Donald Trump wants lower interest rates. He has said so openly and has pressured the Federal Reserve accordingly. The political logic seems obvious: easier money boosts asset prices, juices consumer spending, and appears to support headline growth. With midterms approaching, that sugar high is tempting.

But it’s also a mistake — economically, politically, and strategically.

Lower rates at this point in the cycle would almost certainly reignite inflation. And except in the very short run, they would not make capital more affordable in real terms. Instead, they would worsen the affordability crisis (which voters are already upset about) and undermine the GOP’s reputation as the party of economic responsibility.

Inflation is still a major concern. After peaking above 9 percent in 2022, it has come down meaningfully. But core inflation remains sticky, especially in services and housing. Shelter costs are still rising around 3 percent annually. Since shelter comprises a large share of price indices, it is a major contributor to average price growth exceeding the Fed’s two percent target. Insurance, medical services, childcare, and rents continue to climb faster than incomes. The last thing this economy needs is a renewed inflationary surge driven by easier monetary conditions.

Trump’s implicit bet is that lower rates will bring down borrowing costs and make life more affordable. That misunderstands how inflation and interest rates interact.

Nominal rates are not the same as real affordability. If the Fed cuts prematurely and inflation expectations rise, long-term yields will rise with them. That is exactly what happened in 2021–22: loose financial conditions and fiscal excess pushed inflation higher, and mortgage rates ultimately doubled anyway. The average 30-year mortgage rate went from under 3 percent in 2021 to over 7 percent in 2023 — even as the Fed initially insisted inflation was “transitory.” Once inflation expectations shift, credit does not stay cheap.

Inflation makes affordability worse, not better. It raises rents. It pushes up home prices. It increases insurance premiums, service costs, and replacement costs for everything from cars to appliances. Any short-term relief from lower nominal rates is quickly eaten by a higher price level, and since wages tend to lag, American workers pay with reduced purchasing power.

In macro terms, this is the Fisher effect in action: expected inflation gets embedded into nominal interest rates. You don’t get sustainably cheaper capital by eroding the purchasing power of money.

The political consequences are just as bad as the economic ones.

Voters are not angry about GDP growth rates or S&P multiples. They are angry about grocery prices, rent, childcare costs, and insurance premiums. Affordability is the dominant economic issue in polling. A policy that visibly worsens price stability in exchange for a few quarters of rosy headlines will look reckless to a public that already feels economically insecure.

A cheap-money policy would erode Republicans’ hard-earned reputation for supporting sound economic policy. For decades, the GOP has championed lower inflation, fiscal restraint, and respect for market price signals. If Republicans start openly pressuring the Fed to run the economy hot for electoral reasons, they surrender that brand. They blur the distinction between themselves and the inflationary populism that voters have traditionally associated with progressive Democrats.

Excessive pandemic-era spending, burdensome tax policy, regulatory overreach, and energy policy malpractice have done enough damage to long-term price stability already. The Congressional Budget Office now projects persistent trillion-dollar deficits as far as the eye can see. Federal debt held by the public is on track to exceed 100 percent of GDP this decade. That is a textbook setup for fiscal dominance, whereby monetary policy becomes subordinate to the government’s financing needs.

If Republicans now join the inflationary chorus, voters will be left with no serious economic option at all.

A genuine affordability agenda would seek to restore price stability on the demand side while easing regulations and restrictions on the supply side. We need housing abundance, energy production, and infrastructure renewal. Ultimately, affordability comes from productivity growth, not monetary theatrics.

Trump’s preferred monetary policy, by contrast, pursues uncertain short-term political gains at the expense of certain long-term political damage. It risks discrediting the GOP as the party voters trust with the economy at a time when public trust is already fragile.

If Republicans want to be taken seriously as an economic alternative, they should be defending price stability, not flirting with inflationary populism. First and foremost, they should be offering a supply-side reform agenda. There’s nothing wrong with holding misbehaving central bankers accountable. But that shouldn’t translate into reckless inflationism.

There is no durable prosperity built on cheap money and political shortcuts. And there is no political upside, either, to unleashing the next inflation spike. Trump should rethink his rate gambit. If he doesn’t, his legacy will be the first casualty.

