How To Stay Ahead Of The Fed
Are we simply cogs in the monetary machine? In the first episode of Debased, Jeff Deist explains why he joined Monetary Metals, what will happen with the banking crisis, and how to profitably align monetary economics to shape a better financial future.
Connect with Jeff and Monetary Metals on Twitter: @JeffDeist @Monetary_Metals
Why Today is NOT like the 1970’s
Danielle DiMartino Booth Episode
The Case for Gold Yield in Investment Portfolios
01:40 What’s Wrong with Macro
04:14 Banking Consolidation
09:53 What’s Different Now
12:38 Stemming the Crisis With…
15:39 Triffin’s Dilemma
17:03 Macro Hubris
18:36 A Modern Day Money Experiment
20:54 Radical Rates
24:34 Cogs in the Money Machine
25:54 Gold and Moneyness
28:52 Comment and Subscribe!
Welcome back to Debased, where we talk about the current state of money. My name is Benjamin Vern Nadelstein, and I’m joined by my colleague, Jeff Deist. Jeff, how are you doing today?
Hey, good morning, Ben. It’s good to be with you.
Jeff, I’m excited to have you on the Monetary Metals team. For anyone who doesn’t know you, they’ve obviously been living under a rock, but why don’t you give them a quick overview of how you got to Monetary Metals from the Mises Institute?
Yeah, it’s interesting. It’s a big change for me. I was at the Mises Institute about 10 years and trying to get economics out there to new audiences. And it’s very tough, as you know, in a sense, we have a neo-MMT rubric running a monetary and fiscal policy today. This idea that we have almost unlimited leash for monetary central bankers is I think pretty scary. And we’re operating the US federal government, maybe a third of it. During COVID, more like half of it, basically with deficit financing. So that’s MMT light in effect. So we certainly have our work cut out for us. It was great being at the Mises Institute, hearing from so many people when I left, so many notes and cards. It’s just great to connect with people like you. Obviously, you’ve been a consumer of Austrian economics and read and watched things at the Mises Institute. So this idea that we could go out there and get kinetic and hopefully do something with gold, in particular, to pull some of that value out of it, to pull some of that moneyness, as Hayek would say, out of it is exciting to me.
And so I really like the idea of doing a weekly, almost a wrap type show, wrap up type show where you and I figure out what’s going. And it’s interesting that we all fall on this chat with using the term macro. And we understand what that means, of course. But the flip side is that macroeconomics, in a sense, is really a pseudo-science in a pure economics perspective because using aggregates to better understand what human beings are doing is pretty fraught. And we’ve seen that with some of the modeling failures of our supposed macro economist friends at the Fed and otherwise over the past couple of crashes. And boy, it really feels like we’re on the cusp of another one. And let’s hope that’s not the case.
Yeah, let’s hope that’s not the case. I find this MMT aggregate framework, you never use it in your real life. And anyone who ever said any of these phrases or ideas or terminology, if someone said this to you in real life, you would back away in horror, probably. I mean, if a friend said, Oh, let’s just put it all on your credit card. It doesn’t matter. Oh, this is my aggregate friendship. I just increased my aggregate friendship. You’d be like, This is so weird. And so I agree that economics, life, there’s just a reality. And these new theories, I can’t even call modern monetary theory a theory. Like you mentioned in your book, it’s not modern, it’s not monetary, and it’s not a theory. Why don’t I give you a second there to talk about the book, actually, and how you discuss modern monetary theory?
