Peter St Onge: The Fed Causes the Recessions It Then Tries to Fix

Central banks push interest rates down, which produces a credit boom, and that boom turns into inflation because it is driven by money printing. From there the Fed "jams on the brakes," in his description, and the pattern repeats — go fast, slam on the brakes — which is what gets called the business cycle.

St Onge names AI as the prime suspect for the next recession. He says he expected nothing like the internet again for a century and is shocked at AI, which he rates as five times the internet in every way.

Peter St Onge took his undergraduate economics degree at McGill University in Canada, which he describes as a mainstream, Keynesian program. Across the entire degree he never heard of Austrian economics, and he doubts his professors knew anything about it either.

He found the school years after graduating while digging through old bookstores in Japan. The book that opened it was Skousen's "The Making of Modern Economics," which compares Marxism, Keynesian and Austrian schools — Skousen himself, St Onge notes, is not an Austrian.

Rothbard's "The Case Against the Fed" became the gateway drug, with Ron Paul's book on the Fed as the popularization of Rothbard. From Rothbard he moved to Mises and other Austrians. His framing: Austrian economics is simply classical economics, the continuation of what the field was before government bought its way in.

Something economic lands in the top three issues in elections in really every country on Earth, and St Onge puts border control up there alongside inflation, jobs, economic growth and wages in the US. Two reasons follow from that: governments must look like they control the economy, and the topic is easy to gaslight.

He cites a study in which roughly two-thirds of Americans think the job of the Federal Reserve is to control or fight inflation. His counter-claim is that the purpose of every central bank, the Fed included, is to create inflation.

Before the Fed existed the US had zero inflation for 170 years, in his account, and the central bank went on to destroy 93 or 97% of the dollar. Nine times out of ten a newspaper article about the Fed is about the Fed fighting inflation, which is where the misperception comes from. Economics, he says, is the battle royale of academia, unlike fields such as gender studies that are nice to have.

Host Danny says that in 2015 he would have answered that 2% inflation is good and means the economy is growing, and asks whether St Onge would have said the same before discovering Austrian economics. St Onge concedes the naive version of him had no strong opinions on inflation — he just thought it was part of the system.

His position now is that 2% inflation is a scam, and that inflation is not needed for anything whatsoever. He calls it essentially a counterfeiting cartel.

The metaphor he prefers is a gasoline thief siphoning from a neighbor: the trick is not to take it all at once, a half gallon here and a half gallon there, because draining the tank outright means the neighbor notices and takes countermeasures. Two percent, in his telling, is siphoning a half gallon at a time, with occasional failures such as COVID or the 1970s that produce double-digit inflation.

When that happens central banks panic because they have drained the neighbor's tank to zero, voters start discussing it, and questions about whether the central bank needs reform follow. He separates growth from inflation entirely: the economy grows on its own through innovations and new recipes combining technology, capital and workers, which is productivity growth. Over the past 150 years that has meant about 1.5% growth a year from invention, so prices should be falling by about 1.5% rather than rising.

The interviewer's framing is that central banks may be afraid deflation would cause a bust and put the entire system at risk. St Onge's answer is that it is not a question of need.

He invokes the bank robber Willie Sutton and the line about robbing banks because that is where the money is. The propaganda claim he attributes to the Fed is that without inflation you get deflation and people stop buying because goods will be cheaper later — a claim he calls testable, and one that does not hold up in his reading.

The harmful kind of deflation starts with a financial bubble inflated by central banks. When that bubble pops, it causes massive defaults.

Those defaults evaporate money, because the loans had been counted as money somewhere in the system. If half the money vanishes, each remaining dollar buys more stuff — that is deflation.

The 2008 crisis is his example: mass defaults, deflation at the beginning, then the Fed printed. As defaults began, the Fed said it had told everyone deflation was the end of the world.

Normal deflation comes from productivity improvements and is a different animal from Fed-induced, liquidity-driven deflation. His punchline is that the only bad deflation is the kind central banks create and then sell themselves as the only solution to.

St Onge argues that resources left over from reduced consumption do not disappear. Prices fall until someone uses them.

Construction workers are his example: they remain useful because there is always somebody who needs something done by a construction worker. His framing is that real assets, not money, are the correct lens for the economy.

From there he says you do not need to hand out free money to banks or give them a license to print mortgages. The economy will go hire construction workers on its own, he argues, because the work is useful, so no such license is required to get it to happen.

The host says Austrian economics makes total sense from first principles and is easier to understand than Keynesian economics, then asks why everyone is not an Austrian. The question is left as a question.

The host asks whether he dismisses normal macro — rates, the Fed, the Treasury — as nonsense. St Onge answers that it definitely matters and that they can destroy a ton.

The mechanisms he lists as mattering include Fed printing, regulation, and government borrowing that pushes up rates and crowds out factory building. He also concedes that Keynesian empirical predictions are not that bad.

The gasoline analogy is his way of splitting the difference: Keynesians do not understand what set off the fire, but once the fire is burning they are pretty good at predicting how it spreads. His criticism of the mainstream method is that it puts statistics first — correlating 12 years of rates with inflation and finding a 12-month lag, which he calls monkeys on a keyboard, while granting it is reasonably good on predictions.

