Guido Hülsmann Stephan Livera Austrian Economics

Dr. Guido Hülsmann on Austrian Monetary Economics & Bitcoin | The Stephan Livera Podcast

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Key Takeaways

  • Competition ensures quality. However, money monopolies allow governments to issue inferior money that cannot withstand competition in a free market
  • A fully digital currency grants governments the ability to control all currency units issued in the past
    • Additionally, it becomes easy to crack down on individual accounts
  • Banks are constantly subsidized by the central bank’s printing press which dilutes the purchasing power of the currency for all other users
  • “A natural economy is an economy in which price deflationary tendencies would prevail” – Dr. Guido Hülsmann
    • Firms remain profitable in a deflationary environment because both revenues and cost base decrease, credit is financed out of profit
  • Credit creation doesn’t enrich an economy
    • “Bank credit doesn’t create resources. It channels existing resources into other businesses than those which would have used them if these credits had not existed” – Dr. Guido Hülsmann
  • Central banks hold the biggest gold reserves and do everything to stop it from being used as a medium of exchange. Bitcoin fixes this because of its decentralized nature
  • Based on the Stock to Flow ratio, expect the purchasing power of gold to decline relative to Bitcoin over time

Economics Book Recommendations

Intro

Competition and The Quality of Money

  • In The Origins of Money, Carl Menger describes money as the most saleable good in an economy, the one that best preserves value through time and space.
  • The competitive process preserves quality in the market. That is, entrepreneurs’ ambition to provide superior products to clients
    • However, in the case of money, we have monopolies in the form of legal tender laws which block competition and lead to deterioration of the quality of money
  • Money monopolies allow governments to issue inferior money that cannot withstand competition in a free market
    • “The only way that the government can bring fiat money into circulation is by outlawing competition” – Dr. Guido Hülsmann
      • Case in point, people will always choose gold coins over paper money for long term savings

The Worst Monetary Interventions

  • Legal tender laws force a certain ranking of different types of money
    • Additionally, capital taxation laws disincentives using other forms of money
      • For instance, a gold denominated account will incur capital gains taxes if gold increases in value
  • Beyond limitless money production, a fully digital currency grants governments the ability to control all units issued in the past
    • Additionally, it becomes easy to crack down on individual accounts

Reserve and Capital Requirements for Banks

  • Liquidity reserve is the amount of money a bank has to hold as national fiat currency with the central bank
    • This backs up and is a limitation on the money creation when interacting with its own clients
  • Capital reserve requires a bank to finance it’s a percentage of its operations from its own assets, rather than by taking out credit
    • This prevents a bank from lending indefinite amounts of money created from thin air and earning interest on it
  • That said, these are artificial requirements that don’t necessarily reflect natural business operations
    • Moreover, banks’ existence is guaranteed by the support of central banks so they often exceed these limitations
  • Without the obligation of law, normal businesses voluntarily hold equity to absorb losses in bad years and liquid cash to deal with unforeseen expenses
    • But whereas normal businesses operate with approx. 5%-15% liquidity and 50% equity, banks operate with just 5% of equity or even 1-2% in 2007, what’s the catch?
      • Central banks constantly subsidize their operations and, in the process, dilute the purchasing power of the currency for all other users

How an Equity Based Economy Operates

  • Normally, the money supply is subject to natural commodity production constraints
    • Under such a system, money production lags behind the production of all other goods and services, resulting in stable or shrinking prices
      • Prior to WWII, prices declining at .5%-2% annually was the norm
      • “A natural economy is an economy in which price deflationary tendencies would prevail” – Dr. Guido Hülsmann
  • In an equity-based economy, credit plays a subordinate role and is used for commercial purposes
    • For instance, it wouldn’t make sense to finance a house on debt, because it will depreciate compared to the value of money
    • Firms remain profitable in a deflationary environment because both revenues and cost base decrease, credit is financed out of profit

Fractional Reserve

  • In a fractional reserve system, credit creation drives money creation. That is, banks bring new money into circulation by printing additional credits
    • This artificially boosts credit markets and causes constant price inflation
    • Debt becomes the rational strategy because it’s easier to service a debt out of a rising income
      • This is true for governments, firms, and individuals
    • Monetary causes are behind this change in financial culture over the last century
  • Money supply becomes a purely political question rather than being subject to a market economy in which productive activities compete

Credit Creation Doesn’t Enrich an Economy

  • Bank credit allows you to bid for resources you couldn’t otherwise afford
    • However, these resources would have been used at a cheaper price for other purposes in the economy
      • Uses funded by credit creation aren’t necessarily superior to other uses
    • “Bank credit doesn’t create resources. It channels existing resources into other businesses than those which would have used them if these credits had not existed” – Dr. Guido Hülsmann

Silver Standard vs. Gold Standard

  • Gold has a high purchasing power and thus needs gold-backed banknotes for daily transactions, increasing the importance of financial intermediaries
    • Unlike gold, silver is usable in daily transactions
      • So, while superior to the current standard, a gold standard was a deterioration of money quality from the silver standard
    • “You need banks under a gold standard, whereas you don’t need banks under a silver standard” – Dr. Guido Hülsmann

Gold vs. Bitcoin

  • Gold is a form of political money, central banks hold the biggest reserves and do everything to stop its use as a medium of exchange
    • In a way, “They withhold all the good stuff from the market so that people are forced to use the bad stuff” – Dr. Guido Hülsmann
      • Bitcoin fixes this because of its decentralized nature
  • Gold’s supply expands at about 1.5% per year. In a few years, Bitcoin will become ‘harder’ than gold
    • On this basis, expect the purchasing power of gold to decline relative to Bitcoin over time
    • Keep in mind, bitcoins can be subdivided to suit infinitesimal transaction sizes
  • In his book “The Ethics of Money Production”, Dr. Hülsmann argues that a free society would use a variety of different monies for various reasons
    • For instance, gold for value transfer over long distance and silver for daily exchanges
    • That said, modern monetary systems have strong unifying tendencies and one form of money might end up dominating all exchanges

Additional Notes

  • On digital currencies other than Bitcoin:
    • “The larger is the exchange network that already exists, the greater are the comparative advantages of using that money as compared to others that are used only in a smaller framework.” – Dr. Guido Hülsmann
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Notes By Mostafa Khaled

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