Mises President: Another Crash Is Coming (Audio)
Jay Taylor of Taylor’s Hard Money Advisers interviewed Mises Institute President Jeff Deist about gold as safe money and the importance of unrigged markets. He warns that soon we are going to be faced with another crash as global debt levels rise. Just like Peter Schiff, Deist believes that when the rest of the world gets tired of the Fed’s money-printing, gold will re-emerge as the permanent store of value it has always been.
Highlights from Deist’s responses:
“Well Jay, in essence, Austrian business cycle theory is based on monetary policy, and it posits that monetary expansions, when they’re created by governments or central banks unnaturally, hence cause an unnatural increase in the supply or monetary base. And when they cause unnatural lowering of interest rates, they inevitably lead to malinvestment and a resulting bust. What Austrian business cycle theory does not explain per se is how to time or make money off the resulting bust. It does teach that the bust comes and we shouldn’t think of this as some sort of abstract.
“There are many many instances in recent history where people got quite rich off of shorting busts. Mark Spitznagel, author of ‘The Dao of Capital’ is of course only one example of somebody who became a billionaire as a result of the 2008 crash. Then there are perhaps more suspicious examples of people becoming quite rich by shorting something, like our friend George Soros with some of his currency trades. So this isn’t anything new. I think that the Austrian School deserves credit for identifying it, for explaining it, but cycles have existed throughout history because monetary expansion has existed throughout history, even prior to central banks…
“Well there’s no question that the Fed has managed to inflate the bubble, at least equity markets and certain asset classes and has re-inflated it in bigger and worse ways than 2008. So if you read David Stockton’s ‘Contra Corner’ every day, which I do, you will probably be very alarmed about the fact that the bubble has grown, that derivatives have continued to pace, that overall worldwide debt levels are actually higher than they were in 2008. Both personal debt and business debt have started to creep back up to levels at or above 2008. So there’s nothing happy about the debt that’s washing over the world.
“When you mention asset classes going down in the last crash, it’s interesting that about the only thing that didn’t go down was gold, which tends to teach us that gold, although it is certainly a commodity, is a different type of commodity. While diversification can turn out to be bunk — in other words, your real estate, your stocks, your bonds, your commodity investments can all go down simultaneously during a crash, which we saw in 2008 — gold as a store of value and as a safe kind of money tends to be a place where people go during times of uncertainty.
“I would say that while there are definite anecdotal symptoms of another horrific crash, whether you want to consider the Skyscraper Index as Mark Thornton talks about in the building boom, whether you want to talk about what’s happening in places like the Hamptons, if you want to talk about people still spending $300,000 on expensive dinners in Las Vegas. These are all anecdotal examples that we haven’t learned anything and that we’re right back where we were in 2008 if not in a worse spot. So clearly a crash, if you want to call it that, or a correction, is coming and clearly there are people who are going to make money and become rich off the next one just as there were the last one.
“There are people who sold their houses in the mid-2000s because they thought the housing market was just overheated for their particular region. They looked at things on paper and they realized there was no organic growth happening and that housing prices were crazy. Now, houses continued to go up for another couple years, so they didn’t necessarily hit the absolute peak, but prices crashed to at least 2000 and oftentimes pre-2000 levels. Certainly some people were able to buy back their houses or simply bank a lot of capital gain as a result of that. So certainly there are probably lots of people smarter than me right now shorting the Dow because I think the Dow is at unsustainable levels. I think most of the companies are obscenely priced when you consider their actual earnings, but you have to have some wealth to do that and you also have to have some nerve to do that. Because shorting is not for the faint of heart…
“I would say the Fed has managed to keep the stock market going in nominal terms. In real terms, I’m not sure that the market is higher than it’s ever been. It is an interesting conundrum that the political class that talks endlessly about voters and about egalitarianism and about wealth and equality is the class that is so terrified to confront the Fed or central bankers to say, ‘Well that’s independent and we can’t really understand monetary policy. The Fed ought to be left alone.’ It’s really complete nonsense. Anyone with a few hours’ time can learn what the Fed means. Anyone with a few hours’ time can demystify this stuff.
“You mentioned it really is sad the way markets work today. I think the average little guy has very little chance against computer algorithms and against instantaneous trading and I also think it’s perverse and sad that we’ve forgotten what markets are supposed to be. Markets are supposed to be clearing houses, they’re supposed to be places where people put investment capital at risk so that it can go to its best and highest uses so that it can clear out bad debt, so it can clear out bad companies, so it can replace bad management and also provide capital and money for start-ups, for ventures that show promise. And at some point in a true clearinghouse good decisions are rewarded, bad decisions are punished. Markets in their abstract sense are noble. They perform a noble purpose. But what we have today in America is so rigged and so croney that it really causes despair for the average investor.
“There’s no question, the monetary base has quadrupled four times over since the 2008 crash. The reason most of us do not see and feel that as directly as we might in consumer prices is because much, not all, but much of that monetary base is still sitting on the balance sheets of Fed member banks. In other words, they have not deployed that capital into the general economy via lending, but rather they’ve just pumped up their reserves. They’re above and beyond bank reserve requirements. And that makes sense, because in times of economic uncertainty, banks, like anybody else, like to hold onto their capital and stay fairly liquid. So you can pump quantitative easing onto the bank’s balance sheet until the cows come home. What you cannot do is make banks loan money at greater risk than the small amount of interest they can simply get from the Fed if they’re not so inclined to do so. So that’s what’s happening — money has either remained on bank balance sheets or found its way into the equity markets. It is starting slowly but surely to find its way into consumer prices. It’s something where every action has an equal and opposite reaction, and quadrupling the monetary base of Fed balance sheets in less than 10 years is going to have a terrible terrible impact on all of us…
“Patrick [Barron] is a very interesting guy, and as he points out, the dollar has become what the euro was from the beginning, which is essentially a political project. It is a political project that is propped up by nothing more than the full faith and credit of the US government and of course, its military might. The fact that we have an unholy arrangement with OPEC whereby OPEC sells fuel in dollars rather than euro or renminbi or whatever. But at some point people are not simply going to hold onto dollars that are rapidly devaluing. The political project, unlike a commodity-backed dollar, is just that — it’s something that can rise and fall with the political fortunes of the US. For the moment, with all the unrest in europe, with the problems in Russia, with the slowing growth in China, the US dollar is still, perhaps with the exception of the Swiss franc, the least ugly baby in the nursery. But at some point the rest of the world is going to say ‘no mas.’ They’re already awash in dollars and they’re going to realize that we’re never going to clean up our fiscal house, and as a result we’ve essentially exported our inflation to them…
“As Herb Stein told us, what can’t go on forever won’t go on forever. We know that the entitlement system’s not going to work forever, and it’s up to us to replace it with something better.”
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