 This is Mises Weekends with your host Jeff Deist. Well, ladies and gentlemen, welcome back. Once again, it's Mises Weekends. We're joined by a friend of ours, someone I'm sure many of you already know, Daniel Lacalle. He is an economist, a PhD, someone who speaks all over the world at places like the US Fed and at Heritage and travels around to a lot of different countries in his role as a fund manager. But Daniel, I think what's most interesting for us is that you're not an academic economist at a university. You're not an academic economist at a place like the Fed, but you're sort of what I consider almost a new breed of economists who's out there, kind of like No Me Prins, kind of like Daniel D. Martinabuthan, that you are reporting almost from the front lines. You look at companies, you look at sectors, you apply technical economics training and libertarian and Austrian thought, and you bring all this together in a way that's very different from what I consider this dopey, credulous financial press. When you watched Jim Kramer talking about stocks, in other words, I think, talk about being an independent economist. Yes, I think it's, thank you for that, by the way, because I find it's great to be in such company according to you, but I think it's very important to keep an eye on reality. And one of the things that happens when you speak with scholars, with people that come from academia, is that they stick to, you know, to the dogmas. They stick to dogmas that have the Phillips card, the old-fashioned Excel spreadsheet models, and the reality is a lot more complex. And as we are seeing more and more each day, the economy is not just what the government is spending, what consumers are doing, how people are deciding to spend or to save. The economy is vibrant, it's changing all the time, and there's an overlay that academia tends to forget, which is the financial market, and hence the reason why people are so skeptical about economists and so skeptical about mainstream economists. Because while they exert a tremendous influence on financial markets, they absolutely and completely ignore the challenges and the impact of the decisions that they make in financial assets and asset prices. Well, they also are very good at predicting things, are they? They kind of blew the crash of 08, for example. Absolutely, because think about this. Academia, while giving a sort of magical wand type of mainstream academia, gives a sort of magical wand to monetary policy, to government spending a very aggressive level of direct influence on the real economy of monetary policy and the biggest economic agent, which tends to be the public sector. While they do that, they completely ignore economic cycles. Most economists tend to, by accepting the fact that governments and monetary policy can influence the way in which the economy moves, they ignore economic cycles. And because an economic cycle is an abnormality, usually based on the assumption that there is a problem of lack of demand that can be solved through government intervention. And if you think about this, most of the academia tends to think that all economic problems are demand problems and a such need to be sorted out through somebody, be it the central bank or the government or both, that incentivizes demand. But absolutely ignore oversupply, which is probably something that we, from the side of Austrian economics, understand a lot better, because that actually, the challenges of supply side economics and the excesses, are much more explained by the fact that economic cycles do happen, no? But it would seem that even today, a lot of fund managers, a lot of Wall Street folks, and certainly a lot of professional economists really don't know much at all about monetary policy. In other words, they kind of ignore that side of the equation. Because we have seen, I think this is the third generation of traders that has only seen demand side policies, has only seen expansionary policies. And as such, they don't see anything else. I was having a discussion very, very recently, actually 40 minutes ago on Indian television about the challenges on the Indian economy of the Federal Reserve raising rates. And the answer by mainstream economists is, well, the Federal Reserve should not raise rates. And you see, we have lived such a prolonged period in which every piece of negative economic news was actually good news for financial markets, because it meant that central banks were going to push further with established policies that everybody sort of feels right now in uncharted territory. Because the only thing that we have seen is I've lived 600 rate decreases, no? Imagine, so that is a big problem because it clouds your perception of value, it clouds your perception of what is risky and what is attractive. It clouds many investment decisions. And it's a big challenge right now. But if you're a Westerner or at least an American and you're under, let's say, 40 or 50 years of age, you've never seen 15% interest rates. You have no idea what that would even mean. Paul Volcker might as well be from the 1800s rather than the 1900s. In other words, we have entire generations of people in the world of economics and finance who have never seen interest rates in operation. Yeah, and more worryingly, there is a very large proportion of people who think that interest rates themselves are a negative instead of an essential factor of the price of money and why money has something that is scarce and needs to have a price as a reflection of risk. And it's so interesting because at the same time, the same people that tend to say that, look, interest rates, I have never seen interest rates go up and I expect that interest rates will never go up, those same people have a very aggressive and possibly negative view about the real economy. And it's interesting because while central bank policy has led so many people to be extremely complacent about financial markets and about risky assets, at the same time, there is something that doesn't click. So you do see interest rates at zero, but you don't borrow more. You do see tremendous amounts of money supply and banks willing to lend you almost for anything. They