Yes. MMT is fiscal first and foremost. It is a program of using the Treasury Department through Congress, presumably. I hope we still ask Congress to authorize things like spending and wars, but I don’t know, we’re bypassing them the last couple of decades. But nonetheless, using the Treasury Department to simply issue money in many ways will be a lot more transparent than the system we’ve got now, wherein we create debt at the Treasury level, and then the Fed provides ready backstop for that debt and comes along and basically with a blink and a nod says, by the way, if nobody else will buy your treasury debt during a crisis, we will. So that’s a strange liberty, a strange free market. But yes, I think MMTers are having some influence today. I think as Austrian minded people, we need to push back on that. This is an important time, I think, in America. Are we going to have just absolutely unbound debt and unbound spending? Are we racing towards some crash? The political landscape is pretty bleak, Ben. So it’s got to come from us out in the country if we’re going to put the brakes on this thing.
Yeah, completely. And what’s scary now as we’re seeing these regional bank crisis happening, you’re seeing a consolidation of not only the power and money into these big, too big to fail banks, but really politically connected banks. Those small regional banks we had Daniel DeMartino Booth come on, those small regional banks are the ones who are suffering and states and countries and counties where you knew your banker who said, Oh, I know Jeff, we’re going to give him a loan, or Ben, he’s a smart kid, and maybe we’ll help him out on his journey. Those guys are going to be gone. So you’re going to be a number 2,443 at JP Morgan Chase as this consolidation happens. And it’s on a political level to the federal government, but now it’s happening in the business level as well.
Well, there’s already been a consolidation relative to, let’s say, the 1930s where there were orders of magnitude, maybe three or four times more small local banks in the country. So we’ve already seen a real winnowing down since the SNL crisis in the 80s, since the Great Recession in the 2008s. So this is already happening. It’s accelerating. Of course, they, meaning small and regional banks, do the bulk of the lending to the American people in this country. Most of us don’t pick up our phone and call JP Morgan. So the Big Four are going to become more important than ever. What they’re going to do with FDIC insurance, all the moral hazards that that entails. We were talking about moral hazards in 2008 when layman was allowed to collapse, but other organizations were not when B of A was forced to basically absorb countrywide but not market to market to all those toxic mortgages at the time. There was a lot of talk back then about moral hazard, but it all looks quaint today. I did a little digging around and I mentioned this during the Monetary Metals shareholder meeting. The total global debt in 2008 was roughly $140,000, $142,000.
By global debt, I mean sovereign, corporate, household, family, individual, etc. Now, there’s a whole layer of shadow debt, and there’s a whole layer of public pensions at national and local levels which are not included in that. But nonetheless, let’s call official traceable debt about 142 trillion. Well, now it’s over 300, maybe $305 trillion worth of debt washing around the world. And so that’s 2 X since 2008. Has the world become twice as rich, twice as productive in that period to justify all this new lending? I would argue it emphatically has not, which would presumably support our argument that all of this has been weaponized, that the can has been kicked down the road, and that things have gotten worse since then. So when macro becomes something that just seems very gloom and doomy, almost that the average individual can’t understand the degree of global contention, then I think that’s a good time for us in our personal lives and certainly in our role here, Monetary Metals, to think about the micro and what are things we can do as individuals, what are things we can do locally to protect ourselves. Because I think this macro situation is really just completely outside of our control.
And I’m not sure that we can vote the right Congress critters into Washington who are going to have anything meaningful to do with US fiscal or monetary policy at this point.
Yeah, I think that’s exactly right. I mean, if you ask a person on the street, what are we going to do about the $31 trillion in debt? I don’t think there’s even a pat answer or a default answer that most people have. I think the higher up you get, Paul Krookman will say, Jeff, you don’t understand. It’s never been easier to pay off the debt. And maybe that’ll placate some of his readers. Some people say, We’ll grow our way out of this. But I think most people just say, Well, what are you going to do about it? It should be changed. And that’s where a bottom up for profit business really can make a difference. The same way that other businesses like Airbnb or Uber made a difference where most people said, It’s a cruddy day and the taxi service didn’t pick up the phone. What are you going to do? It’s not like there’s another choice. And now there is that other choice. The question is, how big can that scale from a ride sharing service to a monetary question?