Trump originally said 60 days on the Iran war, and St Onge says it looks like Trump keeps trying to end it while Iran keeps it going.

Before the war, inflation had come down to something like 1-1.2% annualized. The war kicked up oil prices, and inflation has run 4-5% annualized since it started, driven by energy. His balloon analogy is that oil goes up while other things go down, returning to the level of water — the amount of money being created.

The Fed's problem in this account is that it knows wartime energy prices are temporary but does not know the underlying inflation rate. He flags massive deficits, continued money creation, and the AI investment boom conjuring money out of thin air as reasons underlying inflation may be high.

If the war ends tomorrow, he expects another half point, leaving rates slightly restrictive but not massively so in historical terms. If the war keeps going and investment money keeps pouring in, rates could creep durably up into 5-6%, which he calls panic territory for any central bank — and in that case they could keep hiking to six or 7%.

His description of the situation is that it is completely out of control.

If the Fed cannot get a handle on inflation, and inflation keeps getting away from it, the path leads to hikes at 6 or 7%. At that point, in his estimate, the US would be paying out something like $2 trillion of interest, just simply interest.

The host frames this as a worldwide issue rather than only an American one. The speaker's term for what follows is that you can get into a doom loop.

The exchange comes right after the earlier point about interest expense that the host says St Onge raised a moment before.

The mechanism, as he lays it out: manipulate interest rates down, which produces a credit boom; the boom leads to inflation because it is driven by money printing; at that point they jam on the brakes; then the pattern repeats, which is what gets called the business cycle.

His argument against the natural interpretation is that businessmen do not all get stupid at one time and watch all their businesses fail. The cycle is not part of nature — it is completely a central bank creation, in his words.

Before central banks, governments did the same thing by encouraging banks to lend while promising no need to redeem tickets for gold, which is the suspension of specie redemption. St Onge says the cycle goes back in the US essentially to the beginning of the Constitution.

His formulation of the moral accounting is that the first sin is not necessarily that they try to stop recessions, it is that they cause recessions in the first place. The second problem is that having caused them, they try to stop them instead of allowing liquidation.

The host's framing is that if you do not let the fire burn off the dead wood, eventually the entire world burns — so the coming recession could be the mother of all recessions, or a depression. St Onge turns it into an open question: how much deadwood did COVID clear out?

Bankruptcy numbers actually declined during COVID because governments were giving away so much money. A naive reading of those numbers says COVID cleared out nothing, and if bankruptcies went down it probably built up more dead wood.

Governments handed out $9 trillion, so the question is whether that pushed bankruptcies down more than deadwood clearing pushed them up. His answer to where the truth sits is somewhere in between.

He says he has not thought of a very good instrument for measuring exactly how much malinvestment got liquidated. His intuition is that a lot did: the world before and after COVID was very different, with a shift from physical to online, and pubs were hit like a neutron bomb for physical-based industries.

St Onge says he did not think an internet-scale wave would return for a century — not in his life, not in his kids' or grandkids'. His claim about AI is that it is literally five times what the internet was in every way.

He bought Yahoo in the public markets around 1995 or 1996, and says everyone in his life told him he was an idiot for it. He retired young on that Yahoo position, with no Silicon Valley connections and nothing inside.

The biographical point matters for his position in the crypto conversation: he was not a crypto-native, he came out of dot-com finance.

St Onge says we are not at the crazy stage yet: no company started last week is worth $3 billion. His phrasing is that we are getting close, but do not have that yet.

Asked which dot-com year this resembles, he answers 1997, maybe coming into early 1999. He would be really shocked if it popped in the next 12 months and equally shocked if it ran another four or five years.

His timing call is probably late 2027 to early 2028. If you have been playing it, his advice is to gradually take money off the table over the course of 2027.

The scale data behind the comparison: the entire dot-com build-out was about $120 billion in inflation-adjusted terms, while AI investment is roughly ten times that. At its peak the internet took about 30% of venture capital money; AI is at 70-80%, with biotech getting only a sliver. The dominance is the biggest for a technology since the railroad, in his assessment, and Bitcoin began crabbing exactly when AI took off — which he reads as Bitcoiners rotating into AI.

In the internet era, the companies that built the infrastructure were Cisco and Lucent, and the ones that put applications on top were Yahoo, Google and Netflix. He says the builders did not make most of the money when the smoke cleared, and most of them ended up going bankrupt.

Value stayed with consumer-facing applications — Gmail, Netflix, travel and news sites — services he describes as sticky. In AI he sees the opposite so far: a tremendous amount of value has gone to the chipmakers, the picks and shovels, naming Nvidia and Broadcom.

His example for why models do not differentiate: you ask ChatGPT and then Grok, and you cannot remember which source gave you what. His conclusion is that AI is almost a perfect commodity product, where one model is the same as the next.

Gold's fundamental flaw, in his account, is that it needs to be centralized. His example is that you cannot pay the Netflix bill using gold — you would have to put bullion in an envelope.

He compares Bitcoin to having a king with no power: when Parliament, meaning the sitting elite, screws things up, the king steps in. He adds that the king should hopefully be William, not Charles.

He draws his own line between Bitcoin as a technology and Bitcoin as an investment, treating them as separate questions.