don't even ask you, you know? And people are actually saving more. So something inside is actually behaving much more intelligently than what they initially perceived by the current environment. But it is extremely dangerous because an entire generation does not know what is going on. But also, shouldn't financial markets serve a noble purpose? In other words, allocating capital to its best and highest uses, which makes us all wealthier and healthier and happier and it raises people out of poverty. But instead, I think even people who don't understand technically, they sense that it's rigged. They do sense it. They do sense it. And it's reflected in something that I find fascinating when I speak with clients, no? Is that on one side, you see equity markets shoot through the roof. And at the same time, many of my clients, they just want to be involved in fixed income, despite negative real rates. So they do sense that something is not right. But I agree. I mean, financial markets do serve a better purpose. And it's a noble purpose because it's allowing companies to finance themselves and the ones that do better to finance themselves at a better rate and to have more access to liquidity if they're doing the right thing. It is a way of giving a bonus or a premium to companies that allocate capital adequately and, therefore, create more value and generate better business and better goods and services for the community. And all of that, it's distorted by the fact that suddenly central banks are worried about price, are worried about the fact that they don't worry about the fact that those effects are created by financial markets. The financial markets are serving their purpose, but they're worried about the fact that credit growth, they just worry about credit growth. They don't worry about what type of credit. They don't worry if a lot of that money is going to very high risk, high yield, no real return type of companies, bubble assets, et cetera. They just look at credit growth as sort of a goal in itself, no matter what type of growth it is. Now, I remember speaking at the European Central Bank and saying, isn't the European Central Bank concerned about the fact that 80% of capital allocation in the European Union is going to recycling of capital? And they just didn't even know that. They thought, what is the problem? Well, it means that you're basically just churning assets between the same parts of the economy, but you're not creating more and better goods and services and more productivity. Central banks are not talking about productivity almost at all. They actually think that low productivity growth is an abnormality that will be corrected through time, but they're not understanding that they are part of the problem. And mainstream economies, for example, almost never talk and in financial markets about money velocity, which I find fascinating because if you're actually seeing such an abnormal amount of money supply in the economy, money velocity should be an absolutely key factor to understand whether your inflation expectations and your productivity growth estimates are going to happen or are they going to be wrong? Well, give us the central premise of your most recent book. It's called Escape from the Central Bank Trap. What is the trap that central banks have created for themselves by creating so much base money and by keeping interest rates so low? Well, the central bank trap itself is the problem that is created by ignoring the impact on financial markets of the central banks policies. Central banks believe that bubbles or that excessive valuation in financial markets are sort of a benign secondary effect or even a sort of, I don't know, almost something that happens, but you don't have to worry too much about because you care more about inflation, growth, whatever. And that is the trap. The trap is that on one side, you ignore the asset valuations and the bubbles that you're creating. And once they happen, you cannot normalize the policy because the impact of that financial asset bubble would be so huge that it would have ripple effects on the real economy that you're thinking about. So almost as a collateral damage is sort of, well, yeah, valuations are high, but that is supply and demand. No, I've heard this. I've had the opportunity of working or speaking with at least three presidents or chairmen of central banks. And yeah, valuations are high, but who cares? It'll be corrected through time. And they don't understand the ripple effects that they have in the economy funnily enough until they leave the central banks. Ben Bernanke is now talking about the excessive valuations and a green span as well, et cetera. So that is the trap. The book Escape from the Central Bank trap is based on the idea that I've read numerous books, fantastic books about the absolutely atrocious role of central banks and why they should disappear. I've read numerous books about how great central banks are, the best thing after sliced bread, and that they should actually introduce negative absolute rates and push monetary policy even further. But I wanted to write a book that said, look, central banks are not going to disappear. And there are things that they can do to avoid creating more and more bubbles that end up generating lower and lower growth and more and more indebtedness. And the book is basically about the challenges and solutions that are feasible understanding that central banks are not going to disappear. I understand the argument of why they should, they're not. So my point is to give credible and feasible solutions in which central bankers pay attention to the importance of financial asset valuations a lot more than what they actually do. Well, here's an example of one trap. If interest rates were just in the historical average of 5% to 10%, the US government would be in a position where the single biggest budget item for the US Congress every year would be service on that debt. It would be a trillion dollars a year. I mean, how can they ever raise rates? Congress would have a mutiny. Well, Congress would have a mutiny, absolutely. Obviously, low rates. Well, we're for that, by the way. We're for a mutiny