Daniel Oliver of Myrmikan Research

A Moneychanger interview (January 2017)

Daniel Oliver Jr. is President of the Committee for Monetary Research & Education, a non-profit educational organization founded in 1970 to promote greater public understanding of the nature of monetary institutions and of the central role that a healthy monetary system plays in the well-being, indeed, in the very survival of a free society.

In 2009, he founded Myrmikan Capital, an investment firm specializing in micro-capitalized gold mining companies. Previously, he worked for Bearing Capital, LLC, a private equity firm in Buenos Aires focused on Latin American commodities investments.

Mr. Oliver graduated from Columbia Law School with honors in 2001, where he was President of the Federalist Society. After practicing corporate law at Simpson Thacher & Bartlett and co-founding two venture companies, he attended INSEAD and obtained an MBA in 2005.

His first job was at the International Herald Tribune in Paris, which filled him with a love of writing. He currently publishes commentary on monetary principles in various media outlets, on financial television and radio programs, and speaks at monetary and investment conferences. He is finishing a book on the nature and history of credit bubbles, which stretch back to ancient Greece and beyond.

Sign up for his free monthly commentary, elegantly written and filled with historical understanding and original insights.

Dan is a National Review Institute Fellow and is an alumnus of the Swiss American Foundation’s Young Leadership Conference. He lives in New York City with his wife and two daughters, and kindly made time for this interview on 4 January 2017.

It would help your understanding of this interview to read the July 2016 Moneychanger article, “Nor a Lender Be.” That article discusses the historically perennial credit cycle: credit boom, overcapacity, overproduction, bust, and default. If you don’t understand that cycle, you can’t understand what’s driving finance, business, markets, and government today.

Moneychanger: I deeply appreciate your work because it’s concise and brings a historical perspective to bear, rather than focusing on the next or last ten minutes.

Oliver: Thank you. The Keynesian economic mindset is that economics began with Keynes and nothing before that mattered. My outlook is that human nature doesn’t change, so you can find the answers to economic problems in the past, which is what I’ve researched.

Moneychanger: Your work also shows what the Roman poet Horace called elegant simplicity, which is the heart of good style.

You touched on something in November that really struck a chord with me. You wrote “The American constitution was modeled on the Roman Republic, etc.”

Rome evolved from republic to empire: credit levels exploded, widening the gap between the rich and the poor, and then the plantation system began. How does that parallel make Trump’s election inevitable?

Oliver: I’m writing a book on the history of credit bubbles, and it’s taken me back in time. Originally I focused on just the last couple hundred years in the United States, then I discovered you can trace credit events over to Europe, and France, especially back several hundred years. I was somewhat amazed to discover you can go back to ancient Rome and ancient Greece and even beyond that to Mesopotamia and still find credit bubbles. The further back you go, the sketchier the evidence gets, but it’s still right there in front of you.

The fundamental cause of credit bubbles I usury. Until modern times, maybe 300 years ago, usury was a sin. The Bible clearly bans usury, as do Hinduism and Islam and most religions (Confucianism is a notable exception). One reason is that, as Aristotle put it, money increasing of itself is contrary to nature. If you have a cow and I have a bull and I lend you my bull, then you can pay me back my bull and some calves as well. The same is true of all organic things that multiply of themselves. Aristotle wrote that money can be the symbol of that increase, but money itself doesn’t increase.

Imagine a hypothetical economy in ancient Athens where 100 drachma circulate, and the nobles lend drachma to the peasants at 10 percent interest. A year later, the peasants owe the nobles 110 drachmas. Question is, where do those extra ten drachmas come from? Answer is, they don’t exist.

The Roman historian Plutarch talks about sixth century B.C. Athens when the gap between rich and poor widened so far that it created a “truly dangerous situation” – those were the words he used – and then they suffered a credit collapse. Solon was elected as a populist ruler and abrogated all of the mortgages. The penalty for mortgage default in ancient Greece was slavery. Half of the people ended up enslaved to the other half, and obviously that’s not stable. The populist ruler Solon was elected, freed the debt slaves, and abrogated all the mortgages. He essentially got rid of all the mortgages and devalued the currency to let people out of their debt.

