WBD564 Audio Transcription

Why Fiat Drives the Wealth Divide with Avik Roy

Release date: Saturday 8th October

Note: the following is a transcription of my interview with Avik Roy. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

Avik Roy is president of the Foundation for Research on Equal Opportunity think tank and a policy Editor at Forbes. In this interview, we discuss how society can improve social mobility through free markets, individual liberty, innovation, social integration, energy freedom, housing growth and harnessing good deflation.

“Free enterprise and individual liberty and innovation/entrepreneurship do actually increase prosperity for lower and middle-income people, they’ve done that all over the world; we’ve lifted a billion people out of poverty in India and China over the last 20 years...and we can do that again.”

— Avik Roy

Interview Transcription

Peter McCormack: Avik, good to see you.  How are you doing, man?  

Avik Roy: Peter, it's great to be with you again, and welcome back to Austin.

Peter McCormack: Yeah, we're getting to do this quite regularly.

Avik Roy: Yeah, I like it, I'm climbing up the league table of appearances on What Bitcoin Did.

Peter McCormack: You're doing it, man.  Well, listen, there's a specific reason we wanted to come and talk to you.  I've just finished making my second film of this Follow the Money series, and we decided to do it in the UK.  We decided to cover inflation and, as part of that, I was travelling around Bedford, where I live, but I also went to a place called Harlow, which is quite deprived. 

In making the film, we spent a lot of time speaking to people about what they understand about inflation and what the impact has been on them.  And then, since then, the UK has obviously been kind of just falling into this absolute shitshow, this economic shit show; we've had this huge increase in energy prices to the point where trying to understand how people can afford their energy is quite difficult.  At one point, they were predicting the energy cap -- you know about the energy cap we have in the UK?

Avik Roy: I know there's a cap, or you tell me because I don't want to misunderstand.

Peter McCormack: The energy cap, it's not exactly a cap but it's based on the most the energy companies can charge you; there's a limitation. 

Avik Roy: Just creates shortages; it's a classic price control problem.

Peter McCormack: Yeah, but at the same time, it's existed to make energy affordable for families.  At one point, it was about £1,000 last year; what was it, about £1,300, Danny, I think?  Then it suddenly jumped up, it's going to be about £5,000 to £6,000 which means people just cannot heat their homes and, at a time when we've got high inflation and people are struggling to make ends meet there, and now we've got raising interests, there are a lot of problems for a lot of different people; it's not just the poorest but the middle class are being whacked as well now.

You know I'm obviously a fan of the work that FREOPP does, and I read every single newsletter, all with great interest because, obviously, your work is trying to help.  Well, you should explain what you do, but because of what you do, we wanted to talk to you about these issues and get an understanding of how to better construct a civil society that kind of supports each other.  So, I wanted to talk to you about what I've seen, talk to you about your work, and try and understand how these two things meet.  I've done a really bad job there; does that make sense?

Avik Roy: No, that's great and, again, thank you for highlighting our work.  So, I run this thinktank called the Foundation for Research on Equal Opportunity, or FREOPP, and our website is www.freopp.org.  Or, if you want to subscribe to that newsletter that Peter was mentioning, it's substack.freeopp.org, so pretty easy to plug into your Substack feed.

Peter McCormack: Definitely subscribe, it's brilliant.

Avik Roy: Thank you.  We work on how to use individual liberty and economic freedom in innovation and entrepreneurship and pluralism to improve the lives of Americans.  But these lessons apply throughout the West, throughout the industrialised world, how to improve the lives of Americans whose incomes or wealth are below the US median, so how to increase more society mobility or how to increase social mobility, how to increase incomes and also reduce the cost of living; that becomes a big part of the problem that has been neglected that has bipartisan solutions.

The reason why we have that approach, why we are trying to use free enterprise and economic freedom, and individual liberty in particular and innovation in particular to improve social mobility, is because it's a way to bring the parties together, to show the left and the right, or left of centre people and right of centre that, "Hey, you don't have to be fighting each other all the time.  There are solutions that you can both champion, that you can advance your values without compromising with the other side; they actually advance your own values in the way that you see them but also bring in others that you might not otherwise work with". 

That's the only way you can get things done in our system in the US and, at least in most parliamentary systems in Europe, one party gets to control and they could at least pass a few things, particularly if they have a clear majority as opposed to a coalition.  In the US, that's a lot harder; our system is designed so that you have to have the House and the Senate and the President, and even then, you have to get 60 votes in the Senate.  So, even when the Democrats control Congress and the White House, as they do in 2022, as we're recording this podcast, Democrats can't get everything done that they want to do because they are limited by some of these Madisonian restrictions in majority control.

So, all that to say that, if want to actually address some of these structural problems that we have in the West, you're not going to be able to do it, generally speaking, by doing it through one party; you have to at least get some buy-in from the other party and bring people together.  So, that's the core idea, the core insight I should say, and the good news is free enterprise and individual liberty and innovative and entrepreneurship do actually increase prosperity for lower- and middle-income people; they've done that all over the world.

We looked at a billion people out of poverty in India and China over the last 20 years.  In the 1980s, in the UK and the US, we certainly did a lot to increase economic prosperity for lower- and middle-income people, and we can do that again, in the 1990s as well.  So, the 1980s and 1990s were times in which growth was highly inclusive; we didn't have the massive explosion of wealth inequality that we're seeing over the last 20 to 30 years.  We can obviously get into what's driving that wealth inequality, but one big factor, which you're alluding to with some of the work you're doing, is the high cost of living, which isn't just about inflation in the way you read about it in the newspaper, it's a broader set of problems that means that you're working harder to earn less than you did before. 

It's not just about inflation in the sense of how much your grocery costs of how much your petrol or your gas bill is when you fill up your tank in your car.  It can be about things like, if you want to own a home, how easy is it to own a home; how easy is it to educate your kids?  And in the US, those are in particular big problems; the high cost of healthcare here is a huge driver.  So, there are aspects of this problem that are driven by the way central banks behave, which, in the Bitcoin community, we talk about a lot; we could call that the macroeconomic aspect of inflation. 

There's also a microeconomic aspect of inflation which is, when you make it a lot costlier to start a business or to operate a business that serves people in some important way, that business has to raise its prices in order to continue to operate, and then those prices flow down to you in the form of higher prices, higher costs of living for you.  For example, in San Francisco, they are very good at saying, "No, you can't build that apartment high rise; you can't build that house; if you build that house, you can only rent it to one person, not to multiple people".  When you have those kinds of rules what happens?  There are fewer housing units available; when there's scarcity, lower supply, there are higher prices if demand keeps going up, right. 

So, those are the kinds of problems that we found to be a rich area for us to try to develop solutions that both parties can find interesting, and that goes across healthcare, it goes across energy, housing, you name it, education.  We find that there's a lot to do, and not just about what the Fed does or central banks do, but in terms of these fairly technical areas where changing a law here or changing a rule here could open up the supply and reduce the cost of delivering an important service to the population, and thereby making life more affordable for more people.

Peter McCormack: So, the work you're doing is advising on policy and in doing so, you're obviously supporting the governments, support the states, supporting politicians, helping people to create policy whereby the money they collect either from tax, which seems to be less and less these days, or from deficit spending goes towards creating opportunities for others.  So, in the world of Bitcoin, some people are very anti-government, anti-tax, anti-redistribution of money.  What empirical evidence do you have that doing this kind of work is good for everyone, it benefits everyone?

Avik Roy: Well, if we look through our human history, we have lots of unequal societies, in fact almost every society is unequal, it's just a matter of degree.  I would argue, I think all the evidence suggests, that the least unequal societies are those where the economy is dynamic, where people can start from very little and grow into something more, whether it's through working hard in school and getting a good education and then getting a good job, or whether it's starting a business that ends up growing into something else, or whether you got into Bitcoin in 2011 on your laptop and you were mining it and that was your route to success.  There are lots of different ways to be successful but societies that are more innovative, they're more dynamic, that have fewer restrictions to competing with the status quo, with the establishment, those are the societies that tend to be the most equal. 

To give an example from history, when the bubonic plague blew out Europe and 50% of the population got decimated by the plague, that was one of the great democratising episodes in history, because all of a sudden, labour was really scarce.  So, this old feudal system had to make way to a more modern system in which you actually had to say, "You know what, if you want to work for me, I've got to pay you more", and that then led to the prosperity of a lot of people who then had more political powers as a result.

So, if you want a more politically equal society, if you want a more economically equal society, then you have to have a society where more people can work and grow their own earnings.  And the way you do that is by having a vibrant economy where people, various businesses and various employers, are competing for your labour, for your services.

