03/02/16 – Mark Thornton – The Scott Horton Show

Hey, Al Scott Horton here.
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All right, y'all, welcome back to the show.
Well, my dang Mozilla froze up on me, so I can't really read you Mark Thornton's bio.
I'll tell you what I know off the top of my head, though.
He's a senior fellow, fellow, fellow, I don't know what that is, a senior fellow at the Ludwig.
Oh, that's what happened there.
I was thinking ahead.
I got to say Ludwig right, and it got all mixed up in my neurons.
He's a senior fellow at the Ludwig von Mises Institute in Auburn, Alabama, and he's really good on the bubbles.
Welcome back to the show, Mark.
How are you?
Hey, Scott.
It's great to be back on the show.
And Mises Institute is just fine as long as people get to M-I-S-E-S dot O-R-G, we don't care.
That's what I'm trying to say.
Guys, you'll find about 100 zillion pages of written text there of all the great Austrian economists for free.
I mean, so much to study.
If we did a whole two-hour show, I don't think Mark could get through just describing what all you could find there.
I mean, seriously.
Well, and there's a lot of audio and video that you can download to your iPods and take it with you.
There you go, too.
Absolutely.
And a lot of it in Jeff Riggenbach's voice, which don't hurt.
Yeah, he's got the greatest voice.
He keeps you going, but you feel comfortable listening.
It's just wonderful.
Yeah, it is.
He's great.
All right.
So let's talk about the bubbles because, you know, I see everybody kind of pointing at tangential type issues and they're avoiding that truth that was, I think this is the only way to really put this.
A truth so simple that James Carville was able to understand it and distill it for the Democrats leading to their victory in 1992.
It's the economy, stupid.
People are upset because even if they got a job, they ain't sure how long it's going to last like that.
And that's why people are rallying around Trump and rallying around, well, to the degree they are, Sanders on the left side.
Although for whatever reason, they think that Hillary is a better bet.
But anyway, it's the uncertainty that people feel that the economic rug is about to be pulled out from under them again.
And that's assuming that they're even able to get back up from the last time when they broke their hip, you know, so to speak.
So I was wondering if you could explain to the people, and I know it's a difficult subject and it's hard to do, you know, on radio in short amounts of time, but could you explain to the people again how it is that fractional reserve banking and particularly backed by the government central bank, the Federal Reserve, is responsible for those artificial booms that lead to these very real busts?
Well, Scott, we have a very artificial money and banking system.
The United States grew to become an economic superpower on the back of a gold standard and a competitive banking system, where banks just couldn't willy-nilly loan out money, because they would be afraid that their depositors would come and ask for the money and they would end up being bankrupt.
Since the Federal Reserve in 1913, and going off the gold standard in 1935, we've had an artificial monetary system, and in 1971, Nixon took us off the last vestige of the gold standard.
And since then, our money is just simply paper.
It's just a paper document.
There's nothing backing it.
There's no gold backing.
There's no promises to redeem it in anything real and true.
And so the bankers and the central bankers have been using that system to their own advantage to favor the big banks and to monetize the national debt and to create these boom-bust cycles in the economy.
So it's basically the fact that we have this artificial and government-controlled industry known as money and banking that has caused all of these problems and have really caused a very negative effect on Americans, on savings, and on productivity, and therefore on wage rates and jobs.
And so they're really all to blame for not just the erosion of the middle class and the boom-bust cycle, but they're also responsible for the tremendous increase in economic inequality in the United States.
When we were on the gold standard, we became more and more equal, economically speaking, in terms of income and wealth.
And since going off the gold standard in 1971, we've seen a tremendous upshoot in economic inequality where the wealthy and the rich, hedge fund managers and so forth, are becoming multibillionaires while the middle class is stagnated and where real wages in the economy have actually been declining for many years.
So it's all the Fed's fault, basically.
All right, now, but I learned in seventh grade that it was the wild excesses of free market laissez-faire capitalism that caused the business cycle, these booms and busts, and that that's why we need a central bank in order to smooth them booms and busts out.
So apparently you have it all backwards.
No, I'm afraid not.
Well, if you look at it, if you were an historian and you just looked at the economy and you just saw the boom, well, what you see is entrepreneurs and investors going hog wild, investing and building and creating all this stuff.
And then, of course, in the bust, they go bankrupt.
So if you were just looking at it, you would see that capitalists were the prime movers in both the boom and the bust.
But we have to ask ourselves, well, what causes that?
Why would people get obsessively optimistic at one period altogether and then incredibly pessimistic just a few years later?
