01/05/16 – Mark Thornton – The Scott Horton Show

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I got Mark Thornton on the line, one of my many buddies over at the Mises Institute.
That's the Ludwig von Mises Institute, headquarters of the Austrian School of Economics in America.
Welcome back to the show.
How are you doing, Mark?
Hey, Scott.
It's great to be back with you.
I'm doing great.
I don't know if you caught this, but bestcolleges.com just ranked the Mises Institute as the ninth most influential think tank in the country.
You know, I did see that.
And I thought, ninth?
Come on.
It's got to be better than that.
But still, making that top ten, that's absolutely great.
And there can be no doubting that it's at least ninth.
And, hey, I should give credit to the others.
There are a lot of very influential institutes around.
But you guys get work done.
There's no doubt about it.
Well, exactly, Scott.
And the thing about the ranking was the bigger your budget, the more influential you were in this poll.
But the Mises Institute has a very small budget.
So that actually hurt us.
Yeah, someone ought to do an algorithm and adjust for that.
There you go.
I'm sure somebody in your audience has pulled that off.
Hey, you're an economist.
How do you do it?
What are you guys?
What are you Mises guys?
Figure it out, man.
No, I know.
You guys don't all do charts and curves.
You know better than that.
So, listen, we've got a lot of important stuff to talk about.
Here's the thing that people unfamiliar need to know.
Well, there are a few, I guess.
But one thing that you need to know about Mark Thornton is he was one of the very, very first guys.
I guess second.
It was Robert Blumen and Mark at the Mises Institute were the first economists to call the housing bubble back in 2005, I guess it was, maybe 2004.
And Mark is also the author of what he calls the skyscraper thesis about bubbles in the economy.
And you've been making a lot of remarks about that.
And then I guess I'll work into the discussion, the recent news of the Fed's announcement that they're raising the federal funds rate a little bit here later on.
But why don't you go ahead and tell them what you mean about the skyscraper boom and the skyscraper theory here?
Well, Scott, it goes back 100 years.
And it's the correlation of the building of a world record setting skyscraper in terms of how tall it is and an ensuing world economic crisis.
And so the world records are correlated with the panic of 1907, America's Great Depression, the stagflation of the 1970s, the crash of Brenton Woods and going off the gold standard.
And then more recently with the tech stock bubble, the housing bubble.
And now in Saudi Arabia, they're building a new world record setting skyscraper out in the desert.
It's supposed to be a kilometer tall, smashing the previous record.
Okay, now hold it right there for a second.
That all sounds like a lot of very correlated correlations.
However, there are 10 million cranks with 10 million theories about why markets go up and down.
So why should anybody listen to yours or consider yours different?
Well, that's what I first thought too.
But then I also realized that skyscrapers are a telltale symptom of what is going on in the economy.
And so when you see these world record setting skyscrapers, you also see abnormally low or artificially low interest rates driving the economy into a boom.
And so what's happening in these booms is all sorts of new technology, firms merging and becoming much bigger.
And also the price of land gets significantly higher.
And high land prices combined with low interest rates encourages this building of world record setting skyscrapers and all the new technology that has to come online to make that work economically and profitably.
And, of course, now I've also been writing about how this skyscraper curse that, you know, it seems it's over in the desert in Saudi Arabia, but we're also seeing it around the country.
And so in Auburn, little Auburn, Alabama is building its tallest building ever.
In Asheville, North Carolina, where I was recently, they're building two or three buildings that will set records for Asheville.
The same thing I saw in Toronto, Canada, and that people, friends and colleagues are reporting from around the country.
And so.
So what you're saying is this isn't palm reading or something where you go, oh, yeah, you know, you have a long lifeline or this or that.
You're saying there's new money being pumped right into the commercial real estate market.
And this is where it goes.
It's it's literally and figuratively a spike, artificially generated spike on the chart.
Yes.
And it all it all lines up very nicely with the Austrian theory of the business cycle where the Federal Reserve or the central bank has artificially low interest rates trying to stimulate the economy.
And it is stimulating the economy, but it's creating bad investments, investments that are going to turn out to be not as profitable as everybody once thought.
Once the ensuing bust starts and seems to me like.
There are signs in the economy now where we're reaching that pinnacle of the boom.
All right now.
So I think a lot of people have seen the big short.
If you haven't, it's for free right now at the Pirate Bay.
Just stop by there.
Use Q BitTorrent.
No toolbars or anything.
It's a great little program and you can watch the big short.
And that's a great story of what I could.
I couldn't help but thinking while I was watching it that that could have been me.