The same thing happened in Rome. When he was looking for support, Caesar banned interest payments. You see echoes of that in Williams Jennings Bryan in the late 19th century U.S. and other times.

Once a society is trapped in usury and owes more money than exists, there’s no way out save through social strife. The pressure builds and builds until there’s some sort of debt relief, usually through a populist ruler. Often it is very negative and destructive, as in 18th century France, which led to the guillotine. Preferably, it doesn’t go that far. [Laughter]

Om the 1780s, when Americans were first discussing banks and what powers government should have, they looked back and observed, “They had no banks in Rome during the Republic.” When usury was kept under wraps there was more civic virtue. Later, in the empire period, all the wealth concentrated in the nobles, as it had in Athens,.

The main asset of that time was land that produced an income. As wealth concentrated in the nobles, they became vaster and vaster landowners, while the proletarians, the little people, ended up becoming employees of the very rich where once they were small capitalists. As Pliny wrote: latifundis perdidere Italiam, the plantation destroyed Rome.

Moneychanger: It’s the same transition from entrepreneur to employee we’ve seen in America over the last 150 years.

Oliver: Once that happened, then the idea of civic society, where all citizens are involved in the state and care about it and participate, goes out the window. Then comes a state run by the elites – the emperor and the senators and the very rich. That became very unstable, usually with lots of wars.

The parallel in modern times is huge amounts of debt and huge concentrations of wealth in Wall Street. It’s done a bit differently now, but it is still the same monetary phenomenon that focuses money at the top.

Moneychanger: It’s evil because they create their credit out of thin air. A state granted franchise empowers them to do that. The government licenses them to steal.

Oliver: That’s right.

Moneychanger: So whoever has enough political power to get a bank charter gets a license to steal and, in effect, to enslave the rest of the populace. That’s what happened in Rome: huge numbers of people sank into debt slavery until there was a small upper class supported by slaves.

Today the tenor of the slavery is different, but it’s slavery nonetheless: someone owns the slave’s future labor. Today it’s a lien on all future labor. That’s why in 2005, congress removed the ability to bankrupt student loans.

What does that mean? Those slaves are on the hook for life. [Laughter]

Oliver: And it’s worse. I live in New York City, and every time I open my door there’s some New York college student with a petition he wants me to sign for some “progressive” cause. You think to yourself, “My goodness. Here you are with all this debt you borrowed and what are you doing with it? Nothing productive; you’re standing here on the corner with some petition, so how are you ever going to pay your debts back?” Maybe the answer is you go into government and they forgive your debts.

You learn to be a community organizer like Obama, you get a job in some government agency, and they wipe your debts off. It’s wonderful, but completely unproductive, of course.

Moneychanger: You touched on the inevitability of a debt default. The form of the default might change, but is there any way to avoid the default altogether?

Oliver: No. There’s no way to avoid a debt default.

A credit boom distorts an economy’s entire structure, diverting all the effort into long-term projects for which there is no consumer demand, i.e., huge, empty office buildings keep going up but nobody’s raising food on farms anymore. At some point tremendous overcapacity results, which means that prices have to fall in real terms, and then the debtors default and the banks blow up. [See sidebar, “Interest Rates, Bond Prices, & the Credit Cycle.” – FS]

So how do you avoid the economy-wide default, or at least, delay it? The central bank must keep printing money to keep these structures alive. In 1913 a book published about German banking showed that the entire economy and banks were concentrated so that three hundred people in Germany owned everything through mergers, various trusts and conglomerates— everything we are familiar with.

Because these giant structures were so big, the German state couldn’t imagine that they might default and disappear. So the Reichsbank kept printing money to keep these things alive, which was one of the main causes for the 1920-1923 hyperinflation. Yes, the war reparations played their part, too, but it was also the structure of the economy with enormous too-big-to-fail institutions.

The same thing happened in 2008 in our system. Big structures like Goldman Sachs should have failed, but Hank Paulson and the rest of the gang in government just couldn’t imagine a world without Goldman Sachs.