Political scientists contend that a defining characteristic of the state is its monopoly on the use of force (or violence). Meanwhile, economists are quick to emphasize that monopolies are slow and reluctant to innovate, and they charge higher prices for lower quality goods and services than they would under more competitive conditions. Thus, it is no surprise that we get very little innovation in governance. 

However, with cheap commercial flights to almost anywhere on the planet and with the internet allowing for individuals to work and manage their assets remotely, there are geo-arbitrage opportunities in terms of governance. A North American or European can maintain dollar or euro sources of income, while residing in a country with relatively low cost yet high standard of living, lower taxes, and access to beaches. This same person may hold assets in yet another country and bank in another still. 

The late Harry Schultz coined the term “flag theory,” which is the idea that a person can maximize personal freedoms by:

• building a portfolio of citizenships and residence visas (or at least one, outside one’s nation of birth)
• holding assets in jurisdictions that offer a combination of the most secure property rights and privacy
• holding tax residency in a low (or no) tax country
• incorporating companies in jurisdictions that have low or no corporate tax
• finding the “playgrounds” where you actually want to spend much of your time. 

In sum, flag theory refers to arranging your affairs to optimize for a combination of the best governance (with favorable tax rates playing an important part of that) and lifestyle. 

We might add to Schultz’s flag theory by emphasizing the importance of owning assets that are highly portable and outside the traditional banking system (Bitcoin, for example), hosting any websites on servers within countries that are committed to free speech, and communicating – whenever possible – over encrypted and decentralized means. (The Signal app, for example, is encrypted-by-default, yet centralized. The XMPP protocol enables communications that can easily be encrypted and is decentralized, meaning the protocol does not rely on any single app or entity to coordinate users). All of these factors combined work together to describe what authors William Rees-Mogg and James Dale Davidson called “the sovereign individual” in their 1997 book by that title. 

Inspiration from Academic Literature

Charles M. Tiebout argued in his 1956 paper “A Pure Theory of Local Expenditures” that mobile “consumer-voters” are able to “[pick] that community which best satisfies his preference pattern for public goods.” Tiebout argued that competition exists on local levels of governance that does not on the national level. These local communities, Tiebout wrote, are forced to compete against one another to attract new residents. In his own words, “The greater the number of communities and the greater the variance between them, the closer the consumer will come to fully realizing his preference position.” 

In 1970, Albert O. Hirschman’s book Exit, Voice, and Loyalty explored how “member-customers” seek to resolve problems caused by the decline of firms, organizations, and states. Hirschman wrote that member-customers have the option to either vocalize disagreement (“voice”) in an effort “to change… an objectionable state of affairs” or to abandon one organization for another (“exit”). He argued that while political scientists tend to emphasize the power of voice and economists the power of exit, both undervalue the other’s favorite. However, Hirschman stressed repeatedly that the voice option without a plausible threat to exit (and without the existence of a competing alternative to exit to) is “handicapped.” But beyond exit merely improving the state of affairs for the member-customer, he also believed that “exit has an essential role to play in restoring quality performance of government” itself. 

James M. Buchanan’s 1954 paper “Individual Choice in Voting and the Market” outlines key differences between ballot box voting and voting in the market. (In Hirschman’s terminology, ballot box voting would be one way of manifesting “voice”, and voting in the market often involves “exit”). Among the key differences identified by Buchanan is the greater uncertainty with ballot box voting. In the market, a voter can choose between a variety of existing alternatives; in ballot-box voting, he chooses between potential alternatives and “he is never secure in his belief that his vote will count positively.” 

Bryan Caplan’s book The Myth of the Rational Voter identifies systematic biases that prevent voters from thinking rationally about political matters. Caplan argues that the problem of political ignorance is a demand problem, not a supply problem. That is, political information is rarely in short supply. In the Information Age, the daily human experience is one of information overload. Legal scholar Ilya Somin builds upon the systematic biases identified by Caplan in his own book Democracy and Political Ignorance and makes the case that “foot voting” (meaning physically relocating one’s residence as well as taking one’s business elsewhere) gives citizens “strong incentives to learn about the results and evaluate them objectively.” Both Caplan and Somin have written other books exploring the economic and philosophical implications of the right to move across political borders. 

