 This is Jeff Deist and you're listening to the Human Action Podcast. Ladies and gentlemen, welcome back once again to the Human Action Podcast. So happy to be joined by our great friend and Mises.org contributor, Daniel Lecaille from Madrid this Friday afternoon for him. Now you might recall a couple years ago we had him on the show to talk about his book Escape from the Central Bank Trap. Now some of the numbers involved have changed dramatically just since two years ago. And more recently, I guess it was actually May of last year after the COVID crisis started to unfold, we had a great live webinar with Daniel which received a lot of great attention. People really felt like they got some actionable knowledge out of that. And so I wanted to have him back on the show because he has a new 2020 book called Freedom or Equality. And I think a lot of the themes that Daniel discusses and presents in this book are not only of interest to us as people who want to understand sound economics generally, but more importantly as to what's going on in unfortunately this dismal state of affairs we find ourselves. And Daniel, you know how you can tell if a book is really good? It's got a little paragraph by this guy, Jeff Deist here. That means the book is great, but I touched on your book from I believe 2018 Escape from the Central Bank Trap. So I want to go back and say, you know, the amount of new debt at the sovereign level, but also at the corporate and personal level that's been created worldwide. Since you wrote that book and of course accelerated by COVID last year, it's almost staggering. Absolutely it is. Yes. I think that one of the most dangerous elements about the last two years, and we have to underline and remember that the massive debt acceleration did not happen only because of COVID-19. It was already very aggressive in 2019. One of the biggest dangers of it is that the world and the economic discourse and debate in political terms is always revolving around governments as being the lenders of first resort instead of the lenders of last resort. And now almost in any debate that you see in the media or that you get in the economics world revolves around the idea that governments and central banks are the only and first solution, not just a way of trying to balance or reduce or mitigate the impacts of a slowdown in the economy or a change in the economic cycle. So I think that that is the biggest worry to me about this situation. We're hearing it right now, how the World Economic Forum and central banks are saying that even if the economy recovers, governments and central banks need to continue to wrongly called incentivized demand. And I think that this is a very, very dangerous precedent relative to other periods of history. So the theme, one of the themes in your central bank trap book were that there are limits to what central banks can do. In other words, they can create lots and lots of new debt and it produces only a tiny amount of let's say new GDP. So are we now up against a situation where I mean these guys are just they're literally pushing on a string where there's not much more they can do and at some point these governments are going to have to face the music. Oh, they are we're still we're starting to see it now, for example, despite extremely dovish messages from Powell and from Miss Lagarde. We're seeing how bond yields are rising creeping up inflation expectations are going up the the spreads between Germany and other Eurozone countries are rising, even with the ECB purchasing 100% of net issuances. So we we are we are seeing the evidence of that diminishing return of monetary policy. Once you realize that the first wave, which is that massive liquidity injections generate a certain level of euphoria in markets markets, elevate valuations and and you get multiple expansion based on the idea that the recovery is going to be much stronger than the recovery is not much stronger it is like all recent recoveries in the past 50 years. We go with less productivity growth and with less improvement in in in real wages than the previous one, and the, the diminishing return of monetary policy is so evident that what you end up getting is is obviously secular stagnation which is where we were getting into already between 2018 to 2019 and where we're going back to. One thing that's really different about the crisis of what we might call the COVID crisis which you and I would say was an existing financial crisis exacerbated by the virus is that in that in the oh eight no nine crash. Most of the action at the monetary policy level was in creating new commercial bank reserves what we might call the monetary base or M zero, whereas this time around, it seems like both the US government and European governments have created a lot of fiscal side stimulus so there's actually new M one and M two growth there's actually what we call ready money so that's from an inflation perspective that's different than just creating new bank reserves which by definition aren't let out. Absolutely. The previous. This is one of the very important factors about understanding the subtle but very important differences of the changes in monetary policy and their implications is that in QE one, which you were basically getting was probably a deflationary spiral. Why because what you were creating as you said with reserves for banks that