ASH BENNINGTON: Welcome to Real Vision. I'm Ash Bennington. Today, we're very excited to host this important debate about the nature of money. We're going to touch on Austrian economics modern monetary theory. This is going to be the Thrilla in Manila for macro. I feel incredibly fortunate to be hosting this conversation. It takes me back to my days running Nouriel Roubini's macroeconomics [?], we have to absolutely fantastic guests, Mike Green, Chief Strategist and Portfolio Manager at Simplify Asset Management, and Peter Schiff, Chief Economist and Market Strategist at Euro Pacific Capital. Welcome to you both.
PETER SCHIFF: Well, thanks for hosting this debate. Happy to take part.
MIKE GREEN: Thanks, Ash. Always a pleasure to be here.
ASH BENNINGTON: Before we get started, I need to do a quick shout out to one of our subscribers, Liam Cosgrave at Citywide Property Management in the Bay Area, that's San Francisco for international viewers. Liam was interested in this topic and reached out to both of you and he set up this conversation. We're very happy to have you here on Real Vision having this, and thank you very much, Liam Cosgrave.
PETER SCHIFF: Yeah, persistence pays off for that guy.
ASH BENNINGTON: Absolutely. By the way, as a note to our subscribers, we'd love to hear from you. We love to have these conversations. Jump in if you have some ideas. If you have someone you know that you'd like to get on Real Vision, reach out to us, we'd love to chat about it. Mike, to exactly that point, the nature of money, are you an MMT guy?
MIKE GREEN: I define MMT as what I call descriptive and not proscriptive. It is an accurate description of the way the monetary system works today, and it doesn't tell us what to do but it tells us how the system works. From my perspective, to ignore how the system works is foolish. We accept it, and then we decide what the best way to use it is. From my perspective, the underlying character that we are in today, we have a social good in the form of money that is primarily designed for one purpose and one purpose only, to cancel obligations, whether those are taxes, or private liabilities between two counterparties, where that's governed and administered by the state and the legal system, that's what money is, is that which cancels debt.
ASH BENNINGTON: A very crisp description there, Mike. Peter, over to you. I know your background, very different, obviously, coming from the Austrian side. Most people identify you with gold, tell us about what your definition of money is and why it's so significant in your worldview.
PETER SCHIFF: Yeah, well, first of all, I might agree that the way the system is currently operating is what is making MMT popular. The problem is the system is not working. It's working for the government, but it's not working for the economy. It's not working for the people. That's the problem that Austrian economists understand and just to give you a cliff notes of what Austrian School is versus other schools of economic thought, Keynesianism being probably the most popular right now, but Austrians put the emphasis for economic growth on savings and production, not spending and consumption.
They look at all fiscal and monetary policy that is trying to stimulate demand as being misguided, and actually counterproductive, because they put the cart before the horse. Now, a lot of that stimulus comes in the form of money. Hey, let's just print up money so that people can spend it and that's going to grow the economy. The Austrians don't see any value added by just printing fiat currency. Because when you print money, you don't increase the supply of goods and services to buy with that money.
All that really you have is inflation, you just have more money chasing whatever supply of goods and services exists and so prices go up. What money really is, is a way to facilitate trade. It is that improvement on barter, so before money was invented, if you were a chair maker and you wanted a pair of shoes, you had to find a guy that made shoes that you liked, who also wanted your chairs. It was a very inefficient way to transact business.
When somebody realized, hey, wait a minute gold is a very good commodity that we can trade in because it's easily divisible, it's portable, it's value is stored, all gold is the same. You don't have to worry about your chair being different or your shoes being different. Every ounce of gold is exactly the same, and even if you yourself don't need the gold because you're not a jeweler, you're not making anything with gold, somebody will. Of course, gold was a luxury good. Most people like to have things made out of gold, whether it was jewelry, or other ways they were adorning their houses with it, or whatever they had, gold was inlaid in a lot of goods.
Everybody would want gold, whether you needed or not. Using money, as opposed to barter was a big improvement and of course, since Austrians look at economic growth as a function of capital investment, which is only financed out of savings, you want to have money that you can save, and it will store its value. When you're using gold as money, it's an ideal mechanism for saving and so if you have more savings in an economy, you have more capital investment, and then you have more economic growth.
ASH BENNINGTON: Mike, it's interesting, because you guys both framed this in very different ways. I didn't hear any direct disagreement. In terms of Peter's view about the supply side and production, rather than something that comes from the demand side and consumption, what are your thoughts about that?
MIKE GREEN: I think part of the challenge, and again, it goes back to how does the system actually work and what are the complaints? We can spend our time worrying that the current system does not place appropriate limits on what the government does to stimulate. By the way, I actually agree that the way the government spends money or the manner in which stimulus is provided can have a huge impact but the idea that somehow or another, we need to go back to a system that derives the value of money as a commodity or a barter or that the limitation needs to be the physical dynamics, in my opinion, actually hurts our process.
