 I recently spoke with my friend, John O'Donnell, on his Financial Talk radio show, and our discussion about negative interest rates turned into a much deeper conversation about the cultural and moral destruction caused by the Fed and other central banks. And really, there is no greater force than central banks for creating moral hazards, degrading culture, destroying the marketplace, and turning all of us into what I like to call high-time preference economic hedonists. A topic I'll be discussing at our Mises Circle event coming up next Saturday in Seattle. So if you can, and you're in the Seattle area, please join us Saturday morning. If not, please consider listening online at Mises.org. In the meantime, here's a great discussion with John O'Donnell on his Power Trading radio show. Jeff, there seems to be something going on that certainly I've never heard of or certainly experienced in my lifetime, which is the fact that somewhere in the vicinity of $7 trillion of government bonds that are outstanding in the world today across the developed world have negative yields. And I just have to get the Mises Institute's opinion on A, as something like this ever happened before, to my knowledge, this is unprecedented to have negative yields like this. And what is the objective that these institutions must have? And what in the heck would a Mises said about something like this? Well, it is absolutely bizarre. And we're talking about European government debt that has either an actual negative yield or even a nominal negative yield. So that is definitely unprecedented. But if you think about it, it's not just unprecedented as a matter of fiscal or monetary policy. It makes no sense conceptually, right? In other words, there's no universe in which you would accept an arrangement where I say, John, loan me $1,000 and a year or two from now, I'll pay you back $900, right? There's no normal circumstances in which you would take that deal. So I think what Mises would say is that there is no such thing as a natural rate of interest below zero. In other words, interest represents the lender's willingness to give up some consumption now, save some money and give it to someone to be repaid at a later date with interest, but also in the process take some risk of not being repaid, perhaps in full. That's what interest represents. It's a price that one pays for borrowing money from someone who's willing to lend it. So there's no reason conceptually that anyone would ever lend money at negative interest rates. So what we have here is not anything that would naturally arise in the marketplace. What we have here is something that has been engineered by central banks. And really, it's just the latest in another round of endless, I guess, what we might call, not to be sloppy, but what we might call neo-Keynesianism. In other words, the entire view of Keynes as currently interpreted by the economic mainstream is that the role of government policy, meaning fiscal policy, the role of monetary policy is to stimulate demand. Ever and always, we have to get people to buy stuff. We have to get people to consume whether that's retail goods, houses, cars, or companies buying other goods, whatever it is, consumption drives the economy. And from that perspective and that perspective only, the idea of a negative interest rate, whether that's on a bank deposit on a government bond, in a bizarre way, starts to make sense because we have to stimulate people and businesses and families and households to spend money. And that is what is really at the root of all this, is monomaniacal drive to stimulate demand rather than stimulating what Austrians would say creates a truly healthy economy, which is capital accumulation, saving money, and investing money. So we're in a period where central banks don't know what else to do to shock the economy into some kind of growth. And so this is what they've come up with. And I certainly don't think it's going to work. I certainly think it's very scary and we'll see. We shall see what this means for Europe and hopefully God help us, not the U.S. Well, you know, so far the anecdotal information, of course, is rather new, this particular policy, but it is not working. It's not like people are just pulling their money out of the bank or not putting their money in the bank and rushing down to consume because, in fact, prices of goods and services are falling, which is good. Austrians are not afraid of deflation as the Keynesians are. But at the end of the day, there's no suggestion whatsoever that this is going to work. As a matter of fact, I assume since we have a war on cash across the developed world, is this just another methodology to cause us to not put our money in the bank, hide it under the mattress, or use other methodologies, perhaps buy some precious metals to avoid this negative interest rate? Well, you know, that's what people are going to have to do. People are not going to put money in the bank and lose it. So by instituting capital controls or restricting currency, it's going to be very hard to go get fiscal cash out of the bank. In other words, if you go to a bank branch in Irvine today and say, I need $10,000 to buy a used card, they're going to tell you to come back tomorrow because they're not going to have it. So everybody can't go to the bank and get their money out physically in cash. There's only a very small amount of cash available. So what this means is that out of fear of losing your electronic money, your balance and let's say a second, you're going to have a strong incentive to spend it. That's what negative interest rates is all about. And again, it's an express form of engineering. This idea that we have to create demand. Well, in fact, humans already have demand. The question