EXCLUSIVE INTERVIEW
John Butler on Free-market Economics and the Upcoming 'Great Crisis'
By Anthony Wile - September 02, 2012

Introduction: John Butler is a Marin County native who studied economics, history, philosophy and international politics at university before embarking on a career in the financial industry. He worked for over 15 years as an interest rate, currency and commodity strategist at major investment banks in North America and Europe prior to founding his own independent investment and advisory firm, Amphora Capital. While at Lehman Brothers in the mid-2000s, he was ranked #1 for Interest Rate Strategy in the Institutional Investor Survey. He currently serves as the Chief Investment Officer of the Amphora Commodities Alpha Fund and is the publisher of the popular Amphora Report investment newsletter, featured on a number of prominent financial websites. John is also the author of The Golden Revolution: How to Prepare for the Coming Global Gold Standard, published by John Wiley and Sons (2012). A frequent speaker and presenter at investment conferences and seminars around the world, his research has also been featured in the Wall Street Journal, Financial Times, Boerzenzeitung and the Frankfurter Allgemeine Zeitung, among other publications.

Daily Bell: Give us some sense of how you got interested in finance.

John Butler: My original interest in finance was as an underappreciated aspect of history. Nothing important happens in the world that is not financed in some way, yet the sources and methods of financing for international trade, industrial expansions and innovations, wars, revolutions, political campaigns, colonialism, imperialism, etc., generally do not feature prominently in the history books.

While studying toward a PhD in International Economics and Finance, I learned much about what academia is really like and decided I was better suited to the real world of practical finance. And so I headed off to Wall Street and took the best job I could find.

Daily Bell: You worked for European and US investment banks. Describe your feelings about the industry and what you did.

John Butler: Upon arrival on Wall Street I felt privileged to have such a coveted job. It was hard work but a sense of pride helped me get through the late nights and weekend work that are part and parcel of a young Wall Streeter's life. My first job was in a specialized research/consulting function. I worked on some fascinating projects and learned a great deal about both quantitative finance and qualitative risk factors in business. Among other things I learned how these could be modeled in various ways, including using options-pricing theory. It was still early on in the 'derivatives revolution' and I was a part of that. There was a great culture of innovation and advancement and you could just smell the money being made around you.

Disillusionment set in early, however. The bank I worked for, Bankers Trust, found it was the subject of numerous lawsuits for mis-selling complex, opaque, structured derivatives. Profitability collapsed, bonuses for many were zeroed and several employees were fired and then banned from the industry for misbehavior. For me, it was a wake-up call that all was not well with finance, at least not in New York. So I took my experience and language skills and headed to Europe to pursue my finance career in Germany. Bankers Trust never recovered, although it is worth noting that some of the rising stars there landed at other firms and rose to the highest ranks of management, including at Barclays, JP Morgan and Credit Suisse.

Once in Europe I acquired a more international perspective. Different countries had different attitudes towards finance. One thing that was particularly clear was that, in continental Europe, there was a general distrust of the 'Anglo-Saxon banking model' in which excessive risks were taken.

As a case in point, by the late 1990s the tech bubble was becoming so irrational, so out of control, yet really smart people, including some I knew, claimed it could just go on and on. Increasingly I thought these people were myopic, caught up in groupthink, or just 'talking their book.' Of course, it all blew up thereafter and my skepticism was validated. I learned important lessons, that individual, informed, rational thought could outsmart the bankers, and that the bankers did not necessarily act in the interests of their clients or of the economy generally.

Daily Bell: Prior to launching the Amphora Commodities Alpha Fund you were Managing Director and Head of the Index Strategies Group at Deutsche Bank in London. You were responsible for the development and marketing of proprietary, systematic quantitative strategies for global interest rate markets. What did that entail? What are quantitative strategies? Do they work?

