it's, it's a very easy way for them to, to increase and decrease the supply of credit. Back in the day, they would change reserve requirements that would have an effect on how much banks can lend, and this in, in turn would allow, allow the central bank to have an influence on interest rates throughout the economy. So, I know, reserve requirements are zero now, and they have a different setup where they're paying interest on reserves and, and in, instead of, enforcing you have to keep a certain will, will reward you basically for keeping, reserves, and also they have other sorts of requirements, like capital requirements. The point is that the way I think about fractional reserve banking is that it's, it's basically a tool for the central bank these days to, to enact its own monetary policy. And wh-while I do think that if we had like a, a full reserve system with, with a gold standard, interest rates, would, like on average, would be higher, I'd, I also think that there would be less volatility. So what, what we Bank is interest rates go, go out of whack, so they go way down when they're increasing the money supply, and then, and then once there's, some inflation, they have to, they have to pull back a ton. Like in, in the late seventies and eighties, they, they skyrocketed because Paul Volcker was trying to get the price inflation down. And I think we're seeing a, a similar sort of thing here, but not, not to the same extent in terms of the effect on interest rates. so I, I think we would have a more environment, it would be easier for, for business to be conducted, because there, there wouldn't be these huge fluctuations in interest rates. And at the end of the day, the changes in the supply of money and the changes in interest rates would be something that's the result of the market. So it'd, it'd be the result of, of people's own preferences and deciding to increase the money supply through additional gold mining or, or even decrease the money supply in the form of like taking, like melting down gold coins and turning it into a bracelet. Litter or something like that. So all, all of that would be decided by market participants who have to pay attention to profit and loss and have to, you know, they have to provide for their families. So they're making, they're individually making all of these decisions to their own benefit, and the result is it's a sum of beneficial choices. It's a sum of choices that, that represents a socially beneficial arrangement. But as you said, in the case of, of a fiat money, whether it's, whether it's full reserve or fractional reserve, the increases are, are Not necessarily based on people's demand for additional money. I-- and, and in my view, the fractional reserve system is just another mechanism by which you can have like more exaggerated changes in interest rates and, and the supply of money. Yeah." }, { "speaker": "stephan", "time": "41:48", "start": 2507.82, "text": "And it's an important point you make that even if hypothetically we lived in a full reserve fiat system, but just the government gets to print more new coins, well, we're still gonna have inflation because again, it's an interventionist-- It's coming back to this idea of an interventionist phenomenon because they costlessly created more. And that would obviously still be harmful to us. So as you said, even in a full reserve fiat world, to be clear, we would still be suffering relative-- society would be suffering in a overall sense because governments can do that, right? And of course, normally that's a-- that's towards the end stage, right? That's more like the Venezuela, Zimbabwe level of inflation, whereas, you know, let's say in most of the Western world, governments aren't yet at the point where they're directly printing all the money. They're still-- it's- Still, this fractional reserve system where the commercial banks actually create most of the new money and the central banks are, let's say, backstopping them, acting as, as lender of last resort and just protecting this overall system that results in high inflation, but not, you know, Zimbabwe level or Venezuela level, right?" }, { "speaker": "jonathan_newman", "time": "42:50", "start": 2570.44, "text": "Right. I, well, one extra thing that I'll mention here is that, I, I do think that in terms of the way the institutions have evolved, so we used to have-- we used, we used to just use coins, we used to use precious metal coins and Those around. And then, banks, started issuing their banknotes that, and it, I, I, I do think it started off as being a full reserve type system. And so I think that step of depositing, into a bank and then seeing the piece of paper that represents the coin, just like any other sort of title, I think over time that, that caused just a disconnect in people's thinking of the paper is the money and not the gold that's behind it. And I think with fractional reserve banking, that, that connection was lost. Even further, and then when, when, governments started printing their own paper that was redeemable for gold, of course, it was fractional as well, then there was additional disconnect. It's like, oh, now it's, it's not, it's not just that, the paper is the money, but now it's paper that's provided by the government that's money. And so I think that's how we evolved to the system that we have today, where it's just a pure paper, or we devolved," }, { "speaker": "stephan", "time": "44:00", "start": 2640.17, "text": "let's say." }, { "speaker": "jonathan_newman", "time": "44:02", "start": 2642.37, "text": "So, and It happened in stages. It's not like, it's not like all of a sudden somebody had this great idea, \"Oh, I think, I think governments should be in charge of money and, and, and so let's replace all of the gold or stop using gold and start using green pieces of paper with president faces on it.