 Ladies and gentlemen, dear Hans, dear Gülçin, thank you very much for the kind invitation and your outstanding hospitality. It's a great pleasure to participate in the 10th anniversary of a property and freedom society here in Bodrum. Some people say that they do not mind inflation. They say, I don't care what the price of gasoline is, whether it's three, five, or 10 bucks per gallon. I don't mind. At the gas station, I never fill up for more than $20. In my talk, I will try to explain what inflation really is and how it matters to all of us. And the title of my talk is Everything You Always Wanted to Know About Inflation, But We're Afraid to Ask. Today, inflation is typically understood as an ongoing increase in prices. Inflation is said to be a continuing rise in prices over time. And if prices go up, your money purchase less goods and services. To define inflation in this way is, economically speaking, not only unsatisfactory, but also misguiding. It deceives us about the true consequences of the government's handling of monetary affairs. The trouble starts with the term inflation as it carries a misleading connotation. Ludwig von Mises pointed out that the term inflation implies, quote, the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power, quote ends. In the field of human action, there cannot be such a thing as stable money. In the field of human action, quote, there is no fixed point in this ceaseless fluctuation other than the eternal, a prioristic categories of action. It is vain to argue, as if there were in the universe eternal values of human, values independent of human value judgments and suitable to serve as a yardstick for the appraisal of real action, quote ends. In other words, praxeologically speaking, it is impossible to think that money could have a constant purchasing power. As the purchasing power of money cannot remain unchanged, there's always, as mainstream economists would say, inflation, the case of rising prices or deflation in terms of falling prices. So the question is, how can we interpret the term inflation in a meaningful way? To find the answer, we have to take a brief look at what money is. And one sentence says it all. Money is a universally accepted means of exchange. Money has just one function, and that is the exchange function. This is a very important insight for money is a good like any other good. And so money's value is determined by the so-called law of diminishing marginal utility. This law basically says that the greater the supply of a good is, the lower is its marginal utility. And marginal utility denotes the utility of the additional unit. We know a priori that an increase in the quantity of money must reduce the marginal utility of the additional money unit. For the additional money unit exchanges against goods that are considered less valuable than the goods that were exchanged against the previously available money unit. The law of diminishing marginal utility informs us that the decline in the marginal utility of money will affect people's value scales and therefore their behavior. As their money holdings increase, people will demand goods more intensively than before. They will increasingly try to exchange the new money balances against desired goods. And so the prices of the desired goods will go up. So we conclude at this juncture, a rise in the quantity of money will necessarily lower the purchasing power of the money unit. So inflation is equal to a rise in the quantity of money. Rising prices are just one of many symptoms. But the cause of inflation is the increase in the quantity of money. We are now also in a position to understand that the level of the quantity of money doesn't matter. Any quantity of money currently available in the economy will do as good as any other quantity when it comes to fulfilling the exchange function. A large quantity of money, say, $10 trillion US, makes for high prices and thus high nominal transaction volumes. A small quantity of money, say $100 million in an economy, makes for low prices and thus low nominal transaction volumes. While it does not matter what the level of the quantity of money is, changes in the quantity of money are of great importance. So the level doesn't matter, but changes matter. A change in the quantity of money affects prices of different goods at different times and to different degrees. The early receivers of the new money benefit at the expense of the late receivers. The reason is that the early receivers of the new money can exchange their money at unchanged prices. As the money flows through the economy, prices start rising so the late receivers can buy goods only at elevated prices. The early receivers of the new money become richer at the expense of the late receivers. This is the so-called Kantillon effect. The Kantillon effect shows us that a change in the quantity of money will always lead to a redistribution of income and wealth among people. It will always make some benefit at the expense of others. To illustrate this point, let's consider two simple examples. In the first example, the economy is running at full capacity. Let us assume the quantity of money is increased by, say, 100%. What will happen? Well, as the new money is exchanged against goods and services, prices will go up. This is really what you would expect. You increase the stock of money and it shows up in higher prices. Now, consider the second case. Here, the economy is in recession. Unemployment is high and production is well below potential. Again, the quantity of money is increased by, say, 100%. But now we find that prices remain unchanged. In this case, prices remain unchanged. The question is, does the link between the quantity of money or its change and prices no longer exist? The answer is no. What happened in the second case is that the increase in the quantity of money has prevented prices from falling. And prices would have declined had the quantity of money remained unchanged. In our second case, consumers have been prevented from