John Butler: There are many systematic ways in which to trade the financial markets. Simple ways include things like 'buy and hold,' or 'buy low, sell high.' Other ways include buying high-yielding assets and shorting low-yielding assets or so-called 'convergence trades,' or following momentum, or technical signals, or whatever. The list is endless. With all strategies, however, there are times when they work and times when they don't. And there are times when many strategies blow up at the same time, such as when markets turn illiquid and it becomes impossible to reduce risk without moving the price. Ask the Nobel Prize winners who worked at Long-Term Capital Management (LTCM) in the 1990s, for example. Or the quant geniuses who populated global finance through the 2000s. Ultimately, all strategies depend on a judgment call that the necessary liquidity to implement the strategy will remain available. They can work if this judgment is correct but if it is not, they can blow up spectacularly.

That said, other factors equal, one should always favor implementing a given strategy in the lowest-cost way possible. At Deutsche Bank, that was my job: Take an existing strategy, refine it and find a less expensive way to implement it, thereby undercutting the competition. Quant hedge funds tend to have a high cost structure and they charge high fees. At Deutsche, we offered similar strategies for far lower cost and built a large market share in this area.

Daily Bell: You worked for Lehman Brothers in London. What was that like?

John Butler: In many ways it was a wonderful place to work, full of smart, generally polite people who thought up seemingly endless ways to make money. What they didn't realize, however, was that many of these ways ultimately depended on easy monetary policy, artificially low interest rates and the occasional bailout in order to work. A substantial portion of senior executives had lived through the LTCM bailout and knew just how close the firm had come to failing back then. They believed that, were things ever to get that bad again, the Fed would come to the rescue. And so they went about their business without that concern much in their minds.

Research at Lehman was held in particularly high regard, although in practice this meant that there was a huge quant research function supporting an ever-growing suite of analytical tools and databases. There was essentially no interest in a more judgmental, historically-informed approach to investment analysis, such as that employed by Austrian economists. I did much work in this area and it was not highly regarded internally, although a number of clients claimed to find it useful.

Daily Bell: You quit your day job before the financial crisis because you couldn't continue. Why not? What did you see coming and why?

John Butler: When the Fed responded to the dotcom bust with near-zero interest rates in the early 2000s, the financial mainstream responded as if low rates were basically a free lunch. But, of course, there is no free lunch. Someone has to pay for artificially low interest rates or other market distortions. Of all contemporary economic schools, only Austrian economics understands this and has a persuasive framework to explain it, namely Austrian Business Cycle Theory.

As the housing bubble grew in the wake of the dotcom bust, it was clear to Austrians that another, even larger bust was looming in future. Knowing it was inevitable, I worked backward from a known outcome to work out the plausible path things would follow in order to derive the most obvious (to me) warning signs that the crisis was near. These boiled down to indications of illiquidity in structured credit, e.g., CDOs and such, that were at the core of the bubble.

By early 2007, it became evident that the CDO market had become illiquid. There was still much origination and issuance going on but the secondary market had all but shut down. No one wanted to talk about it but if you knew what to ask and who to ask you could find out. In any case, by late 2007 I determined that a major financial crisis was imminent. My Austrian analysis concluded that subprime could not be 'contained' as Bernanke and Paulson and others were claiming. When it all blew up the next year, I was not at all surprised, although I was still somewhat terrified, as if I were watching a bad horror movie in which it was easy to anticipate who would be killed next.

Around that time, following a few discussions with my wife and some close friends I decided that it was best that I leave the industry, at least for a time. Some form of bailout was coming, I believed, and I did not want to be associated with it. I resolved that I would leave the industry in summer 2008 and thereby forgo any bonus compensation. I had done well enough and saved enough to sit things out for a while and figure out how I could become part of the solution rather than remain part of the problem.

Daily Bell: You'd been warning about a financial crisis for a considerable time. What did your colleagues say?

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John Butler: Beginning in 2005 I began to explain to colleagues at Lehman Brothers that there was a bubble in the US housing market. My concerns were dismissed by most. By early 2007, there was some sympathy with this view but then when I explained that the housing bubble could not be deflated without severely impairing the financial system and causing a severe recession, my colleagues either disagreed or simply refused to listen.