Moneychanger: [Laughs]

Oliver: So they saved it. Since all these big corporations fund themselves with the overnight markets, when they ran out of money, the overnight markets froze up. The government said, “We simply can’t allow these huge structures to go down,” and they printed the money. That will happen again and again and again either until hyperinflation hits, Weimar style, or until the bad debts finally get so enormous that the government must start cutting them loose.

With Trump we have a man who ran as a populist and is now our president. When the next big crisis comes— and it will come on his watch—what will he do? Will he let the banks and the big structures fail? Into his cabinet he’s putting all billionaires and oligarchs who represent banks. I guess it’s possible that they turn on their own, but the likelihood is low.

Moneychanger: You keep saying default is inevitable.

Oliver: Yes.

Moneychanger: And that’s the way it looks to me. However, Trump gets elected. The stock market goes up; gold goes down. Apparently, people believe that it really is different this time, that it’s a “new era,” and government spending and central bank credit inflation will somehow pull us out, even though we’re at the peak of that credit cycle already. I don’t understand where their optimism is coming from. The stock market might rise for a week or a month, or six months, but hasn’t its day of judgment already come?

Oliver: All of the major things that Trump has announced are massively pro-credit. Tax cuts without spending cuts are a deficit-financed tax cut, one of the Keynesian ideas. Deficits are very inflationary. Then he wants to unleash the banks, ditch Dodd-Frank and let them speculate with your deposits again. Add to that a trillion dollar infrastructure “investment” plus military buildup— all those things are incredibly pro-credit.

Gold does not like the upswing of a credit cycle. Why? As I said before, in a credit bubble discount rates fall artificially, overvaluing long-term cash flow. Gold has no cash flow and it’s not demanded by industry, so falling interest rates don’t affect gold the same way they affect other things. Hence gold always falls at the upswing of a credit bubble.

That held true even from 1999-2008, when gold went from $250 to $1,000. But if you look at gold in terms of oil or iron ore or other industrial metals, it actually went down. The boom enhances those commodities’ value more than gold, and gold doesn’t have cash flow. However, that’s also why in a bust gold always outperforms. Interest rates spike, devaluing all these long-term malinvestments. Gold is unaffected by that shift because it has no cash flows, and that’s precisely why gold behaves opposite to the credit cycle; that’s what makes it so valuable.

My take is that Trump comes in and he controls Congress. The Democrats always want to spend money, but Republicans only want to spend money when they’re in charge, which they are now, so there’s a good chance much of the pro-credit program will be enacted.

But as you pointed out, we are at the top of an epic credit cycle, the largest history has ever seen, and that’s going to collapse. Question is, how long can Trump push off the collapse? I find it difficult to get a handle on that. This is not the 1950s anymore, when the US was the only game in town. The world is a big place, and China is rolling over, Latin America is rolling over, Europe is certainly rolling over. I have my doubts as to how long Trump’s program can keep this bubble alive.

Moneychanger: It’s not a new era after all. [Laughter]

I hear Janet Yellen talking about all the “tools” that she has—that word annoys me—as if she only has to do is dig in her tool bag when the next crisis hits, and she’ll find the sure-fix tool there.

Oliver: They have only two real tools they can use.

One is open market operations: the Fed buys government bonds to reduce interest rates. They did that three times in the 1920s. World War I created huge overcapacity to fight the war, and when the war ended there was a big slump in 1921. Irving Fisher and Keynes convinced the Fed that their mission was to stabilize prices. So the Fed bought federal bonds in three rounds of quantitative easing to boost commodity prices back to where they had been at the top of the World War I bubble.

This did stabilize prices by reviving demand for the industrial sector’s overcapacity, but the money also rushed into the stock market, which took off. Then in late 1928-early 1929, the rise in the market spooked the Fed and they said: “We’ve got to rein in the speculation!” They raised rates to keep the market stable and keep it from rising too much, and that tanked the whole economy. That is a pretty much an exact parallel to all of our recent economic history.