So how do we consolidate this literature in a way that makes sense for a global market for governance? While Tiebout confined his thinking to the market for public goods provided by competing local levels of government, we can apply it more widely to globally-mobile consumer-voters shopping for the best jurisdictions to be governed in terms of where they physically live, where they incorporate their companies, and where they choose to bank and hold their assets. 

From Hirschman, we understand that voice has value, but a willingness to exit from a jurisdiction (with ourselves and our capital) can bring about swift and meaningful change to our lives in a way that remaining within the country of our birth and vocalizing opposition to decline in governance cannot. 

From Buchanan, we understand that our actions within markets often provide more favorable trade-offs when compared to ballot box voting. But we could bring Buchanan’s analysis a step further by noting that for those willing to move to new jurisdictions, the limited and relatively static state of affairs in governance within a country need not apply so much. There is, in fact, a global marketplace for governance. States may monopolize governance within their own territories, but shopping among those monopolies opens up exciting possibilities. 

Lastly, Somin’s concept of “foot voting” drives home the point that if we move to a new jurisdiction (especially to a new country), our governance often changes drastically and overnight in a way that can be very favorable to us. 

Economists of the Austrian School: Pioneers and Practitioners of Flag Theory

Flag theory is often presented as a late twentieth-century lifestyle strategy: diversify passports, residencies, banks, and assets to reduce exposure to any single state’s policy drift. Yet several of its core intuitions map neatly onto the Austrian tradition, both in its later popularizers and in the real-world choices that economists of the Austrian school of thought made under political stress. 

Harry Schultz, who coined the term “flag theory,” framed his thinking in an explicitly Austrian register, crediting Friedrich Hayek as his main economic inspiration and frequently citing Ludwig von Mises and Mises’s American student Hans Sennholz. The same pattern appears among other popularizers of international diversification such as Jerome Tuccille and WG Hill. In other words, the “flags” idea did not arise in a vacuum. It grew naturally from a worldview that treats institutions as constraints to compare, compete, and, when necessary, exit.

This connection becomes especially vivid when we look back to the Austrian school’s founding generation, where theoretical attention to institutions met an unusually concrete awareness of geopolitical rupture. Carl Menger traveled extensively with Crown Prince Rudolf of Habsburg, an experience that invited comparison across jurisdictions and regimes. As the notes record, Menger anticipated a catastrophic European war years before 1914 and positioned accordingly: he shifted wealth into gold and into securities in neutral Sweden. Mises reports that, around 1910, Menger warned European policy would bring “a terrible war” followed by “horrifying revolutions,” and that, in anticipation, one could recommend little besides hoarded gold and, perhaps, Scandinavian securities. Menger acted on this view by placing savings in Swedish papers, effectively combining a hard-asset hedge with exposure to a comparatively safer jurisdiction.

Menger’s student Felix Somary carried this practical sensibility into high finance and became, in these notes, an unusually clear early example of what we would now call a flag-theory practitioner. Somary helped shape Swiss private banking, and he appears here as someone who married early geopolitical diagnosis with operational decisiveness. Immediately after the assassination of Archduke Franz Ferdinand, he was asked on the phone from Budapest: “Does this mean world war?” Somary’s reply, as he later recalled, was an unambiguous yes, and the message was relayed immediately to business partners in Paris and London. He then described the next step in plain administrative terms: for clients whose wealth he managed, he converted balances and securities into gold and placed that gold in Switzerland and Norway. A few days later, war began. Read as a sequence of actions, this is the “flags” logic in embryo: change the asset (into gold), change the custody location (out of the soon-to-be belligerent sphere), and distribute across relatively safer, neutral settings before constraints tighten.

A further, often overlooked bridge between Austrian economics and flag theory lies with another student of Menger’s who moved from scholarship into statecraft: Richard Schüller. He is considered another of Menger’s favorite students, and pursued a career in diplomacy. His work sharpened Austrian awareness of geopolitics and the strategic value of neutral jurisdictions. He remained in public service and became part of the peace negotiations at Brest-Litovsk and Bucharest (1918) and at Saint-Germain (1919). He then rose to head the Trade and Economic Policy section of the Austrian Foreign Ministry and later served as Austria’s envoy to the League of Nations in Geneva, placing him directly in the institutional machinery that tried to stabilize a shattered Europe. In trade policy, he argued in detail about the costs and benefits of tariffs versus freer trade, and he also worked within League of Nations structures. Schüller’s trajectory highlights that neutrality is not only a private convenience, it is a geopolitical position that can preserve room for maneuver when blocs harden and borders become instruments of coercion.