I recall two incidents of particular interest around that time. First, a senior member of the US economics team, a former Fed staff economist, steadfastly refused to countenance that US house prices could decline on a nationwide basis. He claimed that, because that didn't even happen in the Great Depression, it simply couldn't happen, that it was impossible. Only a PhD and former Fed staffer could make such a breathtakingly audacious statement. And, of course, PhDs and former Fed staffers made up the bulk of senior US economists at the time and they still do. The former Fed staffer mentioned above is now the Chief US Economist for one of the too-big-to-fail banks. Consider that for a moment.

Second, I was invited by risk management to comment on their plan for protecting the firm in the event of another financial crisis similar to LTCM in 1998. They explained their hedging strategy and asked me for my opinion. I looked at the strategy, which was primarily the systematic purchase of so-called receiver swaptions that would outperform in the event of a bullish yield curve steepening. Indeed, as LTCM blew up, the curve bull-steepened dramatically. Obviously, the risk managers were thinking a possible future crisis would follow the same path. So I asked them, "If you guys are hedging in this way, how do you think your counterparts at other firms are hedging?" To my surprise, they responded as if that was not relevant. But, of course, it was. If most major firms were hedged in the same way, then collectively they weren't hedged at all: They were each other's counterparties! The markets would go illiquid, interbank lending would shut down and the system would either collapse or be bailed out. Such is the hubris of modern, quantitative finance that they could not see this simple, common-sense fact.

The only 'hedge' that worked was that the Fed and Treasury finally came in to save the system by tripling the monetary base, enacting TARP, etc. It was too late for Lehman, although not for the handful of surviving firms who increased their market share and continued to pay out huge bonuses to senior executives, thereby monetizing spectacularly the accumulated moral hazard of misguided monetary policies and bailouts through the years.

Daily Bell: Tell us how you came to Atom Capital and began publishing the Amphora Report.

John Butler: In late 2008, following my departure from the financial industry, I was teaching history part-time at an elite private college in the English countryside but I was still actively following financial developments and asking myself whether I could find a way to broadly communicate my explanation of why the crisis had occurred, whether or not the policy responses could work and, in general, try to educate investors and others about Austrian economic thinking by applying it to current events.

In 2009 I began to write occasional economics comments and by early 2010 I felt that I had 'found my voice' and had done enough research and prepared enough rough material to begin publishing and distributing an occasional newsletter, which I titled 'The Amphora Report' after my new business. By the end of 2010 the Report already had a following of over 20,000 regular readers and I had begun work on the manuscript for my first book, The Golden Revolution. By late 2011 the Amphora Report was being picked up by a broad range of websites. I guess you could say that the Amphora Report finally went 'viral' in 2012 and is now showing up in so many places I've lost track of the distribution.

Daily Bell: What is its animating "alternative" investment philosophy?

John Butler: It is an Austrian-informed approach. Basically, if there is too much debt and leverage in the economy then this will be reduced whether policymakers like it or not. The problem from an investment standpoint is that deleveraging erodes paper wealth. So the challenge is to preserve wealth notwithstanding a shrinking economic pie, aware that policymakers are actively distorting financial markets in ways that complicate economic calculation and investment analysis.

Daily Bell: Tell us how you came to focus on commodities. What does it have to do with the larger business cycle?

John Butler: Throughout history, commodities have always provided a store of value even if they haven't always been used as money. Some are more easily stored than others and some have been commonly used as money but they have always served as a store of value regardless.

Now, in a normal business cycle not subject to the artificial boom/bust caused by interest-rate (or other) manipulation, commodity prices will rise and fall inversely to the business cycle. But when manipulation artificially and structurally raises the value of financial assets relative to commodities, as was the case through most of the 1980s-2000s, then in the bust, this process goes into reverse and commodities will outperform during the deleveraging and reset phase.