being in a position to buy goods at lower prices. Their money could have bought more goods had the quantity of money remained unchanged. At the same time, firms were allowed to sell their goods and services at unchanged prices. Their income and wealth situation has been improved compared with the situation in which the quantity of money had not been increased. So we can conclude a change in the quantity of money will always have an impact on the distribution of income and wealth among people. In other words, a change in the stock of money can never be neutral. Quite a few people think that some low inflation, so a small rise in the quantity of money, would be positive for economic activity. And you can see that around the world. Pumping in new money is expected to increase economic growth and increase employment in some circles. No doubt, inflation may well, under circumstances, lead to output expansion. Take, for instance, the case in which an increase in the quantity of money translates into higher stock prices. Higher stock prices reduce firms' cost of capital. Firms will be encouraged to embark upon new investment projects. Investments there wouldn't undertake had there been no rise in stock prices. As stock prices go up, people feel richer and increase consumption at the expense of savings. They embark upon a borrowing spree. Banks attracted by rising collateral values see low risk in lending and generously extend new credit. However, the stimulus provided by inflation, so this increase, this new injection of money, is due to the errors which it produces. An increase in the supply of money cannot relieve the natural scarcity of consumer goods and producer goods. All it does is to lower money's purchasing power. What is more, people tend to forget that money, the universally accepted means of exchange, serves as a calculation tool. Monetary calculation is a method of thinking, as Ludwig von Mises puts it. Inflation corrupts economic calculation, thus the method of thinking. And this is why. If the quantity of money rises, it affects different prices at different times and to different degrees. And this corrupts monetary calculation. It provokes erroneous decisions. Decisions that would not have been taken had there been no rise in the quantity of money. And once the inflation dies down, the market sorts out the distortions caused by inflation. Dispositions, investment projects, for instance, that were taken during inflation, turn out to be unwise, even stupid. The economy tends, ends up poorer compared with the situation that would have been reached had there been no injection of new money. And just to give you a flavor, a taste of how the relation between the stock of money and real production has developed, I brought with me two charts. On the left-hand side chart you see on the horizontal axis, 1995 until the first half of 2015. And you see a lower brown line. That is the American real GDP, so the number of goods and services produced in the United States. And the series were indexed to 100 at the beginning of 1995. And so you can see the real GDP in the US went up from 100 to around about 160. So roughly 60% increase in production. The orange line is the stock of money. The stock of money rose from 100 to 350. So very strong increase in the money relative to economic expansion. The same can be observed in the U area. That's the chart on the right-hand side, the same thing. A strong decoupling between the stock of money and the increase in output. So if people would say, well, there is no inflation, they might have in mind the development of consumer prices. But once you have understood that inflation is, economically speaking, the increase in the quantity of money, you might have a faint idea of how the distortionary effects have increased in the last decades or even years. At this juncture, I would like to demystify the so-called wealth effect, a popular term in mainstream economics. Mainstream economists argue that a rise in, say, stock prices or housing prices makes an economy richer. For instance, the governor of the Federal Reserve Bank in the United States of America, Janet Jelen, is basically thinking that higher housing prices are very helpful for the US economy. So the truth is that rising stock prices or housing prices make those who hold stocks or housing better off. And it makes, at the same time, those who hold money worse off. If the rise in stock prices is not accompanied by declining prices of other vendable items, the wealth effect denotes nothing more than asset price inflation. Asset price inflation, like consumer price inflation, does not make an economy richer. It merely leads to a redistribution of income and wealth among people. This brings us back to the Kantian effect. The Kantian effect makes us understand why governments nowadays hold the monopoly of money and why they have replaced commodity money by fiat money. This situation is actually a need of explanation, of an explanation. For the natural form of money is commodity money. It springs up spontaneously in a free-market economy as Carl Mengel theorized back in 1871. Ludwig von Mises explained that money can only emerge out of a commodity that was previously to its monetary use valued solely for non-monetary purposes. This insight is important, for it tells us that fiat money cannot emerge spontaneously through voluntary action in the free market. Fiat money can only come into existence through coercive action, as pointed out by Murray Rothbard in his little book from 1963, What Has Government Done to Our Money? Now, why would someone want to replace commodity money by inflationary fiat money? The answer is, he would like to replace commodity money through fiat money if he wishes to steal other people's property. This can be done quite effectively if he succeeds in replacing commodity money with his own fiat money. And he holds the production monopolist, and he is the production monopolist of this fiat money. If he succeeds in doing so, he can extract other people's