ASH BENNINGTON: Mark, welcome to Real Vision crypto.
MARK VALEK: Welcome, Ash. Pleasure to be here.
ASH BENNINGTON: It is a pleasure to have you. Mark, we were talking a little bit offline, I think of you is one of the voices in this space who unifies Austrian economics, gold, and of course, cryptocurrency and Bitcoin. Tell us a little bit, before we get started, about how you got involved, how you got interested philosophically in Austrian economics, aside from of course, being Austrian.
MARK VALEK: Well, thanks for these kind words. My background is indeed from the financial side. I was interested in becoming a financial professional at a very early age already, and pursued this path career wise, pretty early on. I was studying all this stuff, which one needs to know apparently to have a successful financial career. I was born in Austria, near Vienna and was studying in Vienna also. I started to work at Austria's largest asset management company, next to my university actually. Once I finished, I pretty fast became a portfolio manager and a fund manager.
In my role at first as portfolio manager was responsible for fund selection on the buy side, looking at various different funds and investment processes and things like that, and I found it really fascinating. That was a really great school for me to have a look at what investment styles are there in practice. I learned about this in theory. I was already trading and investing a little bit, and that gave me a really great opportunity to talk to professionals and then started to focus on hedge fund selection. I found that even more fascinating, because there are all kinds of different ways to invest, different investment styles, and so on.
I was really pretty fortunate to get quite good experience and to see different investment styles, different managers, learn to talk to these managers and so on. I would say the mid-2000s, just heading up to the financial crisis, I was finished with my studies, after I finished university, only I learned about the Austrian School of Economics, which is a little bit of a disgrace. I have studied in Vienna, and not really have learned about that in Vienna. A lot of people are quite astonished that it is not really taught in Venice universities. This may have changed by now a little bit, but back then, there really was not any mentioning about Hayek, Mises, and these people.
Anyway, that fascinated me. That really opened up a completely new perspective for me. That was already the time when the financial crisis was in the making. With this crisis, my whole worldview then changed, and I had to realign.
ASH BENNINGTON: As so many of us did. It is interesting. Our viewers are of Real Vision Crypto span across a wide variety of different backgrounds. We have people who are very strong on the technical side, we have people who have very strong backgrounds, for example, in investing and economics. For people who are not familiar with Austrian economics, give us a primer on it. Explain what the concerns are, how Austrian economists think about the world and why it is so significant in your worldview.
MARK VALEK: Well, Austrian School of Economics is really a school of thought. It has a really big array, one has to dig into that a little bit more, but for me, the most fundamental difference, if I can break it down to one thing at all, was its view on the monetary system because like mainstream economics, typically Chicago School or Keynesians, they more or less take the monetary system as a given. It is what it is. It is central banking. It is a monetary monopoly at the state or quasi-state level. It has been like that for more than hundred years, at least and so if one starts to look into history and Austrian economics, it is an interdisciplinary science or philosophy. Austrian scholars really tend to be interdisciplinary, look at history, look at psychology, look at sociology, look at praxeology, which is a discipline which actually was invented by Ludwig von Mises.
They really put the individual at the center stage as human actor, and they really are critical towards quantitative models and aggregation and these things. They really see economics as a social science. Therefore, it is more realistic, it is also quite humble to some extent. Austrian School actually says predictions about the future are really difficult, almost impossible. For me at least, and I know this from a lot of other people who went through this process, it really took quite a while to breathe in and digest this whole philosophy. It is nothing which one could learn with reading an article or even a book. It takes a while, especially if one went through the classic education.
What I also saw is people who have been-- I do not know-- I even want to say indoctrinated with the classical economic schools, the older they are, the more difficult they actually feel to be able to readjust. It is really mostly better if one discovers this at a younger age when it is still a bit more flexible in their minds, in one's mind, but it is coming back to the monetary system aspect. This was something which got me because before I knew, that was a little bit critically about central banking and so on intuitively, and once I read from Murray Rothbard, what has government done to our money? That was really a big eye opener for me. That kicked it off, I would say, and I can really recommend this book to people who are interested in the Austrian School.
ASH BENNINGTON: What is the thrust of it? What has government done to money in Rothbard's view?
MARK VALEK: Well, first of all, it has monopolized it. This is something, again, if you study history, which has happened so many times, the monopoly of money is something very powerful. Once you have the money monopoly, you can basically create money as much as you want, especially if you have a pure fiat money standard and basically, can rob the people of their productivity by inflating the monetary supply. Inflation, one gets a really different view on inflation once one has studied the Austrian School. Inflation, according to the Austrian School, is the increase of unbacked currency.