In the event that the currency itself is debased, then monetary commodities (i.e., precious metals) will perform particularly well, as we have observed since 2008. History, however, suggests that this process has MUCH further to go. Indeed, as policymakers are still scaling up intervention rather than scaling it back, the distortions continue to grow and thus so do the potential future relative outperformance of commodities, including precious metals.

Daily Bell: Do you consider yourself an Austrian oriented investor or economist?

John Butler: Absolutely, and in more ways than one. Austrians are in key respects the most humble of economists. They understand the limits to knowledge, in particular at the macro level above a complex system. The power of Austrian economics from a trader's point of view is that it can inform an investment process but also recognizes its natural limits. As such, it helps the trader to avoid the common pitfall of thinking that they know more than they actually do.

Daily Bell: Why do Wall Street firms use Keynesian analysis when it doesn't work?

John Butler: Wall Street firms spend much time trying to anticipate what the central banks and fiscal policymakers will do. Most central banks operate with a neo-Keynesian framework and employ primarily neo-Keynesian economists. So if you're trying to anticipate changes in policy, you adopt their framework and you hire people who worked there and who still have connections there and who claim that they can keep you one step ahead of the next manipulation of interest rates.

Daily Bell: Why do governments use Keynesian analysis?

John Butler: It is a self-serving convenience. As with Marxism, it justifies the creation, maintenance and expansion of a central-planning superstructure. In a Keynesian world, we actually need all those bureaucrats. Without them, society would just fall apart, now wouldn't it? And we would all be exploited by capitalists. So we need the Keynesian central planners to hold society together and to protect us from rapacious businessmen. In reduced form, it is all very Platonic or Machiavellian, really, or Straussian or 'neocon' for those who prefer a more modern reference to such thinking.

Daily Bell: Are you familiar with Henry George, Silvio Gesell and Major Douglas? What do you think of letting government handle money entirely as the provider of pure fiat currency?

John Butler: I sympathize but disagree with those populists who would transfer the monetary authority from the central bank to the government. In the US, this would imply taking it away from the Federal Reserve and giving it back to the Congress, where the Constitution places it. There has always been a tension between establishment bankers and the populists. L. Frank Baum, the author of Dorothy in Oz/The Wizard of Oz, understood this. They are fighting over the same central-planning power, in this case, to inflate the money supply in order to serve a particular sect of society.

In my opinion, however, money should not be political. It should be a universal accounting benchmark, a reference point, something that cannot be manipulated by anyone to serve one sect of society or a particular individual at the expense of another. Unless we are out to exploit others we have no reason to manipulate money; rather, money should be created as demanded by a free market, just as with goods and services generally.

Daily Bell: Is gold money? Silver?

John Butler: Money is what society chooses to use as money. Historically, societies the world over have chosen to use primarily silver and gold, the former for day-to-day transactions, the latter as a store of greater wealth or for religious or ceremonial purposes. But who am I to tell a society what they should use? Governments use legal tender laws to do just that but, of course, that is a severe restriction of individual liberty and, to the extent that the legal tender is manipulated, is yet another aspect of the central planning implicit in contemporary neo-Keynesian policies.

Daily Bell: Tell us more about the Amphora strategy, which aims to provide investors with the key benefits of commodities but in an efficiently diversified, low-volatility and market-neutral way.

John Butler: First a disclaimer: I am talking my book here!

Amphora is my best approximation to an optimal strategy combining the wealth-preservation qualities of precious metals and commodities generally with the economic benefits of efficient diversification. Once you accept that fiat currency legal tender is a poor store of value and relegate it to a mere medium of exchange, then you are 'forced' into something else as your store of value. For most, they flee into financial assets, hence the bond market bubble and, to some extent, into equity markets. As those markets become overvalued, a value-driven investor eventually ends up in commodities, including, of course, precious metals. But whereas there are all manner of sophisticated ways to diversify a traditional stocks/bonds/cash portfolio, there has been essentially no such work done on commodities, which don't pay interest or dividends and simply cannot be modeled in the same way.

