The Economy’s “False Calm” Is the Most Dangerous Signal

The most dangerous economic periods don’t always feel like crises — they often feel normal. In this episode, economist Bob Murphy explains why so many economic warning signs lose credibility right before things break.

From the yield curve’s flawless recession record to the Fed quietly changing how it manages its balance sheet, Bob walks through why markets can look stable even as underlying risks build. He explains why debt, interest costs, housing prices, and monetary policy don’t fail loudly — they fail slowly, then suddenly.

If you’ve ever wondered why economic warnings feel wrong until it’s too late, this conversation explains what most people miss and why false stability is often the most dangerous signal of all.

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Follow Bob Murphy on X: @BobMurpyEcon

Additional Resources

Infineo

Transcript

Monetary Metals:

Welcome back to the Gold Exchange podcast. I’m joined by my good friend and returning guest, Bob Murphy. Bob Murphy is the Chief Economist at Infineo and a Senior Fellow at the Mises Institute. Bob, welcome back to the show.

Bob Murphy:

Thanks for having me, Ben. Glad to be here.

Monetary Metals:

Bob, let’s start with something that I think a lot of people are feeling these economists are completely useless. You’re an economist. You guys have been predicting all these recess, whether it’s been because of the yield curve or because of Trump or inflation.

And yet, stock markets at an all-time high, golds at an all-time high. Things seem to be doing pretty well. So, Bob, what are the economists missing about the economy that everyone else is not?

Bob Murphy:

Okay, great question. And it is awkward because there’s a lot about professional economists that I also disagree with. I definitely understand the public’s distrust. But on the issue of, Hey, worrying about a recession, that’s something I’ve been guilty of or accurate about, one might say in the near future.

But other things you less that, I mean, gold doing well in in 2025 does not mean we were wrong to worry. I would argue it’s other people, too, who are worried about what central banks have been doing. That’s partly why gold has gone up so much. But as far as the yield curve, since you mentioned that, let me just spend a minute on that. So it’s true.

I as well as many other analysts, have thought that the yield curve is a good early warning side of an impending recession, and specifically the 10 year minus the three-month. That has been remarkably prescient going back decades in the sense that any time it inverted, we can get specific and define what do we mean? It has to be for some duration and so on.

But once you accurately define, what do you mean? If it has inverted A hundred %, it was followed by a recession.

And every recession, at least in the postwar era, was preceded by an inversion. So there aren’t false positives or negatives. So that’s why a lot of people look at that as being a pretty good indicator. And so that was inverted for years after COVID. Once the feds started raising rates rapidly after COVID because of inflation, price inflation, that the yield curve inverted, and it was deeply inverted. And so a lot of people were saying, hey, if you use historical results as a measure, we should expect the recession to start and people would give. And I was part of that group.

So the reason right now it looks like we were chicken littles is that if you look at a chart of it, the yield curve stayed inverted for longer, this cycle that we’re just leaving longer than it ever had before. So there is that element. So it’s still true. And now with the Fed cutting again in inflation expectations being historical norm. So now you’ve got the three-month yield is coming down in the 10 year is staying treading water. The yield curve is back to not being inverted.

And so, again, historically. So my point is, if there ends up being a recession, let’s say in the latter half of 2026, and then people look at the overall record, it will look like, oh, yeah, the yield curve predicted a recession just like it always has.

I’m just explaining the reason some of us were warning about is that it remained inverted this time around. And you should be able to explain why. And I don’t think we have a great explanation as to why that is. Or we differ. We can get in. You can always ex-post explain, oh, here’s why my prediction was actually right. So I don’t want to be goofy like that.

But my point is, if there is a recession in a not too distant future, the yield curves track record is still flawless in the qualitative sense that, yes, it inverted and then re un inverted before a big recession hit. So I still do think that it’s there. It’s just the issue was, again, it remained inverted for longer than it normally does. And presumably what that means in terms of where the underlying causal forces is, normally once it inverts, it’s because the Fed has jacked up rates.

And that’s why I think that signal is consistent with Austrian business cycle theory that, oh, yeah, when the Fed tight, there’s an expansionary boom period where the yield curve is, quote, normal. And then that causes male investments, and then things start popping off, and then the Fed tightens.

And so that makes short rates zoom up and the yield curve inverts. But so in the Austrian story, it’s not the yield curve causing a bad economy. That’s just a particular combination of readings. And so then the question is, how come the economy was able to avoid an outright recession after the Fed jacked up rates so aggressively following COVID?

Again, different economists will give different reasons for that. So anyway, that’s just my thought on that. But yeah, in general, economists are all over the place. And I think the fundamental reason, to go back to your question, is how come economists, it doesn’t seem like they’re as scientific as other physicists and chemists. And I think it’s because there’s not a controlled experiment.

We’re still arguing about the Great Depression. And that’s because we can’t just go back in time and say, Let’s rerun the ’30s, but this time doing what Hyatt would have said.