If you increase these unbacked currencies more and more, obviously, this has some effects. It has price increasing effects on the one hand, these may be with a lag because it does not necessarily feed in one to one into the economy, but it is actually a huge transfer of wealth. That is something which classic economics basically ignores, the so-called Cantillon Effects, and money monopoly is something which has real benefits for the state, but also for the banking system, for the creators of money and the current system, this seigniorage as it is called, this benefit of being able to create unlimited amounts of money and credit, is shared between the state and the banks. This is an unholy alliance which has been created throughout the last decades at least or even the last century.
ASH BENNINGTON: If we take that philosophy and we focus it through the lens of the Global Financial Crisis, how would you say the ideas of the Austrians sum up or understand what happened in 2007-2008?
MARK VALEK: Well, the Global Financial Crisis was basically the first exhibit in the recent history, at least, the recent financial history where Western central banks started to create currencies, digital currencies only and bank reserves but anyway, some people would say printed money in a large scale that was basically unheard of in the recent financial history. The financial community had to process what is going on and some people saw this very critically and thought, okay, this will bring upon huge inflation. I think it did, but mainly on the asset side, but that is a different discussion.
Most of the financial participants after a few years went back to say, the status quo, and since no extreme price inflation was visible, at least in the official statistics, they thought, okay, this is not a big deal. We can go on as we used to, and this is probably going to be a one-off and perhaps at one point, there will be a monetary normalization, that was a big topic in the last decade, and things will be normalized again. That was just like an extreme scenario and things will be okay again. Some of us got extremely critical, me for instance, but also I would say more in the mainstream financial community. A lot of people never really trusted the system one hundred percent after this huge incident.
The confidence grew again, especially in the mid-2000s, when the US was slowly able to raise the interest rates again, slowly was able to reduce the balance sheet. Apparently, this emergency was ending, and the promise was kept that everything was going to be normalized. People did not think so much about this topic anymore. Coming 2020, everything has changed.
ASH BENNINGTON: Yes, of course. Now, if you look at the Federal Funds Rate, if you look at the expansion of the Fed's balance sheet in the wake of the COVID crisis, some of those green shoots that you were just discussing have withered on the vine. You touched on something that I thought was very important, which is the distinction between asset price inflation on the one hand, and goods and services price inflation on the other. Tell us a little bit about what that divide is, and perhaps how some of the inflation we have seen in assets was pulled away from the goods and services inflation that most of us who were trained in Keynesian economics at university tend to think of when we think of inflation things like CPI and PPI.
MARK VALEK: Well, if one looks at the monetary system as it is today, especially at these inflationary programs, they are actually called asset purchasing programs, when one sees that the money which was created mainly by the central banks after the financial crisis, and this time around, was created by purchasing new assets. The money which was put into circulation was injected into the financial markets by buying up government bonds, but then also equities in some instances and corporate bonds, depending on the Central Bank. This has obviously an inflationary effect by definition on securities, on assets.
Everything that the central banks decided to buy rose in price and even started rising in price once they announced that they are going to do this because speculators anticipated this process and bid up the prices for government bonds, for instance. Then the big hope was that this inflation or this asset price inflation will trickle down into the consumer level, which to some extent, it may have but obviously, it benefited the wealthy way out of proportion. Who is the beneficiary of rising stock markets? The owners of stocks. If you belong to that category of the population who has significant holdings in stocks, then you probably feel better if your portfolio rises in value.
The problem is a vast majority of people actually do not have a significantly big stock portfolio, so this actually really contributed greatly to this increasing wealth gap. That is something which central banks really do not like to talk about, and this is something which I sometimes, on Twitter, asked the European Central Bank, what do they think about the Cantillon Effect? They did not dare to answer this question or touch this topic because they are on a lost ground. This is obviously a very negative side effect of fiat currency. That is something what I personally also feel very-- it is very dear to me, because it is just a morally rotten system to be honest. That is where hard money comes into the equation.
ASH BENNINGTON: I was going to say, I know we are doing this interview for Real Vision Crypto, we have not talked about Bitcoin yet, but this is really, I think, the critical foundation for many people who have an Austrian view of the world to understand where this philosophy comes from, and what the background of it is in rooted in the theory as well as the practice, all of which brings us to my next point, which is gold. How you think about gold, what you think the value proposition for gold is, and how you understand that value proposition?
MARK VALEK: It is very important to have a clear mindset about what gold is in terms of an investment in a fiat money world. Allow me just to look back briefly on say, the history of money in the 20th century, and it was basically a steady demonetization of gold. We started up with a classic gold standard where gold was in circulation. Then it basically became more and more demonetized until 1971, where the last tie to gold was broken and since then, we have this totally unbacked fiat money system, with no limits to monetary expansion at all.