While I advocate holding gold, would I advocate holding only gold? Or only silver? Or only metals? What I advocate is diversification. If they can't print it, I am willing to hold some of it, to the extent that it demonstrably and efficiently diversifies that which I already own. That is Amphora.

Daily Bell: The strategy aims to provide stable returns in a wide variety of market environments. Does it?

John Butler: Well, I do believe that Amphora does what it says on the tin. But as with any investment strategy, there are unknowns, 'Black Swans' if you will, and I am humble enough to know that there is no such thing as a perfect hedge or perfect store of value. Amphora is my best educated guess, nothing more.

In the investment community, there is normally much weight given to the track record for a given strategy or for a given money manager's performance. Track records are important both for what they say and what they don't. When I was working to derive the Amphora strategy I hired a third-party calculation agent to create a theoretical backtest of the strategy from the beginning of 2005. That backtest shows that the trend performance of the Amphora strategy was stable over time during both the bubble phase (2005-07), the bust phase (2008) and the stop-start recovery, back-and-forth phase (2009-present).

While in my book I argue that the current global monetary system is going to collapse into something that is gold-backed in some form, in the meantime, who is to say that the central bankers won't find a way to inflate yet another bubble? That the occasional wave of deflation won't roll through, as it did late last year and early this year? I don't know. Nobody knows. This requires that the Amphora strategy be stable across these environments in order to function as an alternative store of value. The backtest suggests that it is but, of course, that is no guarantee of the future.

Daily Bell: America's debt problem and political gridlock in Washington are risking the death of the dollar's reserve currency status and potentially leading the country on the road to a serious inflationary crisis. How did America get into this fix?

John Butler: Part I of my The Golden Revolution goes through this in some detail. In brief, the US has and continues to enjoy and exploit the 'exorbitant privilege' of printing the global reserve currency, thereby financing welfare at home and wars abroad. However, you have gotten to the point now that US economic power is no longer sufficient to credibly back the dollar's legacy reserve status. Occasional rhetoric to the contrary notwithstanding, the US political elite doesn't recognize this and thus assumes that the US will continue to be able to finance its deficits indefinitely. Hence there is no real pressure to get spending under control and the accumulated debt is now so large that a large dollar devaluation and/or debt default is inevitable.

Daily Bell: Central banks such as the Fed will continue to print money, and this could result in purchases of corporate debt and perhaps even commodities. Will it?

John Butler: I believe there is a significant chance that, if the Fed fails to generate the desired price inflation by buying Treasury bonds alone, they will extend purchases into mortgages and possibly also corporate securities. If even that fails to spark price inflation then they may consider buying up commodities, which is a 'nuclear option' in that it is guaranteed to destroy the enemy—deflation—but it might also destroy the dollar in the process, a sort of 'Mutual Assured Destruction.'

From the perspective of creating price inflation, buying up commodities is even better than a Friedmanesque 'Helicopter Drop' of money because it doesn't just put money into people's wallets; it spends the money in people's wallets. But once people sense that their money is being spent by someone else, they will try to spend it themselves faster on anything that could reasonably maintain its value. In Argentina, where price inflation is now rampant, they buy up old cars for the fuel tanks so that they can store fuel, as apparently it is illegal to hoard fuel. So they buy old cars with no intention of driving them but this allows them to get around the hoarding restrictions for fuel. Anything is better than holding pesos; that is the message. This is what a central bank buying commodities would do.

Now, one might ask why on Earth the Fed would want to create such economic chaos and take the US down the same road as Argentina. Well, they probably don't. But the Fed appears pathological with respect to creating inflation and it doesn't seem too bothered by unintended consequences so I do believe there is a risk of this sort of inflationary mayhem being unleashed at some point.

Daily Bell: Tell us about the severity of the debt and deficit issues facing America. Is the dollar in worse shape than the euro?