\" So it's not like somebody just all of a sudden made that decision, it was a, a slow evolution, maybe a devolution is a better term, a, a slow change in where the government realized that it could use the, this, Paper as a way to expropriate from, from the economy." }, { "speaker": "stephan", "time": "44:37", "start": 2677.09, "text": "Right. Yeah, yeah, I think it is, I think most of, you know, you, me, and probably most of my listeners would agree it's a devaluation of money, unfortunately. And I'm also curious whether-- Okay, so, you know, where we are today, we're talking about what we think inflation should be defined as, right? It's, it's more like a, it's an interventionist phenomenon as we're, as we're talking about it. But if you talk to, you know Of CPI inflation, right? And so the average person or even, maybe even financial commentators might be thinking of it like that, they're saying, \"Really, what they mean is CPI inflation.\" But I'm curious as well, are people-- are we sort of buying into a Keynesian frame when we say, when people say this colloquial idea of, \"Oh, they need to raise the interest rates,\" like they're saying the central bank should raise the interest rates to get inflation down? Isn't that sort of a Keynesian frame to even think about it?" }, { "speaker": "jonathan_newman", "time": "45:31", "start": 2730.71, "text": "Yeah, it's, yeah, I Win this battle, is especially not with just, you know, one paper in the Quarterly Journal of Austrian Economics. So I, I think that, we were sort of targeting our paper at economists who were in Austrian circles who were talking about inflation, and we're just trying to make sure that we, we all see the distinction between this type of, this type of inflation, money supply increase, and this, this sort of, money supply increase that's, that's on the market. so I, yeah, I don't-- I'm not sure that we can rescue the That back, at least, maybe not in my lifetime, but, but the point is we just want-- we just wanted people to think more clearly about, what inflation is and, and the consequences there. You're, you're absolutely right that it is, it's a, it's a Keynesian idea to say that if we just sort of tinker with this interest rate, tinker with this price over here, then we can have this sort of result on prices. but, but as, as we all know, it's, it's a lot of smoke" }, { "speaker": "jonathan_newman", "time": "46:32", "start": 2791.55, "text": "and Prescriptions. They don't understand how complex the economy is. they don't understand how sometimes you could, you could attempt to do one thing and have the opposite sort of, consequence. but, I mean, that, that happens when you have this, this Keynesian view that's looking at these big aggregates and, and defining inflation as the change in, in, in CPI." }, { "speaker": "stephan", "time": "46:56", "start": 2815.7, "text": "Got it. Yeah. Okay. So, yeah, we've spoken about a lot of things. Let's try to summarize some of the key points here. So, I guess we would say, you Mises defined inflation as this increase in money supply associated with the increase in the demand for money. Rothbard defined it more like in- issuing money beyond the stock of specie, in this example, issuing gold tickets, more paper claims, more than the actual amount of gold, or in a Bitcoin case, more Bitcoin tickets than there are actual Bitcoin held on reserve. and so the, I guess the moral of the story, the lesson of this paper is to try to explain the different ways money can be produced. The Cantillon effect as that happens, and to sort of point out that the actual negative consequences are when somebody is making money and didn't pay a cost for it. I would say that's probably the, the summary, right?" }, { "speaker": "jonathan_newman", "time": "47:46", "start": 2866.08, "text": "Yeah, that's exactly right. We, we, we really weren't trying to launch a war over words. We're not trying to have a semantic battle. we, we just said that we, in, in our view, the term inflation is most suitable for this case, but the, the main point of the paper was to, to simply distinguish between those cases. Right." }, { "speaker": "stephan", "time": "48:05", "start": 2884.59, "text": "Excellent. So what do you think our, I mean, just kind of more broadly about Austrian economics and economics education, I'm curious, what are your thoughts more broadly on that? Like, do we have, what are our hopes for success on trying to reach people? Because, you know, I, I think maybe there are, sometimes there's like pop econ books and they can sort of help get to people, as an example, and then other times it's just, you know, you're, you're, maybe you're calling out only to a small percentage. You know, maybe not read or understand this concept, but maybe you're just sort of, you're narrow casting, you're trying to just get to those people because that's realistically all you can reach. What are your views just on e-Austrian economics and trying to spread that more generally?" }, { "speaker": "jonathan_newman", "time": "48:48", "start": 2927.95, "text": "So, I'm, I'm generally optimistic. I, I think that there are, some things that are happening that, cause me to be optimistic. I mean, one, one huge thing is just the existence of Bitcoin itself. So that, that has caused tons and tons