If only I had called Mark Thornton and said, will you teach me how to invest in shorting the people who are investing in real estate right now?
Because I'm hip with your theory.
I think that you're, you know, the skyscraper curse.
There's possibly not only is there no doubt about it that you're right, but I suspect even that the Fed reads Thornton.
And that when they see the biggest skyscrapers in the world being built, that's what spooked them and made them raise the federal funds rate by a quarter of a point.
What do you think of that?
That's a good one.
I've heard that the big short is a great movie, but listeners should realize that it's it's fiction.
It's not true.
It's a, you know, a certain amalgam of the facts, but where they try to blame capitalism for the problem.
But the blame really lies.
You know, it's not too lousy with that.
Have you seen it yet?
No, I haven't.
You know, it's really I mean, they certainly blame the system and they say, you know, it's all corrupt and whatever.
But it is not, you know, Matt Damon and ridiculous kind of Democrat kind of thing.
I mean, they they definitely don't cite you guys as they should.
They don't explain, you know, that the Fed is the lender of last resort throughout all this and what we would have had them write into the script.
But everything else in it, I think, is is pretty copacetic.
You know, I think you'd be surprised and dig it.
I think that's the only tragedy, really, is that they don't explain.
They don't really break down.
Here's the role of the Fed in it all, which would have been the crowning achievement of the production.
You know, well, with that recommendation, I'll definitely see it.
Yeah, definitely planned on seeing it.
But I I've been told that they tried to lay the blame on deregulation or, you know, those sorts of things.
So and in all movies are at least part, you know, fiction.
So, you know, that's where it lays.
But the that's the most important thing of all.
When we look out at reality is that the Fed is causing these problems.
They don't really know what they're doing.
I would like to think that they're reading my stuff, but I'm not sure if that's the case.
And they have no idea what they're doing right now.
Well, where do you think we are in the cycle right now?
Because, you know, I remember this is how little I know about this stuff.
I remember listening to the audio book of For a New Liberty that Murray Rothbard wrote back in the 70s, where he talks about in there how they always try to let the air out of the bubble.
But that doesn't work.
They always pop it and it always leads to a giant crash.
And I can even picture where I was driving on the 101 in L.A. as I was listening to this.
And this is what I always think of.
As soon as they start raising that federal funds rate, even just a little bit, you better run like hell or start betting against them.
Anyway, hold tight.
I'm sorry.
We got to take this break.
We'll be right back with Mark Thornton to find out where he thinks we are in this terrible government-generated boom-bust cycle.
After this.
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All right, so welcome back to the show.
You know, that's another thing I like about that movie, The Big Short, is I like Steve Carell.
And he was terrible in the Noah's Ark thing and a couple other things.
I was glad to see him have a chance to do some serious acting and do it well.
I like that guy, man.
That's a good thing.
So, yeah.
Talking with Mark Thornton, the great Mark Thornton from the Mises Institute, we're talking about, it's not the business cycle.
It's the government-generated boom-bust cycle in our economy.
And my overly convoluted question before the break was something along the lines of, where do you think we are now in that cycle?
Is it time to bet everything we have, assuming we have anything at all, against Goldman Sachs?
Well, Scott, I'm not a financial advisor, but I can tell you that all this money pumping by the central bank is resulting in things like us consuming our savings, male investments in the economy, and, of course, higher asset prices in the economy.
And so I think 2016 is going to be a year where the economy is producing less, which means the likelihood is very high of a recession going into 2016.
And because we're producing less, with all this money bubbling around, we should expect probably higher price inflation in the economy in 2016.
And I also believe that asset prices, in terms of stocks and bonds, that the value of those has been greatly inflated, and that we should see a negative environment for those assets in 2016.
And if you look at individual stocks, Google and Apple and all these high-riding companies, social media companies, I think they've started to peak and roll over.
And so I see negative outlook for assets, a negative outlook in the economy, higher price inflation, and probably higher precious metal prices as well in 2016.
And now, so as far as the raising of the federal funds rate, does that mean that the Fed is spooked?
That, oops, maybe we quantitative eased a bit too much new credit, and so now we've got to ease back?
And then, am I right about, am I paraphrasing Rothbard right, that that means a collapse coming?
There's no soft landing.
That means there's a pop on the horizon.
Well, I think the pop on the horizon is there no matter what the Fed does.
You know, the Fed kept interest rates at zero for seven years.
That's never happened in human history.
And so we're in unprecedented territory here, and the Fed's been saying they were going to raise interest rates.