John Butler: It depends on the metrics used. My favored measures include those traditionally applied to emerging markets such as external debt, import cover and current account balance. These show that the US is in as bad financial shape as the euro periphery, with the euro core looking comparably healthier. The key difference is that markets have figured out that the euro periphery is insolvent; they have yet to realize this is the case with the US.

If it were somehow possible for the euro core to sever the periphery without rendering its own banks insolvent, then the core could emerge as a comparably healthy economic area. But I'm not sure such a clean break is possible. In any event, the current conventional wisdom that the US is a safe haven is subject to an abrupt change. A wave of major US municipal and state bankruptcies would probably suffice and that could happen at any time.

Daily Bell: Where are gold and silver headed in the near future? Put their price action within the context of the large business cycle.

John Butler: Following a prolonged period of consolidation related to a general downtrend in commodity prices and a stronger dollar, I believe that they are now headed higher. How much higher is largely a function of trust and confidence in fiat currencies. The more trust and confidence erode, the higher gold and silver prices will go. There is also a residual correlation of gold and silver to the business cycle but it is less important, in my opinion, than the qualitative factors of confidence.

Daily Bell: The US is in a debt trap. How so? What does this mean for price inflation?

John Butler: The US has accumulated more debt (even before accounting for 'unfunded mandates') than it can possibly service without resort to some combination of devaluation and restructuring/default. Politics favors the former so that is the more likely option, although selective default, say for foreign holders of US assets, is a possibility. As I regard devaluation as more likely than a general default I see price inflation as more likely than price deflation in future. Whether or not this will be captured by official measures of inflation is unclear, however, as these are somewhat distorted and biased to systematically underestimate price inflation.

Daily Bell: Tell us about gold bullion becoming classified as zero risk. What's the import?

John Butler: This is one of the more intriguing and underreported developments at present. Apparently as part of the BIS discussions regarding bank capital requirements, gold may be reclassified as a zero-risk asset. As it stands now, banks must hold regulatory capital against gold positions whereas this is not the case with high-quality government bonds, one of the more subtle ways in which government bonds are effectively subsidized by the financial regulatory regime. But if gold were able to compete on a level playing field with government bonds within the global banking system, financial institutions would almost certainly diversify into gold to some extent, as their shareholders would reward this with higher valuations. This would have the effect of placing upward pressure on both government bond yields and the gold price.

The intriguing part is why governments would support anything that would raise their financing costs. But from the perspective of a country with a weak, undercapitalized banking system, expanding the basket of zero-risk assets would be a simple way to relieve stress on the banks and stimulate lending and growth.

Daily Bell: Financial markets are pricing in a deflationary rather than inflationary future? How so? How is a deflationary endgame paradoxically inflationary?

John Butler: Policymakers have a reaction function. Deflation threatens the financial system and the economy generally and, therefore, it threatens tax revenues and government finances. Policymakers naturally respond to the threat with inflationary policies. Look at the euro-area periphery and you can see just how quickly indebted governments' finances implode in a severe deflation and just how panicky policymakers become trying to create inflation.

In the euro-area, however, this process is complicated because the deflation varies greatly by region, following national borders. Policymakers at the euro-area level struggle to balance the disparate interests of the various member countries. For some observers, this is the key 'flaw' in the euro.

My view is somewhat different. I don't see it as a flaw in the currency but in government policy. You have governments that have spent way too much and governments that have not. The yield spreads within the euro-area highlight the difference between the two and force the more profligate governments to respond to sharply higher borrowing costs by trimming their budgets. I don't see how forcing governments to impose budget discipline is a 'flaw,' as I regard budget discipline as a good thing. The 'flaw' is that certain euro-area governments are dysfunctional. They have run chronic deficits and sought to disguise these in various ways, and have stimulated uneconomic bank lending for political purposes.

Daily Bell: Is the US near a fiat money red line? Does this imply a dramatic devaluation for the dollar?