Well, let’s not forget the average person in his or her personal life worried about their mortgage, their jobs, their kids, whatever it might be. In a sense, they would say, look, back in the early 90s, Ross Perot was showing all these charts and talking about how this debt is going to end up. And David Walker, the comptroller of the currency in the mid 2000s, was going on a tour around the country and warning about this. And yet the sky never fell and nothing happened. And it was $5 trillion when George W. Bush entered office in 2001. It was $1 trillion when Ronald Reagan entered office in 1981. He called that number unfathomable. He said $1 trillion worth of debt was unfathomable. And of course, it took 200 odd years to reach that limit. And now we’re 31 or 32 or whatever we are. Not to mention the entitlement obligations that most seniors in this country in terms of Medicare and Social Security are counting on. The fiscal gap is a whole show we’ll have to do some time. But nonetheless, the average person can certainly be accused for not making their life revolver on threading over the national debt.
I mean, that’s entirely rational because it’s wildly outside one’s control. And in fact, the sky has not fallen. But what’s different now is the interest debt service. I’ve seen charts up late. We were warning about this, the Mises Institute, a lot of people were warning about this just a few years ago. Hey, look, we’ve got all this debt, tens of trillions, and most of it has been issued in this low interest rate environment over the past few years, especially since, let’s say, 2008. But then a lot of it was issued in the COVID era as well. So debt service on all that was very happily low. The average weighted interest on all of that outstanding debt was well below 2 %. It was like 1.6 % up until very recently. And so the federal government was very happy to engage in deficit spending to finance a third or even a half of its budget annual, it’s spending every year by borrowing because it was only costing 300, 400, and then it started to creep up to 500 billion a year. Well, now it’s sky rocketing. It’s getting up to about 6, 7, 8 hundred billion, soon to be a trillion.
And when you get up into a trillion, you’re basically saying that in order to make a minimum payment on our credit cards every month, annually will cost us as much as Social Security, will cost us as much as Medicare, will cost us as much as national defense and the Pentagon, and DOD and all that spending. So that’s very, very scary. And yes, the MMT years are correct in one sense that government debt is different. Certainly, the US government has lots of assets at its disposal, lots of federal land, for example. It also has the biggest baddest military on earth, as our friend Brent at Santiago Capital is happy to point out for us. So I understand that. And I don’t think this is an immediately calam situation because other governments and central banks around the world are doing worse, including the Chinese, including the ECB. But nonetheless, there are natural limits on things. I certainly believe all human action is ultimately governed by physics in a sense. And if we continue to plot this, if we continue to say, Hey, debt and deficits don’t matter, like Dick Cheney famously said, I think those words are going to come back to haunt us in the form of a dramatically reduced US role around the globe and also in a dramatically decreased US standard of living.
I’m going to do everything in my power to make sure that that doesn’t happen and that some sanity returns to us. And you just wonder, Ben, can this be done through people of good faith acting to avoid this? Or does it require some really unpleasant market correction? That’s the $10,000 question.
Yeah. And I think let me ask the $10,000 question for right this minute the side case, which is, there’s a current banking crisis happening mostly in the regional banks at the moment. Interest rates are high. A lot of their portfolios are under water. They’re just going under every week it seems like. By the time you get the podcast out, who knows? There might be another bank under. So a lot of people are saying, here are some options to stem this crisis.
First has been mentioned a short selling ban. So you would unable to be betting on the price of the stock going down. Second, might be that the Fed will pivot. They’ll lower interest rates so low that not only will this banking crisis be stemmed because the portfolios are back to normal, but that rates will actually go so low that the banks are shored up and they are looking totally safe. Your bank is no longer under threat. That will stem the crisis. Or option three is minting the coin. We can simply say debt doesn’t matter, deficits don’t matter. We’ll mint a platinum coin, send it over from the treasury, the Fed will buy it, everything will be fine. Or door number 4, which is that there will be federal deposit insurance on all deposits, regardless of the amount, which you think is most likely, Jeff?