Monetary Metals:

And Bob, now I do want to ask you about the Fed. They’ve kept rates historically high post a zero interest interest rate period or ZIRP. A lot of economists were saying, Oh, because of these zero interest rates, we’re just printing money, we’re easing the economy, we’re inflating all these bubbles. And yet at 5% interest rates, things seem pretty normal.

Obviously, there was a banking crisis earlier, but that has seemed to subsided. So what were the critics who were saying a 5% interest rate or a five handle on interest rates would cause the economy to crash? There’d be more banking crises, gold prices would shatter.

What were these people getting wrong when we’re looking at a 5% or a 4% handle on the Fed funds rate and things seem to be all right?

Bob Murphy:

So again, it’s ex-post. It’s easy for us always to come up with and say, Oh, well, the reason this happened. So I don’t mean to say that, Oh, yes, people like me were claiming this ahead of time that I don’t remember exactly what my mind frame was before, but it’s possible I would have thought raising would have led to serious problems.

So let me give an example, like something about real estate, for example, is that there, part of what has happened is that the Fed, after the financial crisis, 2008, is when they really started, but then they ramped it up after COVID, is the Fed started loaning by mortgage-backed securities. And so it’s interesting that I know now it’s And especially a lot of populists on the right are really trying to curry favor with people on the left and say, oh, yeah, like Blackstone, not to be confused with Black Rock, getting into residential properties and things like And that’s what’s driving up home prices.

I mean, on the margin, sure, that might be contributing to it. But if you do a chart of the home price index against the feds’ holdings of mortgage-backed securities, I think that gives a much better indication.

Whereas something like greed, presumably has been roughly constant since the early 2000s. And that doesn’t really explain why the home prices moved the way they did. Anyway, I think part of it is involved all there. And what you can see now with the Fed’s recent announcement at the end of October, I haven’t seen too many people getting into the minutiae of this.

But what the Fed said is they were basically going to… They had been letting their balance sheet slowly roll off for a while. So people should be aware of that, that a lot of people, oh, money printer go bur stuff. It’s not been going bur for a bit. It’s whatever the opposite of bur, I guess, slurp or something, that they’re sucking the money back. But then the Fed announced at the end October that, oh, we’re going to stop that. We’re going to wind that down in November.

And then as of December first, we’re not shrinking anymore. But more specifically, they said they are going to still allow their holdings of mortgage-backed securities. As they mature, they’re going to just reinvest it in T-bills. Okay, so the feds overall balance sheet is not going to be shrinking as of, you and I are recording now.

But the point was they’re flipping it over. So I do think you are going to see pressure on home prices in 2026, despite the fact that, oh, now the feds in an easing cycle. So there’s that element. And just a weird quirky thing about that is, and this is anecdotal, but yes, when the feds started jacking up rates and mortgage rates followed student started rising, one might have supposed that, oh, that’s going to make home prices crash or at least come down or whatever.

And they weren’t. And I just anecdotally talked to a bunch of realtors and things like that. And one of the things they were saying is, yet it’s this weird scenario where a lot of people own homes and they have mortgages that are ridiculously low, the lowest I’ve ever seen in my lifetime. And so now that mortgage rates are rising back towards normal, some guy gets a job and he has to move to Chicago.

Normally, they would have just sold their house and then moved and then bought a new one once they get their footing. But now they’re not doing that because mortgage rates are so much higher than what they have right now on their property.

So they’re just renting it out instead. So ironically, because the rate hikes had been… Because rates It’s been so low for a while, and then a lot of people now own homes with those low mortgages and then rates rose so rapidly, it was this weird thing where that was keeping homes off the market and thus propping up home prices. So I do think a lot of the warnings about just like, hey, real estate seems overpriced.

That’s probably going to have a correction. And those warnings looked like they were wrong. I mean, I get it with all this stuff. If you say something’s going to happen in a time frame, it doesn’t, you are wrong. I’m not trying to make excuses, but I am explaining there are some weird factors where I I think some things might happen. And then down the road, we’ll be like, oh, yeah, of course. Mortgage rates were historic lows for several years. There was pent up.

People couldn’t move because of lockdowns. And then once you open the floodgates, all of a sudden people want to move to certain areas. The people who still held homes in New York and California didn’t want to sell because mortgage rates were now four points higher than they were.

So a lot of weird things that could explain why prices didn’t collapse. But then if they do come down a lot in 2026, down the road, looking back, we’ll say, Yeah, what do you think was going to happen? So I do think there’s a lot of things like that where people might have been early on the warnings, but that that still will come to fruition. And then stuff like gold, I think it’s because… I mean, there’s a few things.

I think central banks around the world are either openly or surreptitiously stocking up on gold because they realize that, yeah, the global financial system is not on solid footing right now. And they realize five years from now, it would be better if we’re sitting on a bunch of gold rather than treasuries. So I think there’s elements like that. So even though some people might have thought, oh, from a purely technical analysis, the Fed starts raising rates, you’d expect gold to come down.