of people to start reading Austrian economics and start, and start thinking about time preference and the effect of, of fractional reserve banking and, and, and the sort of the negative consequences of fiat money. So, so that's, that's a huge, reason Reason, at least from like a, a larger view, why I'm optimistic is that there's, it seems like there are way more people now that are skeptical of the monetary institutions that we have today compared to, I don't know, like fifteen years ago." }, { "speaker": "stephan", "time": "49:31", "start": 2971.18, "text": "Yeah." }, { "speaker": "jonathan_newman", "time": "49:32", "start": 2971.82, "text": "so it seem-- it seems like we're moving the needle, and of course, only time will tell what actually happens, but I, I am optimistic. you also, I, I think that, really since, The twenty sixteen time period, w-w-when we had, Trump and we had Brexit, I, I think that even outside of just Bitcoin circles, I think we have more people who are willing to be skeptical of, of government in general. They're willing to be skeptical of, of international, bodies that are, are trying to im-impose their own will on what, on what's going on in their own country. So you see a lot of decentralization efforts, you see a lot of people who aren't trusting the media as much as they were before. For, and so I think, I think those sorts of things, are, are really great. It's, it's a really great, a thing, thing to see, to see happening. It's because people aren't taking the media at its word and they're, and they're being skeptical of what they're hearing from government officials. So in, in terms of like, in, in just Austrian circles, I, I know a lot of people like to, to recommend like we need to do more popular books and popular articles and that sort of thing, and some people say" }, { "speaker": "jonathan_newman", "time": "50:44", "start": 3043.94, "text": "And, and, and journal articles and, and big books that are for academics. And, I, I mean, I know it's sort of a cop out to say this, and I, I'm just thinking like, why don't we do both? Like, if you're good at doing the popular stuff, do that. If you think that there's a good hole that you could fill in, the academic literature, then go for it and do that. So, I, I'm, I'm not one to make a, a sort of a, like a broad blanket statement that everybody needs" }, { "speaker": "jonathan_newman", "time": "51:14", "start": 3073.76, "text": "Christopher, Hansen and I published in the Quarterly Journal of Austrian Economics, but, you know, I also write for mises.org and, and I've got, other popular works as well, a-and Christopher does other things as well. I think the, the point is, you know, find, find the most suitable way and the most productive way for you to, to fit yourself into, into the movement and, and go for it, as, as opposed to trying to say everybody needs to be doing, this sort of thing." }, { "speaker": "stephan", "time": "51:38", "start": 3098.06, "text": "Gotcha, yeah. And I think example, right? I would say fifteen years ago, even ten years ago, if you said the term fiat money, most people would just be like, \"Hey, what's that? \" Whereas nowadays, I think more and more people are actually starting to understand, \"Oh, okay, yeah, fiat money, it's, it's government money, right? \" Like, so we're making some progress, I think, you know, even for me, when I was teaching people about stuff, you know, ten years ago, I'd get that question, be like, \"Hey, what's fiat money" }, { "speaker": "stephan", "time": "52:14", "start": 3134.12, "text": "You know, it's uneven and there are times where we regress, right? I think, the years twenty twenty, twenty twenty-one and twenty twenty-two were sadly a very big loss of liberty for, let's say, billions of people around the world, but hopefully we can, reach some people out there. So, look, I think that's probably a good spot to wrap up there, Jonathan. Where can, people find you online or, keep up with your work?" }, { "speaker": "jonathan_newman", "time": "52:35", "start": 3155.27, "text": "So I'm, active on Twitter. My, username is at newman j" }, { "speaker": "jonathan_newman", "time": "52:44", "start": 3163.78, "text": "See articles that I-- articles I've written at, for the Mises Institute at mises dot org, M I S E S dot org, and I just want to say thank you so much for having me on. Oh, let me also just make sure, Christopher has articles on, mises dot org. He, he's, he does a, a ton of great work. He's a great scholar. It's unfortunate that he wasn't able to join us today, but I, I do recommend everybody, check him out as well." }, { "speaker": "stephan", "time": "53:08", "start": 3187.76, "text": "Yeah, fantastic" }, { "speaker": "stephan", "time": "53:14", "start": 3193.88, "text": "It's been an enjoyable chat, thank you." }, { "speaker": "jonathan_newman", "time": "53:16", "start": 3195.52, "text": "Thanks, Stefan." }, { "speaker": "stephan", "time": "53:17", "start": 3196.88, "text": "So I hope that episode helps clarify some things around inflation and how to think through the question. I particularly like the way they summarize it, that inflation is always and everywhere an interventionist phenomenon. So if you learned something in this episode, make sure to share it with family and friends so they can learn about inflation. Also, get the show notes at stephanlivera dot com. And one quick note, Chris Hansen, also one of the co-authors of this paper, had some technical issues, so he wasn't able to In the show notes also. Thanks for listening, and I'll see you in the citadels." } ] }