01/25/08 – Bob Murphy – The Scott Horton Show

Socks and eatin' pickles with Tootsie Pops and it don't stop.
I'm glad, cause when JJ fanned at Supersonic, it was kinda like a sport.
To wear biker shorts or to wear jeans, and it seemed like the masses of hoochies had poison airbrushed on they asses.
Dudes had on Nike suits and the boomers with the fat laces, cause it was either that or K-Swiss.
I miss those days, and so I pout like a chrome dirt, wishin' all I had to do now was finish homework.
It's true, you don't realize really what you got till it's gone, and I'm not gonna sing another sad song, but sometimes I do sit and reminisce then.
Think about the years I was raised, back in the day.
Back in the days when I was young, I'm not a kid anymore, but some days I sit and wish I was a kid again.
Back in the days when I was young, I'm not a kid anymore, but some days I sit and wish I was a kid again.
And everybody say, I remember way back when.
And everybody say, I remember way back when.
All right, my friends, welcome back to Anti-War Radio on Chaos Radio 95.9 in Austin, Texas.
I'm Scott Horton, and our guest today is Bob Murphy.
He's an adjunct scholar at the Ludwig von Mises Institute and is the author of The Politically Incorrect Guide to Capitalism.
His own website is bobmurphy.net.
Welcome to the show, Bob.
Thanks for having me, Scott.
It's good to talk to you again.
How are you?
I'm doing all right.
How are you?
I'm doing okay.
I'll tell you, though, I'm kind of confused about all this economic stuff in the news.
Now, I know that I hate the government and that whatever they're doing is probably wrong, but when it comes to the markets going up and down and people talking about housing bubbles here and bailouts there, it's kind of too much for me to keep up with when I'm trying to pay attention to what's going on in Iraq.
So I was wondering if I could get you to basically just kind of tell us what's been going on in the financial markets over the last few months before you tell us exactly why, but just kind of give us sort of an overview of what's happening to the people who actually have money, what's happening to their money.
Okay, sure.
So over the last few months, the stock market has been incredibly volatile.
That certain days it's way up, certain days it's way down.
And just to give you an anecdote of that is that I worked at a financial institution for Arthur Laffer, actually, about seven months, two years ago.
And there, I mean, on a given day, if the market at the S&P 500 went up 0.5% in a day, that was a fairly big move.
Whereas, you know, lately, last few months, you have days where it goes up and down over 2%.
All right, so these are just really big moves relative to the historical standards.
And what's basically happened is to dumb it down in the mortgage markets is, for whatever reason, and we might get into that a bit, people were getting given loans or mortgages to go buy houses, that the only way they would be able to finance those mortgages is if the value of the house kept going up, right?
So when house prices kept going up, there was a tremendous boom in housing prices from like 2002 to 2005, let's say.
It was fine.
So, I mean, some people are commenting on this.
They're making it sound like the bankers were giving money away that they knew they weren't going to get back.
And of course, they weren't doing that.
They're not that dumb.
What they were doing is giving loans to people on the assumption that, well, no, the house price keeps going up, and then these people can refinance their mortgages, or they can just flip their house.
So, you know, some people thought it was a great market to get in and just buy a second home, wait for it to go up $100,000 in value, and then sell it and pay off the mortgage that you couldn't possibly finance on your income.
And so, of course, what happened then is when housing prices leveled off, or now they're even falling, and in 2007, now some people are stuck with homes they can't sell.
They'd be upside down in terms of their mortgage.
If they sold it, they would owe more to the bank than they got from the, you know, after closing costs.
Yeah, you know, when I was a kid, my dad taught me that if it sounds too good to be true, it is.
Right.
So, anyway, so that's basically what happened.
Then on top of that, you've got the dollar has hit all-time lows against the euro in the last few months.
Gold prices smashed through the nominal all-time record through $900.
Oil prices hit a nominal high the last few months.
And inflation, a lot of people haven't reported this, you know, the site I go to is MoneyCNN.com just when I want to, you know, see what's going on between checking my email.
And I didn't even see this.
I had to see it in some little dinky paper somewhere that the labor department said last year that CPI inflation was 4.1%, the highest it's been in 17 years.
So what's happened is you've got a situation where inflation is really kicking in, and traditionally, you know, the standard economic orthodoxy says that you can't.
That's when you want to sort of ease back on monetary policy when it starts getting really high.
But then at the same time, it looks like we're going into recession according to the standard criteria.
And that says, oh, well, we're supposed to ease.
And so we're really, in many respects, it's like a replay of the 1970s where no matter what the Fed does, we're kind of in a tough spot.