The second tool they have is a derivative of the first: guarantees. People forget that when the crisis first hit in late 2008, QE didn’t come until later. The first thing the Fed did was guarantee about $7.7 trillion of assets. About a quadrillion dollars of derivatives daisy-chained all the banks. They owed each other trillions and trillions of dollars. The Fed said, “Look, we will back up the system so you don’t need to execute your margins against the banks.” And it worked. The banks suspended market-to-market accounting because the Fed said, “We’re going to guarantee all this stuff.”

There’s a historical precedent for this. The first modern credit bubble was John Law’s Mississippi Bubble in France in 1719. He had set up a bank whose function was to lend money to buy shares in his Mississippi Company. As the company’s shares rose, the bank became more collateralized (the shares were more valuable) so they’d lend you more money, which you’d use to buy more shares, which went up further in a constant feedback loop. The share price went from 200 to 10,000 over about three years, with most of that increase at the end.

At the first big hiccup in the share price, John Law said, “Don’t worry, everyone. I will guarantee the prices. I will buy any and all shares tendered to me at 4,500.”

It worked. Everyone said, “As long as I know I can sell these things back to the bank, I’m not going to sell them. I’ll keep them.” So the share price doubled again over the next three or four months.

Then came a second hiccup and Law tried it again. “Okay, the share price went from 10,000 to 9,000. Anybody who wants to sell me shares at 9,000, I’ll buy as many as are tendered.”

Guess what? A billion shares were tendered by people saying, “We want the money.” So he stabilized the company’s share price in terms of his currency, but then his currency collapsed because he had to create another billion currency units.

History always repeats itself, sometimes in broad strokes, sometimes very specific strokes. The guarantees worked so well for the Fed last time that my guess is next time, Janet Yellen will say, “Where’s my tool box? Let’s see, here are guarantees! Last time guarantees worked. Let’s guarantee everything.” But what if the next time all of the banks say, “Here are all these worthless certificates. Give us the dollars.” That will happen at some point if they keep using guarantees. Then, all of a sudden, the currency simply collapses overnight, as in France. I think that’s coming.

Looking back at historical crises, you don’t usually see what we had in the 1970s, which was a nice parabolic ten-year movement of gold’s price with inflation. Usually gold goes along at a very steady level, then one day or over a weekend, it opens 50% or 100% higher.

I think today we’re in more of a 19th century debt problem, not a 1970s Keynesian Phillips Curve problem. The 1970s were driven by this absurd idea that the more inflation, the lower unemployment. So, they just printed money to squelch unemployment. It didn’t work, but it did deliver a slow burn, accelerating inflation over ten years. Still, in a debt crisis like today, gold’s price tends to change in big steps.

Look at modern hyperinflations. Russians will tell you that one day a cup of coffee cost 5 rubles and the next day it cost 50. Prices changed very, very chaotically and radically.

When gold is not going anywhere, gold investors get nervous, but I don’t. You can’t expect it to go up $10 a day over 20 years. However, you can expect it to go nowhere or even down sometimes, and then one day you wake up and it’s doubled.

Moneychanger: I’ve been buying & selling physical gold and silver since 1980. There have been long periods when it was not a good business because gold was on the opposite side of the cycle. Even since 1999 - when gold bottomed – it’s taken a lot of patience. Investors have to realize they’re waiting for the few days of discontinuous rises.

Oliver: That’s right.

Moneychanger: If you concentrate on gold’s day-to-day, you’ll likely wind up depressed. But every now and then, it doesn’t work that way, like gold stocks in 2016.

Let me just go back to something you just said - And the same thing would have applied to Germany.

Oliver: Look at the gold price in Weimar Germany– in the middle of the hyperinflation. You say, “How easy.” Gold goes up all the time, but as the inflation accelerates, the volatility grew, too. People would say, “Why, this is easy. I’ll borrow a bunch of money, buy a hard asset like gold, and then inflation will wipe away my debt.”

That’s a great plan unless the volatility is enormous and you get a margin call that wipes you out – then gold takes off. Even in a hyperinflation it wasn’t obvious how to trade this stuff. To trade gold in and out you need to be at a bullion bank where you can watch the capital flows. If you’re trying to do it from your living room, it’s tough.