Peter McCormack: I agree with you, and ethically I agree with you, and morally I agree with you; I think it's a good to have a more equal society, especially in a society where some people were just born into a luckier house or a luckier situation.  I was afforded great parents who gave me great education and gave me an opportunity; I know other people aren't.  Other people out there though, Avik, will be like, "Well, I don't care", so are there actual other benefits where it benefits that person and does it lead to lower crime?  Should it ultimately lead to lower taxation because there's less of a demand on the welfare state?

Avik Roy: Yeah, there are a lot of things to say about that; let's just bring it back to Bitcoin for a second.  So, you're absolutely right that a lot of the culture of Bitcoin is very much this kind of "leave me alone" libertarianism which says, "Hey, I've made it and I'm really proud of the fact that I've got in early enough and I'm doing well with it and just I don't want anyone to mess with that".  I get that as a human instinct but, if that's your point of view, then you should be especially concerned that if you're right about Bitcoin, that if Bitcoin is what we all think it is, that it's going to grow over time relative to the US dollar and to other fiat currencies, that those who got in earlier who've been stacking sats are going do better than those who have not, then there's going to be a lot of inequality generated by that. 

The people who did not get in early or who have not got in even now, the nocoiners so to speak, they're going to be even more resentful; we see that actually.  One of the things that's interesting politically, if you think about it here and also in the US and also around the world, Bitcoin is out of the headlines because its price action has not been as interesting, and as a result, it's not politically in the headlines either.  There isn't as much work going on to whack down the Bitcoin community because Bitcoin, it has not been as newsworthy as it's been in the past.

So, if Bitcoin goes to $400,000 or $1 million or what have you, I think it's Balaji Srinivasan who calculated that, at that point, I can't remember the exact price point, I think it's $200,000 or $400,000 where there will be more Bitcoin billionaires in the world than fiat billionaires, that's a pretty big tipping point; if that actually does happen, you'd better believe the knives are going to be out for those Bitcoin billionaires.  So, if we don't have a public spiritedness about the way we build this ecosystem, then there can be a lot of effort by governments, by people, to blow up the thing that all of us have worked so hard to build. 

Peter McCormack: The kind of ideas that you're talking about there, the public spiritedness, that's very European I think, well, a little bit more European in the way of thinking.  I can't help but keep coming back to just thinking about this; when I made the film, the thing that really stood out to me, and I wanted to come back to you and ask you about, is that you can do all this great work, Avik, and you can make all this opportunity, but if we have poor monetary and fiscal policy coming from the government and all these other geopolitical issues, is that actually destroying some of the work that you've been working on?

I'll give you an example: with the massive increase in energy prices in the UK, there were people getting energy bills, it could be a cafe or whatever, a business -- I was listening to one interview on the radio, a company, it was a cake business, they made pastries, I think they had three or four cafes, they had to close those down and they only now make at a central bakery and they sell them on wholesale, but they had to close down all three businesses.  So, how do you approach this now knowing that everything else that happened, it's essentially destroying the opportunity for small businesses?

Avik Roy: Yeah, that's a great way to ask the question, and the way I would put it is it's really important to distinguish between the status quo policy environment, which some people call the market, and what an actual free market looks like.  What we've seen, particularly in economies that are stagnant or in recession or declining, is that there are people who will blame the market for that result and not understand how much government has rigged the system to create that result.  To give an example, the financial bailouts in 2008, right, that inspired in many ways the Bitcoin whitepaper, that was an example of, in many ways, socialising the downside for the banks but letting them protect their own upside, and the Federal Reserve is doing the same thing. 

It used to be called the Greenspan put, or the Bernanke put, and for those who don't follow options trading terminology, what that means is basically your downside was always protected, because if the financial system was starting to suffer or the stock market was starting to go down, Bernanke or Greenspan would come in and flood the market with money to prop up the markets for you, the financial community.  That's not a free market system, that's the government stepping in and saying, "We're going to make your dollars less valuable so that financial institutions can thrive and do better"; that's not a fair system.

Peter McCormack: It's not a fair system; is it a system where they are trying to protect the rich; or is it a system where they're trying to protect the economy and, by virtue of that, the rich benefit?

Avik Roy: Well, that's exactly the theory.  There was this old saying in the mid-20th century, "What's good for General Motors is good for America".  The idea was, because General Motors was this titan of American industry, what the CEOs and the executives of General Motors wanted the government to do, the government should do, because General Motors makes cars, General Motors employs tens of thousands of people, and the economy, the US, will benefit from all the things that General Motors does to be the engine of the economy, literally and figuratively.

But that theory, I think, turns out to be very flawed, in that when you focus on what's in the interests of an individual business, I think 70, 80 years ago it may have been different, a little different in that I think there was still that sense of from corporate America, "Well, we really have to think about the national interests.  We can't just think about our own narrow self-interest".  That happened too but I think there was very much a culture in the USA, because it was just after World War II, there was very much this sense of solidarity, there was a sense of, "Hey, we've got to do what's in the American interests, not just in our own interest".

The corporate world today is much more out for itself, each company is out for itself in a way that I think was less true 70 years ago, 75 years ago, and as a result, there is not this idea that what's good for a particular business or a particular industry being good for the rest of society isn't necessarily true, or you have to make a distinction.  The distinction is this incumbent player, the big oil companies, say, or the big bank, may have a certain interest, and that interest may be different from what the disruptive innovator in that sector wants, but the entrepreneurs, the disruptors, don't have lobbyists, they don't have time. 

When you're building a new business, you're just busy trying to keep the lights on, you don't have time to hire lobbyists to tell senators what to do.  You're just hoping that you can make payroll the next month; whereas, if you're BP or your Deutsche Bank or JP Morgan, you've got armies of these lobbyists who have built decades of relationships with legislators and they're saying, "Oh yeah, you should do this, you should do that".  So, there's a competitive advantage to being an established incumbent that often ends up steering people in the wrong direction; I'll give you some examples. 

So, several years ago, we had a situation where the big banks basically, because everyone knew they'd get bailed out if they failed, could borrow money at lower rates than smaller banks.  Now, the problem with that, of course, is that means smaller banks basically can't offer competitive mortgages or competitive car loans because JP Morgan, say, or Bank of America can offer lower interest rates because they're bigger, because everyone knows they'll get bailed out by the government.

Now, if you try to reform that system, those lobbyists from JP Morgan and Bank of America will say, "Gosh, you can't regulate us in that way.  If we have to charge higher interests for home loans and car loans, then we won't be able to offer mortgages to people.  People won't buy cars, and that'll crash the economy; you can't do that!"  And it's this very similar thing.  What's good for Bank of America is good for America; that's the argument, and you have to be pretty sophisticated as a senator to know that that is a self-interested and flawed argument. 

That's where guys like me come in, or our organisation comes in, where we try to brief these senators, we try to brief members of Congress or regulators or people in the White House and say, "Hey, here are some of the things that Bank of America's not explaining when they say what they're saying".

Peter McCormack: Well, we've had it this past couple of weeks in the UK; how much did they unleash to protect the pension industry?

Danny Knowles: I'm going to say it was 90 -- but I'll have a look.

Peter McCormack: I don't know if you followed this, but the government announced they were going to be buying up UK treasuries, I think it was UK treasuries.  I didn't follow the story closely --

Danny Knowles: £61 billion.

Peter McCormack: £61 billion, yeah, and that was buying UK treasuries.

Danny Knowles: Yeah, gilts, but the same thing.

Peter McCormack: What really stood out to me there was, I've been actively working on a programme to try and help improve opportunity for people playing football in my local community; you know I'm involved in football.  One of the big problems, well, we have two big problems; kids whose parents who do not have enough money can't send their kids to play football because they can't literally afford the boots, or they can't afford the kit, because to join a team it's about £150, that gets your kit and equipment, it pays for everything. 

The second problem is the number of playing pitches that are available; they just don't exist, and this is a problem which has been going on for years in the UK.  We used to have youth clubs, they all got sold off, playing fields have been sold off, parks, it's just all been sold off.  We have less and less outdoor playing areas for kids to go out and do sports and whatever, which we know is good for kids; it keeps them out of the house, it keeps them active, but it just doesn't exist, and there's no money for it.  Then, suddenly, all of a sudden, £60 billion is immediately available to protect the pension industry, because what was coming out of the news was, if they hadn't have done that, a number of the funds would have blown up.

Danny Knowles: I think the bond market basically went no-bid in the UK, which would be catastrophic.  There was a London banker I saw in the Financial Times said he thought it was like a Lehman Brothers moment.

Peter McCormack: What I don't understand is what caused this; are these funds taking too big a risk, or are they taking the right amount of risk but the policy that's coming from government has essentially destroyed the market?  You might know better than me; I have no idea.