Starting from 1971, that is an interesting starting point, we saw fiat currency increase at about roughly 10% per annum. Very interestingly, the price of gold also rose close to 10% per annum during that period of time. The reason for this happening is gold, what one needs to know about gold, gold is obviously a very scarce commodity but what makes it so special as a unit of account or as a saving technology is gold is not being diluted. It is not especially only it is scarcity, but I would say it is constant in quantity. Each year, 1.5% of the gold supply, the stock increases by 1.5%. This number is very constant regardless of the price.
ASH BENNINGTON: This is because of extraction costs, the scarcity within the earth and some of the inherent supply and demand dynamics.
MARK VALEK: Well, I would say, because of a few properties of gold. One being it is an eternal metal. It is one of the only materials which basically you can bring over time without it being tarnished or anything. The gold from 2000 years, 5000 years, today looks exactly as it looked back then. This is also, if you want to be a little bit philosophic, something which I think us, humans, being obviously eternal beings having this in mind, we like the idea to have something which basically is eternal so we can pass something on over our lifespan, far beyond our lifespan. This is something why jewelry, for instance, obviously a wedding ring typically is gold because it is a symbol of eternity to some extent.
People like to also take jewelry, golden jewelry to think about a specific time in their lifetimes. For instance, say your child is born and you give your wife a ring to celebrate this and to think about that even in 50 years' time, this ring will look like it is today. This is a little bit of a philosophic aspect but that also blends in here. Then obviously, humanity has this hunger for gold or this fascination for gold, has been having this for thousands of years. This actually was important precondition to have this big stock already, this above ground stock. If you think about it, usually a commodity, you have a utility of a commodity, if you use it, if you consume it, say for instance wheat or oil, you burn it and then it is in a different form, you can only use it once.
With gold, it is different. It derives its utility by just you hoarding it and thinking about this really nice moment in time which you are celebrating with [?]. People have accumulated gold and that was a precondition that the stock actually grew and grew, and it was not consumed. We are already sitting on this quite a big chunk of gold which has been mined over the history of humanity, and relatively to this above ground stock, the newly created, the newly extracted gold is really insignificant in terms of quantity. That is what makes gold so special as commodity. It really has an inflation rate of 1.5%. You can be as holder of gold. You can be very sought certain that the gold supply next year will not be doubled and will be very constant and will therefore also conserve your purchasing power. That is a little bit how I think about that.
ASH BENNINGTON: It is interesting. This is cross-cultural, universal, as we see the rise of Asian economies, for example, China, India, cultures where gold is obviously a great value as well, it is physically passed on from generation to generation in the form of jewelry, and other forms. This is something that, as you said, has been going on for a very long time.
MARK VALEK: Since you have been mentioning this, I think when one sees also very different perceptions of gold in different cultures, for instance, now, if you think about the more recent history, I am from Austria, as I said, and German speaking countries generally have quite a high-- they hold gold very dearly. They like to invest in gold. That is also because Germany and Austria had had this huge hyperinflation almost hundred years ago, has been in a while already, but still to today, this is in the collective mind and the collective memory in cultures, like for instance, the Anglo-American culture, the last hyperinflation was really, I think, in the case of the US, it was before the founding, and you had another big inflation in the Civil War.
Even that is too long to be very present still in the collective mindset. After a few generations have passed and are used to more or less a sound currency system, you do not really regard gold as an interesting store of value. Whereas, you mentioned Asian countries, or let us say, South American or Middle Eastern countries, they have not been used to a stable currency system. They value gold much higher as the average American citizen, for instance.
ASH BENNINGTON: It is so interesting, when most Americans hear the phrase hyperinflation they think back to the 1970s, that was not hyperinflation compared to what the German speaking world experienced in the 1930s. It is such an interesting point that you make when you talk about how this is something that remains in the collective psyche of a culture for nearly a century. Talk a little bit about what impact that has had on your thinking, as well as on Austrian economics.
MARK VALEK: For instance, I take the example of Austria where I was brought up. Austria is a Catholic country, generally speaking. There was and still is this tradition that when you are baptized, you get a present which is usually an ounce of gold, for instance. It is just a small reminder of your grandparents reminding you okay, whatever happens, you will always have this ounce of gold and this will always have some value. This is a little bit passed by generations, but also here, this memory is being lost a little bit because it is just a typical long term psyche of the three, four generations, then the next generation thinks, okay, well, I do not need that.
In fact, if you ask me my personal experience, it was really bad. Because when I started investing in 1999, I had these coins which were given to me by my grandparents, and so on. I remember, I still have that somewhere, reading a classical Wall Street research here and they were talking about the next decade and everything was obviously tech, you need to have tech, you need to have dotcom stocks and we are just at