Interview with Jeff Deist (Part II)
“Our prosperity is temporary and illusory. “
Claudio Grass (CG): While President Trump blames the Fed, the Fed blames the President and his trade war for the recent turbulence in the markets. What do you identify as the most important effects of the trade frictions in the country? Do you expect the conflict to be resolved before the next election?
Jeff Deist (JD): Tariffs are a form of economic warfare, and as a protectionist/mercantilist, Trump does not mind incurring casualties in trade wars. I am not sure he fully understands, however, that those casualties are the poorest Americans, those who shop at Wal-Mart for cheap food and clothes. Tariffs are taxes, and like all taxes, they disproportionately hurt the poor, as far more of their income goes to basic consumption of necessities.
Unfortunately, there is stubborn support for trade tariffs among the American public, and this allows politicians to make the same errors time and again. More Americans need to read Henry Hazlitt! If in fact Trump loses the 2020 election, his trade tariffs–and the recession they may well cause– will be the reason.
CG: Speaking of the upcoming election, it can be argued that the intense polarization of the public that started in 2016 will escalate further this time around. With the possible exception of Joe Biden, most leading Democratic candidates, like Bernie Sanders and Elisabeth Warren, seem to have a very radical economic agenda, and a distinct bend toward more centralization and government intervention. Do you think such ideas resonate with the majority of voters, or even the majority of Democrats, or are they only popular with a small subset of supporters, on the left fringes of the party?
JD: Americans like the mythology of self-reliance, but they like the reality of government entitlements, welfare, and militarism. The US is not a libertarian country, but merely a less advanced social democracy. Our polarization is cultural and regional more than political, and it is certainly not ideological. The vast majority of Americans would not advocate a reduction in spending on Social Security, Medicare, national defense, education, or virtually any significant federal programs. Sanders and Warren represent increasingly mainstream economic views; the opposition to them is based almost entirely on social issues like race, abortion, guns, and supposed “climate change.”
CG: Among the most talked about proposals in the Democratic debates have been Universal Healthcare, the forgiveness of student loans, an extreme increase in regulations and a Wealth Tax. What would you expect the impact of these plans to be on the economy?
JD: These proposals represent the next “great leap forward” in American statism. The Civil War represented the end of federalism and states rights; the progressive era represented the end of substantive economic freedom; the New Deal era represented the entrenchment of entitlements, central banking, and income taxes, and the Great Society era represented the enactment of a permanent welfare state.
Today’s progressives are on the cusp of the next historical turn, toward guaranteed income and taxes on wealth. All of these eras demonstrate the relentlessness of progressivism and the challenge for liberty-minded people. Note that the Right is worthless in this battle; to paraphrase Murray Rothbard, the US GOP merely consolidates the gains of the Left.
CG: Up until today, the Achilles heel of generous promises like that was the question “how will you pay for it?”. Now, however, we see rise of Modern Monetary Theory and the slow normalization of the idea that debt is not a problem, not just in the US, but in Europe as well. Do see this shift as a real threat to the economy and to society or do you rather see it as a passing ideological fad?
JD: Former Vice President Dick Cheney famously said “deficits don’t matter.” This represents a growing belief in America, that our $22.5T debt will never need to be repaid– and in fact, will never have much of an impact on our economy! This is magical thinking, and of course, the rest of the world knows the US will never get its fiscal house in order. In this sense, buyers of US Treasury debt should demand junk bond rates! And of course, we already finance much of our federal spending using debt; in fiscal 2019 the federal government will spend about $4.7T and collect only $3.7T.
So the difference is effectively monetized, over many years, in a roundabout way: the Treasury sells bonds, the public or banks buy them, and the Fed either actually repurchases them (as with QE asset purchases) or creates an implicit backstop (i.e. the public believes it will serve as the buyer of last resort in a crisis). Although the Fed is not directing the Treasury to literally print money (or create digital money), it is in effect already engaging in MMT by financing roughly 25% of the annual federal budget (the deficit).
CG: The past few months have been a very exciting time for gold and interest has once again picked up in the face of increased market volatility. Short-term price moves aside, what is your long-term view on precious metals vs fiat money and what is your own motivation to own gold?
JD: Gold is a hedge not only against financial risk, but against political risk in the form of currency collapses. Will the US dollar, or the Swiss franc for that matter, always be valuable? We cannot know the future, but we can study the past. And gold– unlike many currencies, assets, and investments– has never gone to zero. As Mises explained, the market decides what is money. So far, modern human societies have never rejected gold as money, no matter how hard central banks try. Gold is not an investment, it does not pay dividends. It rises and falls only in relation to the volatility inherent in fiat currencies, but gold is not volatile itself. It holds value precisely because it is not subject to fiat issuance by any government or central bank.
CG: Going forward, there is a multitude of risks for the US and for the global economy. From geopolitical tensions and global political division, to economic red flags and a significant shift in monetary policy by most major central banks. In your view, which are the most important risk factors and pressing challenges that both investors and citizens need to look out for?
JD: Look for western governments increasingly trying to ban or severely restrict the use of cash. Negative interest rate schemes cannot be imposed if people can hold large amounts of physical cash at home or in private non-bank storage. Who would pay interest to a bank when you could hold physical cash instead? By forcing us into digital bank accounts and digital payments, governments can control our lives in countless ways– tracking us, taxing us, and charging us interest for the privilege of operating with our national currencies.
Limitations on cash are nothing more than a form of capital controls, and should be seen in the same cautionary light (just this year Argentine officials attempted to restrict the withdrawal of foreign currencies from their banks). Restrictions on the use of cash are a sign you should get your money out of the country, if at all possible.
Claudio Grass, Hünenberg See, Switzerland
Bildrechte: Photo by Anthony DELANOIX / unsplash.com