02/13/15 – Mark Thornton – The Scott Horton Show

Hey y'all, Scott here.
Ever wanted to help support the show and own silver at the same time?
Well, a friend of mine, Libertarian activist Arlo Pignatti, has invented the alternative currency with the most promise of them all, QR silver commodity discs.
The first ever QR code, one ounce silver pieces.
Just scan the back of one with your phone and get the instant spot price.
They're perfect for saving or spending at the market.
And anyone who donates $100 or more to the Scott Horton Show at scotthorton.org slash donate gets one.
That's scotthorton.org slash donate, and if you'd like to learn and order more, send them a message at commodity discs.com or check them out on Facebook at slash commodity discs and thanks.
All right, you guys.
Welcome back to the show.
I'm Scott Horton.
It's my show, the Scott Horton Show.
Our first guest today is our friend Mark Thornton, senior fellow at the Mises Institute.
That's M-I-S-E-S dot org for their website and 10 zillion pages worth of free content of the highest quality mises.org.
Welcome back to the show.
How are you doing, Mark?
Hey, Scott.
It's great to be back on the air with you.
Coming to you from the lovely village of Auburn, Alabama and the Mises Institute.
Right on.
Good to be on the show.
Very good to have you here.
All right.
Personally, I'm not too into defending Rand Paul, but this article attacking him, I am into trashing it.
And I thought, you know, a lot of a lot of errors are made in here that are obvious even to me.
And it seemed like it'd probably be instructive to listen to a real expert like you correct this guy in his, to me, pretty hollow seeming attacks on Rand Paul.
The article is clueless in Kentucky.
Rand Paul's ideas about the Fed make absolutely no sense.
And I don't know if, well, I guess I'll start off with he says, well, the Austrians blame the Fed for the boom and bust, but there were booms and busts before the Fed and there were more of them then.
And so obviously they don't know what they're talking about.
The Fed's doing a great job of smoothing out the boom bust cycle, which, as we all learned in seventh grade, is the reason FDR created it back in 1933.
Well, Scott, I'm not familiar with Rand Paul's views on monetary policy myself.
And I guess some of your listeners might be surprised to learn that I've never even met Rand Paul.
But I can tell you, the author of this article is really clueless about a lot of things and seems to be speaking to be just an open mouthpiece for the Federal Reserve and its efforts to cover up what it does.
And specifically on this first point about the idea that the Fed solves the business crisis, it doesn't, the business cycle, it doesn't cause it.
That's the be all and end all of the Fed.
They don't want the American people to know that they caused the business cycle.
And the Fed wants Americans to believe that the Federal Reserve is protecting them against the business cycle and, you know, the cycle of inflation and unemployment.
Well, we certainly haven't had a smooth ride since the Federal Reserve began in 1913.
And as you implicitly point out, the Fed was around and helping to create and shape America's Great Depression.
So the Fed is founded in 1913, just in time to inflate the insanity out of the dollar to finance World War I.
And then we had a very shaky 1920s leading up to the crash in 1929.
And it's not just me, it's not just the Austrians that say the Fed caused America's Great Depression.
There are a lot of historians who say that.
There are a lot of mainstream economists who say that.
So even Milton Friedman and Ben Bernanke, sort of the arch rivals of the Austrian school, the Federal Reserve was responsible for different reasons for America's Great Depression.
But it is true we also had boom-bust cycles before the Fed was put into place.
But we also had federal banking regulations starting in the 1860s.
And those are what really caused the panic, the panics of the late 19th century.
So we had a series of financial panics because of the leverage that was put into the banking system by the National Banking Acts.
And prior to the Civil War, we had two major business cycles, but those were associated with the First Bank of the United States and the Second Bank of the United States, both basically set up by the government to act as a quasi-central bank.
There have been studies that have claimed that the Fed has smoothed out the business cycle, but you have to take the Great Depression out of the analysis in order to get that result.
And so, and that doesn't even include the fact that we've got this financial crisis that's lasted seven years, and it seems to be spreading.
It's spreading into Europe.
It's there in Japan.
China is now cracking.
And so, you know, the Fed is responsible for the business cycle.