Avik Roy: Well, I haven't followed this specific story closely, but I can tell you that in general, the pattern that you see, which it sounds like this story fits into, is it's a combination.  So, the government may incentivise you to take greater risks than you might otherwise take.  Eventually, those risks get called, or you blow up, or you run into potholes, and then you get to bail out there.  This is kind of what's happening now but it's also what happened in the Financial Crisis.

So, for example, when you keep interest rates near zero, and with pension funds, this is particularly a problem; because I don't know how it works in the UK specifically, but in the US, there's a conventional rule, it's not a law per se but it's kind of a custom that pension funds have what's called a 60/40 rule: they keep 60% of their portfolio in bonds and 40% of their portfolio in stocks, and that's basically all they can hold.

Now, the problem with that is, if you keep interest rates near zero, as the US and Europe have done for the last several years, you're getting no returns off your bond portfolio if you have traditional conservative bonds, like treasury bonds or gilts or government debt; you're getting no return on that.  The stock market part of your portfolio might be doing well, but you're getting no return on your bonds.

Now, if you compare that to the stock market, or to inflation even, that might not keep up.  So, let's say you're generating 8% returns, or 10% returns on your stock portfolio and you're generating 0% returns on your bond portfolio, and that's 60% of your portfolio, right, if it's 10% on the stocks and 0% on the bonds, you're basically generating a 4% return. 

Now, if inflation is 9%, that means your real return for your pension is actually negative, your pension is growing at a smaller rate than inflation, which means that your savings are actually melting over time, as we often talk about in the Bitcoin context; this is even true in a fiat context when it comes to pension funds.  So, what do the pension funds do in response to that?  They start investing in higher-risk debt securities.

Now, instead of putting their money in gilts or treasury bonds, which are considered low risk securities because the government rarely goes bankrupt, they'll put money in maybe bonds of start-ups or bonds like Michael Saylor's MicroStrategy bonds, which we may all think are great, but from a financial standpoint, they would be considered higher-risk bonds because Bitcoin is volatile compared to the treasury bonds. 

So, you invest in higher-risk bonds and then what if some of those companies that you're investing in go belly up?  Then those bonds are worthless and your returns crash; that can happen.  And then you can't pay off the pensions of the people who you owe money to, and then the pensioners get mad, and so it becomes a political problem because those pensioners start complaining, and then you have a bailout by the government to deal with that.

So, the government incentivises higher risk-taking by forcing you into higher-risk investments because that's the only way you can generate a return.  And then some of those higher-risk investments fail and then the pensioners are left holding the bag; that's the sequence of events.

Peter McCormack: Is one of the primary problems here that we're not letting things fail that need to fail?  It's almost like we're giving participation trophies to the financial sector, because things need to break, they need to fail.  If businesses are broken, they need to fail and new better businesses need to be borne out of their ashes.  Is this the problem we've got to?  If you go and watch Ray Dalio's video on the business cycles and we have boom, bust and super-booms, but it seems like nobody wants to accept a bust anymore.

Avik Roy: Yeah, the conceit of central banks is that we've figured out, scientifically, how to eliminate the boom/bust cycle by raising and lowering interest rates.  That's this kind of Keynesian classical 20th century thing that Fed economists, left or right, or whether they're nominated by Democrats or Republicans, let's put it that way, they basically, all the ones who are in office now, that's what they believe. 

They believe that the government has access to the statistics, the knowledge, the data to dial up and dial down interest rates to finetune the economy as if they're operating a machine, and that's not how the economy works, for a lot of different reasons we can get into.  But that conceit is wrong, and the Fed has been wrong time and time and time again, and they're always puzzled, like, "Well, all of our analysis from all these Harvard and MIT and Stanford PhDs said that we should do X, and X didn't turn out to work so that's very puzzling".  They never stop to consider that their whole approach to thinking about the role of interest rates and the economy is wrong, and we're a long way from fixing that problem.  But we need to fix that problem, we need to fix a lot of problems, but that's the fundamental problem when it comes to the financial industry, right. 

If you have all these very well-connected bankers telling you, "Gosh, you can't go too far too fast in raising interest rates, because then my business will collapse and the stock market collapse and you'll get blamed for that, Mr Powell", that's something they're very sensitive to, because they all come out of that community and they often go back to that community after they're done serving in their roles at the Fed.  So, that's their ecosystem, those are the people they're talking to every day, those are the people they're going out to dinner with every evening.  So, it's just kind of a bubble culture that's a huge problem that affects everyone and I think one of the things that could improve that is for politicians to understand that. 

The politicians have often been worse than the Fed, because they don't want a stock market crash when they're in charge, so they push the Fed or the central banks to lower interest rates so they can get through; Nixon did this in the 1970s, he really aggressively pushed his Fed chairman to keep interest rates low.  That's why they left the US dollar pegged to gold, because he didn't want a recession when he ran for re-election, and it worked.  He got re-elected in 1972 and then we had stagflation and the misery index and all the things that happened in the 1970s, and we're kind of going through that again. 

Peter McCormack: So, the political cycle itself is counterproductive to setting policy that is right for society; they're setting policy which is right for retaining power?

Avik Roy: Yeah, and now we're even going from 10,000 feet to 30,000 feet because there's this kind of macro bug, you could say, in democracy where the incentives of democracy are to look at the short-term rather than the long-term interests of society.  So, that's one thing that the Founders of the United States thought about a lot, they thought about, "How do we address that problem?" and that's why they created all these checks and balances and tried to incentivise the election of politicians who would have a longer-term perspective, but it's proven to be a challenge.

Peter McCormack: So, how does it get fixed because there are so many problems, Avik?  You look around the world and there are lots of problems, lots of economic problems; there are countries suffering from high inflation, some from high interest rates, high energy costs.  We seem to have them all at once in the UK at the moment; it's not pretty to see. 

I'll just give you one example with regard to interest rates.  I found out recently, every month, in the UK, 300,000 people come off a fixed-rate term to a variable rate.  Now, interest rates have gone up so high recently, and we've had such issues that some of the mortgage companies have pulled their products; we've had 40% of mortgage products pulled off the market.  So, there are less products available, the rates are higher because they're less competitive. 

The average disposable income in the UK is £175.  Now, couple that in with high inflation, high fuel costs, you've got people who now cannot afford, once their house flips to a variable rate, they will not be to afford to pay their mortgage.  That's going to lead to a large increase in the supply of houses which are available, which I think the government has recognised, why they've reduced stamp duty; I don't know if you saw that, stamp duty is a tax you pay when you buy a house.  But we've got that real issue with interest rates; it's a nightmare. 

Also, when I looked at the interest rates when people were talking about 5%, 6%, it seems to me the problem is the speed we've moved from 1.5%, 2%, the rates at which people are borrowing, to 6%, 7%.  That seems to be the issue, because fundamentally, I actually don't think an interest rate of 5%, 6% is a bad thing.  Firstly, if you've got savings, you've got an incentive to save because you can actually get a return in the bank, which we've not had for a long time, and also I don't think borrowing money should be so cheap.  So for me, the thing with the interest rates is not the rate it is, it's the speed of movement.

Avik Roy: Yeah, and that's because the Fed and the central banks were late, right.  They thought inflation in 2021 was transitory and that's why they didn't have to raise rates, and then all of a sudden, when they realised it wasn't transitory, it was long term, longstanding, they then reversed course, and that created this more aggressive increase in rates.  Well, they should never have dropped rates so low in the first place, then we would not have had to raise them in such an aggressive and rapid manner in more recent months.  So, again, it just points to the mismanagement of interest rates, which is part of the problem, but let's not leave the microeconomic element off the hook.

So, we talked on one of our previous conversations about how gas in Europe and the UK is so much more expensive than in the US.  Now, even in the US, there's variation; I was in California last week, gas there is like $7 a gallon compared to $3 a gallon in Texas.  Now, in Texas, $3 is considered expensive, but the point is it's double in California than the price that it is in the US, and that's not because somehow there's no way to transport gas to California, in fact quite the opposite; Chevron is headquartered in California, at least for now; they're moving to Texas.  It's not like there's a lack of crude oil or gas or refined or whatever, it's all there, the supply is there, it's just that there's massive gas tax in California at the state level that increases the price to consumers.  There are also a lot of restrictions in the permitting of production of gasoline in our crude oil in California that thereby constricts the supply.

So, that's not a problem in Texas, where obviously the energy industry is much more influential you could say, and so it has much more room to operate, but the end result has been more affordable gas prices at the pump, more affordable home utilities.  And, by the way, that also makes it easier to run an industry here; if you run a manufacturing plant and you're employing blue collar workers, you can do that more easily in a place where energy is less expensive. 

So, the high price of energy in the UK is a choice that the UK does not have to make, and one of the things that the new Prime Minister, Liz Truss, is doing that's --

Peter McCormack: When you say the high price of energy is a choice, are you referring to fuel, gasoline, or you referring to like heating our homes?