Moneychanger: Is it really possible that the US dollar would be hyperinflated? Think of Germany in 1910, the greatest economic power in Europe with the soundest currency – probably sounder than the British pound. How could it ever hyperinflate? Is it really possible that the US dollar could hyperinflate out of existence? You understand what a gigantic social and economic dislocation that involves?

Oliver: It’s theoretically possible. Before that happens, though, they’ll shut the banks down and pull out another “tool” of credit collapse that you always see – Resolution Trust Companies.

Banks are trapped by “maturity transformation.” They always borrow short-term and lend long-term. A depositor puts overnight funds into the bank and the bank says, “You can get them any time you want.” Then they lend ten times the amount through the fractional reserve process for 30 years to build ships and buildings nobody wants.

The bank congratulates itself, “As long as depositors don’t show up to get their money, it’s fine.” Well, that's not quite true, because the borrower built an asset for which there is little consumer demand, so prices fall, and then the malinvestments can't make their debt payments, and it's actually not fine. When the overnight depositor shows up to withdraw his deposit – it ain’t there.

The banking system, including the Fed, has two choices: print the money so they can pay depositors, or admit default: “Hey, you’ve lost all your money.” Instead of admitting default, they create these “Resolution Trust Companies,”

Moneychanger: What I call the “garbage can” to get all those rotten loans off the banks’ books.

Oliver: Like the no-good assets the bank financed, which the bank will foreclose on, sell off over four or five years, and then give you the proceeds. And if you had a $100 deposit in the bank, you end up getting $30 or $20. Maybe, though, after all the fees and the lawyers get paid, you take home only $15 . . . four years later.

This prevents a hyperinflation because the Fed doesn’t print money and give it to depositors, but it does mean depositors get wiped out. It’s the Cyprus solution, but not just Cyprus. John Law did it in 1720 when his system collapsed and so did FDR.

I think this is more likely than a hyperinflation - just closing the banks. Of course, all the insiders will get out first before the doors close. Then they’ll do some populist thing and Trump is just the guy to do it. He’ll say, “Look, everyone with a deposit less than $10,000 is fine, but people who have over $100,000, ‘the so-called rich, won’t be paid.”

But, if they do something crazy like the 2008 guarantee for the banks, and they may well do it, it would be disastrous. Then, you really could see hyperinflation because there are just so many deposits out there. Or maybe they issue the guarantees and then just not pay. Either way the dollar will suffer a huge decline.

What is a dollar? A Federal Reserve Note “dollar” is a unit of liability of the Federal Reserve, and it’s not possible that a liability on a balance sheet can be worth more than the assets backing it for long.

What assets are backing the Fed’s liability? A little bit of gold— seven percent at current prices—and then mostly very long-term government bonds. The average bond maturity is now 12 years, which means those assets are very sensitive to interest rates and also default risk. The rest of the Fed’s assets are those extremely toxic mortgage-backed securities.

One of the fun things about mortgage-backed securities is that when rates are falling everyone refinances, so the duration of the bonds is very short. But when rates are rising nobody refinances. So they not only lose value because rates rise (bond values go down), but your duration risk increases at the same time.

Right now the dollar is caught in a short squeeze the same way that the Athenian peasants were caught in a short squeeze when they owed the nobles 110 drachmas and only 100 existed. There exists $4 trillion worth of base money and $90 trillion of debt, which requires interest payments all day long. That demand keeps the dollar’s value quite high, because if you don’t have dollars, you can’t make interest payments and you lose your assets to the bank.

Once that squeeze breaks, the dollar can fall to a level that is supported by the Federal Reserve’s assets’ value. Historically, looking back at the Fed and the Bank of England to 1704, gold has backed the liabilities of the dominant country’s bank by about a third. Using that measure, the equilibrium value for gold ranges from $5,000 to $8,000 an ounce. However, that’s in the context where the other assets—government bonds and commercial paper—were very solid instruments, which is not the case today. So the real equilibrium price is a bit higher, probably $12,000 to $15,000 an ounce.