And that's what the Austrian theory of the business cycle and a proper understanding of the Fed, Federal Reserve, and paper money is, is that the Fed, by printing money and by reducing interest rates, they cause the boom.
They encourage investors to borrow too much money and to get involved in projects that are just not going to be profitable.
And so, yes, if you look at the economy from a historical or a historian's point of view, you would see capitalists being prime movers.
But when you ask yourself, why would they all do this at the same time, then you get behind the scenes and you see what the Federal Reserve is doing is manipulating interest rates and the money supply and the availability of credit.
And so they're the ultimate cause.
And, of course, ultimately, if people are investing too much money and in projects that aren't going to be profitable, then ultimately that's going to have to collapse.
All right, but so I guess, well, I'm trying to imagine, you know, the alternative arguments as best I can.
You can't just have the economy grow and grow and grow and the money supply never grow.
The money supply has to grow with the economy.
And so maybe your problem is, is they just go overboard on the margin and that's what causes the bubble.
But otherwise, what terrible catastrophe might befall us if the money supply did not expand along with whatever other growth and new inventions and new labor forces and what have you in the economy?
Well, that's a great, great question, Scott.
If you look at the statistics of the money supply in American history, what you see is from the very beginning of America to the founding of the Fed, the money supply grew very steadily.
It never really contracted very much, but it grew at one to two percent as gold entered the monetary system.
The economic growth in America was greater than that.
And so there were more jobs, there were more people working, there were more manufacturing, you know, all sorts of things expanded tremendously on the gold standard.
But what would happen is that simply prices in the economy would fall to compensate for the fact that GDP is greater than the increase in the money supply.
So in a normal, non-artificial economy on a gold standard, the money supply does increase, but prices gently fall to compensate for that.
So there's plenty of money to go around to pay wages, to buy iron and steel, to operate industries and so forth.
It's only when you get to the Federal Reserve that you see wild swings in the money supply, particularly so after 1971.
And of course, since the financial crisis, the increase in the money supply has been enormous.
Right.
And so, and, you know, we've just seen it over the last few years.
You can't really deny it.
You see a boom and a bust about every, well, what, 10 years or so, or actually, I guess sometimes what, eight years, something like that.
From 92, that was how George Bush Sr. got defeated.
That was why it's the economy, stupid, was such a great slogan was because we were in what was then called the Bush recession, which was what, consequence of all the inflation for the first Gulf War or from before that?
Right.
And then, of course, there's the dot-com bust of the end of the 20th century.
And then the mortgage crisis of 2008 and wherever we are on the cycle now, I don't know.
Well, you know, when we teach the business cycle, we first start off by drawing a graph where we show the economy going up and down in a regular formation.
But in the real world, we can't time the timing or the magnitude of what the business cycle is going to do.
So if the Fed puts a check on credit early in the cycle, then the cycle is going to be shorter and it's going to have less magnitude to it.
If the Fed gets out of hand and continues to hand out low interest money to the big banks, then the boom can be extremely large and the bust can be particularly severe.
So Austrians teach that you cannot time a business cycle precisely the way mainstream Keynesians would.
And as to where we are right now, well, we're really in uncharted territories because they really never let up, let the excesses of the housing bubble completely deflate.
And then they went upon a massive interventionist policy in terms of zero interest rate, quantitative easing to infinity, operation twist, bailouts, and so on and so forth.
So that we have an economy right now where much of the economy is suffering with no growth, stagnation and unemployment, no jobs.
And then other parts of the economy that are just booming.
And of course, the stock market's been booming, the bond market had been booming, shale oil had been booming, and now it's collapsed.
And in Auburn, we've got enormous construction projects everywhere.
It's just unbelievable that half of the city has been torn down and is being rebuilt.
In Little Auburn, Alabama, and we're getting record height buildings for our area that are currently under construction.
We've got two enormous construction cranes in downtown Auburn, the likes of which have never been seen here before.
So the Fed has created this monster out there where the economy has...
Give me a good metaphor for the amount of bank credit expansion between 2000 and 2008 versus from 2009 through right now.
Are we talking about a minnow and a whale, or we're talking about Earth and Jupiter or something?
Tell me.
Earth and Jupiter is probably a good analogy.
That's pretty big, man.
Yeah, it's pretty big.
And the Earth is solid.
I mean, we could have recovered from what the Fed had done from 2001 to 2007.
We were following a normal correction in recovery phase in 2007, and then the Fed stepped in with policies which had never been tried before and have since gone into policies that have rarely been talked about ever before.
And now we're talking about negative interest rates, and some countries have implemented negative interest rates.
