Moneybeat: Rate hikes from the European Central Bank

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Good to be with you, Nick.

EICHER: It’s hard to pick the big story of the week, David. Do you think it might’ve been the markets sort of pulling out of a three-week slump or was that not the top story for you this week?

BAHNSEN: I think there were two stories: the smaller one—but, you know, important to follow economically—was Europe increasing their Fed rate, their overnight rate, essentially, what we call in America, the Fed-funds rate by 75 basis points, which is three quarters of a percentage point. It was the highest interest rate hike they've basically ever had, in one time.

Now, that doesn't say much, because since the formation of the European Central Bank, there hasn't been really very many rate hikes at all, they've been cutting rates most of the time.

But the problem is that the Euro has collapsed—and the Euro has dropped so much against the dollar. Because the Fed is tightening more, Europe is having to play defense. You really have central banks right now engaged in sort of a currency war, and Europe is having to do what they really don't want to do.

There, it's going to do more damage to them coming out of this moment, to tight monetary policy. But if they don't, their currency continues to collapse. And so that was a bigger economic story this week.

I think the secondary story is when you mentioned the markets, recovery was somewhat violent, there were a couple of days over 400 points, there was another day up a good amount as well in between. And so the reason it's a bigger story is not about this week, it's not about recession, it's not about inflation, it's not about the economy. It's for investors, it's for people to remember, the market timing is a fool's errand. It is impossible to do. The market had rallied 4000 points from mid June to mid August, and then dropped 2500 points in a couple of weeks, and then came back 1500 points. And in a week, these up and down movements are what we call volatility, not a straight line up not a straight line down, you know, where the s&p basically is, where it was before Russia invaded Ukraine. Interesting more. And so you've had a lot of roller coaster along the way, I think this has now been over six months since the invasion. It's been a lot of up and down movement. It's not been just a straight path. But when all said and done, that's where it's ended. And so trying to guess those gyrations, I think it's an important lesson for investors to remember, their investment strategy needs to be better than that.

EICHER: Let’s just go with one listener question this week, because it’s kind of a big question, and it’s related in a way to the ECB’s move, Europe’s move, on interest rates. You mentioned the Euro’s collapse, so I think this is especially relevant.

The question is from Emery of Louisville, Kentucky, and he works in home remodeling.

EMERY: Hi, Mr. Bahnsen. My question is in regards to hard currency versus fiat currency. And I was wondering, in your opinion in a perfect world, what the biblical ideal would be, then how should we as Christians live in this world if that does not align with what we believe the biblical pattern is? Also, since this is a very in depth topic, I was wondering if you could recommend any resources to dive into this topic further. Thank you.

Probably better define terms, too, hard currency and fiat currency.

BAHNSEN: Well, actually, in this case, how one defines those terms is very important to the answer. Because if what one means by hard currency is physical gold and silver and that somehow there's a biblical commandment, that the medium of exchange we use be a precious metal? I certainly don't believe that. But if one means a standard that limits the growth of money supply, that there'll be some form of objective standard that is governing the currency. I'm completely for it. And I think the principles of that are in Scripture, but I would disagree with people who say that the Bible was providing all the details as to how a modern currency system ought to work with the level of complexity that exist in today's economy as a medium of exchange. So here's what I'd start with what is currency? It is a medium of exchange, it is something to facilitate divisibility that the analogy I used in dividend Cafe this last week, is if I want a yellow pad of paper, and someone else wants a cow is going to be really hard for me to have to take as many yellow pads of paper, as they may have to get even exchanged with the cow. And yet, we certainly don't want to divide up that cow. Okay. And so a medium of exchange gives people the ability to transact in uneven quantities at different values. And so the presupposition in the question is when I agree with that, you want a fair medium of exchange. And there is a biblical concept of honest Weights and Measures that I'm completely sympathetic to. What I would prefer we have in our modern society is a objective standard. And there's a lot of different ones out there. Scott Sumner has this idea of nominal GDP targeting, which is a fancy term for the central bank being committed to just increase money supply, in concert with the actual level that GDP is going up each year. And adjusting year by year, Milton Friedman had similar ideas, the point being, that I don't think that there is a problem with fiat currency meaning paper, but I believe the growth of that money supply should not be left to willy nilly discretion. And so this puts me in a position where almost everyone could find something to disagree with, there are some who want it to be a very hard standard of gold, which can become problematic in a deflationary sense, as we saw during the Depression, and there are some they want no standards at all that they want just the wisdom of, of 12 PhDs around a conference table to handle all this. And what I'm suggesting is that we ought to have a standard, but that we do not need to pretend that standard is prescribed in detail in Scripture. And so this is really hard to answer in only a short period of time. I can't point to one particular book because I don't think it's been written yet. I think there are books that advocate for certain specific views that I don't want to advocate for. But I will tell you, I most certainly intend to write a book on this subject someday, to hopefully add my contribution to what I think is a topic far too many Christians get really wrong.

EICHER: Yes, in your spare time!

Well, we’ve come to the end of our time for this week.

You can submit your question for the Moneybeat Mailbag and again, we do prefer that you use your phone to make a voice memo. Try to keep it short and send me a file, as Emery did, at feedback@worldandeverything.com.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

David, talk to you next time. Thanks!