And no, because people are doing longer term and saying, yeah, the Fed might be tightening right now, but they’re going to loosen soon. And then those people were right because I think the Fed is now, they have as of October said, okay, we’re not shrinking the balance sheet anymore.

So anyway, that would be the way I would explain some of those particular things. And then just to throw it all in the mix, I think the AI stuff is real in the sense that there are lots of companies, I think, that are integrating AI. It took a while to figure out how do we bring this into our workforce.

But it’s a sense in which you can have workers that are for certain tasks have an IQ of 115, and they know a bunch of stuff, and they don’t call in sick, and they charge 15 cents an hour when you do the math. And so that has taken a while for some companies to figure out how to use that. But I think that It also is partly explaining why certain pockets of the economy were still doing well despite the headwinds, as they would say.

Monetary Metals:

And Bob, obviously, people are always worried about the national debt. Every year, it feels like, oh, my gosh, 37 trillion, 40 trillion. And soon we’re going to be a $45 trillion. But in a way, these numbers are so mind bogglingly big that in a way, it almost doesn’t matter. They’re so big, and they don’t really affect you day to day that for most people, they say, Wow, that’s a big number, and then go on with the rest of their day. So what the national debt? Is this something people should be worried about? Obviously, economists are saying, Oh, the yields on treasuries could spike because we need to pay a penalty rate for our treasuries. People are worried about this printing coming from the US. And yet, again, treasuries have not seemed to spike. The national debt seems to increase, and yet the economy seems to be pumping along. So what about the national debt? Is this another item on the economist list that most people don’t need to worry about, or are the economists right?

Bob Murphy:

So again, with this stuff, too, I understand the people who are talking chicken littles, and I get why not just a standard Keynesian, but like an MM tier, especially, would just laugh and say, jeez, you guys, there have been deficit commissions back in through the 1980s, warning about, if we don’t get our ducks in a row and get this under control, blah, blah, blah, blah. And they’ve been talking about that. And look, now treasuries are still rock bottom as far as the eye can see. So I understand all that.

But with a lot of these things, I think it’s the thing where imagine somebody who is warning about, jeez, maybe we shouldn’t be using giant blimps filled with hydrogen. Maybe that’s a bad idea. And until it blows up like, oh, come on, people have been talking about that. And then once it blows, yeah, that was dumb. We probably shouldn’t do that. So I think it’s the same thing here where if nothing ever happens, okay, and US debt to GDP just goes to 800 % and there’s never a blip and whatever. And people still talk about treasures being the risk-free asset, okay.

But if things do rapidly get out of control, and then there is a debt crisis, then I don’t think anyone’s going to slap their head and say, wow, how did that happen? They’re going to say, yeah, it’s amazing it took this long, right? So the cliché, like the things happen, it’s slowly at first, and then all of a sudden. So I do think there’s an element of that. I mean, you do see a little warning signs along the way that all the credit rating agencies, the big three, over the years have been changing their rating of US debt. Now, again, it’s not that they say, oh, it’s triple a bee or something. But they have been changing their ratings and whatever just to warm people up to the fact that…

And it’s not even that, Oh, the US structurally would be unable to service its debt. There’s lots of stuff they could do. In other words, they have enough tax revenue coming in that if they wanted to, they could cut everything else and just pay bondholders. It’s not like they would even need to monetize it. So I’m saying there’s no danger that structurally they could handle it.

It’s just with our political process, I think more and more people are saying at some point down the road, the way the US system works, even if it’s just something like a standoff and not raising the debt ceiling just because of a partisan bickering that bondholders realizing there could very well be a partial default. And so I think all that stuff plays into it. Now, ultimately, the MM tiers are correct in that the Fed could just monetize everything, whether it did it, they just changed the rules and it literally did it directly or the way it does now, where it’s a shell game.

And technically, the treasury floats bonds to people in the private sector, and then the Fed buys those bonds from the people in the private sector by creating new money, new base money. So they can do it that way. So ultimately, that is partly why… That’s the immediate mechanical reason that, yeah, I don’t think T-bill rates are going to go to 20 % anytime soon because the Fed does have the power to prevent that. But you could find yourself in a situation where consumer price inflation is unacceptably high and people are telling the Fed you need to tighten.

And then what if treasury yields are rising such that, well, jeez, the interest carrying costs on the debt would mean we got to cut everything else 10 %, and they might find themselves in a position like that in the not this in the future. But already the interest on the debt is higher than what they were spending on the military in the last fiscal year. So that’s not some… When I was younger, that was always a looming thing. If we don’t start dealing with this debt situation, eventually the interest is going to be higher, and that just seemed inconceivable at the time.