John Butler: The US political elite takes the 'exorbitant privilege' conferred by the dollar's reserve status for granted. There are certain neo-Keynesian economists out there who continue to believe that the US can spend its way out of its debt problem. They are wrong. Beyond a certain point the US's foreign creditors will cease accumulating US assets and from that point forward the US government will be unable to fund itself without resort to direct debt monetization and implied dollar devaluation. No one can possibly know where that point lies, although I argue in my book that it is probably no more than a few years away.

Daily Bell: Is the US on the way to a dramatic surge in corporate restructurings and bankruptcies?

John Butler: Bankruptcy is the legal realization of past resource misallocation. No one wants to realize a loss until they are absolutely convinced that the residual value of the asset can be put to better use elsewhere. But once that point is reached, action becomes immediate. And once a given asset is written down then similar assets must also be written down. It is no coincidence that bankruptcies occur in waves, or clusters if you prefer. The fact is, the US economy has been underperforming for a long time. If you look at history, periods such as this normally result in a much higher rate of corporate bankruptcy. That it hasn't happened yet this time round is primarily a function of the artificially low interest-rate environment but all that does is delay the inevitable. The bankruptcies are out there and the initial trickle will quickly become a flood.

Perhaps controversially, I regard bankruptcy as a good thing. It is a realization of past capital misallocations and it therefore enables reallocation and economic renewal. Josef Schumpeter called this process 'creative destruction' and without it I believe material economic progress is impossible, as I argue in my book.

Daily Bell: You hold the opinion that either the Fed must move to implement a credible, rules-based monetary policy, focused primarily on preserving the purchasing power of the dollar, or the dollar will lose reserve currency status. Is the Fed capable of this?

John Butler: The Fed serves the system and the system primarily serves the banking and political elite. So we should ask: Is the elite capable of this? I think they might give it a go. They did so in the early 1980s and pulled it off with the help of Paul Volcker and others. But could they do so again?

I doubt it. The US had far more political and economic clout in the early 1980s than is the case today. The US military is still supreme in many ways, but it is a blunt instrument ill suited to maintaining dollar supremacy. The rest of the world is stumbling towards a dollar alternative, something that cannot be manipulated by the US, or any other power for that matter, at the expense of others. The same thing happened in Europe in the mid-19th century and so arose the so-called classical gold standard. It appears history is rhyming if not exactly repeating in this regard.

Daily Bell: Is the Fed necessary to US monetary policy at all or is it a destructive impediment?

John Butler: Unbacked fiat currencies require legal tender laws, as societies prefer to choose their own money rather than to have it forced upon them by diktat. Central banks are normally used to manage fiat currencies, although it need not be done that way. The US 'greenbacks' used to finance the Civil War were unbacked fiat currency yet they were issued by the Treasury. The 'assignats' of the French Revolution were issued by the Revolutionary government. There are many other such examples.

As to whether the Fed is inherently destructive, I believe that is open to debate. Milton Friedman is often derided by Austrians as a misguided anti-Keynesian but I believe his heart was in the right place. He suggested that central banks follow strict rules with respect to the money supply. On paper, that seems a neat idea. In practice, it has never worked. Friedman lived long enough to see much evidence of that and later in life he repeatedly observed that central banks almost never seemed to do what they were supposed to do. In some informal conversations he indicated that he was leaning toward a return to some form of gold standard as the best way to restore confidence and trust in money and monetary policy. He also became a champion of liberty generally, railing against central planning in areas such as education and drugs policy.

Daily Bell: Tell us about Hugo Salinas-Price's plan for re-introducing circulating silver coinage in Mexico. Could the same thing be done for gold?

John Butler: In principle, yes, although Hugo Salinas-Price advocates silver because, as it has a lower value by weight/volume than gold, it could circulate more widely throughout society, becoming in time the common man's money. It also happens that in Mexico, his country of residence, silver traditionally served as the primary monetary metal and so there is a historical and cultural understanding of the use of silver as money.