It requires us to move backwards to an extraordinary degree in a manner that is unproductive. The way I would ultimately-- where I would significantly disagree with Peter is I do think that governments can actually positively influence outcomes. We've seen this in areas that have good governance, like Singapore. We've seen this in areas that have bad governance, many emerging markets that have failed to emerge, point to Zimbabwe for example. Those poor decisions in terms of how to spend the resources of the state or how to allocate the resources of the state in support of the private sector are really what the complaints are on.
The rise of the Austrian School was largely a byproduct of the work of Karl Menger in 1871 and the incipient collapse of the Austrian economy following the Founders crash in 1871. It was built on the idea the government had overreached and that the money had been spent in the wrong way. I don't necessarily disagree that sometimes governments will improperly spend money, but I don't think the limitation is some commodity function.
PETER SCHIFF: Yeah, well, a couple of points I want to make. First of all, on Singapore, there's an old saying, I don't know if it's an old saying, I think it was Thomas Jefferson, maybe I'm wrong but the government that governs best governs least. That's pretty much the success of Singapore, or any country that has limited government is the less involvement the government has in the economy, the more prosperity the economy enjoys. That is the secret of places like Singapore, or like Hong Kong in that government was small.
That was also a reason that the US prospered during the 19th century. In fact, and this is a point where I take exception, I think that you can't even argue, but I think the most prosperous period in US history where living standards for the average American rose the most was probably the period between the end of the Civil War, and let's say, the beginning of the First World War, around that time period, and during that time period, you had phenomenal economic growth, you have the whole transformation of the US economy through the Industrial Revolution from a largely farm-based economy, but manufacturing economy.
You have the invention of all sorts of goods that previously never even existed. People's lives really got transformed, and their living standards. That was also the purest gold standard up until the beginning of the Federal Reserve. That was the purest gold standard the US ever enjoyed and that was the most prosperous period in US history. Having gold as money was not an impediment to economic growth. In fact, it helped foster economic growth.
Despite all that rapid economic growth, and also at the same time, America was absorbing millions and millions of immigrants including all four of my grandparents who came to America during that period from Eastern Europe, lots of people were coming here and the gold standard worked beautifully. More people coming, more goods and services being produced, and consumer prices declined during that period. With all that economic growth, we didn't see consumer prices going up, we saw consumer prices going down, we saw the value of savings going up.
I don't see how you can say that it would be a step backwards to return to a monetary system that enjoyed so much success compared to what we have now. The complete collapse and we go from boom to bust to boom to bust, but we've basically hollowed out the entire US economy. Under this fiat system, we've gotten from the world's biggest creditor to the world's biggest debtor. The standard of living of average Americans has been destroyed by government. Now, a middle class family, you have two people barely making a living. Whereas prior to that, one person could have a job and support an entire family and have savings. I think that it's not a step backwards, it's progress to go back to what used to work rather than continue what's failed.
MIKE GREEN: Unfortunately, I'm going to have to point out that that's coincidence as compared to causative so the same time period that you were referring from roughly 1870 until 1920, it was also the invention of modern sanitization. We decided that we were going to start boiling instruments the doctors used to facilitate giving birth, we decided to introduce antibiotic, not antibiotics, the antiviral components under Louis Pasteur and so bacteria was identified. That time period is the same time period that's described so eloquently in Upton Sinclair's work highlighting how challenging that was for the average American that they were stuck in the emerging factories and slaving away as compared to having the idea of independent freedom.
PETER SCHIFF: Remember, they weren't stuck in those factories, they took those jobs voluntarily, because they were better than the alternatives, which was working on the farm. A lot of people came here from Europe to take those jobs. What you're describing was a worldwide phenomenon. The thing is, why did America succeed so much more than the rest of the world? It was because we succeeded in limiting government, we had more economic freedom in the United States. That's why people came here. It was to escape bigger governments in their own countries to enjoy the freedom and the prosperity that went along with it here in the United States.
MIKE GREEN: Peter, I'm sorry, but that's just historically inaccurate. You're absolutely correct that there was a large scale immigration from Europe and elsewhere into the United States, but that was simply because the United States had far greater land per capita available. The resources that exists in the United States, having not been populated from time immemorial, or more accurately depopulated by smallpox, freed up resources that allowed the capital labor ratio in the United States to be far greater than anywhere else in the world.
PETER SCHIFF: Well, they had plenty of land, and like Russia. Look, it wasn't the land. It was the combination of limited government. If you have big government, it doesn't matter how much land you have. You need freedom. Freedom is the key ingredient. That's what people wanted. That was a source of our prosperity.
We didn't have taxes back then. We didn't have income taxes. We didn't have Social Security taxes, we didn't have a Federal Reserve, we didn't have minimum wage, we didn't have any of the labor laws. We had a free economy, and that's what produced our prosperity, not the fact that we had land, there's land all over the world.