Avik Roy: All the above.  So, we make energy more expensive by applying taxes to energy and restricting growth in the supply of low-cost energy.  So, we do a lot of things to make energy more expensive, and part of the theory is, it's kind of a climate thing, if we make energy more expensive people will use it less, and that's not how it works.  If you make energy more expensive, people still need to heat their homes, to have refrigerators, to operate their air-conditioners, so people will still consume energy.  They'll just pay that extra price which means their cost of living will increase and their disposable income will go down. 

So, it's profoundly irresponsible, and this gets back to the FREOPP lens, it's profoundly irresponsible to say that the way we need to address climate change and reduce carbon emissions is to make energy more expensive for poor and middle-income people.  Instead, what we've got to do is ramp up nuclear energy and some of these other avenues for producing abundant energy at a relatively low cost; that's the solution. 

The good news is we're making progress with that, but that's a 10- to 15-years' timeline to fix the errors we've made.  If you think about what Germany has done over the last several years of shutting down its nuclear plants post-Fukushima, and not just Germany of course, and then everyone wakes up and says, "Well, wait a minute, energy is really expensive now"; I mean, a terrible policy mistake.  And you have Gerhard Schroeder on the Board of Gazprom; that's a whole other rabbit hole we can go down.

But all this to say that high energy prices are a choice.  High housing prices are a choice; you can build more housing.  And I think one of the things that I've read about the new Prime Minister, Liz Truss, is that part of her agenda is to do some regulatory reform, permitting reform, that allows more energy production, more housing production.  By the way, if you allow more energy production and more housing production, then that generates economic growth, because as people's costs go down, they can do more things; they can hire more people; they can spend more their savings on others things, so likely have savings, and all those things were down to the benefit of the UK economy.  So, the UK has options, Europe has options, the US has options to drive their economy upwards. 

One of the things that the former president, President Trump did in the US, whatever your opinions of him are, he had a deregulatory agenda; that was a big part of his economic agenda.  And each of his economic departments or agencies, executive agencies, had to come up with a plan of, "Okay, how are you going to reduce the regulatory burden that people in your jurisdiction are dealing with?"  Everyone had to work on that, and there were some real concrete victories as a result of that that led to, again, lower costs of delivering those goods and services, which means you can hire more people; you can grow your business; you can deliver products at lower cost; you can innovate more.  All those things drive economic growth and prosperity upward. 

Peter McCormack: With the work you do with FREOPP, are you able to, or do you analyse how different states operate, the policies they put in place, the different policies?  Are you able to look at Texas versus California and see noticeable differences?

Avik Roy: We do.  We can look at state differences, we also look at international differences.  We've talked before about the World Index of Healthcare Innovation, for example, where we've looked at the UK healthcare system for the US versus other countries; we've got a new addition to that coming out in a few months.  So, we'll both look at international models as a way of saying, "Okay, what could the US, at a national level, do better that it could learn from other countries?"  Also, at the state level, there's certainly a lot to observe about how different states think about things.  It also helps with proof of concept, if you've got a state that's enacted a reform that's working, you can say, "Okay, this is a real-world model that other states can learn from"; so, there's stuff like that that goes on.

The climate and energy stuff is a particular nut, because there are two kinds of environmentalism, at least what we have observed, because we came into the climate and energy debate saying, as we've talked about, "Let's have an energy policy that's less regressive, that harms poor people less, number one.  And, number two, if you really want to solve the problem of carbon emissions, CO2 emissions, nuclear energy is the clear scientific solution". 

We just published a big paper on this, it's on our website, on the Nuclear Regulatory Commission in the US and how, since the Nuclear Regulatory Commission was established in 1974, almost 50 years ago, not a single new nuclear plant has been permitted in the United States, not a single one.  You compare that to France, which gets 70% of its electricity from nuclear; Ontario is another place, in Canada, that has a lot of nuclear energy.  We've just abandoned the field even though we invented nuclear energy.

Peter McCormack: Yeah, just to interject there, on France, so a couple of things I found out recently that was quite interesting, I think I read that Germany's energy prices are going to go up soon because they are buying a lot of their energy from France, and they've also decided to extend the -- do you know about this?  I think Neil forwarded this to me, but they've extended or delayed the final, I think it was two or three nuclear plants they were going to decommission, but anyway, they've been buying their energy from France, and I found out that France has something like 64 nuclear plants, which firstly blew my mind --

Avik Roy: Oh yeah, it's tremendous.

Peter McCormack: But then secondly, the problem they've got is 30 of them, I think, are out of commission at the moment; there are issues with about 30 of them.  So, they've got a lot but they've got a lot there out of commission; can you try and look that up, Danny?

Danny Knowles: Yeah, they've got 56, but there are a lot of outages at the moment; I'll see if I can see anything.

Peter McCormack: Yeah, and I wonder if that's because there's an increase in demand for the rest of Europe buying from them.  But the real question I have is what has France got right and how do you feel about France being primarily a state-owned energy system?  Again, that is not something certain people who listen to this show will like, but energy security for a country feels highly relevant right now.

I was chatting to Danny; Danny lives in Australia, he's like, "My energy prices haven't really changed".  I mean, mine have doubled and, at one point, they quadrupled; they've kind of come back a bit, but mine have gone up massively.  Is it beneficial for a country to have energy secured and provided by the state; is that a better thing we should be doing, or should it be open to the free market?

Avik Roy: I think both ways can work, as France has shown, leaving the ideology philosophy side out of it, both approaches have worked.  Actually, if you look at France's electricity prices, they're not that different from the US; they might actually be slightly higher.  The author of the Nuclear Energy paper at freopp.org is Grant Dever, so take a look at that and you can see we have all the data there.

We actually talk about this specific thing, that the France approach is very much the central government runs it all.  And in Ontario, it's been a little bit more decentralised in that it's the Ontario Government, not the Canadian Federal Government, that's involved.  There's going to be a certain amount of government regulation in nuclear regardless, even though there are entrepreneurs who are developing new small modular reactors, and some other interesting technologies, that basically build off the nuclear engines that are used are nuclear submarines to power individual buildings or neighbourhoods or things like that.  So, there's a lot going on in nuclear. 

The advantage of having a scaled-up nuclear programme, whichever way you do it, is there are economies of scale; once you build one nuclear plant you could just replicate the blueprints and build another and another and another.  That's especially true of the small modular plants where you could basically use these kind of off-the-shelf parts to build the nuclear power assemblies.

Peter McCormack: IKEA nuclear plant!

Avik Roy: Yeah, this is what Elon Musk has done with rockets, right.

Peter McCormack: Yeah.

Avik Roy: He's built these rockets that are a quarter of the cost of the NASA rockets or the European Space Agency rockets, and they're just as effective, if not more so, because they use off-the-shelf parts for everything.  It's obviously a great triumph of private sector engineering that he's been able to do that; now he's sending people into space, he's doing all this stuff that used to be only done by governments, right.  So, there is a way to do that with nuclear energy that protects against some of the risks.

Peter McCormack: Yeah, Danny just found this, "More than half of France's 56 reactors haven been shut in recent months.  The shutdowns have weighed on electricity supply across Europe and pushed prices higher just as…"  It's unusual that just at that time, and I wonder if it's because there's been so much demand from Europe that's put too much system in the system.

Danny Knowles: Possibly.  It says here it was for maintenance and corrosion problems.

Avik Roy: Maintenance and corrosion problems?  Yeah, I think I do remember reading that somewhere.  Yeah, so that's something they can handle, right, or it's something that they should have done a better job of handling in the past.  But that also goes to this point about the small modular reactors versus the big plants; so, if have smaller reactors, if you take one offline, it's not a big deal, they're replaceable, effectively.  So, having a more resilient system is part of a goal, I think, if you really want to have effective nuclear energy.

But going back to your earlier point that, you know, what I've observed working on this problem is, there's an obvious solution if you really want to reduce the carbon emissions from our energy grid, but also ensure that lower- and middle-income people can afford the energy they need, there's a way to do that using nuclear, it's pretty straightforward.  This is not actually something that's really debated seriously among people who understand the data. 

But yet, you have all these people who call themselves environmentalists, who call themselves people who are concerned about the climate and the planet, who oppose the use of nuclear energy to solve this problem.  They're effectively kind of aesthetic environmentalists where it's like, "Well, they like wind and solar because it just feels like you're out in nature and there's sunshine and there's wind and that sounds very organic and natural" as opposed to, if your goal is to solve the problem of greenhouse gases in the atmosphere potentially increasing global temperatures, that's a specific scientific and engineering problem that nuclear energy solves.

So, the good news is, with technology we've had for 75 years, we can solve these problems.  We don't have to invent anything new to massively reduce the amount of carbon emissions in the United States, and in a lot of other countries that now rely on coal to generate electricity.