Well, now that’s the reality. They spend more servicing the debt than they do on the military. And it’s not that they’re afraid to spend on the military. They’re both really big numbers. So a lot of these things that when I was younger, people would say would never happen I have already happened. Another one is Social Security. Ever since the financial crisis, I believe it’s been true every single year since then. There might have been a couple of years where there’s a blip.

But in general, the amount taken from workers’ paychecks from on withholding has been lower than what they’ve been sending in benefit checks to Social Security and Medicare recipients.

And so what I said, as someone who became interested in politics and budgetary stuff in the late ’80s and early ’90s, myself So that was always a looming thing. Like, oh, we need to reform entitlements because at some point we’re going to start whittling away the trust fund. Well, we’re already there. Anyway, I’m just saying a lot of these things that were long-distance concerns have now become a reality. But again, people are, well, I mean, it’s not a crisis today.

And it’s, again, the options of how are we going to deal with this just keep getting bleaker and bleaker. It’s the thing where I think we can all agree it can’t be that the US debt to GDP ratio gets to be 2000 %. And so then the question is, what is it going to be? And so, yeah, it’s been able to be 100 % and the world doesn’t end, but it can’t go up to 2000. And so what’s going to It happens.

Monetary Metals:

Last one, poking fun of economists, Bob, now that I’ve got you here. What about Japan? A lot of people say, Oh, well, maybe 100 % debt to GDP is too much, but 2000 is ridiculous. But Japan is maybe getting closer to 2000 than they are 100. So what about Japan? Obviously, the Bank of Japan buys a lot of Japanese debt in this way where not many outsiders are buying it.

The Japanese economy is not so great, but it’s still kicking along. It’s a major economy, and the people there seem to be doing fine. But what about Japan? They seem to be in a worse, whether it’s demographic or financial situation than the United States, but their economy is still kicking along. People are still having birthday parties and having a good economy in Japan. So why is Japan not a black swan to this theory? Well, we can’t keep adding debt to GDP forever.

Bob Murphy:

Okay. So even there, they have taken measures and things where I think that they’re throwing the towel. And it’s true, the new Keynesians and MMT are saying, Oh, they’re just capitulating to the fears of the people worrying about bond vigilante. And all these things whenever some government, like the Hoover administration in the ’30s, that they tried deficit spending for several years, and then they got nervous and jacked tax rates way up in ’32. And then I was, oh, see, it would have worked, except they chickened out.

The first three years didn’t prove that the remedies of increased spending didn’t work. So let me just say, at the very least with Japan, There was always this irony where guys like Paul Krugman in the wake of the financial crisis in 2008, going forward, when Austrians and Chicago school types, standard Conservatives, fiscal Conservatives would warn about, jeez, Obama administration is running trillion dollar deficits. They ended up doing it four years in a row. And this is crazy.

And the feds doing all that stuff. And you’re right, then they would point to the example of Japan. But even on its own terms, it was like, hey, what’s stopping us from just copying Japan?

And we, too, can have a lost decade where the economy is completely garbage and we had to recapitalize the bank several times. We can do that, too. In other words, my point is they were pointing to Japan saying they’ve been doing our remedies for a while. And, yeah, we had to keep upping the ante because it wasn’t working in their economy, everybody agreed their economy. It’s literally called the lost decade. I’m not making that term. That wasn’t a Heritage Foundation slur. That’s a thing.

But they were pointing to Japan. And so I’m seeing your specific worries about our remedies were wrong. But what Japan showed… It’s like the patient is going to… You’re recommending the patient hangs himself or does blood letting. And it’s, Oh, no, he might die from blood loss. And then it’s like, Oh, no. And he points to some other guys, Look, he was He was in bed for six months. That’s not… So you guys were warning that he was going to die. No, he could just end up in bed like this other patient who followed our advice.

So again, I’m just saying, even on its own terms, it was crazy land that people are pointing to Japan to show you should trust our remedies because the specific thing you’re worrying about didn’t happen over here with Japan in its last decade, following our advice.

But again, more generally, Japan has a high savings rate. And I think the thing, the specific mechanical thing that just what everybody would agree with is if you say, how can it be… But Japan even had negative interest rates and things. They were doing things like having to…

And other places did this as well, the negative rates. But it It was like large institutions, you might say, well, why wouldn’t they just pull their money out and hold it in actual cash? If the negative interest rate got too much. And it was like, well, because then the banks would… They came with procedures where they would look at what your historical balances were and still charge. So it was like, you have to just decide, do we ever want to use the banking system again?

Like, even if we just try to pull out our cash to economize and minimize our negative interest costs. So I’m just saying that was how much they pushed Keynesianism And it didn’t work. It just kept not working. But don’t, we’ll do a little bit more. So where I’m going with that is to partly explain mechanically how could they get away with it, whereas we know in Zimbabwe and other places, just printing money to pay for the government’s bills leads to hyperinflation.