I said they painted themselves into a Keynesian corner.
Oh, I see.
So it's sort of like that stagflation that was never supposed to be able to exist, right?
Right, exactly.
I mean, if you read the standard news stories, they say, you know, the argument seems to be, should the Fed stimulate the economy or have a loose monetary policy, cut interest rates and give people their jobs back and get the economy humming?
But, oh, gee, then we're going to have price inflation, and that's bad.
Or should the Fed, you know, be real tough guys about it and keep rates high?
And so we'll have a recession, but at least we won't have inflation.
And what's happening is we're getting both.
Ah, well, great.
Yeah.
Well, you know, OK, I saw Alan Greenspan on The Daily Show a few months back, and they were talking about how, well, as you're saying, they painted themselves in the corner.
And I guess the tactic has been to just keep lowering the rates and hope to get it humming again and take the risks of inflation and that kind of thing.
And Jon Stewart asked Alan Greenspan, he says, yeah, but when you do that, when you push down the rates to help Wall Street, because that was the point, was to keep the stock market going up instead of down, when you do that, aren't you punishing the little old lady with the savings account?
And aren't you essentially transferring wealth from her to the guys on Wall Street?
And Alan Greenspan answered, more or less, yes, that's what's happening.
So is that right?
Yeah, among other things, that's exactly right.
That is what happens.
And yeah, you're right.
That was a great interview.
And Jon Stewart, I think it was the same episode, unless he had Greenspan on a different time, said something along the lines of, well, I thought we had a capitalist system.
Why is the government in the business of fixing interest rates?
And it was beautiful.
No one ever asked people that, but Jon Stewart, coming out of nowhere, comes up with that great question.
So yeah, it's entirely true.
If the government lowers interest rates, it lowers the target for the federal funds rate, which is the rate that big banks charge each other for overnight loans of reserves at the Federal Reserve.
That, in a sense, lowers the bank's costs of getting capital.
And so because of competition, then that trickles through and lowers other interest rates, like the interest rates that a bank would pay to somebody who just has their lifetime savings rolling over in a very safe account.
So yes, if it really is the case, and I think it is, as do you, that the Fed has been influenced a lot in the last few months by the turmoil on Wall Street and says, gee, you really need to cut rates because investors are going crazy and they're demanding monetary loosening, then yeah, that's one of the implications, that you're basically doing what you can to help investors recoup some of their losses, and you're punishing people who, like little old ladies who are dependent on fixed income assets.
I think probably in most areas of policy, people would admit that special interests send their lobbyists up there.
If we're talking about telecommunications, who has the right to own a cable company in this town or that town?
People understand that that's the way things are.
However, with the money, I think most people think that there's just this function of government where they sort of automatically know what to do, and they kind of keep all this currency flowing around so that we all can use it in our transactions.
We ignore the fact, or maybe we're deprived of the fact, most of us, that monetary policy is just as heavily influenced by special interests, and that when the government makes a monetary policy that goes this way or that way, they're hurting someone to benefit someone else.
No matter which way they're going, there's pain going on here for somebody.
Right, I agree with you.
I think part of it isn't so sinister.
It's just that monetary policy is so complicated and confusing that the average person really doesn't even know what's going on, so they're not in a position to say, wait a minute.
Whereas if the government sends money to build a bridge in Alaska out of nowhere, most people would say, wait a minute, that's crazy.
That's part of it.
It's just the complexity of it that it's really hard to penetrate through and even understand what's going on.
But you're right.
It's true.
What some people say, and in fact, Tyler Cohen, who's a generally free market economist at GMU, he's a sharp guy, he has a, I think it's the New York Times, I might have the paper wrong, but he's got a recurring column.
And back in September, when people were griping that all the Fed's bailing out Wall Street investors at the expense of Main Street, which is just the argument he just said, he was saying, no, no, this isn't a game of winners and losers.
It helps everybody.
If we have liquid financial markets, nobody is going to be benefited.
If there's a credit crunch, and then banks stop lending to each other because they don't know what's on everyone else's balance sheet, and then you get all these foreclosures and just a ripple crisis spreading through the system, that doesn't help anybody.
That was his argument.
So I guess it's true.
If you think that the Fed is really doing things scientifically, and they're just a bunch of disinterested academics sitting back and saying, hmm, how can we best help people, that you might come away thinking that the Fed's not picking winners and losers.
But on the other hand, even in the Wall Street Journal and other places, Fortune magazine, I was glad to see that lately, with this most recent aggressive cut that just happened last Tuesday, a lot of people were saying, wait a minute, this is crazy.