Very, very tough to say. I think the trillion dollar coin idea is interesting, put it mildly. Paul Krugman’s for it, which tends to create a reflective attitude in me. But nonetheless, the question would be, what would that coin be worth on the market? Were it to be put out there for sale? What would that coin actually bring in the market as opposed to the value assigned to it? It’d have to be pretty big coin. It got to be at least as big as a gold medal in the Olympics. So no, I don’t think that’s likely. I think people understand that there’s no difference between that and just pretty more Fiat in electronic terms. It just feels more real because it would take the form of this physical thing that would probably be housed in some nuclear bunker somewhere, I guess. No, I think they will continue to kick the can down the road. I think they will bring interest rates down or attempt to. I think this has gotten out of hand, though. The marketplace will ultimately determine interest rates, not the Fed funds rate. And so I think that there’s no there, there. We’d like to think that these really smart people at places like the Fed, and they are very smart people.
And I won’t any this for all of them. I don’t think Jerome Powell is some maniac, globalist, WEFer who wants to destroy America so that we all have to eat bugs and live in hovels. No, I don’t think that. I think he’s a well intentioned guy. I think he’s a brilliant guy. But as Keith Wiener points out all the time, there’s no person or group of people can know, especially in this global interconnected, interdependent economy, where money should be flowing, what the cost of capital should be, what the so called money supply should be. It’s all unknowable. I mean, Hayek explained this to us a long time ago and the fact that we keep falling for this stuff. And of course, as the supplier of the world’s reserve currency, we’ve got this triffin’s dilemma, which a lot of Monetary Metals fans will already understand. But there’s an inherent tension, if not an outright conflict between, one, our desire to control as a sovereign nation, our own domestic monetary policy. And drone Powell has been doing that by raising interest rates aggressively to try to quell inflation. But then also supplying the world through trade deficits with enough dollars to transact business and also having the exchange rate between those dollars and whatever foreign currency you’re dealing in not change or diminish too radically.
You got to have a stable exchange rate. And then finally, you want to try to do both those things in a global environment where there aren’t really capital controls, at least between the main countries, so that capital can flow wherever it might want to. I mean, it’s hard to do all three of those things. And so not only does Trump have to manage all that, but he has to have what he calls a soft landing, which I would presumably define as GDP stays positive. There’s not a huge spike in unemployment and interest rates can be allowed to normalize over time. So this is so far beyond the abilities of any one person or group of people. These aren’t magicians. These aren’t alchemists. As Nohmy Prins calls it monetary alchemy. I think that’s such a great phrase. And so it’s a very tough environment. Nobody could master it. And there’s a hubris to it. There is a grandiosity to all this that an economy is something that can be engineered through legislative or monetary policy fiat. And of course, it isn’t. An economy is about production. Economy is about capital investment and increasing production. That’s how you actually increase the well being of humans in society.
And Ben, here’s something that my good friend Bob Murphy is talking about. I hate the political in this country. I hate culture wars. I don’t like this stuff, but imagine all of this stuff with a really nasty economic depression or recession. The scapegoating, the blame game. None of that would get any worse. So I hope that what we can convey to people through this show over time is there are deep cultural and social ramifications to all this. The idea of high time preference, the idea of moral hazard. This is all very real. And it doesn’t just exist on some economic plane. It filters down and affects everything we do, the decisions we make as consumers, as savers, as people trying to have the retirement maybe someday, maybe provide for our kids, maybe pay off a mortgage. Boy, what a mess. So let’s be like a diamond. Let’s cut through all this.
