Jeffrey Tucker, author, economic scholar, and CEO/CLO of Liberty.me, sat down last week with Mo Dawoud of WallStForMainSt to talk about the state of the US—and global—economy, Austrian economics, and Bitcoin’s place in a faltering economy. Both Mo and Jeffrey were very critical of the mainstream economists and their inflationary economic doctrines. Let’s examine the main talking points in Jeffrey Tucker’s WallStForMainSt interview:
Central Banks’ Control of the Interest Rate
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A main determinant of the state of the US economy has been, for decades, the Federal Reserve’s interest rate. The interest rate set by the Federal Reserve serves to either stimulate or restrict lending by the individual Fed member banks. How? Every Federal Reserve member bank—which is pretty much every bank in the United States at this point—is required by law to keep their reserves in an account with the Federal Reserve. The Fed’s interest rate determines how much profit the individual banks will make by keeping their reserves in their Fed vaults rather than loaning them out.
If the Fed’s interest rate is, say, 5%, then its member banks will earn get 5% profit on their reserves every year for simply holding them rather than lending them out. But, if the Fed lowers its interest rate to 0%, the banks make no profit from holding, and are highly incentivized to loan out their reserves—thereby expanding the money supply, which of course stimulates investment and economic growth. The European Central Bank has ran into difficulty stimulating lending even at a 0% interest rate, and has opted to implement a negative interest rate in order to stimulate credit expansion.
Another function of the Fed’s interest rate is the Federal Reserve’s discount window, which is a source of extremely short-term credit that is made available to member banks. If the interest rate is 0%, banks can get relatively small, short-term loans from the Fed so that they can remain solvent and will only have to pay back the principle. This “free” credit helps the fractional reserve banking system remain solvent, and is very important to the sustainability of a system that Murray Rothbard often called “inherently fraudulent.”
In the interview, Jeffrey Tucker offered a simpler explanation of the Fed’s control of the interest rate. He said that the interest rate is the “price of credit.” And, just like any other price controls, manipulating the interest rate determines the prices of goods, as it is a large determinant of the rate of inflation or deflation in the economy. He says that changing the interest rate obscures the true state of savings in the economy and creates a false sense of prosperity.
So, it is clear that the Fed-controlled interest rate is essential to the well-being of the economy. However, its arbitrary manipulation does much more harm than good to the economy. Rather than allow the interest rate to be determined by the free play of the market, by the time preferences of individuals, the Federal Reserve changes the interest rate so that they can steer the economy in any way they choose. The Fed believes that it has the power to prevent economic downturns and usher in a never-ending period of prosperity. But that has never happened, says Jeffrey Tucker, and the Fed has actually caused all of the economic recessions and depressions in the United States since it was created in 1913.
Included in these financial disasters is the very recent crash of 2008. Tucker says that the Fed pumped money into the economy in order to stimulate growth, which pumped up a massive, unsustainable stock market and housing bubble. Tucker also said that the crash of 2008 has “broken” the lending markets in the US, and that the Fed is now struggling to pump up another bubble because none of its traditional tools are working, due to the damage inflicted upon the lending markets in the crash of 2008. According to Jeffrey, all of the money being thrown at the banks is not actually entering the economy because of this damage. Additionally, the Fed’s stimulus programs are really preventing a true recovery and are only stagnating the current state of affairs.
“We’re still trying to adjust out of the 2008 crisis, still!”
Free Markets and Capitalism
Mo and Jeffrey pointed out a great confusion in the public opinion regarding the role of the free market in the 2008 crash. Tucker noted that many people believe that the bank bailouts and the billion dollar bonuses handed out to the bank CEOs were a product of deregulation, of unrestricted capitalism. But, Tucker said, the left fails to realize that everything regarding the 2008 financial crisis that they blame free markets for was really caused by government intervention into the markets. In fact, the only thing that has brought any progress in the world has been the progression of the free market! Jeffrey then points out the economic ignorance displayed by many of the leftist documentaries on the 2008 crash, as well as economic ignorance coming from the left in general.
From Jeffrey Tucker:
“A lot of these films… don’t really understand market economics.”
“Government can’t create anything… They don’t create wealth, they destroy wealth. That’s extremely clear.”
“The market in general is the great creator of wealth.”
Bitcoin’s Place in a Faltering Economy
Finally, the interview with Jeffrey Tucker concluded with a discussion on how Bitcoin fits into this world, which is shaped by misguided beliefs about the abilities of central banks and the nature of the free market.
The discussion on Bitcoin started with speculation on what the role of government currencies would be in a hypothetical world where Bitcoin has taken over as the preferred medium of exchange. Both Jeffrey and Mo agreed that a strong possibility for the role of national currencies would be solely to pay taxes. Tucker referred to the recent OECD report on crypto-currencies and how it concluded that digital currencies could never replace fiat as legal tender because “people need to pay their taxes.” It seemed as if Tucker found it amusing that the only role the government currencies would have in a Bitcoin-dominated world would be to pay taxes to the government:
“In the future, national monies will be used to pay taxes, but that’s pretty much it.”
Jeffrey Tucker’s talk about Bitcoin then turned to the topic of adoption by major corporations. Mo noted that Overstock set a precedent for Bitcoin adoption by large enterprises, and Tucker stated that be believed it is only a matter of time before even larger companies start following
Overstock’s lead and accepting Bitcoin as a legitimate means of payment. The next step for Bitcoin adoption in the mainstream business world, said Jeffrey, is when companies start doing their accounting in terms of Bitcoin rather than fiat currencies. He said that this shift will
gradually start to happen as Bitcoin’s user base continues to broaden, which is only a matter of time. Jeffrey then backtracked slightly and said that he did not even know what “a matter of time” meant anymore when talking about Bitcoin, because acceptance of the currency has grown faster than anyone could have ever imagined.
“Bitcoin is huge compared to what anybody imagined it ever would be.”
Mo then asked Tucker what he thought about the mainstream media and their constant predictions about the death of Bitcoin, none of which have came true.
“All the mainstream predictions of Bitcoin’s death has been wrong.”
Jeffrey then talked about the inevitability of Bitcoin’s competition with mainstream, government currencies and how such competition can bring nothing but good to the global economy. Tucker said that the US has not had any currency competition in approximately 160 years, so while competition between crypto-currencies and the dollar is inevitable, no one really knows what will happen. Only one thing is sure, Bitcoin keeps getting stronger and it is here to stay.