is whether they have capacity. We all want stuff. We all want more stuff. That's a natural human instinct. Because what brought us up out of caves, right? The desire to have more and more material goods and material comfort. But just creating demand amongst people who do not have the economic means, either cash or credit, to buy things, at least in the rational world, is a very bad idea and a very dangerous idea. All of human history has been based on putting something away for a rainy day. In other words, generation after generation has saved more than it consumed. And the three of us are beneficiaries. That we walk out the door and we see this glorious material world all around us because all of our ancestors have done this. And for the first time in human history, we're saying that what humans ought to do is consume. And so apart from the economics of it, apart from the complicated government policies, if you just step back and look at it conceptually, it's almost heartbreaking. And it creates a worse society morally. It's not just an economic matter. When you turn savers into chumps, when you treat people who save money badly, you create a nation of people who just spend. You create a nation of people with high-time preferences who say, you know, why should I wait until tomorrow to have that car or that vacation or whatever? Why should I try to put money away from my kids when it's being eaten up either by inflation or negative interest rates? You know, instead of buying that Ford Taurus, what the hell, I'll buy that BMW. I mean, there's a million manifestations of how a high-time preference society, people who prefer stuff today instead of saving for tomorrow, that when government and central banks encourage that, there are all kinds of ways that that brings us down morally. You know, it scares me because it feels like this is like drug makers, right? The policy makers out there kind of feel like drug makers. So, pointy and I were out at lunch today and I'm an insomniac. So, I have serious issues sleeping. I don't like to take any medication for it, but I went to the doctor the day. I'm like, you know what, I'm just going to try Ambio. Let's give it a shot, see what it is. So, I went home and I'm reading this. And yes, it's going to cure my sleep patterns or potentially help me get some good sleep. But I'm reading some of the side effects of this. And it's like one of them in there, and I'm not kidding. It just says, you may wake up to have done things that you don't remember doing, you know, like driving a vehicle. I'm thinking, what the hell? The whole point of this is so I can get to sleep. So, the remedy here of negative, you know, sorry, I go to Ambio and I'm thinking that they know these side effects. Okay, maybe some guy out of a thousand people, four or five are going to kill themselves while driving their cars. And then you remember doing it. It's okay because, you know, the 996 are okay. Was there this sort of forethought with these negative interest rates? Because as you mentioned, we've been taught for centuries to save. And I'm not worried about it. Personally, I could care less. This doesn't bother me. My money's not sitting in a savings account. I'm investing in the marketplace because that's what I do. I'm trying to build my wealth so I don't have to worry about any of this stuff going forward. But for those that are 70, 80, and they've been taught all along, look, you better save. You better have a big nest egg to support yourself through retirement and medical expenses that are coming. You know, save, save, save. I can't help but to feel very sympathetic for someone who's retired who's thinking, I've done everything that I'm supposed to do. I'm saving. I've got my nest egg. And now you're telling me, if I just leave it there, I'm going to lose a percent or two percent or who knows what it's going to get to. It doesn't seem like there was much forethought to the all spectrums of impact here. Well, no, there wasn't much forethought. This has been a slow and steady drip really since the crash of 2008 where we've entered into this new period of unprecedented monetary policy. If they had known in 2008 that this is what it would take, I think that they would be quite shocked in other words, they've tried both in Europe and the US. They've tried quantitative easing. They've tried keeping interest rates very low or effectively close to zero. They've tried all kinds of liquidity measures. None of it has worked in really stimulating any real growth. I mean, it can pump some more money in the economy. It can raise certain asset prices. It can raise housing prices in overheated markets. It can raise equity prices. But what it can't do is make people and companies more productive. Right? There's more money in the system. Doesn't mean more stuff, more goods or services are produced. So it really has been, you've heard the expression pushing on a string. But I don't think anyone could have guessed in 2008 that it would come to this. And I don't necessarily think all of the people involved are malevolent by any stretch. I think they're just groping in the dark. But here's the thing, there's nothing magical about going from a plus one real percent real rate of interest to a minus one real rate of interest. That's no different than going from a 7% to a 5%. I mean, we shouldn't put too much emphasis on the fact that an interest rate tips negative other than for the conceptual bizarro factor. It really is all just about, do we want a society where people accumulate capital and deploy it by saving or investing it? Or do we want an economy based on consumption? Well, we all want to consume, but something has to be produced in order for us to consume. So it really gets down to two totally different