Dominik Stroukal is a liberal Czech economist, who received his doctorate in economics from the University of Economics in Prague, while he also studied media studies at famous Charles University. He is also the author of the first book about Bitcoin in the Czech language.
Do you agree on a quote that the growth of financial markets is achieved only by the influx of new money in the economy? Is it that simple?
It is certainly not that easy. Of course, we are innovating, competition is growing somewhere, we are looking for new materials, etc. So, the financial markets will show some percentage up and down in real fundamentals. Certainly, markets are completely unprecedentedly dependent on new money. If we cut off quantitative easing, which would involve rejecting any promise of future quantitative easing, then markets would be somewhere else long ago.
What do you think of the coronavirus and its impact on the global economy? Is it already a black swan event, which will tear down an avalanche of the recession expected for several years? Or how do you think the whole situation will develop, respectively. how far can it go?
Coronavirus already made a great mess all around the world. Not only is this a tragedy in itself, but the blowing of markets will be attributed to the virus and will continue to blow and more. They will blame coronavirus for all the fails.
Central banks have already promised to cut rates, and even if they didn't, they would. When it falls, it must stop. Markets just must not fall, even if we take off someone innocent. This is exactly what is happening.
But it's not a big conspiracy. We have a constitution, a law about the central bank, economists who have some consensus and all do what is generally considered right. It is a mistake partly because these laws originated long ago, when it still made some kind of sense, and partly because it is based on nonsensical theories. But I do not want to fully judge this, because most economists believe them, and therefore they are the mainstream and not what I consider to be the right self.
Every downturn is an opportunity to explain to the public that the current economic model is on the water. Or rather here in the air. Indeed, in a crisis, we have always managed to change course, but usually for the worse, so I would rather than promote the better theories, to prevent the onset of madness.
What awaits us, we should prepare for that. Anyone who has an obscure theory of how the world should work is shaking at the crisis to show a new way. They are such sects. And I admit that a few of them got me too. But rather than promoting my own, I would like to prevent people from entering into those who are perishing. And that there are.
What do you think of Japan and its long-lasting deflation? Is there a way out of it, or is it a scarecrow for Western or all the world's economies?
Japan is not currently in deflation, but it is true that since the late 1980s it has been above and often below. But I understand the question and I would say the most important thing we can get from Japan. We're on the Japanese road. Japanization of the Western economies is not a hypothesis, it is already happening. Japan is a kind of crystal ball that shows us what the economy will look like in the future.
We will be pouring piles of money into it, but we will not reach inflation, just blowing bubbles here and there and discounting debts, especially the state and corporations, creating huge moral hazard and inequality across the economy.
Let's stay with Japan for a while. The state owns vast holdings in firms across sectors. Simply because they always "create" new money and support "economic growth" by buying new shares. Unfortunately, this is probably the direction of the US or EU economy. What about the companies that will be 90% state-owned?!
Although sometimes I simplify it myself, there is room to point out that the state does not buy shares directly through the central bank, but usually some ETFs, so it has limited ownership rights and it is not easy to say that the companies "own" state stand and fall.
What will happen? Nothing important. Businesses will still employ people, keep innovating and looking for new products, but it will be much slower. As in Czechoslovakia in the socialism era. It kind of works, but it's pretty bad. The main argument for us, who does not support the massive buying of assets by central banks, is not that it will cause a giant recession, but that it might have been better. Well, it is difficult to explain.
Many world countries are considering or planning to create their own digital currency. Can this somehow help in monetary policy management? For example, the setting of fixed or variable inflation in a certain range according to the economic cycle? At this moment, the Marshall Islands are launching their new digital currency on Algorand with a fixed inflation rate of 4%.
The problem for us ordinary people is that we do not spend as central banks would like. It will cut rates and banks will not reduce theirs. Even if they do, we won't take more mortgages, so there won't be that much new money. And even if we do, we don't spend the new money on bread and new cars, but stuff it in the stock markets or sew it in mattresses.
So, we do not grow inflation as measured, even if bubbles are inflating next to us. The ideal would be to force us to buy bread and new cars. That would be planned prices! That would be the monetary policy of dreams. Digital money, of course, can help. But the difference between the state and the cryptocurrencies would diminish and it would be clear to see how we live in a strange world. And that there is a better option. Today, cryptocurrencies are something oddly different. People still compare them to cash, even if there is a minimum of cash.
Leading cryptocurrency expert Andreas M. Antonopoulos recently told me in the interview that "cashless society is a fascist society". Do you agree with this view and are you worried about the emerging national digital currencies that will emerge from a cashless society?