Moneychanger: I have to complement you on that analysis. You put it in one or two sentences in one of your recent reports, and I was stunned. I know that the Federal Reserve note is the Fed’s liability and must be backed by assets. Of course, we talk about gold backing, but I never had pondered the effect of interest rates on the other asset values and when they fall, that drives down the dollar.

Oliver: That’s right. When you think about the Great Depression, the Federal Reserve’s balance sheet in 1929 was 50% gold. The other assets were 30 to 90 day commercial paper with almost no duration risk at all, and their government bonds were very short-term, maybe a year.

When the 1970s began the percentage of gold backing the Fed’s liabilities was 10-13%. The government bonds on its balance sheet – there were no more commercial bills– were relatively short term, around four years. Interest rates rose the whole decade crushing the bonds and sending gold to a price that made the hoard at the Fed back its assets by 100%.

Today the average maturity is more like twelve years. What’s the point? The bonds on the Fed’s balance sheet are vastly more sensitive to interest rates now than they ever have been. That’s why I think when things really get going and the dollar breaks, it’s going to be fun for gold, more fun even than the 1970s

Moneychanger: How long can this last? After 2008 I was frankly astounded at the ability of the Fed and the government to put off a collapse. They were very successful. They’re very clever people. They’ve got all the money in the world to hire clever people to work for them to try and make things work out, at least till the end of the day. So how much longer can this go on?

Oliver: That is the question.

Throughout the 1970s Hayek was warning that it was all going to blow up and collapse. In the late 1970s he wrote that he had misjudged the timing because under the gold standard a credit bubble can only go so far. When it became obvious that there was too much credit the thing collapsed. This kept credit and lending in the right proportion. But in 1971 they essentially abolished the gold standard and Hayek didn’t anticipate how much longer a credit bubble could survive without gold anchoring the system, though he knew it had to collapse at some point. Here we are again, in the next round, but only paper backs the paper.

In 1980, when gold hit $550 an ounce the Fed’s balance sheet liabilities were 100% backed by gold. That was not a good time to be buying gold because the dollar was effectively a representation of gold itself. The Fed pushed interest rates over 20% to squeeze all the credit they could out of the system. That ended the 1970s credit bubble and began our current credit bubble.

The current bubble has gone on much, much longer than any bubble in history because we’re on a fiat currency standard. You’re right: very clever people run the Fed with huge resources behind them and they manage it very well. Unhappily, they are—and will be—victims of their own success. The longer and the better they’re able to keep the rotten investments and the overcapacity alive and encourage even more overcapacity, the more pressure builds for a crack up.

I am amazed it’s lasted long as it has, but ask yourself, “How many more ghost cities can the Chinese build? How many more fourth ring loops around secondary cities can they build before they starve to death because no one’s growing food anymore?” We’re long overdue.

Now interest rates are effectively zero, but if they raise interest rates, these bad investments simply can’t afford to pay a higher rate and you have $600 trillion of derivative interest rate swaps which become unbalanced as rates go up. That’s problem number one.

Problem number two: if they lower rates to negative as in Europe, then everyone flees the bank system for cash. This does unwind the pressure mechanism, because all the depositors start thinking, “Give me my cash back.”

In Switzerland last year I went to an old Swiss army bunker that a private company has rented out. They were filling it up with safety deposit boxes, mostly for Germans bringing cash. They drive cash into the country because the banks are now charging them to hold cash.

We’re at a point where it’s not obvious to me how to keep this thing going for very much longer. But, as you pointed out, markets are a humbling thing.

You can never be too certain of anything. My view was that the big Chinese stock market hiccup in 2015 marked the cycle peak and now we’re shooting down the other side. It is taking longer than I anticipated, but nothing—not even Trump’s victory on a global scale—has happened to dissuade me from the view that credit is still shrinking. Industrial production, global trade and many other metrics are all contracting. How do banks expect people to keep up interest payments if trade is literally shrinking?

We are in the contractionary period, which will accelerate, assuming the Fed doesn’t ease things. However, there’s no political cover at the moment for the Fed to do a big QE. We have to experience a really big crash first before Trump will say, “Hey, I was just kidding! Let’s do a QE.”