You're just causing inflation.
You're going to just give us more of the same of what we had this time around.
I read this book once by William Greerter, the former editor of the Washington Post, I think, Secrets of the Temple.
And basically, it's the story of Paul Volcker's term as chairman of the Federal Reserve Board, and about an impossible book to get through.
But anyway, the point of the book basically is, well, before the time frame in the book begins, there's been all this massive inflation for no reason, apparently.
It didn't have anything to do with all the socialism and war of the 1960s and 70s.
But for some reason, there was all this inflation, and never mind that the Fed had created it, something had to be done about it.
And then so Paul Volcker's term as Fed chairman was to raise the interest rates through the roof, and basically strangle the economy in order to finally get a grip on the inflation.
And the effect was basically demand side economics, but for the rich, rather than it was supposed to be, you know, supply side economics, where the people who are already rich have more money, and so they'll invest in more supply and get people back to work or whatever.
It ended up there was already too much supply.
Anyway, there wasn't really a demand for increase in supply.
So everybody just went and bought Porsches and yachts.
And, you know, the rich people did at the expense of everybody else.
And they talked about, you know, people sending in two by fours to the Federal Reserve Board and saying, yeah, this was going to be a house, but you destroyed my business.
And so now it's not, and that kind of thing, where their divorce rates go up, bankruptcies go up, families torn apart, because the Federal Reserve Board is waging war against the inflation that they cause.
And it seems to me like that's where we're headed, right?
We're going to have all this inflation from their policy.
And then another five, 10 years from now, we'll have interest rates through the roof.
Right.
That's exactly right.
That's what's going to happen is because of the easing now, you're going to get, like I said, last year's inflation rate.
And of course, these are the official numbers that the government releases.
And there's plenty of people, and I think they have legitimate arguments, who say that, come on, are you telling me you're at the price of the average household went up only 4.1% last year with what happened to energy and food prices, you know, say things like that.
But even according to government's own statistics, last year, there was 4.1% inflation, which was the highest since 1990.
And then all of a sudden, you know, the government, I mean, you read about the paper every day about how they're injecting tens and even more billions of dollars in temporary credit just for liquidity purposes.
And then they're cutting interest rates aggressively.
This recent cut on Tuesday, when they lowered it from 4.25 down to 3.5%, that was the biggest move in terms of a single period like that, I think, in something like 24 years, okay?
So these are really fairly unprecedented in recent times actions that the Fed has been taking.
And yeah, I mean, if you just think about what they're doing, they're literally pumping hundreds of billions of new U.S. dollars into the economy, and that's going to cause prices to go up.
And then, as you say, people right now, they don't care about that.
They're very short-term, and they're saying, I don't care about price inflation.
I'd rather have a job and have prices go up than to be unemployed.
You know, what good is it if you've got stable prices if you don't have a job?
That's the mentality.
And so, yeah, we might get through 2008 without having a serious contraction economically, but it doesn't make the economy more productive to print up green pieces of paper or to bump up the electronic entries with, oh, how much does this bank have on deposit with the Fed?
Let's add a zero to that number.
That doesn't all of a sudden make workers have more skills or give us more oil or forest, okay?
So that doesn't make us richer in a real sense, and it just really postpones the inevitable.
And so, as you say, I don't know when it's going to be, but once the Fed backs off, you know, suppose inflation gets to be 8% or 9% per year, and people right now say, oh, that's crazy.
But no, during the 70s, it was even higher.
We had double-digit inflation.
You said that was the term stagflation.
And so once that happens, eventually people are going to say, this is getting out of hand, and then, yeah, there's going to be some so-called hawk who takes over the Federal Reserve, and then he's going to jack up interest rates to try to put the inflation genie back in the bottle, the way they might describe it, and that's going to cause serious hardship at that point, whereas right now, if they had just kept interest rates where they were, we would have had probably a moderate recession, but then we would have gotten through it, and it would have been okay.
We would have been back to the status quo.
But it's going to make it that much worse.
Yeah, it really seems like the rich people, the very, very rich people, are screwing the rest of us coming and going.
They get to create money out of nothing and devalue our currency, and then when they are so bad at it that something has to be done about it, then they all just get to sit back and make a killing off the interest rates from all the money that they stole from us in the first place, and at the expense of the regular people both ways.
Yeah, but I haven't thought of it in those terms, but yeah, that's certainly a way to look at it.
I mean, I guess if I was a billionaire, I'd try to create a Federal Reserve System, too, right?