would lend to an economy that was already in over capacity and therefore by perpetuating over capacity and by maintaining the level of indebtedness of the more unstable sectors or the ones that are less efficient what ended up happening was that there was no real in or at least evident in headline CPI inflationary effect obviously there is significant inflationary pressure and non replicable goods. I think that the difference was precisely last year in which the decision to inject liquidity directly to government spending and to provide either checks or different levels of stimulus to households. That elevated the level of M two and M three to let to two figures that we would not even imagine a few years ago. M three growth came up this week in the eurozone was at 12.5%. This is China type of M three growth. Obviously with all of the challenges that the eurozone has and that obviously is coming to buy consumers with a much higher level of inflation, particularly in the goods and services that they buy on a daily basis. Obviously for example that despite an allegedly subdued level of inflation at the end of 2020, you had fresh food rising 4%, you had insurance rising 3%. So two or three times the level of headline CPI in in Europe, the same happened in in the United States and we're now getting the double whammy know you have the the the bounce effect of the of the commodity complex who would say that oil prices will be recovering 30% in less than a month now and all those effects are very very negatively affecting the least well of of society, the poorest, which as you very well know, are the ones that suffer inflation, the most because where they, the goods and services that they buy, they get all of the negatives on the on the things that they buy on a daily day to day basis, and they don't get any of the positives on the on things like technology, leisure hotels, things like that. Yeah, it's interesting. I saw you tweet, I believe just maybe today about grain going up in price and seeing inflation and grain where I live in Auburn, Alabama, there's a huge housing boom going on lumb lumbar. You got to frame houses with wood lumbar is up 100% over 12 months, which is causing huge problems for the for the construction trades, the contractors, the home sellers, the developers because you have so much uncertainty with regard to pricing. Yeah, this is this is something where I think we're going to have some huge dislocations ahead. And if you're the let's say the new Biden administration in the United States, where people are seeing it is gas and groceries. I mean, that's that's pretty hard to hide. And I wonder if any of our, let's say central bank centric friends will ever give the Austrians any credit for for warning about what that this is what central banks do. This is their raison d'etre. This is what they exist to do to inflate as a policy. And that, you know, we shouldn't be surprised by this. It's it's really, it's it's it's hugely destructive. And, you know, you bring up the poorest and I want to I want to pivot a little bit to your book because there's so much in here, which is really about poverty. Yeah, and how we create a more just and a more fair society and you use the term and the concept of social capitalism in this book in a way that I think is intriguing and important. And I want to just let you explain it yourself. But I want to distinguish what what you're talking about conceptually with the social elements of capitalism. Of course, me says almost named human action, social cooperation is different from what we think of today or discuss as stakeholder theory or equity concepts. It's a different thing. Absolutely, it is. It is actually probably to a certain level, almost the opposite. Because what we what we are getting from from the, you know, from the conversation in in different international bodies and with between economies, etc. is this idea of centralized planning and government intervention as the key factor to improve equality and to improve the welfare of people. When what we're seeing actually is that more government intervention and more central bank intervention are precisely the pillars of the rising inequality in recent years, you know, why because the biggest beneficiaries of massive liquidity injections and huge huge government debt increases are the first recipients of money, which are the indebted and the ones that have access to assets and who are the worst off the ones that that pay for that situation savers and salaries real wages and the least well off. So only because of ideological reasons we find counterintuitive that the idea that less government intervention is actually more social and that is actually what I what I say in in the in the book is that if we really want to achieve better welfare and allow the lower to middle classes to recover sound money and lower government intervention are much more effective, because what we're seeing right now is the opposite what we're seeing is that the this this constant at increasing inflation is reducing the disposable income and the capacity of the middle class of flourishing and achieving a better status and at the same time it's making the poor less available to climb the social ladder. And then, when the issues of inequality come up, then they say that what they have to do is more than what they have to do is even more government