In 1970 Nixon put Arthur Burns in charge of the Fed, and Burns did exactly what Nixon wanted, which was to lower interest rates. Hoover did the same thing. Lincoln did the same thing. And Henry Clay, if you go all the way back to 1819, was instrumental in getting the Second Bank of the United States—our previous central bank—off the ground to fund internal improvements in the US.

Trump’s strategy is nothing new. It has been tried over and over again to try to reinflate contracting credit bubbles, and it always ends in disaster. It will this time, too.

Moneychanger: But people are like geese in a new world. They know nothing about history, they don’t see the repetition. Trump is offering the same tired nostrums that have never worked.

Oliver: I was at a meeting in September where academics gather and talk about economics. You know what was odd? Not a one of those scholars writes economic history. Econ departments are all math and mathematical models. History departments teach economics through the prism of racism or colonialism or whatever the latest ism happens to be.

There’s no demand for economic history, so no one writes it. I’m writing a book on the economic history of credit bubbles because I’m driven by the topic, but if I was trying to win a professorship somewhere, I wouldn’t write this book. There’s no concept of history in colleges.

I’ll share one of my favorite anecdotes. One of the Roman historians talks about the Panic of A.D. 33 in Rome. Have you ever heard of the Panic of A.D. 33?

Moneychanger: No.

Oliver: No one ever has. According to Tacitus: “But now ...[because of] a stringency in the money market ...creditors demanded payment in full, and those upon whom the demand was made could not, without losing credit, fail to meet their obligations. So they ran hither and thither with entreaties, then the praetor’s tribunal resounded; and the purchase and sale of property, resorted to as a remedy, worked just to the contrary ... the more heavily burdened any one was with debt, the harder he found it to dispose of his property . . . and many were ruined in their fortunes.” Classic margin selling. Then, as Tacitus tells us: “Tiberius Caesar came to the rescue, and deposited 100,000,000 sesterces in banks, the debtors having the privilege of borrowing for three years, without interest, on giving landed security to the state for twice the amount of the loan.”

This is precisely what TARP was, no interest loans against mostly real estate collateral to stabilize the money market – nearly 2000 years ago! I’ve never heard anybody talk about this. It’s extraordinary that Tiberius Caesar designed TARP and these modern central bankers and governments arrived at the same conclusions. It has all happened before, and in the same ways, but nobody reads history.

Moneychanger: There’s a predictive value to that, too: the trajectory of the crisis is fixed. Details change, not the trajectory.

Oliver: That’s true. And interestingly enough, the Roman currency, the denarius, was 98% silver and had been for two centuries. A.D. 33 marked the moment when debasement began and eventually the Roman Empire collapsed in a.d. 476 mainly because of hyperinflation. It took several hundred years because the capital turns over only once a year in an agrarian society as opposed to several times a year in an industrial society.

Why did they debase the currency? Because it seemed so easy to simply put more money out in the market and solve all your problems.

Moneychanger: I cherish the foolish hope that the 150 year era of central banking is coming to an end. The crises are increasing in amplitude and frequency. Will it all end by the restoration of some gold-backed money?

Oliver: That’s an odd question, because in a certain way, the central banks are more powerful than they’ve ever been, but it’s a good question because the next crisis can tread two paths, freedom or tighter control. Does it get so huge that they just let the system collapse and move on with free markets?

When the Allies occupied Germany in 1945 they kept all the Nazi economic controls in place, even though the war had been fought against National Socialism. Worse yet, they increased draconian controls until the economy completely collapsed. Within the German government there was a big fight over whether they should control even more or let the controls go? They let them go.

Jacques Rueff and other observers wrote that the recovery was almost immediate, that even people who favored markets were amazed at how quickly the economy recovered once the controls were removed.

Another option is to tightening control by adding more price controls. The Emperor Diocletian (a.d. 244 – 312) published hundreds of pages of price controls on thousands of items, including lions bound for the Coliseum. If you sold something above that price, the penalty was death. Of course it didn’t work but it did destroy the economy and the middle class.