BAHNSEN: Thanks so much, Nick.

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Good to be with you, Nick.

EICHER: It’s hard to pick the big story of the week, David. Do you think it might’ve been the markets sort of pulling out of a three-week slump or was that not the top story for you this week?

BAHNSEN: I think there were two stories: the smaller one—but, you know, important to follow economically—was Europe increasing their Fed rate, their overnight rate, essentially, what we call in America, the Fed-funds rate by 75 basis points, which is three quarters of a percentage point. It was the highest interest rate hike they've basically ever had, in one time.

Now, that doesn't say much, because since the formation of the European Central Bank, there hasn't been really very many rate hikes at all, they've been cutting rates most of the time.

But the problem is that the Euro has collapsed—and the Euro has dropped so much against the dollar. Because the Fed is tightening more, Europe is having to play defense. You really have central banks right now engaged in sort of a currency war, and Europe is having to do what they really don't want to do.

There, it's going to do more damage to them coming out of this moment, to tight monetary policy. But if they don't, their currency continues to collapse. And so that was a bigger economic story this week.

I think the secondary story is when you mentioned the markets, recovery was somewhat violent, there were a couple of days over 400 points, there was another day up a good amount as well in between. And so the reason it's a bigger story is not about this week, it's not about recession, it's not about inflation, it's not about the economy. It's for investors, it's for people to remember, the market timing is a fool's errand. It is impossible to do. The market had rallied 4000 points from mid June to mid August, and then dropped 2500 points in a couple of weeks, and then came back 1500 points. And in a week, these up and down movements are what we call volatility, not a straight line up not a straight line down, you know, where the s&p basically is, where it was before Russia invaded Ukraine. Interesting more. And so you've had a lot of roller coaster along the way, I think this has now been over six months since the invasion. It's been a lot of up and down movement. It's not been just a straight path. But when all said and done, that's where it's ended. And so trying to guess those gyrations, I think it's an important lesson for investors to remember, their investment strategy needs to be better than that.

EICHER: Let’s just go with one listener question this week, because it’s kind of a big question, and it’s related in a way to the ECB’s move, Europe’s move, on interest rates. You mentioned the Euro’s collapse, so I think this is especially relevant.

The question is from Emery of Louisville, Kentucky, and he works in home remodeling.

EMERY: Hi, Mr. Bahnsen. My question is in regards to hard currency versus fiat currency. And I was wondering, in your opinion in a perfect world, what the biblical ideal would be, then how should we as Christians live in this world if that does not align with what we believe the biblical pattern is? Also, since this is a very in depth topic, I was wondering if you could recommend any resources to dive into this topic further. Thank you.

Probably better define terms, too, hard currency and fiat currency.

BAHNSEN: Well, actually, in this case, how one defines those terms is very important to the answer. Because if what one means by hard currency is physical gold and silver and that somehow there's a biblical commandment, that the medium of exchange we use be a precious metal? I certainly don't believe that. But if one means a standard that limits the growth of money supply, that there'll be some form of objective standard that is governing the currency. I'm completely for it. And I think the principles of that are in Scripture, but I would disagree with people who say that the Bible was providing all the details as to how a modern currency system ought to work with the level of complexity that exist in today's economy as a medium of exchange. So here's what I'd start with what is currency? It is a medium of exchange, it is something to facilitate divisibility that the analogy I used in dividend Cafe this last week, is if I want a yellow pad of paper, and someone else wants a cow is going to be really hard for me to have to take as many yellow pads of paper, as they may have to get even exchanged with the cow. And yet, we certainly don't want to divide up that cow. Okay. And so a medium of exchange gives people the ability to transact in uneven quantities at different values. And so the presupposition in the question is when I agree with that, you want a fair medium of exchange. And there is a biblical concept of honest Weights and Measures that I'm completely sympathetic to. What I would prefer we have in our modern society is a objective standard. And there's a lot of different ones out there. Scott Sumner has this idea of nominal GDP targeting, which is a fancy term for the central bank being committed to just increase money supply, in concert with the actual level that GDP is going up each year. And adjusting year by year, Milton Friedman had similar ideas, the point being, that I don't think that there is a problem with fiat currency meaning paper, but I believe the growth of that money supply should not be left to willy nilly discretion. And so this puts me in a position where almost everyone could find something to disagree with, there are some who want it to be a very hard standard of gold, which can become problematic in a deflationary sense, as we saw during the Depression, and there are some they want no standards at all that they want just the wisdom of, of 12 PhDs around a conference table to handle all this. And what I'm suggesting is that we ought to have a standard, but that we do not need to pretend that standard is prescribed in detail in Scripture. And so this is really hard to answer in only a short period of time. I can't point to one particular book because I don't think it's been written yet. I think there are books that advocate for certain specific views that I don't want to advocate for. But I will tell you, I most certainly intend to write a book on this subject someday, to hopefully add my contribution to what I think is a topic far too many Christians get really wrong.

EICHER: Yes, in your spare time!

Well, we’ve come to the end of our time for this week.

You can submit your question for the Moneybeat Mailbag and again, we do prefer that you use your phone to make a voice memo. Try to keep it short and send me a file, as Emery did, at feedback@worldandeverything.com.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

David, talk to you next time. Thanks!

BAHNSEN: Thanks so much, Nick.

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