It doesn't solve the business cycle, but that's the big lie that the Fed wants every American to believe.
Well, now, if you could somehow adjust for overall differences in wealth between, I know it's hard to go back to the 19th century almost and compare, you know, those days to the situation now, but is there a way that you could compare the depth of the busts and even excluding the Great Depression for the sake of their argument?
Is it a difference between having, and as you said, it's not like there weren't already laws about banks and how much, you know, new interest, new credit they can create and all that stuff before this, but was it a matter of more frequent but much smaller crashes or were they just as bad as, say, 2008, but more frequent too?
That's a great point, Scott.
And what I would say is the pre-Fed crashes were short and sharp and tended to inflict the most damage on the people who were gaming the system and getting the most out of it.
So, you know, it had severe effects on banks and stocks and industrial labor.
Those panics were sharp, but short in duration.
The recessions since the Fed has been in place, and notice the difference in terminology.
One's a panic, oh my God, and the other's just a recession.
And so, but those have been just as injurious to the economy and have put more of a, inflicted more pain on labor and homeowners rather than on financial interest.
So it's a difference.
And the other major difference that the Fed doesn't like discussed is the fact that it is hard to compare wealth and income prior to 1913 and post-1913, primarily because, of course, we're much wealthier now and also because the value of the dollar has been cut loose from the anchor of the gold standard.
But I can say, and economic historians would clearly agree with this, that the rate of economic growth was faster prior to the Fed than it has been since the Fed.
And the growth rate in the American economy continues to diminish.
So if you erase all of the ups and downs of the business cycle and look at just long-term economic growth, where our growth and our prosperity has diminished and it continues to diminish as we moved into this new century.
So economic growth on a real per capita basis, adjusting for inflation, adjusting for population, was faster prior to the Fed while we were on a true gold standard than it has been on with the Federal Reserve and now the fiat monetary system over the last 45 years.
And so I think the evidence is clearly in and it doesn't support the case for the Federal Reserve and its manipulation of the fiat monetary system.
Well, and it sounds like they've had all this time since then, 100 years, to perfect the system whereby they socialize all of the risks onto everybody else and all the consequences onto everybody else with all the repeated bailouts and all that.
And of course, in Washington, D.C., they're all on the government payroll there.
So there is no downward pressure on wages ever for them.
And so they really don't even know how the rest of the country feels, what they're going through.
Not that they would care necessarily, but they've basically immuned themselves from everybody, you know, on what they would call the margin out here who have the rug completely pulled out from under them every few years, try to build up a little bit of wealth and then blam, good luck selling whatever it is you sell because nobody's buying for a little while now.
You got to start all over again.
It just it hurts the population of the country more than I think anyone in New York or D.C. imagines.
You're right on, Scott.
You've nailed it.
Sucks.
You know, when I was a kid in the 80s, after the oil bust, there were giant properties that were partially developed and then they stayed undeveloped for 15 years.
You know, street suburbs built, but no houses for 15 years.
They stayed that way.
We'll be right back with Mark Thornton on the other side of this.
What was the only interest group in D.C. pushing war with Syria last summer?
AIPAC and the Israel lobby.
What's the only interest group in D.C. pushing to sabotage the nuclear deal with Iran right now?
AIPAC and the Israel lobby.
Why doesn't the president force an end to the occupation of Palestine, a leading cause of terrorist attacks against the United States?
AIPAC and the Israel lobby.
The Council for the National Interest is pushing back, putting America first and educating the people about what's really at stake in the Middle East.
Help support their important work at councilforthenationalinterest.org.
All right, you guys, welcome back to the show.
I'm Scott Horton.
It's my show, The Scott Horton Show.
I'm talking with Mark Thornton, senior fellow at the Mises Institute, mises.org.
And we're talking about, well, we're talking economics.
It's brought up this attack on Rand Paul and then by way of Rand Paul on Austrian economics in the Washington Post here, talking about the business cycle a bit.
But now, so here's the thing about you, Mark, is that you called the housing bubble and therefore the coming bust.
You and Robert Blumen, I guess, called it back in 2005 before everybody else over there at the Mises Institute.