What happens now with the state so powerful? All of us depend on electronic things and they’re all traceable. They’re probably recording this conversation because they record everything. If from here the state becomes more totalitarian it will wield extraordinary power.

Do we go down that route where some sort of Hitler figure keeps the trains running on time? Hitler had a great line: "We will build a solid State, proof against crises, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp.” That’s the fascist model, because power is what money is all about.

Is that the path we go down, with a manager having all this power at his disposal to manage the economy Soviet-style or Nazi-style? Or do we let the whole thing collapse and enjoy free markets again?

That’s a cultural question. How solid is America today? And I get nervous—you go out and you see every single person covered in tattoos and you think, “Well, that’s not a hopeful sign that people are liberty loving, God-fearing, bourgeois people.”

It’s very simple. The bourgeois mindset is based on the idea that you maximize consumption by saving. With the money that I save now I can consume more in the future. So I minimize my consumption, save money, and discipline myself because I want the future I have already invested in to arrive unmolested.

Under a hyperinflation there is no future financially. If you save your money it all disappears. You are crushed.

So most capitalists refuse to pay into the future. People say, “Why would I not consume everything right now?” It’s not by accident that the drug epidemic among inner city blacks arrived in the 1960s. They were essentially prevented from working because with an effective marginal tax rate above 100%, the more they worked, the more they were penalized because those not working got all this free stuff. For those working, the free stuff disappeared—no reason for them to work.

Now the drug epidemic is hitting the white working class because of the same phenomenon. As you said, they're virtual slaves, and the have no way to save their wages. Interest rates at the banks are zero, and sharply negative in real terms, the stock market is a casino where they most likely will lose. When people are prevented from savings, they naturally turn to immediate consumption. All this is perfectly predictable as a result of what the Fed is doing.

Moneychanger: You’ve come back around to the point that intrigued me so much: the social transition that credit money power concentration has engendered in the last 150 years. The population has been transformed from bourgeois to employee, or what I would call from entrepreneur/employer to employee.

Oliver: That’s right.

Moneychanger: That necessarily transforms the mindset of a free man to the mindset of a slave or dependent. Part of the proof of that is that 40% of U.S. GDP comes from state, local, and federal government spending. If you throw in the loans and loan guarantees and all the other stuff, it’s actually way more than that. So there isn’t any economy, because more than 40% of the people don’t produce anything. They depend completely on government for their living.

What scares me about that—even more than tattoos—is those people do not want freedom, because they do not want risks and responsibilities.

Oliver: That’s exactly right.

Moneychanger: To return to free markets, then, requires an enormous and fundamental social revolution.

Oliver: You’re absolutely right. I live in New York and they have great little neighborhood markets. I used to go to nice little market. Some black guy swept the floor, and I didn’t pay much attention to him because people sweeping the floor usually don’t have a lot to say. I complained about the prices at one point, and he started explaining about the harvest and where they get the produce from and the prices and I was shocked. This was a little store but the man who swept the floor knew about the business as a business and was learning all the things he would need to start his own business one day. He wasn’t just sweeping the floor, he was an apprentice.

Well, a bank-financed Fairway showed up across the street, and then a Wall Street-financed WholeFoods showed up, and my little market was driven out of business. The guys doing menial jobs at Whole Foods, they don't know what the margins are or how the business operates. Their job is to sweep the floor and that's it. And that's why they usually can’t improve their status because that's all they do. It’s not their fault—they are given no opportunity for apprenticeship.

The small capitalization society engenders responsibility, capitalism, and entrepreneurship. All that disappears when wealth concentrates.

Debt creates very efficient systems. There’s no question about that. But it comes at the cost of flexibility, and economists don’t see that Amazon is wonderfully efficient, but it’s completely inflexible. As your cost of throughput goes down, you can’t change things.

Moneychanger: A highly centralized economy loses flexibility, so becomes more vulnerable to systemic shocks that take can the whole thing down. A decentralized economy has redundant systems.

Oliver: That’s exactly right.

Moneychanger: I deeply appreciate your time.

Originally published January 2017