And nobody had ever discussed negative interest rates except a guy 100 years ago named Silvio Gazelle, who was considered not even an economist, a monetary crackpot, although John Maynard Keynes mentioned his name in the general theory, and so he's become somewhat famous, but his ideas were always considered crazy.
And so the monetary policy since 2007 has prevented the recovery and has blown up an enormous bubble.
Corporate balance sheets are more leveraged and uncertain now more than ever.
And so I think Jupiter, being sort of a gaseous-type planet and an enormous bubble-like structure, I think that makes for a great analogy to where we are today with these enormous bubbles, with these inflated balance sheets, with savings in the American economy stagnating and contracting.
We're eating our seed corn, and it's an enormous, enormous problem.
It sounds like the only good news is there's still so many bad bets being made from the last bubble that are still being liquidated that there's still all this deflationary pressure on the economy, kind of counteracting all the expansion of money, right?
Right.
And deflation is the way in which an economy corrects itself.
And the Keynesians are dreadfully fearful of deflation, but that's what makes an economy correct itself.
And so you see asset prices fall, capital prices fall, land prices fall tremendously.
You see labor reduced wages and a greater availability of labor.
But consumer prices don't go down very much.
They go down, you know, a few percent.
And as a result, entrepreneurs can look at that environment and see that all sorts of capital is really, really cheap.
Labor is cheaper and abundant, and you can put all that together and make consumer goods for a profit.
And so deflation is really the way in which a free market economy corrects itself.
But right now that's saving us, in a sense, from how big the bubble could be, right?
Is that you still have everybody struggling.
There's nobody really dying to take out a loan to go into business because he doesn't have any customers.
Well, that's true.
You know, and it depends on where the deflation is, really, if it occurs in consumer prices, which it does on a regular basis.
I should say here, Mark, too, that I'm kind of going off of my, you know, very uneducated imagination here.
I'm basically picturing Bernanke and Yellen pouring dollars like liquid into a black hole where, yeah, they're inflating and inflating and inflating, but it's just basically being destroyed on impact or wherever it goes.
Nobody knows.
That's right.
And, you know, a lot of this money that the Fed has created, what they've done is that they're simply printing up money electronically, giving it to the big banks in exchange for government bonds and mortgage-backed securities.
And so a lot of that money is not really getting into the real economy.
It's just basically the Fed bailing out the big banks, number one.
Number two, the Fed taking over the mortgage market by buying up an enormous percentage of all mortgages through mortgage-backed securities.
And the third thing it's doing is it's monetizing the national debt.
It's buying government bonds.
So the government sells bonds to banks, and then the Fed buys the bonds from the big banks.
And so the banks make a little profit there.
The Treasury gets money for as little as two-tenths of one percent interest.
And so it never has to consider spending cutbacks.
It doesn't have to reevaluate our foreign policy of throwing away trillions of dollars overseas in wars that cannot be won from enemies that cannot be beaten.
And we're just throwing money by the truckload, literally, into that black hole, because our government doesn't have to worry about spending cutbacks.
It can just spend as much as it wants on anything it wants, knowing that the Fed will come to the rescue and simply, through this little trick game they play between the Treasury, the banks, and the Fed, they just take all that money off of the books.
All right.
Now, listen, I know you've got to go, but let me ask you one thing real quick.
What would you recommend to people who are new to this?
What's one good, single, hopefully somewhat short read on business cycle theory that you would have them look at?
Well, the first thing they should read is Murray Rothbard's What Has Government Done to Our Money?
, Joseph Salerno's book, Money, Sound and Unsound, is a wonderful collection.
Although I recommend people start at the fifth section of that book and work their way towards the front of the book, it makes it a better read for those who are just initiated into the process.
And we have, you know, just an unbelievable material.
Check out our blog every day if you want the best commentary, and keep your heads down because between now and the election, I predict that ISIL and other terrorist groups are going to be hitting the United States and our allies around the world in order to drive the political, the presidential race into a more war-like tune.
Yeah.
Well, and they'll have plenty of help from people over here, too, in accomplishing that same goal.
I know it.
Yeah.
All right.
Hey, thanks again for coming on the show, Mark.
I really appreciate it.
Thanks, Scott.
All right, y'all.
That's the great Mark Thornton.
He is Senior Fellow at the Mises Institute, M-I-S-E-S, Mises Institute, mises.org.
And he's the book review editor of the Quarterly Journal of Austrian Economics.
He's the author of The Economics of Prohibition, Tariffs, Blockades and Inflation, The Economics of the Civil War, The Quotable Mises, The Bastiat Collection, An Essay on Economic Theory, and The Bastiat Reader, obviously.
Hey, y'all.
Scott here.
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