As for the details of his plan, the core of the idea is that the Mexican or any other government could 'open the mint' to silver and produce coins to meet demand at a valuation premium over bullion, say 10-15 percent, a form of seignorage income for the government. The coins would not, however, have a stated face value but just an indication that they contain one ounce of pure silver. As such, they would rise in value along with price inflation. If businesses and households were concerned about inflation they would hoard the coins out of circulation, a simple way to protect wealth that would be tax-free but would also contract the money supply. As inflation concerns subsided, the coins would re-enter circulation once again, effectively expanding the money supply. In a way, the system would become self-regulating, thereby promoting price stability while making a simple inflation hedge available to all. I fully support his idea and efforts to get it implemented in Mexico and elsewhere.

Daily Bell: Where do we go from here? What is the monetary future for America and the world?

John Butler: I'm a near-term realist and a long-term optimist. The history of the world is a history of progress interrupted by occasional, sometimes horrific, setbacks. We may be in for something rather unpleasant in the near-term as the global financial system resets itself, wealth is destroyed and/or redistributed in various ways and sound money finds its way back into general use for lack of any other option. But that will lay the foundation for a renaissance. Combine sound money and the associated distrust of central banking and other forms of central planning with the great technological innovations of modern times and the industrial and economic achievements and social benefits that will follow will earn a place in the history books as a golden age. I may not live to see it, but that is irrelevant.

Daily Bell: What should people do to protect themselves?

John Butler: First, just accept that a bigger crisis is coming. Read novels about the 1930s. Learn about how people deal with hard times firsthand. Do what you can to educate yourself, your family and friends and try to prepare as a group.

Second, consider buying or investing in the basic production, processing, storage and transport of energy, food, clothing and shelter. And acquire the skills that are required to successfully manage such operations.

Third, be flexible. Be willing to move to where the opportunities are. Understand and accept that history has dealt us a difficult hand to play but we have to play it as best we can. And please, be honest. When you have a difficult choice to make, red pill or blue, take a good, long look in the mirror. Is the choice you make part of the problem, or the solution?

Daily Bell: Any last thoughts?

John Butler: Perhaps continuing on from the above, I find it helpful at times to consider the lessons and morals of Norse mythology. If morality is derived from consequences alone it has no meaning because consequences cannot be known in advance. True morality exists only in the present, based on all available information and the exercise of reason. Because in Norse mythology we are all doomed, no matter what, true moral action becomes easier to recognize as such: It doesn't change the ultimate outcome; rather, IT IS SIMPLY THE RIGHT THING TO DO. In times such as these, when we all face such uncertainties and difficult choices, I personally find the Norse concept of moral action refreshing of spirit, something in rather short supply.

Daily Bell: Books or websites you want to mention?

John Butler: For those interested in learning more about what I call 'common-sense' or 'no free lunch' economics, the best place to start is with Henry Hazlitt, a prominent economics commentator of the 1950s and 1960s. Economics in One Lesson and What You Should Know about Inflation are timeless classics even more relevant today than they were back then. For the more academically inclined, I would dive right into Hayek and von Mises as well as more contemporary exponents of the Austrian economic school. Finally, consider reading some alternative history whether in fictional form, such as that of the late Gore Vidal, or of the more academic sort, such as Charles Beard, Harry Elmer Barnes and Murray Rothbard, to name but a few.

As for websites, there are too many to mention. Indeed, that is the blessing but also the curse of the Internet. Something I strongly recommend is source- and fact-checking. When you come across an intriguing idea or analysis on the Internet, see if you can trace it back to its original source and who financed the original research. This can be challenging but it is hugely instructive and it will give you a sense of which ideas, information and analysis are of high quality and reliable and which are not. Few people take the trouble to do this but the Internet makes it relatively easy. Remember that ideas or analyses for which provenance is unclear are suspect. Indeed, the provenance may be deliberately obscured. Ask yourself, why? To what purpose? You might begin to see patterns, themselves highly instructive. In some cases you will discover that you are being manipulated. When you do it is really eye opening.

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