And I think partly it’s because these other places, the bond market and whatnot assumes, okay, surely if things started getting out of hand, they would nip it in the bud, right? Just like Bernanke on 60 Minutes after they started QE people were concerned.

And the host asked them, I mean, what happens if things start getting overheating? And Bernanke said, oh, we’ll just wrap it. We’ll just contain it like that. I forget his exact wording, but I think he snapped his fingers. So that’s partly I think what reassured people that, oh, okay, yeah, the Bank of Japan, the Federal Reserve, the ECB, they can quadruple the monetary base in a few years, and we won’t see egg prices quintiple because, oh, yeah, they’ll just sop it all up if they… It mostly stayed in the banking system.

So I think that is the element with all this. But again, that’s why if cracks in the dam start to appear, it could unravel very quickly because everyone knows in terms of the fundamentals, what they’ve done is risky. And I think it’s just they assume, Oh, no, there’s adults in charge. And if things started to actually be a problem, they would unwind all this stuff.

And I’m saying we might get into a position where they can’t because it’s going to be so painful.

Monetary Metals:

Bob, Bob, now let’s talk about a country that is trying to unwind some of their monetary mess, which is China. China has, if you want to say, printed more money than even the United States has. They have a worse real estate crisis happening in their country than we do. There the stock market is much weaker. They have capital controls in their country. They have a weaker currency than the rest of the other currencies like the United States dollar or the Euro.

And of course, their people are worried about the banking sector rather than trusting of the banking sector. So what about China? A, do you think that they’re able to get out of this mess, or do you think they’re basically looking at a bleak economic future? Or are there lessons from China that the United States can take on remedying their fiscal issues as well?

Bob Murphy:

Well, I don’t, by any stretch, claim to be an expert on the microdetails of what’s going on in China. I mean, big picture, I’m talking over the last 30 years, they have just gradually been liberalizing. And so it’s ironic that as the West slouches more towards socialism, places that really gave it a go in the ’50s and ’60s are pulling back. I think that’s partly to explain, and you see a lot of these statistics, too. I’m sure your listeners are familiar with There’s a sense in which we basically conquer global poverty.

If you look at measures of the… You define some absolute measure of a floor, like calories per day or something that’s It’s not just how do you… How is your lifestyle compared to the guy down the street? But like an absolute measure. And by standards like that, like from 1950 to today, the fraction of the global population that is really on the verge of starvation is much lower than it was.

Okay, so there’s various things. And a lot of that is just because of the increase in the standard of living in places like China and India. So again, what’s happening there, it’s not that they finally discovered the virtues of MMT or that they finally had some labor union organizers get serious.

That’s not what happened there. It’s that they backed away from central planning and allowed within limits liberalization and things like that. People could, instead of having collective farms, allowing peasants to have some control over what gets planted. And, hey, if you exceed your quota, you can keep that for your family, or you can sell it in the market and whatever. And all of a sudden, all of a sudden, they had good harvest. The rain changed when they made those structural reforms.

Okay, so that’s the long term thing. And besides that, I think there is an element of, not to go all Hans Hoppe on you, but there’s a sense in which some of the things that, even though they’re technically the Chinese Communist Party, their decisions are longer term, in terms of fundamental, just realizing, oh, to get along with our neighbors and to expand our sphere of influence in various regions of the world, instead of sending over aircraft carriers and things, which is expensive.

And then we’d have to worry about the… Instead, we’ll just strike deals with all these governments and send them a bunch of money so they can build infrastructure, and then they’re going to owe us a bunch.

Maybe we will extract their resources and we can just foster trade flow. A lot of things that not because they have read David Hume, and they’ve seen the light. But just that if you’re thinking long term and you realize we don’t need to have an open confrontation with the West, they’re destroying themselves on their own. We can just buy it our time. I think that’s the way I’ve interpreted that.

Along these lines, Dominic Frisby, who some of your listeners may have heard, he’s been a guest a lot on Tom Wood Show, for example. He has an interesting thesis where he studied gold flows a lot, and he makes a pretty compelling case that in terms of the official announcements, if you go and check the world’s stockpile of gold by central banks and other official entities. And the US is still on paper the world’s leader by far, and China has been growing.

And he makes the case that, and again, he has micro data showing flows to say these official numbers can’t possibly be right, that he thinks the US is overstating its holdings, and that the Chinese government quite deliberately is trying to stay under the radar as they stockpile.

And so I think you see a Lots of things like that. So having said all that, yeah, it’s… I mean, central planning doesn’t work, and they can certainly… They have a lot of wealth to throw around, and partly because of the liberalization over the years I’ve talked about, it’s unleashed a lot productivity. And so that does give them some large S to deploy and say, Hey, look at this amazing new city we just built. And yeah, it’s not economical.

Market forces, completely unfettered would not have built that city right there with such grandiosity as we just did because we’re trying to impress people. So I do think there are elements of that. I guess having said all that, though, if you’re going to waste a bunch of money, it’s better to male invest in building cities and bridges or whatever that are maybe 30 % more ostentatious than they should be, as opposed to bulking up your military so you can go around fighting wars around the world.