Well, that’s what I love about not only Austrian economics, but in some ways, monetary medals is a science experiment, if you want to think about it in that term, in economics, which is that the Paul Krugman’s of the world, the MMTers of the world, the Janet Yellens of the world are telling you, time preference doesn’t exist. That has nothing to do with interest rates. That’s just some kooky Austrian theory. But in the real world, yield curves are inverted, which means if we were going to take the Marshmallow test, all these strange things would happen. Yield curves can be inverted. People don’t need to have interest on their savings. You can have 0.01 % on your savings deposit. So your savings account looks like your checking account. People don’t need that. What they really need is stimulus checks and aggregate demand needs to be stimulated. And not only is that not true, once you start reading Austrian economics, you realize it’s not even that complex. In your own day to day life, you want things now, and that shows up in your time preference. And the cool thing about Monetary Metals is that we’re showing that in our interest rates.
So when we pay this yield on gold, in some ways we have to coax it from the current gold owners who are having it in storage or holding it at their homes. We have to offer an interest rate, and that obviously needs to not only compensate them for the risk, but for not having the liquidity as well. And that needs to be a positive interest rate. If Monetary Metals offered not only a zero interest rate, but a negative interest rate, your business would go under in 20 minutes. I mean, no one would offer you their gold. And yet that is a private sphere showing, look, interest rates must be positive. There’s a floor in the ceiling on interest rates. And yet when we look at the federal government and the most important interest rate in the world, which is the Fed’s interest rate, you’ve seen negative interest rates, you see zero interest rates, and you see rapidly volatile interest rates. We’ve shot the moon towards five, and there’s a feeling that we’re going to pivot back down to zero and possibly negative. And it’s such an obvious indictment of not only their type of economics, which says negative interest rates are fine, yield curve conversions are fine.
This has ramifications, like we’re saying in a broader social world where people accept that time preference can be wonky and it is what it is.
Well, a lot of our critics don’t believe in the concept of time preference, and they would disagree with the idea that in a marketplace, interest rates are positive and necessarily so. They just wouldn’t agree. My retort to that is always, Okay, well, would you rather have your dream house at age 40 or would you rather have it at age 92? I think most people would take it at 40 because all things equal, we’d prefer consuming today versus a far away future. And so if we’re going to give someone $1,000, let’s say a personal friend or family member, in a loan and say, Okay, a year from now, you can give me back 900. That wouldn’t compute for most people just in terms of human action. I think there’s a lot we can understand axiomatically about human nature and about human action. And I know that a lot of people in mainstream economics refute that. They’d say, Well, Jeff, how do we know that someone would rather have their dream house at 40? Maybe they’re weird. There’s always going to be that thing. But inverted yield curves, we have to understand that it took the late Paul Volcker almost two years to raise the Fed funds rate from about 11 ish to about 20 ish.
That was almost two X, almost doubling over two years, which was radical. Let’s not forget, people forget this, prime borrowers with good credit were paying up to 21 % in that period of, let’s say, 1981 when Volcker was finishing up his rate hikes or his attempted rate hikes. Again, the market sets rates. I don’t want John Tamme coming after me about this. But nonetheless, that was a real thing. People with good credit were paying 21 %, for example, on mortgages. It took him two years to get there. Now, fast forward to 2023, in just one year, we’ve gone from below 1 %, about 8.83 %, Fed funds rate to over 5 %, effective funds rate. So that’s more than 5 X in one 12 month period where what was considered radical and aggressive, Paul Volcker going 2 X was in a 24 month period, roughly. So if we’re wondering why we’re getting inverted yield curves, I think the one year is at about 4.7 %, now I think the 10 years is about 3.5 %. Okay. I mean, to an extent, yes, you can use force in effect. You can force things through monetary and fiscal policy to happen.
The question is whether you can do any good with all of this. Frank Shostak, who writes over at Mises. Org, he’s an Israeli economist, very interesting guy. He always says, Hey, look, money is just a representation. It’s not the linchpin in the economy. What makes the economy wealthier is more capital. So creating more money or fiddling with interest rates is not how we create prosperity. How we create prosperity is to try to have government set the best conditions. You have a rule of law, have contracts respected, don’t over tax people, let interest rates actually reflect. Here’s an idea. How about if interest rates actually reflected the savings habits of the underlying populations? Lots of people are saving more than their paychecks and putting it in the bank, then your cost of lending would go down and vice versa. That’s not a radical concept. But when you try to engineer things, when you just use force, we should expect these radical distortions like the inverted yield curve. It should make us sad. It should make us angry, I think. This idea that we are cogs and that we should be subject to these machinations of what our rulers want us to do.