property and resources, and hardly anyone would know what is going on. It is therefore not surprising that the modern state, the territorial monopolist of ultimate decision making and its close friends, are very much in favor of fiat money. Now, a central question is, can an inflation policy go on forever? Looking at fiat money production helps providing an answer. If the issuer of fiat money brings the new fiat money into calculation by just printing up new money and spending it directly on vendable items, he will presumably, for all eyes to see, snatch up other people's resources. People would realize quite quickly that he is a counter-fitter, a criminal person. They would presumably stop him from doing what he is doing. The fiat money monopolist would therefore think of a more convenient way of producing and issuing fiat money to his benefit. He will decide to produce fiat money through bank credit expansion. Banks will be allowed to increase the quantity of fiat money by extending credit created out of thin air. Credit that is not backed by real savings. The issue of new fiat money through credit expansion suppresses market interest rates, and this, in turn, sets into motion an artificial boom. To prevent the boom from turning into bust, central banks must increase the credit and money supply further, lowering the interest rates to ever lower levels. Mary Ross Bards puts it succinctly, quote, like the repeated doping of a horse, the boom is kept going and on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. Mises saw that there is a limit to a fiat money induced boom, that it cannot go on endlessly, he noted, quote, the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction, which, as in all other cases of unlimited inflation, ends in a crack-up boom and in a collapse of the money and credit system. All the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances. Mises' point can be illustrated by two prominent historical events. The first event relates to the United States of America. The boom of the 1920s went directly into bust as from October 1929. The US stock market crash, banks defaulted, credit and money supply contracted a depression set in. The second event took place in Germany's Weimar Republic in the early 1920s. Politicians of the new democracy desperately tried to escape the bust, which was about to unfold as Germany's wartime economy had to adjust to peacetime production. However, democratic politicians wanted to prevent the approaching bust. They started running the printing press to finance government outlays. The increase in the quantity of money became so extreme that it finally developed into hyperinflation. So hyperinflation can be understood as the quantity of money rising at accelerating rates. And the symptom of ever higher increases in the quantity of money are accelerating prices. In November 1923, when the purchasing power of the Reichsmark was basically destroyed through hyperinflation, the economy collapsed and the bust set in. German politicians had chosen the most disastrous policy possible. They orchestrated hyperinflation first, which was then followed by bust, as every boom must be followed by bust. To Mises, it was clear that ongoing attempts to keep the boom going by injecting ever greater amounts of fiat money will finally lead to a breakdown of the demand for money. He brief quote from Mises. But finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things that were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give anything against them. So what Mises tells us is that the demand for money is actually the fiat money's Achilles here. As long as the demand for fiat money keeps up with the supply of fiat money, prices remain unchanged, and the fiat money regime goes on unchallenged. Once the demand for fiat money falls short of fiat money supply, prices go up. If prices go up, the demand for money declines. People increasingly exchange money against vendable items, and prices go up further. A downward spiral sets in, which can potentially sound the death knell for fiat money. Ladies and gentlemen, I think we are now in a situation to understand why the world's fiat money architecture didn't come crashing down in 2008 and 2009. The turmoil of 2008 and 2009 was a case in point of a fiat money-induced boom that was about to turn into bust. When the bust was about to unfold, however, central banks intervened. They lowered interest rates basically to zero and extended credit to aiding banks and governments. This prevented the fiat money system from collapsing. The 2008-2009 crisis was a credit crisis. It was a credit crisis. People were afraid that borrowers, such as banks, governments, and corporates, might default on their debt obligations. People were not afraid in the first place that the purchasing power of fiat money could be destroyed. To the overwhelming majority of savers and investors, fiat money appeared to be the safe haven. They sold off bonds, stocks, commodity, and mutual funds, and went their funds into fiat money. People preferred to hold fiat money in the form of bank deposits or in the form of bank notes. In 2008 and 2009, I think this is important to note, the demand for fiat money rose. It didn't go down. Just to give you a taste of people's preference for holding fiat money, on this chart you see from the early 1960s until the middle of 2015, the relation between the money stock held by the wider public, that's the money stock M2, relative to nominal GDP. And as you can see, when the crisis hit, the liquidity preference rose substantially. At the moment, there's the highest liquidity, excess liquidity situation ever in the United States of America because fiat money is very much popular among savers. Now you may ask, how come that the demand for fiat money holds up so well, I would like to provide two answers. First, government's pro-fiat money propaganda has been working quite effectively. Mainstream economists have, and quite successfully so, been selling to the public at large