MIKE GREEN: It's just historically inaccurate, but--
PETER SCHIFF: Well, it's not inaccurate but anyway, let's disagree to disagree and go to a different topic.
ASH BENNINGTON: I'm curious, with the past as prologue here, I'm very curious to hear how each of you define the real world problems that we're experiencing right now. One of the most extraordinary things to me about the time that we live in is the incredible agreement we see on the political left and on the political right, whether you listen to AOC and the squad on the one hand, or Steve Bannon and Breitbart on the other, there's this extraordinary agreement about how American workers right now are really suffering the hollowing out of the industrial base, the extraordinary inflation in education and health care costs, and of course, in inequality across the board.
Many will point to Central Bank policy and the absolute tear that US equity markets have been on while workers have just not participated in that. How do you each define the problems that we see right now?
PETER SCHIFF: Well, it's ironic that you have people like AOC and the left complaining about the problems that they themselves created. College tuition would not be so expensive, but for government aid to education both subsidized guaranteed student loans and direct student loans, that's why the prices have gone up. The same thing with health care. The free market would bring healthcare costs down. It's government involvement. That is the reason health care so expensive.
The biggest problem with the US economy is all of the malinvestment, which is a Keynesian term, but it's the result of the artificial suppression of interest rates that has screwed up our capital structure to the point where the US is not really manufacturing, because we don't have the savings and investment to sustain that. Of course, we have excess regulation that helps make our manufacturing less competitive, but these artificial interest rates and government spending have created a bubble economy that is based on consumption and spending.
In order to run a consumption based economy, somebody has to produce all the goods that we're consuming, and that is falling largely on the rest of the world, a lot of emerging market economies like China. We run these enormous trade deficits so that we can consume things that we did not produce and everybody has the service sector jobs, and we have this enormous government and it's this giant bubble economy that's sustained by the artificial suppression of interest rates which continues to exacerbate these underlying economic imbalances that ultimately are going to need to be corrected with a major economic collapse.
Part of the Austrian School is understanding that a lot of these economic booms are the problem. They are created by government. When they bust, that is the free market trying to fix the problems that were created during the artificial booms but then the government steps up and tries to mitigate the recessions even though the recession is the cure that we need but we never really cure the problems because we get government intervention to try to make the problems worse. We've been doing that for so long that the problems are now so big, that I think the next downturn from a monetary perspective could be a fatal one and we end up with a hyperinflation situation, which will be catastrophic.
ASH BENNINGTON: Mike, I want to give you a chance to respond directly to Peter, of course, but also, if you'd like to take this opportunity to talk about how you see the problems that are facing the country and the global economy right now, I'd really be curious to hear you sketch that out from your perspective as well.
MIKE GREEN: I think that there's a lot of similarities in the way that we would diagnose the problem. I agree that we have an intervention as the Federal Reserve that has decided that they cannot allow a financial crisis to emerge. They have become progressively more aggressive in terms of their reaction function, rapidly cutting interest rates supporting through QE or other processes. Whether that is what's the cause of our current boom, and I would broadly look at the environment and say, as you know, I have very different views of what's causing much higher equity prices, for example, what's causing asset prices, by and large to respond.
I think the Fed's reaction function of providing a bond that rises in price when disaster occurs, so lowering interest rates in response to financial crises, creates a diversifying asset that actually hedges your portfolio with positive returns encourages leverage in the system. That will come to an end. I think Peter and I are in agreement on that.
In terms of the underlying characterization that today's world is that much worse than times in the past, I just don't actually agree with that. I think, understandably, many people are frustrated by their inability to participate in the economic system to the extent to which their parents did, etc., but I would largely tie that back to the fundamental mistakes that we're making in terms of the treatment of capital in our society. Again, going back to the 19th century, the critical input was not actually whether we had minimal amounts of government or maximum amounts of government.
The critical input was that the United States attracted extraordinary amounts of human capital in the form of Peter's grandparents, or half of my grandparents, individuals who chose to be here and chose to work and put their resources to use. Raising that human capital component is what we need to do. Unfortunately, I think that the government can play a role in that. We can choose to stop subsidizing retirement and protecting the financial assets, as we have done and instead choose to devote those resources to educating our children and encouraging household formation so that people can get busy in the economy creating value.
PETER SCHIFF: Right, but remember, those things will happen on their own. When my parents' grandparents came here, they didn't speak English, but nobody educated them. They educated themselves. There was no welfare. There were no caseworkers. Nobody helped them. They had to help themselves to the extent that they could rely on other family members who had moved here before them.
Yes, you had that, but everybody was self-reliant. We were a nation of rugged individuals, and that's why we succeeded and prospered. We need to recreate that environment again. The problem today with immigration isn't that immigrants are coming, it's why they're coming. A lot of them are coming to be on welfare, to get government benefits, take away those benefits, let people come here to work and have opportunity and we want all the people we can.