Peter McCormack: What was that nuclear technology that guy emailed us about the other day?

Danny Knowles: I don't know what you mean.  Do you mean the micro-reactors, the Oklo stuff, or is that something different?

Peter McCormack: No, it's something different.  I copied you in on it; it was a different type of nuclear energy produced with thermal…

Avik Roy: There's geothermal, which is not nuclear.

Peter McCormack: No, it's not geothermal; anyway, we'll have to dig that out. 

Danny Knowles: Thorium.

Peter McCormack: Thorium, yeah.

Danny Knowles: Thorium reactors.

Avik Roy: Okay, so just using a different isotope, it sounds like?  Okay.

Peter McCormack: Yeah.  So, I don't think we fully finished off though actually dealing with the issues caused by the central banks and the government.

Avik Roy: Yeah, okay. 

Peter McCormack: What is the solution; I know that's a bit of an obvious question but, if you were advising on policy, what do these people need to be doing?

Avik Roy: Well, the solution is Bitcoin, but obviously if you just say that on Capitol Hill, they're just going to kind of roll their eyes and kick you out of the meeting!

Peter McCormack: Have you mentioned it on Capitol Hill?

Avik Roy: We approach it in a more, sort of like, you bring them along, kind of way, right.  So, how do you bring them along?  First you highlight the problem of low interest rates and how it's contributed to inflation; so that's step number one, is to kind of explain to people that the Fed has not gotten it right, that the Fed has kept interest rates too low for too long.  In other environments, the Federal Reserve increases interest rates too high.  The Fed is flying blind and not making decisions.  The impression that you might have of the Fed is this group of super-geniuses who have it all figured out; it's not true.  So, I think just puncturing that veil is step number one and getting people to think about a different system.

So once you puncture that veil, then the question is, what is a better system than what the Fed is doing?  How do we think more rigorously about interest rates as it's related to the whole financial system?  Then you start to explain to people, you want to look at housing prices, you want to look at energy prices, some of these other things. 

So, we published a paper recently on housing policy; that's also up on our website, I think that's the most recent one, where we walked through actually a simple chart that we put at the top of the paper.  It compares median household income after taxes to the median home price in the United States, and just charts that over, I think, a 75-year period, something like that, and there's this massive collapse.  There it is; he found it. 

So, look at that, you see that thick, blue line, so that's looking at the last 40 years, sorry, from 1985 to 2022, and you can see that for a good chunk of time there, from 1990 to 2010 or so, it was about 32%, meaning the median household income after taxes was about a third of the median home price.  Then it just collapsed in 2012 or so; why is that?  It's because interest rates, as they were shut down, shut to zero after the Financial Crisis, basically led to a massive speculative bubble in the price of homes, and as a result, your average median income did not keep up with that. 

So, the amount of money that you earned, as a percentage of the median home price, declined, not because your income declined but because home prices skyrocketed so much, the denominator skyrocketed.

Peter McCormack: Hold on, but it went on from 2005 to 2010; is that big jump around 2008 the Financial Crisis?

Avik Roy: Yeah, so it's basically you had a growth in income throughout that period that kept pace with, or increased relative to median home prices, and then there was kind of a speculative bubble going into the Financial Crisis driven by a bunch of factors.

Danny Knowles: That's here, right?

Avik Roy: That's right, that's right there, so that's the Financial Crisis right there.  So, the ratio goes up for a bit because people's incomes were going up alongside housing prices, and then there was a collapse.  So the collapse, of course that shaded area, is when the recession was during the Financial Crisis, that grey, or that pink bar on your screen. 

But basically, what you're seeing is, after a couple of years, home prices started to really skyrocket as a result of the Fed's intervention and the economy, and that meant that, even if your income was staying roughly the same, it was harder and harder for you to afford a place to live.  So, a lower number is bad on this chart, from your standpoint as an earner, a wage earner, and a higher number is good.

Peter McCormack: Is any of that to do with the likes of BlackRocks or these big funds going out and buying up these houses?

Avik Roy: Yeah, absolutely, so it's all related.  So, why is BlackRock able to buy up all those homes?

Peter McCormack: Because they have a disproportionate access to cheap credit.

Avik Roy: Right, because they can borrow money at 0% interest rates.  So, this is one of the dogmas of the Fed that's completely wrong.  So, one of the theories that's widely believed at the Fed is that, when you lower interest rates, it creates a wealth effect, because when you lower interest rates, it increases access to credit for lower-income people, they can borrow more and thereby do more things and lift up their station. 

That's why, in general, it's progressives, people on the left, who favoured loose monetary policy because they believe that, well, if you reduce the cost of borrowing money, who needs to borrow money?  Poor people, and this will help poor people by allowing them to borrow money; that's not how it works in reality.  In reality, the way it works is poor people have low credit scores and don't have any net worth and so banks don't lend them anything because they're like, "You're never going to pay me back, or least there's a higher risk that you're not going to pay me back; whereas, if I lend money to BlackRock, I know they're good for it. 

Peter McCormack: "How much do you want?  Take as much as you want".

Avik Roy: Exactly, "We'll lend you as much as you want".  So, BlackRock can borrow $100 billion and flood the market, flood the housing market with that and buy up all these homes that are getting constructed.  Then that's part of what the Fed does, is it artificially reduces the demand for housing by subsidising it through low interest rates, through easy credit.  But the people who actually need to afford the homes, those people making $62,000, $63,000 a year, they're out of the market; they can't buy anything.

So, what you've done is you've massively increased wealth inequality, you've massively increased the cost of living because those higher home prices filter down to the higher cost of rent, even if you aren't owning your own home.  Yes, for the third of the population that owns its own home in the US, that's fine, they'll do better because their home value will increase; their property taxes may go up as well, which is another problem with all this.  If you're retired and your home value goes up and your property taxes go up, you can't afford those property taxes, right, because you're not making more money to pay that property tax bill. 

When you talk about gentrification, gentrification's driven by the fact that you have high property taxes in cities.  If you're retired and you own your home, if you worked hard your whole life and you finally own your home, but you're retired so you're not making more money, and your property tax bill keeps going up, you're forced to sell in order to live somewhere that's lower cost.

Peter McCormack: I've heard that's a big argument, or a criticism of what's happened here in Austin.

Avik Roy: Yeah.  So in Texas, property taxes are pretty high in general because we don't have an income tax or we don't have a capital gains tax, and property taxes are determined at the local level, and so that does happen.  So, as the real estate values in Austin have surged in part, in large part, because of the Fed, if you've owned your home for a long time, yes, you might be happy that your home value's gone up, but at the same time, your property tax has gone up as well.  

That home value, you can't dine out on that, that home value, it's paper, it's a paper gain; whereas your property tax, you're paying every year, so that can be a problem.  Every two years, when this Texas legislator meets, the property taxes are a hot topic for that very reason.  But all that to say that the cost of housing in particular, so if you actually look at what is it that people spend money on in a given month, housing is the number one line item.  Housing for the average person in the US is about a third of their living expenditures; that is actually when you calculate the consumer price index, about a third of it is housing costs. 

Now, it's actually higher if you're low income for the obvious reason that, if you're lower income, housing is just going to be a higher proportion of your costs of living; whereas, for wealthy people, it's slightly less.  But still, housing is number one.  So, when the Federal Reserve drives up the price of housing for the people who are either first-time homebuyers or renters, or retirees who pay property taxes, they all get hurt by this policy.  It's just one of these things where there's this massive gap between the Fed's point of view and reality.

Peter McCormack: Why though; if everyone else can see it, if you can see it, everybody I know can see it, why do they get it so wrong?

Avik Roy: I'm working on a book about this topic, the working title of which is Why Experts Fail.

Peter McCormack: When will this be done?

Avik Roy: Well, I'm still working on the proposal, so it's early days, early innings, but the whole idea is to walk through all these different phenomena as to why experts fail, by their own standards.  So, it would be very easy to write a book that just says, "The salt-of-the-earth people are right and those pointy-headed nerds are wrong who work at the Fed"; it's more why is it that experts think they're awesome?  Experts think they're awesome because they know more, they've studied more, they have more access to a broader range of information than you as an average person has, and they've seen a lot, they've studied the history of something a lot more than you have; that's why are experts and that's why they know more and should be entitled to make these decisions for us.

But there are a lot of problems with that theory, one of which is, and this really applies to the Fed, is that historical data does not necessarily apply to the world of the future.  So, 75 years ago, the US economy was largely a domestic economy; when General Motors made cars, they generally sold them to Americans.  When American steel manufacturers, like Bessemer, made steel, they sold it to American's, actually to GM to build their cars. 