the idea that the fiat money regime is a state-of-the-art monetary system. And presumably, most people think that fiat money is the natural form of money, to which there's no alternative. The second reason I would call the addiction problem. Fiat money is a scheme for the aggrandizement of the state. It makes the government financially very powerful. The government starts offering job opportunities, provides firms with contracts, et cetera. People become financially dependent on government handouts and therefore also dependent on the fiat money system. Sooner or later, people will support virtually any government action meant to prevent the fiat money system from collapsing. And against this backdrop, it might become clear that it takes a lot for the fiat money demand to break down, thereby putting an end to the fiat money regime. Once fiat money has been launched successfully, the fiat money monopolist has a great incentive to make sure that people keep their confidence in fiat money. To this end, the government must not expand the quantity of fiat money at such a rate that the people get the conviction that price increases will continue endlessly at an accelerated pace. Now, the crucial question is, can government restrain itself in terms of increasing the quantity of fiat money? The more short-sighted those are who are in charge of the printing press, the more likely it is that the fiat money regime ends in hyperinflation. For instance, in banana republics, it's quite frequent that hyperinflation sets in, because those who run the printing press have great interest to misuse the money system, even if it comes at the cost of a complete breakdown. But even not only in banana republics, but this happens also in democracy and take Germany's Weimar Republic experience of the early 1920s. When we look around the world, we will find that the fiat money-induced boom has been going on for quite a while. And this does not contradict the boom and bust theory as outlined by the Austrian School of Economics. In its pure form, the boom and bust theory rests on the assumption that there is no economic progress in terms of, say, productivity gains opening up of new markets and new innovations, et cetera. In reality, however, there is economic progress, despite the use of fiat money, I should add. Economic progress has, at least to some extent, mitigated the inflationary effects of fiat money expansion. Economic progress has led to an increase in incomes. And this has helped mitigating the consequences of ever higher debt burdens in the economy. And to show you some more data on referring to what I just said, you see on this chart from the early 1960s until the middle of 2015, the amount of debt outstanding, in this case, I took the stock of bank credit relative to GDP, and it refers to the left-hand side scale. And you can see how over the decades, the debt burden has been building up. And the dotted line is the annual increase in GDP in production. And as you can see, there's a downward trend in growth at the same time and strong increase in the overall debt ratios. And that is indicative of what the Austrian have in mind, namely fiat money leads to ever greater debt loads. And at the same time, it causes overconsumption and malinvestment, it squanders resources and leads to capital consumption, thereby eroding the forces of economic progress, translating into lower economic expansion rates. In view of declining economic expansion rates and rising debt, creditors will soon or later become hesitant to keep extending credit to borrowers at low interest rates. When the credit supply dries up and interest rates rise, the fiat money boom turns into bust. Now you may ask, when will the boom turn into bust? Economics cannot provide an answer to this question. It can tell us what the consequences of a certain mode of action under given circumstances are, but economics cannot tell us what actors will do in the future and how the circumstances will look like under which action will be taken. What is required to answer this question is entrepreneurial judgment. So this is where we have to leave the sphere of economic science and entering entrepreneurial territory. If you ask me how things might unfold, I would say two things. Fiat money will be debased, no doubt about that. But a sudden breakdown does not seem to be around the corner. The fiat money regime will presumably continue for quite a while. Second, I would think that if push comes to shove, that the fiat money regime will end in a German Weimar Republic type scenario. Central banks keep the boom going and create high inflation regime before the inflationary boom finally turns into bust. This is, in fact, the view Rothbard expressed in the introduction to the fourth edition of America's Great Depression. In Rothbard's words, quote, we can look forward not precisely to a 1929-type depression but to an inflationary depression of massive proportions. In view of what I just said, you may ask, how does it help me in terms of protecting my financial wealth? And I would like to leave you with four remarks, very brief remarks. I think inflation is more likely than deflation in an unbacked paper money or fiat money regime. So you better watch out for the debasement of fiat currencies. When it comes to financial matters, I think adopting an intravenous spirit is of great importance. Consider yourself as an investor, not as a saver. The second, I think, investing in great businesses makes sense even under current conditions. Trying to identify firms that can do something others can't do and firms that have inflation-resistant business models, these firms can create positive real returns on capital and this is what you need and what you would need to weather the storm. And finally, keep in mind that gold is money. After all is said and done, I hope you don't mind me ending my talk with a quote from Alan Greenspan. He said, quote, gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it. Thank you very much for your attention.