That line runs straight to Geneva and the institutional ecosystem that, between the wars, became a practical laboratory for internationalism and a refuge for exiled scholars. When Mises left Austria, he did so for neutral Switzerland, taking up a professorship at the Graduate Institute of International Studies in Geneva in 1934 and remaining there until 1940. The Institute itself was created in 1927 in the wake of World War I and the League of Nations’ move to Geneva, aiming to improve diplomatic competence and international understanding. It later distinguished itself in the 1930s and World War II by welcoming exiled researchers while maintaining intellectual independence. This “Geneva base” becomes a key link between Austrian economics and flag theory because it embodies the same principle at the level of institutions: a neutral jurisdiction can function as an intellectual and financial safe harbor, a place where cross-border cooperation and analysis can continue when surrounding regimes polarize.

The Institute was shaped by William E. Rappard, a Swiss academic and diplomat who illustrates, almost biographically, the transnational posture that flag theory later systematized. Rappard was born in New York City (April 22, 1883) to Swiss parents; his father worked in the United States as a representative of Swiss industries. Rappard then moved to Switzerland, graduated from Harvard in 1908, and studied at the University of Vienna in 1908–1909. That personal arc, New York, Harvard, Vienna, Geneva, matters here because it reflects the early twentieth-century version of a “portfolio life”: embedded in multiple jurisdictions, literate in multiple intellectual worlds, and positioned to build institutions that outlast any single political swing.

Within that Geneva milieu, Mises and Hayek were not merely “present.” They anchored a research and teaching emphasis that naturally foregrounded the mobility of goods, capital, and people as a civilizational question, not just a technical one. Mises held a chair in international economic relations. Hayek taught at the Geneva Graduate Institute as well, including a summer course in 1937. And the Institute’s later self-description of its mid-century focus explicitly highlights trade and international monetary economics among its core emphases. Put differently (and this is an interpretation rather than a quotation): once you treat economies as interconnected systems, you are inevitably drawn to the question of how quickly flows can be redirected when governments become predatory. That is the analytical backbone of flag theory, expressed decades earlier as scholarship and institutional design.

Even in peacetime, Austrian economists sometimes engaged in what could be called “micro-flagging,” selecting legal environments for specific life decisions. One small but revealing instance of governance-shopping is Hayek teaching at the University of Arkansas in Fayetteville for a summer to take advantage of Arkansas’s comparatively relaxed divorce laws. 

In modern terms, it is the same logic, applied narrowly: find the jurisdiction whose rules fit the problem at hand, then move (even temporarily) to make use of them. Finally, the Austrian story also contains the darker mirror image of voluntary exit: forced exit. Mises, as a Jew in interwar Europe, ultimately had to “vote with his feet” to escape the Nazi threat, reminding us that mobility is sometimes not optimization but survival.

The Federal Reserve held its target range for the federal funds rate constant in January 2026 at 3.5–3.75 percent. This decision was consistent with market expectations for the path of the federal funds rate, which for weeks had indicated that the Fed would hold rates steady at its January meeting. It is also consistent with rates prescribed by leading monetary policy rules. Notably, Governors Stephen Miran and Christopher Waller dissented from the decision, with both favoring a 25-basis-point cut.

At the post-meeting press conference, Powell pointed to elevated inflation and a stabilizing labor market to explain the Fed’s decision to hold rates steady. He said Fed officials now “see the current stance of monetary policy as appropriate to promote progress” toward both sides of the dual mandate. Previously, Fed officials had expressed concern about the tensions facing the Fed’s dual mandate amid a softening labor market. Powell said that available data show “economic activity has been expanding at a solid pace,” driven primarily by consumer spending and business fixed investment. He acknowledged the lingering effects of last fall’s prolonged government shutdown, but suggested that any drag on activity in the third and fourth quarters of last year will likely be reversed in the first quarter of 2026.