and incompatible mindsets that it was the same 100 years ago, it's the same today. I don't know if it's the way people, I don't know if it's a genetic thing, I don't know if it's nature inertia, but there's two different ways of seeing the world that keep seeming to pop up. And one is sort of the Keynesian consumption way, and one is the Austrian capital accumulation way. And we're still fighting this, we're still fighting this battle, almost 100 years after Keynes' general theory. Jeff, there's another challenge here. I've always felt, and we've talked on this show about we think credit is in fact the mother's milk of capitalism. There's equity finance, there's savings that's intermediated by the financial intermediaries to give entrepreneurs capital in credit instruments. That being said, we haven't talked much on the moral hazard of these extreme monetary policies that we've seen. What's the Mesian approach on the danger of the moral hazard and the unintended consequences from these extreme actions by central bankers? Well, the moral hazard was all around us in housing prior to the crash of 08. There's a great blog you may be familiar with called Irvine Housing Blog, which chronicled the whole run-up and really continuing run-up in the housing prices in Irvine. And we see that in an era, especially prior to the crash, let's say from about 2001 or 2002 at the dot-com bubble burst, right up to about 2008, we saw an era where money in effect became so cheap that both businesses in the M&A world and individuals buying houses, et cetera, went on a buying spree that they never would have if they were paying five or 10 or 15 or 20% interest on their purchases. So as a result of all this, in a certain way, businesses and individuals acted rationally. The Fed wants to make the cost of borrowing money very, very cheap. Well, people are gonna take you up on that. And they're gonna go out and do things that make economic sense on paper, only in an environment where borrowing money is really cheap. And all sorts of shenanigans surrounded that. In other words, people were getting loans based strictly on their statements, unsupported statements about their income, no credit checks. So we had all the subprime lending going on. And we had things like taxi cab drivers and cocktail waitresses in Las Vegas buying six, seven, eight houses and flipping them. Because you could make $30,000 on flipping a condo in six months. But that wasn't adding any value. They weren't going in there and remodeling it or something. So you created this moral hazard in the sense that everyone thought that they had sort of more juice than they did. Everyone fancy themselves an entrepreneur because a lot of ideas make sense on paper when the cost of borrowing money is really, really cheap. But when that cost rises, a lot of people go bust. And that's what happened in Las Vegas, which is still, which is still hurting me. It has adjusted and has not happened to the same extent in Southern California. But if you're asking me, we could. Jeff, did you see the movie The Big Short? I have. Well, you might recall that there were two primary culprits in that movie that were not addressed very clearly at all, hardly even mentioned, which was the role of Fannie and Freddie and the role of the Federal Reserve System. And Merlin and I had on this show, on part trading radio, one of the members of the presidential panel that studied why the real estate crisis happened, ex post facto, of course. And basically what he said, he was a lone dissenting opinion. They had like five Republicans, five Democrats. I forget the gentleman's name or at this moment. Peter J. Wallace. Okay, Peter J. Wallace. And he was a lone dissenting opinion that said the primary reason, the primary culprit was Fannie and Freddie and the Federal Reserve System. Fannie and Freddie specifically created demand for those subprime mortgages and the banks and the mortgage brokers would have not have gone out and created them, unless they had a market to sell that paper to, which was Fannie and Freddie, which turned around and helped package it or send it to Wall Street to be packaged, which ultimately sent it on to its ultimate destination of a bunch of pension plans. And of course, the Fed manipulated interest rates lower but we don't ever seem to wanna talk the point the finger at the root cause of that challenge. And his point was, if there was no demand for that toxic paper, the toxic paper would not have been created. Well, that's absolutely correct. Not only did Fannie and Freddie create artificial marketplace for people along with the Fed who would not be able to borrow the sums they did in a rational lending environment in terms of credit scores, income, down payment. But they also created a moral hazard in that taxpayers provided a backstop for lenders against the loan portfolios of Fannie and Freddie. In other words, they were quasi-private, quasi-governmental agencies that were implicitly backed up by taxpayers. So it's a lot nicer to make a loan when you have the US taxpayer ready to step into the breach if the actual lender goes into default. So it was a terrible situation. And you have to understand it's a story that's never gonna be completely told because it doesn't fit a particular narrative. And I hate the idea that this becomes an issue of left or right or Democrat or Republican. It really shouldn't. It ought to be, you know, humorous versus common sense. It ought to be practicality versus mania because that's what it was. And there's so many layers to the onion. Did you say, well, Bush did this and then Obama didn't do this? And you know, all of us pair some responsibility, right? We all have to look in the mirror at this and say, this has come to pass under our watch.