intervention, and even more, even more central bank intervention. The point that I make in the book is that is to recover the word social for true capitalism is to recover is to is to remain reclaim the the word social to the human action. And of capitalism that is precisely the constant joining of the benefits of different types of people and different interests for a common good that delivers the best level of welfare for everybody. What I'm trying to say is that at the is that what you need to do is obviously there's going to be some form of cooperation with the with the governments in each country, but governments cannot be the first and the the deciders of where innovation and investment have to be in, because they will inevitably be wrong by by definition for a very simple reason, their incentive is to perpetuate the status quo. So the only way in which you achieve innovation and welfare and better real wages is by allowing competition. The key factor in social capitalism is competition and innovation. Those two things cannot be directed from the government down but from the civil society up. Our friends on the left, I think have a lot of skepticism when it comes to the idea of the private sector making investments in social welfare, which is a lot, which is what this book is is chiefly about. And they also, I think because they need central banks to pay for everything. Yeah, they they some of them recognize that central banks cause inequality, but they don't attack central banks, root and branch. I think these are a couple of blind spots on the left. Yeah, absolutely. They see that central they like central bank intervention. When central bank intervention creates inequality, what they demand is for central banks to directly finance government spending. And that's how they go from being very much in favor of quantitative easing to the concept of modern monetary theory which is not modern or a theory it's something that has been implemented in history, numerous times now which is printing endlessly to to finance government spending isn't it. I think that the problem in the left is that they perceive that the idea that a profit based economy is going to generate more welfare than a debt based economy. For them is wrong because they believe that looking for a profit is in itself a bad idea, until we understand what looking for a profit is now. It's the is is aiming for efficiency. It's aiming for achieving the way to deliver more goods and services that are affordable to the majority of people, and at the same time making them sustainable for the future. A profit based society is a sustainable society and unsustainable society is a loss based economy that is predicated on debt. No, obviously for them, inflationary policies are not bad. Because it's very simple. I come back to the point that the biggest beneficiary of massive liquidity injections and massive central bank policies are governments. So it's in effect, a way of expropriating wealth out of the economy, in a way that you would not be able to achieve, even with a communist revolution now the best way to expropriate the wealth and the, and the productive fabric of a society in favor of the government is the destruction of the purchasing power of the currency. So, if you if your ultimate goal in the left is to achieve that little by little. Those policies are something that you will defend and obviously they know that it will create hyperinflation at some point if it's done in the way that it's done in Argentina or Venezuela, etc. But they know as well the reason why in those countries, the governments have not gone back to sound money is because it's a perfect way of expropriating the wealth of the country via monetary policy and fiscal policy. Because think about this modern monetary theory says, well, if we inject too much liquidity and we put and we issue too much money, and then there is too much inflation. It is because it is not taxed enough. So what we need to do is use fiscal policy to tax that excess money out of the economy think about this. What we're doing is say we issue money, the beneficiary is government, the ones that pay for it are real wages and salaries, and once inflation, which is a tax on the poor creeps up. What we do is tax the last recipients of money, real wages and savers. So that's very interesting. And obviously, you might think that it's a flawed concept, but it's not a flawed concept. It is a beautifully, perfectly thought out concept of what you want to do is expropriate the wealth of a nation. And that is socialism at the end of the day. That's why what we need to do is to remind people that a profit based economy is not something that goes against the people. It is that something that goes in favor of people. I had the other day and sorry to get too long into this. I had the other day of an interview in El Salvador. El Salvador, as you know, they dollarized the economy when the when everything went completely pear shaped and inflation was through the roof of disaster, etc. So the government is sort of implying that there could be a possibility of the dollarizing now. And people were asking me why is that a bad idea. Now, and I said, think about this. What would you do with those colonies is the name of the currency. What would you do with those colonists, colonists, the moment that you received your salary. Obviously, exchange