After softening for much of last year, labor market conditions now appear to be stabilizing, Powell explained. He pointed to relatively low and stable unemployment in recent months as evidence that the labor market may be at or near maximum employment. Echoing past statements, Powell acknowledged that the slowing pace of job growth likely reflects changes in both labor supply and labor demand. He said other indicators — such as job openings, layoffs, hiring, and nominal wage growth — “show little change in recent months.”

Powell acknowledged that inflation has remained stubbornly above the Fed’s two-percent target, with PCE inflation likely coming in at 2.9 percent over the 12 months from December 2024 to December 2025. Elevated inflation, he contended, “largely reflects inflation in the goods sector, which has been boosted by the effects of tariffs.” At the same time, Powell emphasized that longer-run inflation expectations remain aligned with the Fed’s two-percent target. Taken together, these claims suggest that inflation remains a concern for Fed officials, but one that is driven primarily by temporary, non-monetary forces.

According to Powell, the current target range for the federal funds rate is “within a range of plausible estimates of neutral” — that is, consistent with neither an overly accommodative nor restrictive stance of monetary policy. Holding rates steady, Powell argued, should help stabilize the labor market while allowing inflation to return to target “once the effects of tariff increases have passed through” to the price level.

By attributing elevated inflation primarily to tariff-driven increases in goods prices, the Fed is implicitly treating today’s inflation as a transitory relative-price adjustment rather than a broader monetary phenomenon. If that diagnosis is correct, a wait-and-see approach may be appropriate. There are, however, reasons to be skeptical. 

Total dollar spending in the economy rose sharply relative to expectations in the third quarter of 2025, a pattern that is difficult to reconcile with a genuinely neutral stance of monetary policy. When nominal spending accelerates at this pace, it suggests that monetary conditions remain accommodative, regardless of how inflation is distributed across sectors.

More troubling is the fact that, despite the surge in dollar spending last year, financial markets are currently projecting two additional 25-basis-point cuts to the federal funds rate over the coming year. Given that inflation is still running above target, it is difficult to see which economic conditions would warrant further monetary easing. Absent a clear deterioration in real activity or a decisive return of inflation to target, additional rate cuts risk reinforcing the very spending pressures the Fed is attempting to contain.

Ultimately, the Fed’s current posture reflects a high degree of confidence that inflationary pressures will fade without further policy restraint. That confidence rests on the view that inflation is largely the result of temporary, tariff-driven distortions rather than excess nominal demand. But if that view proves mistaken, the cost of waiting — and especially of easing further — could be a renewed loss of progress toward price stability. For a central bank whose credibility depends on keeping expectations firmly anchored, misdiagnosing the source of inflation is not a neutral error. It is an error that compounds over time.

Landlords are amazing. 

That’s perhaps a perverse, controversial statement in these Mamdani-ish times, where “free” socialist housing is all the rage. In popular imagination, landlords are rent-seeking middlemen, extracting value from shelter they did not “create,” skimming from tenants who have no alternative, riding the fiat money printer and dysfunctional zoning regulations all the way to the bank (read: overvalued housing market). 

It is a tidy morality tale. It is also mostly wrong.

Since most of us regular consumers have to live somewhere, we’re sooner or later asking ourselves whether we should own or rent our dwellings. And at dining tables with friends and extended family, the owning-vs-renting conversation often comes up. 

Most people think of paying rent as “wasted” money. It’s money straight into a landlord’s pocket that you’ll never recoup, and it’s a pure expense. At least paying down a mortgage gets you (partial, gradual) ownership of your home, a real asset. Since the (often tax-deductible) interest you’re charged is lower than the rent you’d otherwise have paid, mortgaging one’s finances to the hilt is a good idea, right?

First of all, renting vs owning is a silly dichotomy: it’s all renting. The only question is whether you’re renting money from a bank or the actual apartment from a landlord. Essentially, it’s all just a balance sheet question in your own personal finances. 

You either rent the dwelling, or you rent the out-of-thin-air money that the bank created to buy the house on your behalf. You’re either on the hook for paying rent to a landlord or on the hook for paying a bank money rent, i.e., “interest.” (With the 50-year mortgages that President Trump recently floated, there’s some sense in which you’re renting from the government, too.)

The question isn’t to rent or not to rent, but how much financial leverage you’re hungry for or willing to stomach, and how tied down you want or need to be. In a healthy housing market, it’s about specifying the exact properties (pun intended) of your living arrangements.