Monetary Metals:

All right, Bob, now that I’ve poked fun of economists for a while, now that I have you and you are an economist, I want to ask you questions for a range of topics that maybe economists don’t usually get asked. So first, what about Ozempic? We’ve come up with these GLP-1 drugs. They’re helping people lose weight. They’re also helping people with addiction and other problems.

And maybe in the future, this will help lower health care costs because people won’t have hip replacements or hurt knees. They might live a little bit longer, so they’ll pay a little bit longer. What do you think about the economic impacts of these GLP-1 drugs that maybe not a lot of economists are thinking about?

Bob Murphy:

So I think for sure, if we broaden the category and just say technological innovations, is that going to lower health care costs? Yes. So the specific GLP, I don’t know enough. It would be silly for me to speculate on that particular because I know some people think there’s a lot of risks involved, and I’m not familiar enough to that literature to say whether the critics, Oh, people are always worried about every new thing, or if there really are a lot of serious issues.

But yeah, I think we’re getting closer to the point where they could have nanobots and stuff like that, just go in and reconstruct stuff. That’s not that far up. I think for sure we will that in my lifetime. Also, they have these so-called free cities that are being established, part of the revenue model in terms of some group will go to some government. In Honduras, there have been political difficulties there. But the idea is they’ll approach some relatively poor government and just say, hey, we want to carve out this region over here. You mind your business and we’ll do blah, blah, blah. And then you got this area that’s not encumbered by French or US medical laws.

And so, yeah. And so rich people can just go, and it makes sense. What operations would it make sense to locate in a region like that where there’s very low taxes and blah, blah, blah. And there’s actually not that many. It’s difficult. It’s hard to just create some new city somewhere and get people to go there. And then if there’s not oil or something, what are they going to do? But one thing that has worked is medical tourism. So you get a bunch of…

Because you can rotate, too. Some of the best brain surgeons in the world or whatever, they can all just go and spend three months there. Because if it’s not a place you want to live for the rest of your life, the pay is great. The after-tax pay. So you can do that, and then people can go. So I think you’re going to see that Sprout more and more, even if it’s on cruise ships that just keep getting bigger. And then it gets more and more, as opposed to people taking cruises, it’s just more and more wealthy people just have a second home on this floating thing that’s outside of certain jurisdictions and whatnot.

So I think over time, you’re going to see more of that and that, yes, average lifespans will expand it and so on. So I think that’s going to be the general trend, and it’s really hard right now for life insurance companies and people selling annuities and all these types of things. It’s hard to make long term forecast because at the same time, you’ve got a lot of people saying, hey, future historians will probably say, World War III already started.

I’m not trying to be evasive and just throw out, but I’m just saying the world right now is crazy. And stuff that previously would have been a month in our news cycle now is gone in a day because there’s so much stuff hitting us that you can’t focus on anything.

Monetary Metals:

All right, next one to ask the economist, what about stable coins? These are coins that are usually one-to-one-backed with some stable asset, whether it’s gold, whether it’s the US dollar, whether it’s the Euro. Are stable coins basically going to prove whether this 100% reserve model is interested or interesting for the market participants?

Will this basically be the first time that weird monetary economists like yourself have the ability to say, Wow, look, people actually care about fractional reserve banking or 100% reserves, where in theory, the textbook might say, Yes, they do care, or no, they don’t care. But now we have actual financial products that will be able to to prove whether fractional reserve backing is important or not.

Bob Murphy:

Okay, great question. So here I have done, as opposed to the Ozempic stuff, I have done a lot of research, and so I can be more granular in my response. So Among other things, I was disappointed that the genius act, as I’m sure many of your listeners know, just make sure I’m not losing anybody. So the genius act has to do with US dollar denominated or pegged stablecoins, and at least in the US jurisdiction.

And so among its provisions, it said that, oh, any US issuer of USD payment stablecoins, and that were payment is serving a function in this discussion, has to be backed. And the way it’s written in the common parlance is to say you have to have 100 % reserves. And so you’re right then that it ruined the experiment in the sense, not that that’s the most important thing, but yes, this was going to be a great test case to see the views of Selgin and White versus Hulsman and Murphy, let’s just pick two, in terms of, oh, Would the market gravitate towards close to 100 % reserve banking on demand deposits and things? Were it not for government bailouts and FDIC and things like that?

Because that’s always been the argument is that the 100 % reserve camp has said if there was no favoritism and the authorities is coming in and relieving banks of their contractual obligations, then yes, you would see market forces pushing banks towards 100 %. And then the so-called free bankers would say, no, as long as everything’s free and open, people like to get interest on their checking accounts. No big deal. So the market for stablecoins was really a good test case for that to see how is this going to play out over time.