So, there was a domestic market that the Fed could say, "Okay, if we increase the price of the dollar, or increase the price of interest, we can affect this kind of contained siloed economy".  In a global economy where trade is worldwide and 24/7, that doesn't apply in the same way.  So, you can do a lot of things to try to simulate the local economy, the domestic economy, that don't necessarily work in the same way when you talk about the international context, and so that's an example of something the Fed just doesn't understand.

So, the fact the financial markets are global, the Fed understands that in theory, it's like, "Yeah, I know the financial markets are global", but when they look at historical data, they're not taking that into account.  So, that's one example of a way in which experts fail, is that experts are really good at studying the past, that's often how they become experts, but the past does not necessarily predict the future, and where experts often go wrong is by applying historical knowledge to a contemporary or future event in which the circumstances or context is very different.

Peter McCormack: That's kind of arrogant really.

Avik Roy: There is certainly a component of arrogance to it, and again, I try to step away from that kind of terminology in the sense that the purpose of this book is, or the goal of this book, is to really explain to experts themselves why they should have more humility.

Peter McCormack: But they won't read it because they're an expert!

Avik Roy: Well, hopefully they will.  My goal with this book to tell an expert audience in a sense, "Hey, guys, check yourselves, realise that there might be something you're missing.  You may not have complete command of the context and the information as you think you do".  I mean, COVID is obviously a great example of that, that's kind of what motivated me to think of this topic for a book.  So, for those of you who follow my work on COVID, you'll know what I'm talking about here. 

But there's a broad range of areas of life of public policy where expertise not only -- it used to be experts were about giving you advice, and you could choose to take the advice or not, but increasingly, we've evolved into society where experts have the force of the government behind their opinions.  So, it's especially important in those contexts that experts have more humility about the opinions they issue and the rules they impose on society, because as we've seen with COVID, particularly in the context of school closures, those expert opinions can be incredibly damaging with a lot of long-term effects. 

Another example of that is fiscal policy, right, so we shut down the economy because of COVID expert opinion.  Then we said, "Oh, well, we've got to stimulate the economy by spending all this money we don't have to compensate the businesses and the people who had their livelihoods taken away; and, oh boy, now we have a massive budget deficit and now we've had these low interest rates that we now have to compensate for"; that creates all these economic ripple effects down the road.

So, a lot of this, you know, we were talking before about is this because politicians and government officials don't want banks to fail, they don't want anything to fail, it's not just banks.  That sort of panic and lurching around not letting things fail, or not taking a risk, risk aversion is really the problem.  On COVID, there was real risk; COVID is a serious problem, lots of people died because of COVID, lots of people got seriously ill because of COVID, it's not something that was made up; but having said that, we overreacted at a time when we had evidence to indicate that we didn't need to overact. 

We could have had a much more tailored response, a much more targeted response that maximally kept the economy open in society, open to the degree that we could practically.  If we had done that, we wouldn't have had to lurch into this massive fiscal stimulus, this massive monetary stimulus that we're going to paying for for generations.

Peter McCormack: They were able to find ways for certain businesses to stay open as well, they found a way that food could be delivered, or things could be delivered.  So, they found a way the likes of Amazon could stay open, and a McDonalds could stay open, and they had to have their own internal policies, but in the UK, they found a way for the Premier League to still play football.  So, they found a way for certain things, but it was very kind of discriminatory in what they did, which ultimately again like all this stuff, it always seems to benefit those who need it the least, and it seems to destroy those who need it the most.

I mean, one of the points I've got here, Avik, the thing that really stood out when I was making this film that really, really got to me is I ended up going to this town called Harlow; it's one of the most 20 deprived towns in UK, it's just outside of London.  I went there because there was a specific project I wanted to see, it's this building called Terminus House; it's an old disused office block right in the centre.  Now, Harlow has a housing problem, specifically a social housing problem.  So, whatever people think about government providing support and whether their taxes should pay for it, I like the fact that, if you are single mother with two kids and you're homeless, they will find you a home, but there is a massive shortage in the supply of houses.

So, they converted this office block in the centre to social housing; it is essentially a western favela,  because it's this awful office block which has been converted into flats but it has a -- here we go, look at this.  So, we went there.

Avik Roy: Looks like the headquarters for the Health and Human Services Department in the United States.

Peter McCormack: It's awful.  So, it's got this car park underneath and what they've had is they've got a mix of families, young families, single mums with children, but also people who've got clear social issues themselves, so it's become a centre of crime and drug abuse.  Everything I tell you, you would have predicted.  If somebody had come to you and said, "Hey, Avik, we're thinking in the UK of turning this building here into social housing", you would have said, "Don't, for A, B, C, D".

Avik Roy: Yeah.

Peter McCormack: But they've gone ahead and done it.  But the thing that really stands out to me, not just the incompetence of making that decision -- and that's not the only one; there are lots of these.  And, by the way, the people running them are making a fucking killing because the government are paying them millions to run it.  But the thing that really stood out to me is that we are a richer society, GDP has grown to whatever level, doubled, tripled over the last 10, 20 years, whatever it is, we are a richer society.  But I can't help but in the UK notice a widening wealth gap and an increase in poverty, increase in people in poverty, children in poverty.  So, somehow, we've become a more productive, more successful society and then pushed more people out to the fringe. 

We've got this massive increase of people using food banks, people who are having to make a choice between feeding their children or heating their homes; how have we got to this point as a productive society?  Obviously, down to policy.

Avik Roy: Yeah, one of the things of we've done is we've increased the price or the cost of all these goods and services that people need to live their everyday life.  So, if you make things more expensive, even if society is wealthy, those on the bottom end of the income distribution, people who are lower income, even if they have more money on paper, they can afford fewer things.  So, that's one problem; we've talked about that in the context of energy, we've talked about it in the context of housing.

But part of what we've done, and your housing example really brings this home, is we've concentrated poverty in a way that we never did before.  So, it used to be that poor people, wealthy people, lived in the same communities, and what we've done with social policy through saying, "Oh, we're going to take all the poor people, round them up and stick them in a concrete high-rise building", is we've damaged both.  We've damaged the old fabric of a community where you looked out for the people who are down on their luck who lived in your town, in your neighbourhood, the things we used to do more of, because they're not in that community anymore; you live in a wealthy enclave or a middle-class enclave where those people aren't around.

Then, in those concrete high-rises where you have a lot more low-income people living together, you might have 2% of them even might be bad apples, they might be criminals, they might be drug users, that because they're bad apples, that social disorder spreads to the rest of the apartment building, because they end up dominating the system in a way that, if they're engaging in violent criminal activity, then everyone else is scared to leave their apartment, for example.

Another thing that comes out is there's lack of social capital.  So, there's an economist, I think he's at Harvard now, he goes back between Harvard and Stanford, named Raj Chetty, you may have heard of, really terrific economic researcher on social mobility.  One of the things that his work focuses on this idea that, if you are a low income people who is in a neighbourhood, or has social relationships with people who are middle or high income, your chances of your economy fortunes increasing and improving over time are much, much higher than if you're a low-income people whose social network is other low-income people.

So, by concentrating and distilling poverty and putting all the poor people in the same apartment building, you've actually made their likelihood of success much, much lower.  So, one solution to that that we've talked about in our housing work, is we have this programme in the US called Section 8 vouchers, where instead of saying, "We're going to put you in a public housing building, we're going to give you a certain amount of cash, effectively, to rent an apartment wherever you would like, with a participating landlord, of course".  That programme has some things that we can improve about it, but in general it works, because then you can live in the same kind of neighbourhood as everyone else, it's just that your rent cheque is subsidised by this extra voucher that you can use to pay your rent.

Peter McCormack: And they can live next door?

Avik Roy: They can live next door.

Peter McCormack: The way they do it in the UK is slightly different.  So, whenever a housing company is given approval to build a whole bunch of houses, they have to build a certain percentage of social houses; is it 10% or 20%?

Danny Knowles: I don't know the number, but that's right, yeah.

Avik Roy: There are cities that do that here.

Peter McCormack: But the way they do it, they end up grouping those together.  So, say there were going to build 300 houses and they had to build 30 that were social housing, they would group those 30 together and put them in a separate area, and so what ends up happening is they end up becoming like a stigmatised group that's separated from everyone else.  But what would make sense, it seems to me, is that those houses would be spread and distributed evenly amongst the other group of houses.

Avik Roy: Yeah.  So, I lived in a building like that when I lived in New York City; I lived in a 52-storey high-rise and there was a certain percentage of the building that was reserved for these low-income qualifying individuals, and they had a separate entrance to the building.  So, they took different elevators, you know, they went in from a different entrance, so that's not a great system either, right.  So, a better system is to just say, "Hey, we'll give you, depending on exactly where your income falls", and let's say it's $2,000 a month of whatever it is, "and then you go find a participating…".  We should make it easy for landlords to participate in the programme.