it for gold for dollars for anything. Why because you know precisely that it's going to be completely destroyed the purchase and power of that currency. So I come back to the point we need to remind people that expansionary monetary policies as an ultimate goal, don't aim for the idea of price stability and maintaining the purchase and power of the currency, but gradually expropriating part of the wealth of the economy to finance the debt and the spending of governments. And I actually have a chapter here. It's all about profit and price and how they're essential to this idea of social welfare and social benefit. And profit and price are awfully difficult to calculate sometimes when we've got an unsound currency underlying everything. And if Lumber's going up 100% in 12 months where I live, I'm not so sure we have much room to be criticizing El Salvador. Yeah. Well, we have, we have some room, some room. Yes, it's one thing, you know, I owe every time that that, you know, all of us in Europe or in the United States criticize rightly, the monetary policy of our nations. I always remind my good friends in Argentina that they suffer four or 5% monthly inflation due to due to a much worse monetary policy monetary policy can get a lot worse. But I agree with you that it's gotten out of hand. I agree with you that it's gotten out of hand. And there's things like this, but not just lumber or think because this is the this is what I what I hate about the the dialogue with the ones that defend inflationary policies is how actually dishonest it is now you're saying, look, you know, the rent prices, healthcare, education, insurance. So many of the essential fresh food of the essential goods and services that people purchase are rising much faster than in headline inflation and that and then real wages. They should be truly concerned about monetary policy, but what do they do. They never blame it on monetary policy. So they will say that the reason why lumber prices are up is not because of the dollar debasement, which obviously is a big, big, big component of it, but because there's ample demand for reconstruction and refurbishment of properties in the area. I come back to the perverse incentive of monetary inflation is to always blame an external enemy. In Argentina, the government destroys the currency every year prices go up 40%. What does the government do present itself as the solution with safe prices that are intervened. What happens then that the supply of those goods and services collapses because the businesses have to sell them at a price at which they are losing money before they sell them and then who they blame, they blame the businesses. And you know the history of the assignments for example in France, in France, they issued assignments inflation went through the roof who did they blame first the church, then businesses. So, it's the use of the external enemy we're seeing it right now know first they say that there's no inflation so they print more. Once they print more and then inflation starts to creep up, then they say that it's temporary, and that it has base effects so they have to look at a longer period of time. Then, some of the most important goods and services continue to rise above real wages and above the partisan power of citizens in the middle and the lower classes. So they say that it's because of speculation. It's never the central bank or the government who's to blame. And that is, unfortunately, the perverse incentive of these policies is that when is that they will never give us credit, and they will never give us credit because all of the negative effects that come from monetary policy, they will adhere the blame to somebody else. If bonds and equities go through the roof, the blame is not on central bank policy. It's on us investors who are greedy and evil and take too much risk. If quantitative easing leads to mass to increase the inflation, they will blame it on businesses they will blame it on OPEC. You name it on China. I don't know. You always have an external enemy, and that is what is so intellectually dishonest. And unfortunately, the reason why the left always continues to defend those policies, even with the experience of it failing in Chile, in Argentina, in Iran, in Venezuela, so many countries, Ecuador, El Salvador, you name it. It's because they always say this time is different. And the reason why it happened the previous time is because of some external enemy. You know, it strikes me we spend so much time talking about politics and monetary policy is that we can engineer or tweak or set a policy. But we never talk about just goods and services. I mean, this is what your book is talking about. We need productivity. We need innovation. We need profit signals for more goods and services. You know, this can't be engineered or commanded. It just strikes me that, for instance, money, you know, money's gotten so funny now you take Bill Gates. Bill Gates has a lot more zeros in his bank account than I do. But at the end of the day, our lives are far more similar than they were between a middle class guy and a wealthy guy two, 300 years ago. I mean, that's that's because of deflation innovation. I have a smartphone in my pocket that's roughly the same as Bill Gates. Maybe he has a nicer house or nicer car or, you know, whatever. But our lives are more alike than unlike. And