by Congress or anybody else. Low rates are an incentive to borrow more. Yeah. They present lowering rates as an opportunity to reduce imbalances, but they're not. They're an opportunity to binge. And obviously the most indebted and the most sectors that have the most access to debt are the ones that are going to take that opportunity, government being the first. The federal government definitely has a problem with the budget. The United States has lived too long from borrowing and with the false idea that it's actually embedded in academia, you can read very, very thoughtful papers about it, saying that the US government actually needs to borrow more because if not, it doesn't provide liquidity to the rest of the world and that the US debt is actually an asset, a quality asset that other people value. Well, obviously that is a complete nonsense. It is a liability and it's a growing liability and it's the reason why the United States, like so many other countries, gets out of crisis with weaker and weaker growth rates and the reason why it goes from crisis to crisis much more rapidly as well. Crisis have always existed, but we have seen they're more and more abundant. They're not as aggressive as they used to be before there was a globalized the financial market, but it is true that we have more number of crisis and debt stands at the forefront of that problem. Well, let me ask you something that Ron Paul asked, Ben Bernanke, do you look at gold? Do you care about gold, this gold factor into your thinking as an analyst? It does, I do, I do. I do pay a lot of attention to gold. I don't pay attention to gold from the perspective that some people do almost as the true measure of money, but to me, gold is an important factor. It's an important factor because the price of gold reflects numerous things starting with and not being only, for example, what are the real inflation expectations of the economy? The gold is an inflation hedge. I do look at the price of gold all the time, but one thing that I think that people who pay too much attention to gold fail or make mistakes by doing so is, for example, considering that a currency is stronger if the central bank of a country has more gold. The key example is the Russian ruble. Russian ruble is a very weak currency, but the central bank follows almost Austrian and actually very wise policies for its own economy. But this is clear, for example, dichotomy. You have countries in which the amount of gold reserves is high, Russia or Turkey, for example, and their currencies are very weak, their stock markets can be extremely weak and their imbalances are actually important. So I do pay a lot of attention to it, but not as sort of like the pillar that around which everything evolves, more like something that sort of, it's like an anchor. It brings you back to reality when things get crazy. Well, one last question for you, Daniel. You mentioned earlier, dogmatism. That's a charge that's oftentimes thrown at really hardcore Austrians, really true believers, but the irony here is we're supposed to be the causal realist school of economics. How can Austrians do better? How can, I mean, obviously the short answer is be less dogmatic, but how could Austrians do better? And how can we get our views out there and let people know that the Austrian perspective had a lot to say about the 08 crash and might be valuable in the future? My biggest criticism as a follower of the Austrian school is that we don't provide solutions. It's usually the Austrian school is tremendous at pointing at the problem and saying, look, so we're almost looking at that as the guys that are going to turn on the lights and stop the music. So get these people out of here. I don't wanna talk about these people. They tell me that everything is wrong. I wanna know more, no? And I think that that's where we need to step up because the Austrian school of economics was always about solutions. If we look at the teachings of Mises, we took, it was always about not just criticizing what was going wrong, but also about an entire model of economic policy that was better for savers, for the middle class. I think that that's what we're missing. Precisely in an environment in which we are seeing that maybe indirectly, maybe people don't know why, but they do get that something is wrong and they react against the status quo, the status quo by saying, we don't believe in central banks, we don't believe in governments. Yet, instead of going to something that is actually a solution to all of that, which are the teachings of the Austrian school of economics, what they do is actually go to socialism because socialism offers Xanadu, offers party, offers the music to continue to play despite the fact that there's no turntable. And so the, I think that that's where we need to step up. I think that what we need to do is to see more articles, more comments in what we say is, look, these are the solutions. If we think about this, the reason why the middle class is angry, the reason why people perceive that they are not better off than how they were before crisis, et cetera, we need, and they sort of understand that governments and politicians and they don't understand very much central banks, but they do understand that the purchasing power of their salary is lower, is that we offer solutions that make economies work better, that don't have to go constantly from boom to bust cycles and that don't elevate the government to God will at the same time protecting savers and the middle class. That's what we need to do in my opinion. Well, Daniel Akai, thanks for your time. Good evening to you in London. Ladies and gentlemen, I'm glad to be thinking about and listening to some of these independent voices. You can find Daniel Lakai, L-A-C-A-L-L-E on Twitter. You can find his book, Escape from the Central Bank Tramp, at Mises.org. You can find it at Amazon. And I really suggest you follow us Twitter Freed because he's a very active guy and someone you ought to be following. Daniel, thank you so much. Ladies and gentlemen, have a great weekend. Subscribe to Mises Weekends via iTunes U, Stitcher and SoundCloud or listen on Mises.org and YouTube.