They've been saying they're going to normalize interest rates for years now.
And so I feel that they were pushed into a corner, and they reacted with this minuscule quarter of a percent interest rate hike, more out of public relations and saving face than anything else.
In other words, they're expanding bank credit so much that the quarter of a point hardly makes a difference, you know, relatively speaking.
Is that right?
Yeah, and basically what that amounts to is that they're paying banks more on their excess reserves.
So the banks got an immediate increase in the money that they get for holding money at the Federal Reserve.
But my savings account still says that the interest rate is one one-hundredth of one percent interest on my savings account.
So they're not helping the savings class that they've been busy destroying for the last seven years.
They've been just basically backing the big banks and bankrolling them.
And they're the ones that should have paid because they're the ones that benefited from the boom.
And but the Fed has backed up these big banks to the detriment of labor and the savings class and people trying to build a pension and a retirement fund.
Well, you know, I'm reminded this book that I have but never read called The Dow of Capital that was written by an Austrian.
And basically the point, according to the back of the book that I should have read, is that, hey, you know, all us libertarians, we know this.
Virtually everything the government does amounts to a distortion in the market.
So if you want to make money, you just bet against their distortions and they're easy as hell to see.
And everybody agrees with what you just said, because it's the obvious truth that none of the systemic problems underlying, you know, the causes of the financial crisis from last time have been fixed, whether it's Federal Reserve backed bank credit expansion or whether it's all the so-called derivatives markets and all the different, you know, double blind bets and this, that, the other thing that people make, where they created these trillions of dollars worth of bubbles the last time.
We all know that all the institutional flaws are all still there.
So seems like I'm reminded of the little tchotchke on my dad's desk.
It says, if you're so smart, why aren't you rich?
I'm thinking that maybe I'm in the wrong business here, Mark.
Maybe I should at least try out the shorting market, if I could save up a couple hundred bucks to get in there.
Yeah, well, it's not easy.
I reviewed the Tao of Capitalism on Mises.org, and it's an interesting and informative book, no doubt.
But it lays out the hazards of investing in general.
And so it's a hazardous business.
And I would much prefer if people could just save money in a bank in terms of gold and see that pot of money rising throughout their lifetime and into retirement.
But we can't do that because we have fiat money that depreciates, and we've got banks that are unstable, and it's all because of the Federal Reserve.
And so you have to keep an eye on the Federal Reserve when you're investing in an economy.
You can try to bet against the Federal Reserve, but it's a very powerful institution as well.
And so the more you know, the better, and the less you rely on the Fed.
Other than catching the wave via the skyscraper index or something like that and hedging your bets against government and against the Fed for the long-term investor.
Yeah, because that's the thing, right?
Everybody looks at the interest rate when they're doing their investing.
Perhaps the Austrians are the only ones who understand the significance of having police power set the damn thing.
Whereas everybody else just takes it as the normal function of the economy.
Oh, yeah, absolutely.
There's no question about it.
This is a hazardous world in terms of investing, and this is a very hazardous time.
And the general impression out there is that the market has been going up for seven years, and that's going to continue.
And that home prices have firmed, and they're going to continue to go up.
But you have to realize that what's generated higher stock prices, what's generated higher bond prices, which has generated higher land prices and higher home prices, and all the rest, has been all this funny money from the Fed, the quantitative easing programs.
And that that's a weapon that the Fed uses that does not last infinitely, because ultimately what the Fed is doing in rigging these higher prices is that it's misallocating resources systemically throughout the economy.
And eventually we're going to realize, and I think this is going to come in 2016, where the economy is simply not as productive as we thought it was going to be.
And that production in the U.S. economy is going to go down in 2016.
It's not going to rise by any significant matter, and we're going to join Japan in a recession.
China, which says it's growing at 7%, but nobody believes it.
Russia's in a recession.
The Middle East is, of course, as you know very well, a total mess.
And Europe's also in a recession.
Canada's also having trouble.
Brazil is a nightmare case, where their federal funds rate is now 15%.
So the landscape from the vista of the U.S. is still okay, but looking forward, you see a lot of problems out there.
All right.
Well, I'm sorry we're out of time with that.
I'll have to let you go.
But as always, I really appreciate your time on the show, Mark.
Hey, thanks, Scott.
I love doing your show.
All right.
Appreciate it.
All right, y'all.
That is the great Mark Thornton.
Mises.org.
M-I-S-E-S.
Mises.org for the Austrian school.
And we'll be right back in just a minute with Brad Hoff on some new Hillary emails.
Good stuff here.
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