Because places like issuers like Tether and whatnot, they certainly did not have 100 % backed up in $100 bills in a vault somewhere or even in conventional bank accounts or whatever. They had a bunch of assets that were well more than what the outstanding liabilities were, but they weren’t all liquid in the form of USD. So that was the issue, and it was going to say, okay, is there going to be a couple of crises, and that will scare everybody straight, or is it going to remain? And so the genius act made it a moot point where they just insisted on it.

But then there was also a double whammy where what they’re calling reserves are people having T bills. That counts. And so in this parlance, no, if you If a Bank of America has a billion dollars in checking account balances, its customers put in, let’s just say paper currency, keep it simple. It was originally in the vault, and they’re all now, electronically, they put their debit the ATM that says they got the Anevola’s numbers, and it’s a billion.

If Citibank then takes the cash and goes and buys three-month T-bills and keeps rolling it over, that’s zero % reserves in the way economists historically talk about this stuff, even though In the stablecoin discussion now, people would call that 100 % reserves. So anyway, I’m just saying it did muddy the waters. And besides that technical point, just in general, now we’re not going to see exactly what would market forces have done because of this. I will say, though, that I think they were smart, the people involved with crafting this, that the big banks realized, if we don’t do something, we’re going to get put out of business by these stable coins because it’s easier.

You can transact blockchain-based items 24/7. You just need an internet connection, whereas normal banking, even though it’s very easy with online stuff, that’s closed if it’s not banking hours. So there’s that element. And also, I think the market was moving that stable coins were going to start paying interest. They would have to. Certainly new entrants, how would they compete with the Tether or USDC? Is they were going to have to say, oh, if we can take our fund, incoming wire transfers to issue our stable coins, and then we go invest it and earn seven %, we’re not just going to be able to book that.

We’re going to have to give our customers two %. And so the coin, like Everyone who has 100 of their stable, ACME stable coins, then that would turn into 100. They would mint two more and give it to them over the course of the year. You get what I’m saying? So I think that’s clearly the way the market was going. So it was either going to be 100 % reserves or if fractional, that market forces were going to make them pass that through their customers. And I think the big banks realized we don’t want this trend to continue.

So they just stop that it tracks because the genius act also forbids paying interest to customers as well as, again, making you lock up. But the one, and it’s Alex Pollack, another senior fellow to me since who made this clear to me when I interviewed him on the stuff, is he said, The one exception to all this that I’ve been talking about is if it’s a bank, it can have its own stablecoin, and it doesn’t need to have the funds tied up in treasury because it’s a bank.

In other words, from the genius act point of view, money on deposit in a bank, as long as it’s FDIC-insured, is as good as T-bills, even though, well, no, what if the bank goes and invest in mortgages? That’s not as liquid as a T-bill. So I’m just saying the whole thing is convoluted that it’s giving this appearance of air tight safety. And then, oh, yeah, we want the public to know if they buy stable coins, that it’s just a bunch of T-bills rolling over, that eventually they can get their money back if they wait three months at most when no, that’s not necessarily what the case is at all.

There could be a wave of bank Just last thing I’ll say, Ben, just like with Silicon Valley Bank, Circle had, I forget what the number was, I think, I want to say 13 billion on deposit with them. So that all was an FDIC covered. You know what I mean?

That would be a lot of accounts to be the $250,000. And so there was a period where circle stablecoin fell below par because people weren’t sure, are you guys in trouble? And then the authorities basically bailed them out. They didn’t need to. That was an FDIC. That was way more than had to happen. But I’m just saying that thing is what Alex Pollack pointed to, to say the foundations of this are much shakier than I think a lot of people realize.

Monetary Metals:

All right, last interview question before we get to the rapid fire section, which is, do you think the issuance and distribution of these stablecoins worldwide or globally has basically cemented the US dollar as the world’s reserve currency?

If you live in Namibia, you live in Chechnya, you live in Iran, you live in any country in the whole world. Now, basically, if you have an Internet connection, you can have access to gold, the US dollar. You can basically say, Hey, who needs the lira? I’m just going to get a US dollar bank account basically through my iPhone. Do you think that the issuance and distribution of stable coins has basically cemented the US dollar as the world’s reserve currency for good?

Bob Murphy:

Well, to continue your metaphor there, you’re saying cemented? I would say it’s ducted it, in the sense that, oh, yeah, it’s It’s tighter now than it was without the duct tape, but that’s certainly not as solid as cement. And so I’m not just merely trying to be coy or whatever. Just to unpack what I mean is, yes, other things equal. I think, like I said, how I thought some of the big banks were involved in the… And I don’t have any inside information. I’m just outside looking in.

I think you can clearly see how the provisions of the genius act benefited the big banks, or at the very least, protected them from what was coming in terms of they didn’t do anything about this rising stablecoin market, but also helped the US Treasury, among other things, by insisting that, Oh, any non Bank stablecoin issuer has to have reserves in either T-bills or checking account balances. That, I think, is going to create a lot of extra demand for treasuries relative to the counter factual where they didn’t regulate that stuff. So in other words, a lot of stablecoin issuers are going to have portfolios of treasuries who otherwise would have had more diversified assets.