That's one thing where Section 8 has some problems, is they put so many hurdles in front of people who want to participate in the programme that your options in using the voucher are a lot more limited than in a conventional private market.  But having said that, if you fix that and improve that, that's a way to say, "We've not going to concentrate poverty; we're going to let you live closer to your family, close to where you job might be".  That housing project might be far from where you have work every day, so yes, you may have subsidised housing; but if you have to spend an hour going back and forth to your job every day, that's two hours of your day that your productivity is zero, so that's not good either. 

It's a very 1960s approach to say, "Oh, we're just going to build a big concrete building and stick you in it".

Peter McCormack: Yeah, all right.  There are a couple of things I want to talk to you about before we let you go today as well.  One thing that stood out to me today was the United Nations asking central banks to stop raising interest rates.  The pound in the UK has dropped heavily against the dollar, and that causes us a number of issues itself, but I saw a chart, I think it was Preston Pysh who put it out, that said, the US dollar versus all these other currencies.  It seems globally, everyone is kind of fleeing to the dollar and currencies are crashing everywhere. 

So, my first question is a double question; what are negative effects, globally, or a high dollar; but also therefore, are there some negative effects for the US as well?  And, what do you think about the UN essentially meddling in policy?

Avik Roy: Well, just to level set for our audience, the reason how this is related is that, when you raise interest rates in your country, you make that currency more attractive, because if you buy treasury bonds, if the interest rate on treasury bonds goes up and then you buy treasury bonds, in essence lending money to the US Government, you're getting a better interest rate on that; that make the US dollar more attractive because those transactions are happening in US dollars.

So, that's why the US dollar has appreciated relative to other countries, because the US has been more aggressive than other countries in increasing its interest rates to deal with inflation.  So, that's a good thing overall.  As we've done, we can criticise the Fed for its execution, but better late than never to the solution of higher interest rates, so that part is at least good.

But to your point, as a result, countries that export to the United States, which is a lot of the world, the cost of their goods and services that they're exporting to the United States have gotten more expensive and that harms their economies, if you're an export-oriented economy in particular.  If you're a T-shirt maker in Bangladesh, say, and your T-shirts are now more expensive -- well, actually, I have that completely reverse.  Actually, when the dollar is more expensive, it actually works the other way, excuse me, pardon me.  US exporters are the ones who complain because their goods and services become more expensive to the rest of the world.  So, that may be the thing that these other countries are complaining about actually, that their exports become cheaper, which is good for their economies in general, but if they have to buy goods and services from the US, they become more expensive.

Now, another problem that's sort of a second-layer problem is there are a number of countries, particularly in Latin America and the Caribbean, that actually have their currencies pegged to the US dollar.  And those countries, they basically have outsourced their monetary policy to the US and so, when the dollar becomes more expensive, their exporters have a problem because, all of a sudden, they're transacting in dollars as well.  So, I'm not sure exactly who in the UN has been pushing the UN to take this position; if it's the dollar-dominated countries, it's pretty easy to explain because they're the ones who are basically having to see their exports --

Peter McCormack: But there are not many of them.

Avik Roy: There are not many of those, so it could be the reason, but ---

Peter McCormack: Can you dig the article out?

Danny Knowles: Yeah.

Peter McCormack: Here we go, this just I'm essentially reading, "There is time to step back from the edge of recession" --

Avik Roy: So, it's more about the broader GDP growth or recession piece, right.

Peter McCormack: I'm just going to read this for the audience; "We have the tools to calm inflation and support all vulnerable groups, but the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession", yeah.

Avik Roy: Yeah, so their concern is then that, if there's an overall recession because interest rates go up, then that harms all economies including third world economies or however you want to describe it.

Peter McCormack: But this is the Keynesian thing where you can't have recessions; I fundamentally believe you need recessions.

Avik Roy: Yeah, well, you're less likely to have recessions if you aren't meddling so much in the economy in the first place, right.

Peter McCormack: Yeah.

Avik Roy: But, if you're going to try to finetune everything and then you misread inflation because your data is wrong -- inflation is far worse for everyone than a recession.  Inflation is much, much more damaging in the long term, because even if inflation is zero next year, we've still had an increase in our prices of 18% over the last 2 years.

Peter McCormack: We discussed this last night, didn't we, Danny?  This came up; what was it you questioned?

Danny Knowles: It's not that I questioned it, but I watched a video of some economists, traditional economists, who were claiming that a sustained period of inflation is better than deflation.

Avik Roy: Yeah, that's another one of these expert theories that deflation is bad.  Now, think about it, are you mad when your cellphone, or your smartphone gets cheaper? 

Peter McCormack: No.

Avik Roy: Are you mad when your laptop gets cheaper?

Peter McCormack: Find that chart; you'll probably know this one.  Go on to Preston Pysh's Twitter; he put out this chart recently which shows what's going up in price, what's going down in price, and it was all electrical consumer goods that were all dropping in price, and it's healthcare, education or foodstuff that's gone up in price.

Avik Roy: We have a chart like that. 

Peter McCormack: Maybe it's from you!

Avik Roy: So, there are a couple of things to say about this, to give a credit to the argument, here's why economists, mainstream Keynesian economists, believe that deflation is bad.  It's because the way they look at it is, if you're in a deflationary economy, it's because people are engaging in less economic activity, there are fewer jobs, there's less job growth, there's less income growth, and as a result, people are buying fewer things and that's why you're seeing deflation.  So, there can be a deflation in the context of a -- yeah, this is a guy named Mark Perry who put this particular chart together from AEI, the University of Michigan-Flint.

Peter McCormack: Do you know what really stood out to me on this, it is all the things that you need the most, that you have to have --

Avik Roy: And where the government has been the most involved in destroying the markets.

Peter McCormack: Yeah.

Avik Roy: So, if you think about healthcare, the government have already subsided in the US without regulating the price, and so the prices keep going up.  College, we just did this $1 trillion bailout of higher ed where we're saying, "Okay, you can borrow as much as you want, and the taxpayer will pay it for you", and what are universities going to do?  They're going to raise their prices, because they know that ultimately the taxpayer will pay the bill and neither the university nor the student will pay the bill; it's incredibly destructive. 

So, all those areas of life where the government has said, "We've just going to subsidise it, that's our brilliant solution to making things less expensive or more affordable for you", you end up making things less affordable because the suppliers of those goods and services say, "Oh, you have a $10,000 subsidy to buy this?  I'm just going to raise my prices by $10,000"; that's how things work, so that's been incredibly damaging.

Now, let's just step backwards, so there are two kinds of deflation, and this is the thing that a lot of the economists miss; there's good deflation and there's bad deflation.  There's a deflation that comes from a sick economy where you're engaging in less economic activity, you're buying fewer things because you're poorer; that's the kind of deflation that people want to avoid.

There's deflation that comes from competition and technological innovation and from improvements over time in the quality and productivity of businesses and of goods and services and of industries; that's good.  The fact that your laptop could do more things at a lower price than it could before, that's deflation too, but that's good deflation.  The problem with economists is they're stuck in this 20th century model where they're not thinking about technology at all and they're not thinking about global trade.  

So, the two biggest drivers of lower prices in the US, over the last 50, 60 years, have been technological innovation, which drives cost down on lots of things, and trade.  So, the fact that you can buy things from somewhere else where they have a comparative advantage in purchasing it or producing it, makes it a lot less expensive for you to buy it.  So, those are the two things that have counteracted the Fed. 

So, the Fed has had this loose monetary policy, relatively speaking, for a long time, and they look at these statistics with their green eyeshades and say, "Well, hey, inflation is low so we can pump more money in the system.  We're not causing inflation by pumping more money in the system"; that's the way they think, because all they think about is inflation and interest rates as these two things that they can just manipulate at will, and that's not how it works.

In reality, technology and trade are driving prices down, and that's good; that makes people's lives more affordable.  This gets to this point about why FREOPP exists, right; why does FREOPP exist?  Because of this observation, this point about how cost of living, the rising cost of living, is essential for social mobility and increasing social mobility; it's not just about income growth.  If you only focus on income growth but you ignore the cost-of-living growth that goes alongside it when you flood the market with money, you haven't solved anything. 

So, when the Fed floods the market with money and says, "Oh, this money is going to come to you eventually, trickledown effect", maybe it will to a degree, but if the cost of your housing goes up by even more, you're poorer in the end.  Whereas, if we focus on those two problems together, how do we grow the economy so your wages can grow, so your earnings can grow, but most importantly that your disposable income can grow because you're paying less in taxes, you're paying less in cost of living, then you create a wealthier society; so, deflation in that sense is good.