Dead Money and Offloaded Financial Responsibility

When you’re “buying a home,” you aren’t just forking over dough for a dwelling like any other market transaction. You are underwriting a leveraged real estate business on your own personal balance sheet! You have suppliers of physical material (builders, plumbers, maintenance, electricians) as well as financial capital (banks). You’ve got to appease the government via (often hefty) taxes, and usually a mandatory insurance company with regular premiums. In most Western housing markets, too, the money-banks-regulation-real estate industrial complex is so dysfunctional that the very expensive and tedious transaction itself might take months or years. If the market tanks, or there’s some “unpredictable” event like COVID or the 2008 Financial Crisis, you’re stuck rolling payments for years.

From the renter’s perspective, the pesky funds I hand over every month are far from “dead”; they are premiums paid to avoid large, lumpy expenses and risks to my balance sheet. I’m buying options, geographic mobility, freedom from regulatory and tax uncertainty. When the roof leaks or the boiler fails, it is not my bank balances that take a hit. When interest rates rise or property values fall, it is not my equity on the line. 

The landlord is the residual claimant: He takes all the financial risks involved in the arrangement. And while many economic risks remain hidden and invisible to a consumer unless they happen, like an insurance company, the service they provide is valuable. (Nobody would say that car insurance premiums were “wasted” just because you didn’t crash your car.)

Speaking of insurance, the landlord likely has some insurance arrangement that goes well above yours — more expensive, more coverage, more widely ranging.

Next, taxes. Most jurisdictions impose a property tax for the privilege of owning a home. While economists find them efficient (in the sense, “nondistortionary”), most people hate them. Fine, economically speaking, property taxes translate into the rent I’m paying, but a property tax is yet another thing you’d be on the hook for if you owned the home instead of just renting it. 

Last, and this is the biggest one: opportunity cost. If you own your home, you can’t really leave — unless the market, a suitable buyer, five sets of bureaucrats, a few realtors and financing requirements happen to align. I can cancel my lease with a few months’ notice, and I’m out, no questions asked. 

Financial opportunity cost is a real thing as well. You’re stuck paying into a financial product that returns you approximately the low-ish single-digit interest on your mortgage. That’s not a great savings vehicle; I’d much rather keep my surplus funds regularly dollar-cost-averaging into the stock market’s long-run return of 9.7 percent, the fantastic decade the S&P 500 just had (15 percent), gold’s steady 9 percent, or bitcoin’s 25-90 percent (adjust depending on timeframe and repeat-probability going forward). 

For thirty (or fifty) years, you’ve committed yourself to saving in a financial product that returns you only about the interest you’ve already paid on your mortgage, plus whatever few percentage points your house may appreciate going forward. True, you get the ability to cheaply go 7x long on a hard asset, but there’s hidden risk in there: everything from interest-rate sensitivity to housing market collapse. And to be frank, I’d much rather watch my unencumbered bitcoin fall 30 percent in value — which it has done many times in the past, and recovered — than try to fall asleep in my overleveraged house, suddenly underwater because the housing market fell. 

Historically, house price appreciation was quite respectable, depending on the monetary regime and timeframe, somewhere between six and eight percent, which reimburses you somewhat for your maintenance troubles. With demographic declines, uncertain economic outlooks, and plenty of threats to real estate’s outsized monetary premium on the horizon, there’s no guarantee you’ll see that sort of return again. Whereas when I’m renting a home, I can invest in whatever I please — and much more easily achieve a decent diversification should I wish to do so. (Most American households’ net wealth is locked up in illiquid housing assets.) 

Importantly, I offload all of these practical and financial troubles to someone else. They are on the financial hook for hijacking their personal balance sheet to a physical domain, nestled between a profit-hungry bank and a rapacious government. They are financially liable for maintenance, for repairs, for keeping the house in working order. 

The upside is that the owner gets to decide what, like, the bathroom redecoration looks like. Maybe build a new porch.

From the consumer’s point of view, landlords exist to absorb risks that households should be wary of carrying themselves. They borrow so I don’t have to; they lever themselves up so I can stay liquid; they hold the legacy asset while I keep the options.

Landlords of the world, I salute you for your service!