And they put us in a box and we go in the direction they want us to. We’re not cattle, we’re not tax cattle, we’re human beings and we want a positive return on our money and we want the ability to save, whether that’s in a currency or in the stock market or in real estate or in bonds or whatever, we want the ability to save, to put away money for a rainy day. That’s a very natural human impulse, all of us, if we’re lucky, will get old someday and it’ll be hard to work physically and otherwise. And beyond that, if you even have the good fortune to do more than save for a rainy day and actually leave something behind after you die for your kids, again, the most natural human impulse. And so these truly human impulses, we turn them on our head. Savings is for chumps. When inflation is higher than interest rates, when you’re not even treading water by putting money in the bank and putting money into something, let’s say, a CD or something safe that forces you out to chase yield, that’s very anti human policy. But I would argue that both are monetary and fiscal policy or anti human.
Here’s the thing. Here’s how I see monetary metals. Bear with me if this sounds pitchy. I look at it, I think, differently than Keith Wiener in some senses is that here’s what we know is that for a couple of thousand years, several thousand years now, gold has never gone to zero and neither the advent of pure Fiat, let’s say since 1971, really earlier than that. The introduction of Bitcoin and other cryptocurrencies, the introduction of MMT into more mainstream thinking, NeoKeynesinism, all these fiscal policies, the biggest bad military. None of these things have ever made gold go to zero. And whenever it’s allowed to be, gold has an element of moneyness to it. In other words, if you simply allow people to transact, some people will actually use gold or demand gold. Gold contracts, fortunately now, are illegal. Once again, the United States, they were not at one point. So gold has never gone to zero. I’m not saying it couldn’t. I’m saying it never has. It always has, at least, industrial or jewelry uses. It’s always had a degree of moneyness to it. And then the final factor would be that there’s a couple of hundred thousand metric tons of it sitting around all over the world.
It’s sitting in central bank vaults, it’s sitting in private households. It’s sitting in deposit boxes at banks. It’s sitting on the balance sheet of some public, but God, we can’t even begin to imagine the private company holdings, the family offices, all this gold is sitting there at current dollar valuation that’s 12, 13 trillion dollars worth of gold still in existence. And we have this tremendous asset. And again, it never goes to zero. So even people who drive gold bugs, even people who are Bitcoin maximalists, will admit it is an asset. It has a value. So why aren’t we pulling something out of this asset which is otherwise basically sitting fallow all of the world? What if that could be used to finance, as collateral or otherwise, production of goods and services? Well, that’s a hell of an idea. We just need governments to get out of the way and allow that to happen. So I don’t think gold has to go to $5,000. I don’t think Bitcoin has to be outlawed or regulated by the powers that be. I don’t think we need a return to a gold standard. I don’t think any of these dramatic what ifs needs to happen to say that right here, right now under current conditions, there’s a value proposition to putting all this gold that’s sitting around to use.
I think it’s pretty fascinating. I’m encouraged that more and more people since 2008 and now with this new crisis are waking up and thinking outside the box. That’s so important. I hope that we can use the marketplace to prove this concept of ours.
Absolutely. I couldn’t think of a better note to end the episode on. Jeff, I want to thank you so much. Thanks for tuning in to the first episode. If you have any ideas or comments on inflation, how it’s impacting you, how you’re protecting your wealth, what topics you want to see covered, what you want Jeff and I to discuss next, leave a comment in the description. Thanks so much for tuning in.
Additional Resources for Earning Interest in Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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