I agree. However, ... Cash is not canceled and nobody plans it. I guess I wouldn't run into that conspiratorial line. Central bankers need to achieve inflation, there is no conspiracy about wanting to control us. Does that lead to it? Sure. But the share of cash in GDP in our country is growing and it is mainly solved in the Nordic countries, where it declines. We may choose it ourselves over time. If this happens, and once it does, it would be best if the state allowed the privilege of cash. If anyone wants it can. Banks would issue cash and even discover the magic of cover. If we didn't do that, I'd agree with Andreas.
As a liberal economist, what do you think of negative interest rates? Can they help the economy to grow, or is it another tool after inflation to open the scissors between rich and poor?
Clearly, they help the economy grow. At the same time, they open scissors between rich and poor. Empirically they increase income inequality because the rich usually have income from shares to a greater extent than the poor who live on fixed wages. But the inequality of wealth, that is, what we possess, is decreasing, because the poor usually have a property that rises in price and is an important component of our wealth.
However, I always argue here that the price of the property we live in will grow up on paper. But what about it? We only have one, so we can sell it and move to another, which has also become more expensive. Or the rent, which grew too. So, it's useless, we can just pat on our shoulders that we're millionaires. Of course, if you have five properties, so cool, you sell four more. But the poor don’t have it. To sum this up, this whole fun is for the rich at the expense of the poor. And it is pure evil.
Let’s turn our conversation to cryptocurrencies. What do you think of the four-year Bitcoin cycles given by halving? Can the impact of halving on its huge volatility diminish over time?
Volatility is mainly reduced by two things. Firstly, the usage. The more Bitcoin is used and the less speculation is, the lower the volatility. And secondly, the more expensive it is. Then a larger volume of bitcoins is needed for the same price movement. And, of course, how liquid the exchanges are, etc.
However, the halving of rewards can trigger increased media interest and hence demand, which will increase the price and reduce volatility. I see the line there, but it all stands and falls on demand. We know the offer well. They need higher demand to raise prices. How to do it? They must be more usable or alternatives, especially state money, must be more successful.
Do you think that other cryptocurrencies may eventually get rid of the positive correlation on Bitcoin and its four-year cycles? Do you see any cryptocurrency that could reach this point?
I don't think so. I think the other cryptocurrencies will eventually die out. I love competition, but sometimes competition is doomed and only helps consumers push the lead to innovation. I expect it here, but nothing is carved in stone. Maybe someone will come up with a miracle. I don't see him yet.
Apart from price speculation, do you like any cryptocurrency project technologically? What about cryptocurrencies dealing with decentralized finance / DeFi?
Previously, I tried to keep my finger on the pulse of the altcoins, but I lost interest around 2016, and finally in 2017 when I saw what the altcoins were all about, even if they didn't work a bit.
I like DeFi projects, I think I can find a lot of interesting things there and I always like to learn something new.
I do not rule out something new and interesting, but I do not see it. You know, it feels like whiskey, cognac or rum or whatever you drink. You've been trying for five years, looking for the best, and then finding what is top for you. Here and there someone convinces you that you should try something else. Okay. Try it. And it's worth noting.
Or it's just not it. It cannot be ruled out that you will fall in love for the second time, it cannot be ruled out that someone will build a new way, but whenever someone shows you a random unknown bottle, as a rule-of-thumb. You may be wrong, but when you are disappointed two hundred times, you just statistically discriminate. I'm the Bitcoin Emergency Maximalist. If only there were ten-twenty super cryptocurrencies, I love the competition. But I just can't see it. And I'm sorry about that!
At the end of our interview, I would like to ask you for your comment on this quote and whether you think economist Friedrich August von Hayek would be happy about cryptocurrencies.
"I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop." Friedrich August von Hayek, Austrian economist, and philosopher
I hate to put my thoughts into other people's mouths, but in general, convinced classical liberals and Austrian economists should be pleased that there is a totally non-violent, voluntary alternative to the current violent and involuntary money. And thrown gloves to their stewards.
Hayek did not trust private money for a long time, so it would depend on when Bitcoin would have been built in his lifetime. If it were earlier, he would probably point out the problems it has. And he would point out the ones he really has. Late Hayek would then laconically point out that Bitcoin is far from all the money so far, but we can only discover its magic in free competition. Let's keep the money competing. Maybe it will be gold, maybe Bitcoin, maybe people will choose Bolivar. Who am I to tell them what to choose? And how do I know what they want?