And you've got your great skyscraper thesis about when the bank's got so much money that they're building skyscrapers with it, then yeah, that's a lot of artificial bank credit expansion and you're in a bubble and it's going to pop soon.
These things all make much sense to me.
But in the Bush years, we had plenty of inflation to pay for the war, all kinds of bank credit expansion to pay for the war, but it didn't necessarily, and I don't know all the numbers, but best I understand, it didn't lead to widespread price inflation across the board.
I mean, fuel was high and groceries were creeping up, but you had inflation in certain sectors for sure, like say, for example, the stock market and the housing market and a bunch of bogus financial instruments and all these kinds of things.
But it wasn't a widespread inflation.
But then after the crash and the start of the new monetary policy of QE, which is just bank credit expansion plus, I guess, and the stimulus spending and all that, you, I believe, correct me if I'm wrong, an Austrian said, now this is going to lead to inflation, hyperinflation even across the board.
This is so much new money that they're creating that it's going to lead to such a rapid rise of prices, it's, you know, the economy could completely unravel, they're going to break the dollar and all of that.
And yet now here we are quite a few years later and groceries are creeping up, at least fuel's down, but grocery prices are still creeping up and there's still some inflation, obviously, no matter what TV says, but it's hardly hyperinflation.
And this guy at the Washington Post says, yeah, well, don't tell that to the Austrians because they just know they're right anyway, that kind of thing.
So I was wondering if you could explain to me the discrepancy here and then, you know, maybe if it is just a matter of bubbles in certain sectors, rather than, you know, the entire dollar, as I, you know, perceive, as I think, then I wonder where we are in that boom and bust cycle before it crashes again, because that amounts to advice to people when they know how to get out, you know?
Oh, absolutely.
And that's a great question.
And it highlights the benefits of the Austrian economic analysis of monetary policy, rather than mainstream analysis.
The mainstream analysis focuses almost solely on the consumer price index or some variation of the consumer price index as a gauge of inflation.
The Austrians don't look at it that way.
We look at where is the new money created and who's getting to spend that money?
Where is that money?
And typically, the central bank or the Federal Reserve gives the money either to the government or to the financial system, and in this case, both.
Where the money is coming in is in Washington, D.C. and in New York City.
And that's where real estate prices are still booing, basically, in Manhattan, where they're building all sorts of skyscrapers, and in Washington, D.C., where real estate prices have gotten to an all-time high.
So when Austrians look at the money supply and prices, what we saw in the 2000s was that money was going into the housing sector.
And that's why we, you know, Robert Blumen, myself, Frank Shostak, and others writing on Mises.org, were pointing the finger at a housing bubble and warning of a financial crisis in mortgages.
And this is in 2003, 4, 5, and 6.
The skyscraper index sent a signal of economic crisis in July of 2007, when everybody else was saying, you can't lose money in real estate, real estate prices never go down, investing in homes is the best place to put your money, and all that stuff, and belittling the Austrians once again.
And so we relish being attacked by the mainstream, whether it was back in 2007, or whether it's 2015.
We think the fact that people are attacking us in the New York Times and the Washington Post and other mainstream outlets means that we're having a positive impact on people's thinking, and that the, you know, the powers that be on Wall Street and on Manhattan and in Washington, D.C., are getting afraid that the Austrians are gaining much, much influence.
And the fact also that alternative media such as your program is having such an impact on a larger number of people.
And so the Austrian analysis is doing just fine, as the money started going, you know, with quantitative easing, which is basically, you know, they brought the interest rate down to zero, and then they force-fed Wall Street by buying up government bonds and buying up mortgage-backed securities.
And so they've had an effect of flooding the banking and financial system with money.
And of course, what we've seen is that bond prices and stock prices have skyrocketed to all-time highs.
And I don't think government bonds have ever been this high in price and this low in yield.
And the stock market is at an all-time high as well.
So the money, where they put it, is showing up in higher prices.
You and I don't get that money.
We're not experiencing the great expansion in wealth that Washington, D.C. and Wall Street is experiencing.
So the Austrian analysis is spot-on as far as I'm concerned.
And the fact that we're being attacked, I think, is very consoling to the people who support the Austrian economic view of how the economy operates.