A stronger dollar is effectively a kind of deflation, because the dollar can buy more things; that's good, but it needs to be understood in the context of that microeconomic stuff where you're actually making the cost of living less expensive, you're not intervening with the Fed to artificially juice demand where the long-term effects -- it's like a sugar high; you create the sugar high, everyone's happy for a minute, and then you crash.

Peter McCormack: But do you think there becomes a problem with other currencies devaluing too high against the dollar, and do you think that will lead to another policy change to try and reduce the value of the dollar?

Avik Roy: Well, actually, it goes the other way right now in the sense that other countries have room to increase their rates knowing that the US is raising rates more aggressively.  Usually, the thing you worry about is competitive devaluation, it's called, where countries will reduce their rates to keep their currencies low in price relative to the others so that their exporters can be happy; it's kind of this lobbyists thing.  The exporters talk to the government and the government wants to do what the exporters want and forget about the average person who actually wants their currency to be strong so they can buy more things, so they more purchasing power.

So, there is risk of a global recession from aggressive interest rates, but that ignores the fact that we've artificially juiced the economy.  The economic growth we've had has been juiced by easy money, not by actual organic economic growth where industries have grown and produced more things more efficiently.  So, that's the problem, is there's always a recession if you've artificially juiced economic growth through low interest rates, through quantitative easing, through all the easy money policies, and that's basically the Pied Piper; you eventually have to pay that price for what we've done.  So, the UN can say, "Yes, please keep interest rates low".  I think, at the end of the day, the good news is J Powell doesn't have that view; he understands that inflation is a real problem.

By the way, I wish, Danny, if we were at a point where inflation was zero, then yes, we could have a very interesting argument about deflation.  People had the same argument about interest rates, they said, "Well, you can never a federal funds rate or a central bank interest rate below zero, because then that would create all these crazy effects in the economy that we can't understand", well the European Central Bank did it, Germany did it, they've had negative interest rates; it's not that hard, it just means you're paying people to spend money, paying people to borrow money, that's what you're doing.

Danny Knowles: I think Japan still have negative interest rates.

Avik Roy: Right, so there's this term you hear in academic economic discussions, "Well, there's a zero-bound, you can't cross the zero-bound because then the world will end"; it's like you're going through the black hole or something like that.  No, you can charge negative interest rates, it just means you're paying people to borrow money, and you can do that if you want, it's destructive but you can do it.  We shouldn't do it, we should be okay. 

This is, I think, one of the things you were asking before, how do we solve the problems, or how do we address the errors of the Federal Reserve?  One way to do it, and this is a big project, but one way to do it is to eliminate the stigma from negative inflation or deflation; that is to say, yes, there's the bad kind of deflation, but there's a good kind of deflation that comes from purchasing power going up and innovation and competition in the economy.  The fact that clothing is less expensive today than it was 50 years ago is a good thing, it's not a bad thing.

Peter McCormack: I think clothing was going up on that one, wasn't it?

Avik Roy: Was it?  I thought it was one of the things that went down.

Danny Knowles: I'll pull it back up, but I think that's the exact context of that video I watched missed, and they need to read your future book!

Avik Roy: I've got to get cracking on it!

Peter McCormack: Okay, before we let you go, you're always got your finger on the pulse on what's happening policy-wise with regard to Bitcoin and stablecoins and crypto generally, even though I'm a Bitcoin show, but is there anything that's been going on that we need to be aware of?

Avik Roy: There are a number of bills circulating in Congress right now that are relevant to the Bitcoin community.  The first is, I can't remember the exact title of the bill, but it's a bipartisan bill from Debbie Stabenow, a Democrat from Michigan, a Senator; John Boozman from Arkansas is a Republican; John Thune, who's the Senate Minority Whip, so one of the senior Republican leaders in the Senate, from North Dakota -- it's South Dakota; he'll kill me for getting that wrong!

Peter McCormack: He's a regular listener!

Avik Roy: And Cory Booker, who's the Democratic Senator for New Jersey, who people may remember who ran for President in 2020.  So, the four of them put together this bill, it's a little bit like the Lummis-Gillibrand bill, where it would define Bitcoin and also Ether as commodities that are explicitly regulated by the CFTC, but it's the only thing the bill does.  Basically, all the bill does is says, "We're going regulate Bitcoin and ETH and any other digital asset that can be defined as a commodity as such as a digital commodity.  We're going to define what a digital commodity is, and have that regulated by the CFTC".  So, it's more of a standalone bill if you compare it to the Lummis bill, which is more wide-ranging and comprehensive, but it has, at least, some chance of passing Congress, at least that's the indication I'm getting.

Peter McCormack: Is that good bill; is it good to get away from Gensler and the SEC?

Avik Roy: Yeah, I think that's exactly the one, Danny; you're putting it up on the screen now, the Digital Commodities Consumer Protection Act.  So, the idea is that it would regulate the exchanges that trade these digital commodities.  So, if you were the equivalent of a Coinbase or a Kraken and you traded Bitcoin and ETH, or any other digital commodities, not digital securities but digital commodities, those would be regulated by the CFTC under the same rules that apply to real-world commodities today. 

That would be, again, a way of advancing the ETF conversation, because once you have a regulated entity trading Bitcoin, then it's a lot easier for the SEC to say, "Okay, you can have an ETF around this regulated market".  That's why I think overall, it's good, it's that if you actually have a regulated market, a loosely-regulated market for trading Bitcoin on exchanges, of course this does not affect a peer-to-peer trading of Bitcoin, then that allows there to an ETF that broadens access to the underlying asset, and I think that would be a pretty significant victory for Bitcoin.  So, that's something that we'll see if it gets through, but --

Peter McCormack: What's the timescale on that?

Avik Roy: The bill has been introduced in Congress, and there are conversations about including it in a broader -- Congress, every year, at the end of the year, they have these deadlines where they have a lot of bills they have to pass just to keep the government operating, and so the goal of many senators, or some senators, is to include this package in the broader package and thereby just clarify that, "Okay, now Bitcoin and ETH and regulated by the CFTC and thereby there's some regulatory clarity around that".  And that's why it's bipartisan; the Democrats like it because, "Okay, we're finally regulating this space", the Republicans like it because they say, "Okay, the regulatory clarity can allow these businesses to proliferate and succeed".  So, that's an interesting opportunity; we'll see whether it goes anywhere.

Another bill from some other senators, or actually members of House, excuse me, is about stablecoins, particularly algorithmic stablecoins, like Terra LUNA, that would basically effectively put a lot of regulatory hurdles around the existence of algorithmic stablecoins.  Then there's the Federal Reserve which just keeps looking at a CBDC, something we've talked about before; central bank digital currencies is a huge threat to economic freedom and personal freedom.  Fortunately there, I think, we're sort of stalled; the Fed is not really taking any concrete action to move the ball down the field on CBDCs, so that's good news.

Peter McCormack: Good.  

Avik Roy: There's some effort to try to fix this infrastructure bill thing that affected proof of work and I'm not sure we'll get there, but that's another thing that's out there; there are people who are working on that in Congress right now.  So, keep an eye out. 

The thing I worry about with these end-of-year bills is, a lot of times what happens, it's happened to us before, where there's a last-minute provision stuck in this 1,000-page bill that nobody reads and that ends up being very harmful.  So, the kind of crypto lobbyists, the Bitcoin lobbyists in Washington were kind of asleep at the wheel last time this happened, totally surprised, taken aback that this was happening.  Hopefully, this time around, they're more activated, keeping a closer eye on the process.

Peter McCormack: Awesome.  All right, give a shout out to FREOPP; tell people where to go because, look, the work is brilliant, I genuinely love the email, I'm not just saying it.

Avik Roy: Thank you.

Peter McCormack: Every time I read it, I always think, "I want to talk to that person, I need to talk to that person".  We need to get some other FREOPP people on the show --

Avik Roy: Yeah, I'd love to do that.

Peter McCormack: -- because I think the issues you cover are very important.  But, yeah, tell people where to find this all.

Avik Roy: Well, if you're a Twitter person, you can find us at @FREOPP, and my personal Twitter is @Avik, just my first name.  And the Substack newsletter is substack.freeopp.org. 

Peter McCormack: All right, we will stick that in the show notes.  Sadly, we can't have dinner with you tonight, can we?

Avik Roy: No, I'm flying off to Norway this evening, but I look forward to doing it again.

Peter McCormack: Well, listen, we'll always be back; we'll be back in January.  I always like talking to you and hanging out, Avik, and just keep doing the amazing work, and anything we can do to ever support you or help you, you just give us a shout.

Avik Roy: Same to you, Peter.  I'm a huge admirer of what you do to expand this community and make it more public-spirited as we said.

Peter McCormack: Thank you.  All right, we're done.  Anything, Danny?

Danny Knowles: No, that's good.

Peter McCormack: We're good, man.  All right, safe flight.

Avik Roy: Thank you.