And so that they’re building in this looking forward, jeez, the big beautiful bills certainly locked in a lot more treasuries. It’s got to get issued over the next 30 years. And so I think they’re building that in. But also, yes, by giving regulatory certainty and just allowing people to build Because you got to have the rails, too. It’s one thing to be a stablecoin issuer, but if it’s not easy for institutions to use them or you’re not sure what the tax treatment is going to be or what the heck am I going to get hit with some money laundering charges just because I accepted these things.

So I think the Trump administration, by saying, Hey, we’re going to be the AI and crypto capital of the world, fostering through some of this legislation, I think given all the other uncertainty that their actions are, I think on there, they are trying to say, Yeah, let’s go ahead and tell people around the world, build up blockchain-based rails. And that, yeah, over the next 10 to 20 years, that will make the US dollar part of more transactions than would have been the case if Kamala Harris had been elected, right?

Because I think they would have continued the hostility that the Biden administration had to crypto projects. But having said that, maybe a classic economist and say, On the other hand, I think that’s in a sense selling the rope, like the classic Marxist slogan that we’re selling the capitalist, the rope that they’re going to use to do something to themselves.

That once, as more and more institutions and even households around the world, it’s very common place now that you’re not logging into a bank or something. You’re just going to your MetaMask wallet or whatever, or more sophisticated things they’re going to develop. And you have a bunch of different coins coming and going, many of which right now are going to be USD stable coins, and that that’s what’s locking in.

But as that becomes more or more common place, it’s going to be really simple just to click a pull down menu and say, hey, let me reduce my holdings of USDC and increase my holdings of Tether Gold or increase my holdings of whatever else you want it to be. Because in other words, that’s right now when people talk about, is the US dollar going to be the reserve currency 20 years from now?

The single biggest objection to that, nobody disputes the problems with the dollar, but they just say, Where’s anyone going to go? Are the bricks going to have their current? You’re going to take one? What are you going to do?

Overrated. And it’s really briefly, even on its own terms, a lot of libertarian types, when they say, Oh, no, no, no. Companies don’t pay. Exporters don’t pay tariff. Consumers do. That’s not correct.

It just even standard tax incidents analysis. It has to do with elasticities. Just like a cigarette tax could fall on tobacco producers or consumers, depending on the less so. I think a lot of libertarian types the impact of terrorist on consumer prices.

Monetary Metals:

All right, Bob, what about AI? We’re hearing a lot about AI investment. There’s trillions of dollars being pumped into the AI economy. Do you think, looking back, this is going to be a boom period where we were excited about all these investments into AI, or is this going to be a bubble that will eventually bust?

Bob Murphy:

I don’t think AI, per se, is overhyped. I think that that really is going to, as companies figure out how to integrate in their workflows and whatnot, is going to be a huge driver number of things. It’s entirely possible that years from now, looking back, they’re going to say, Oh, yeah, the early flow investment, they should have spread that out more.

Oh, boy. I’ll say who’s the most underrated is this guy, nick Row, out of Canada, that I always find him to be fascinating. And your listeners probably don’t even know who that is.

But I’ll say he’s the most underrated. I don’t know. Favorite? I can’t say favorite. It’s just it’s too hard.

Monetary Metals:

All right, Bob, which of your kids is your favorite? All right, next one. All right. Which single policy or trend do you think is actually most underrated that people should be focusing on, but we’re not talking about?

Bob Murphy:

I guess a surveillance state. I don’t think, in the use of drones. I think in the not-too-distant future, there would just be drones hovering around and people will know if you get out of line, people just disappear.

And that will be a rumor and people, Oh, that’s not really what they’re… And others will think, No, I’m not going to take my chances. I think we are going to see that in our lifetime. And yet I even feel funny saying that out loud because it sounds nutty, but I think we’re going to see that.

Monetary Metals:

All right, Bob, last one in the rapid fire section for you. If you could go back in time and witness a historical event, and you get to change one thing about that historical event, like you’re a mad scientist, what would you want to go back and see and potentially change?

Bob Murphy:

I guess the transaction where the guy bought the pizzas for the bitcoins, and I would instead bring better and get those bitcoins.

Monetary Metals:

All right, Bob, tell us a bit about your day job at Infineo and some of the products that you guys are working on.

Bob Murphy:

Sure. What we’re doing is we’re combining blockchain with life insurance, And so we’re trying to take this very age-old, conservative financial product has a lot of built-in features, and marry it with all the convenience and advantages and speed of the blockchain. So that’s what we’re doing, both for conventional owners of life insurance, just an ecosystem where they can just have access to more liquidity and other features, things like that.

Thanks, Ben. Always a pleasure.

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