Looking forward, it sees, you know, the quantitative easing has been canceled, right?
And so if they don't continue to have, you know, more quantitative easing, then we should expect the economy to continue to slow.
And we're seeing deflation or lower prices in commodities and in oil.
Gold and silver have backed off tremendously, which means the economy is going into a contraction.
And real inflation-adjusted median income in the U.S. has been declining.
And so the main thing is, what is the Fed going to do next?
We've seen the European Central Bank- But wait, wait, wait.
Let me make sure, before we get to what they're going to do next, let me make sure I understand you.
I'm saying that right now, just the fact that they've stopped inflating so much, that's almost parallel to them going ahead and raising interest rates and deliberately trying to induce a recession or a correction, just because they've been inflating so much that just dialing it back amounts to raising interest rates.
They haven't raised interest rates.
They're already as low as they can go.
So the only thing that they could do is just go back to QE or have a recession at this point?
That's correct, Scott.
Or another one?
Yeah, we're headed in the direction of a recession.
Right now, I'd say the U.S. economy is fairly strong.
I mean, the labor market apparently is adding jobs.
Wages are not declining yet.
But there are sure signs of economic contraction in the U.S. economy, in the Japanese economy, in the Chinese economy, in the European economy, the Russian economy, the Brazilian economy.
I mean, I'm looking at reports from all over the world, and I see a general contraction phase underway basically throughout most, if not all, of the world economy.
So it's starting.
And when we take the temperature of the world economy, we look at things like oil prices, commodity prices, things of that nature.
And we're seeing a general contraction in metal prices, in grain prices, in oil prices, in the price of natural gas.
These are worldwide prices, essentially, and they're falling.
And so that tells me that the world economy is contracting at this point, despite the fact that the Japanese and the Europeans are undertaking quantitative easing programs.
Well so that's where all the money went, right, was propping up a bunch of prices that still have yet to hit bottom after the 2008.
They're just pouring all this new money into black holes still.
Well, that's exactly right, Scott.
And that's why I referred to QE monetary policy as queasy monetary policy, because it doesn't actually heal the patient or heal the economy.
It just makes them sort of have an upset stomach.
Gotcha.
That's a good way to put it.
I read you loud and clear.
That's Mark Thornton.
He's at the Ludwig von Mises Institute, mises.org.
Thank you so much for your time, Mark.
Hey, thank you very much, Scott.
I enjoyed being on the program and look forward to doing it again.
Hey, I'm Scott Horton here for The Future of Freedom, the monthly journal of the Future Freedom Foundation.
As you may already be aware, Jacob Hornberger, Sheldon Richman, and James Bovard are awesome.
They're also in every issue of The Future of Freedom, and they're joined by others of the best of the libertarian movement.
People like Anthony Gregory, Wendy McElroy, Lawrence Vance, Joe Stromberg, and many more.
Even me.
Sign up for The Future of Freedom at fff.org slash subscribe.
It's just $25 a year for the print edition, $15 to read it online.
That's The Future of Freedom, edited by Sheldon Richman at fff.org slash subscribe.
And tell him you heard it here.
You hate government?
One of them libertarian types?
Or maybe you just can't stand the president, gun grabbers, or warmongers.
Me too.
That's why I invented libertystickers.com.
Well, Rick owns it now, and I didn't make up all of them, but still.
If you're driving around and want to tell everyone else how wrong their politics are, there's only one place to go.
Libertystickers.com has got your bumper covered.
Left, right, libertarian, empire, police, state, founders, quote, central banking.
Yes, bumper stickers about central banking.
Lots of them.
And, well, everything that matters.
Libertystickers.com.
Everyone else's stickers suck.
Hey, Al Scott Horton here for wallstreetwindow.com.
Mike Swanson knows his stuff.
He made a killing running his own hedge fund and always gets out of the stock market before the government generated bubbles pop, which is, by the way, what he's doing right now, selling all his stocks and betting on gold and commodities.
Sign up at wallstreetwindow.com and get real-time updates from Mike on all his market moves.
It's hard to know how to protect your savings and earn a good return in an economy like this.
Mike Swanson can help.
Follow along on paper and see for yourself.
Wallstreetwindow.com.