I think that's because of deflation, which seems like the shibboleth that central bankers fight all day long. Absolutely is that there is a massive welfare case for moderate deflation. Absolutely there is deflationary pressures lead business owners and entrepreneurs to look for better alternatives for more effective costing for better management of inventories for to invest in those technologies that in that make things easier and that make things more available to a wider public deflation is there's absolutely nothing negative about deflation. When you include the words productivity competitiveness and efficiency. Absolutely. There is there's only one thing about this in the periods in which we have had very high levels of inflation. What we have basically seen is a complete collapse in innovation productivity and competitiveness. Why, because inflation is not a tool for competitiveness. Inflation is a tool for cronyism. What you're basically doing is a subsidy on the least competitive businesses that are usually very close to the government and that are and that are unable to improve either the wages of the of the workers or the cost structure and the margin base of the business. That's why it is so important to tell citizens that this completely flawed idea that deflation is negative and inflation is good. Actually, is proven by what they do on a daily basis as citizens. It's proven by the fact that you want to live in countries where deflationary pressures are allowing you to align your level of welfare to that of somebody as astronomically rich as Bill Gates, because you have a similar access to goods and services in an inflationary economy. The equivalent of Bill Gates would basically be some, I don't know, farm owner or or somebody who has the the concession of mineral resource. That's that that would be the person what would align you to that person absolutely nothing what aligns you to me to Bill Gates is this is that this device is extremely cheap is extremely extremely cheap for everything that it contains it might be expensive relatively but if you think about it what the evidence of the positives of deflation are precisely in technology and that and technology innovation is actually deterred by inflationary pressures. So that's the point that we need to make people understand is that the message that we need to combat deflation create some inflation because then with that level of inflation, people will consume more save less companies will accelerate their investment programs that will create a beautiful incentive to improve real wages above the level in which prices go up. That is an absolute fallacy never. It's never happens. It absolutely never happens. The real wages never follow the inflationary pressure, because the inflationary pressure is a subsidy on the sectors that prevent real wages from growing and that's why productivity growth, which is the first derivative of real wages. That's why productivity growth collapses with massive inflationary policies. Well, you know we can't separate any of this stuff from society or culture. I mean it's all interconnected and it makes this, I would argue that inflation and a policy inflation makes us worse people. I want to give this quote, you're going to get yourself in trouble. I think this is actually from the introduction of the book. You say family is the most social economic agent. Be careful, Daniel, next thing you're going to bring up God or something. You're going to get in trouble with, you're going to get in trouble with this book, but just I mean we're just about out of time, but I want to talk about the cultural ramifications of all this. So give us your thoughts. Yeah, when I say family is the most social economic agent is for people to understand that whatever your family is is that when individuals free individuals get together for a common purpose. They willingly decide to help the the other part of that economic agency without any problem why based on a profit based view that is that you're using the part of your savings and part of your of your wealth to create something that is better for everyone in that segment. Okay, that's the point that I'm trying to make is that a society that is based on those similar principles which are prudent savings and prudent investment is much more social than one based on spending at any cost and debt. Well, Daniel, I want to thank you so much for your time this afternoon. You know, ladies and gentlemen, you can find his book Freedom or Equality, his book on the central bank trap and all of his other books at his Amazon page. Probably the best way to follow Daniel is via his website, which is dlacale.com. There's both an English and Spanish language site there. He also has both an English and Spanish language YouTube page. You can find his Twitter feed and other things through dlacale.com. And in terms of economists out there sort of in the trenches providing analysis of real data, not over here in the academic or theoretical world. There's nobody I recommend more highly to stay engaged with Daniel. And so, hey, Daniel, I want to want to thank you for your time today. I hope our listeners have a great weekend. The Human Action Podcast is available on iTunes, SoundCloud, Stitcher, Spotify, Google Play and on Mises.org. Subscribe to get new episodes every week and find more content like this on Mises.org.