Right, and that's what's funny, is people think that, you know, if you read your history book or what you might have learned in eighth grade or something, it's, you know, all under the free market, there's these wild ups and downs in the business cycle, and there's all these bank panics and things in the 1800s, and that's why they finally had to establish the Federal Reserve System, and it was just, you know, the government didn't want to because of the Constitution and everything, but it just, it really had no choice because of the needs of the people.
When, no, if you go and read somebody like Murray Rothbard's books about the Federal Reserve and how it was actually formed, like just in terms of historical analysis, and no, it was all these huge bankers getting together in back rooms, probably smoking cigars for all I know, cutting deals and getting the Federal Reserve put into place.
Right, you know, G. Edward Griffin, the author of The Creature from Jekyll Island, I think it's chapter 3 or chapter 4, which probably should be the name of the book, is The Name of the Game is Bailout, and that's what it's all about.
You have this partnership where if George Bush wants to say, for example, slaughter hundreds of thousands of Arabs without raising our taxes, he just goes to the Federal Reserve and they create the money out of nothing for us and devalue our money, but it's a hidden tax, and the same thing for the big banks, right?
When Citigroup makes billions of dollars worth of bad loans and they might have to suffer the consequences in the market, then the Federal Reserve creates a bunch of money out of nothing for Citigroup, and both sides get to benefit at the expense of the rest of us.
Right, and just in case some of your listeners are thinking, come on, you guys are sounding like crazy conspiracy theorists, I mean, if you just read any standard account of what happens when the Fed lowers interest rates, I mean, it's not, this is probably going back to when we were talking about how it's so complicated it's hard for the average person to even understand what's going on, it's not as if the Fed wanted to, it's not a price control in the sense that the government in New York City might say, oh, this apartment, you're not allowed to charge more than $800 a month for it, or else you'll get a fine or go to jail.
That's not the way the Fed sets interest rates.
It pumps money into, it increases the supply of loanable funds for particular banks, and so like I said, if the people are thinking we're sounding like crazy conspiracy theorists, just go read a standard account of what does it mean when the Fed actually lowers interest rates, it engages in what's called an open market operation, and they come and they buy, let's say, government bonds or other assets from a particular bank that's got to be a privileged member of the Federal Reserve, so that's where the cartel aspect comes into it, that only certain banks are in this club.
And so it buys a government bond, let's say, from the bank, and then it just creates money out of thin air and puts those deposits on reserve for that bank, so that it can go out and lend money to more of its customers.
And so, so yeah, if you just think about it simplistically, it's okay, the government in a sense is printing up new money, and that's a bit of a simplification because it's electronic, but yeah, the government just prints up $10 billion in new green pieces of paper, and then decides to give them all to bankers first, and then those extra dollars trickle throughout the rest of the economy over time, of course the people who get that money first are going to be in a huge advantageous position, and that's what these privileged banks are in the present system.
Right, the people who get the money first, they get it at whatever it's worth that day, by the time we get it, it's been devalued.
Right, exactly.
And as far as conspiracy theorists, never mind J. Edward Griffin or even Murray Rothbard, all anyone has to do right now is put the words City Group and Bailout into their Google News search engine, and they'll get 379 results from this week.
So yeah, apparently there really is such a thing as the government creating money out of nothing and giving it to the billionaires who own the biggest bank in the world.
Right, and you know, if you want to push it even further, I mean, is it just a coincidence that Paulson, the Secretary of the Treasury, that he used to be heading up Goldman Sachs?
You know, is that just a coincidence?
I don't know.
Yeah, well, and you know, I think the way you encapsulated the myth as opposed to the reality was just perfect there, and I really hope people caught on to that.
I believe that the foundational myth, really, of America now, I wouldn't even say it's the Civil War, I would say the foundational myth of America today, at least of the American Empire, is the Great Depression and the Second World War.
And it's exactly as you said it.
Everybody, Bob, except you and me and a few other people over at the Foundation for Economic Education or whatever, believe that capitalism, that is a lack of regulation, caused the Great Depression, caused the terrible boom and bust system, and that then the government had to create the central bank in an attempt to smooth it out.
And what you're making the case is that the exact opposite is true.
Right, I mean, it's the central bank that causes this.
Yeah, the easiest way to sort of punch a hole in that standard myth is, you know, talking to regular people and say, well, when do you think the Federal Reserve was founded?
A lot of them think, oh, FDR probably did it, like, in 1935.
You say, no, it was founded in 1913.
So it had been in operation for over a decade when the Great Depression kicked in.
And so if your standard view is the Great Depression was the free market and then the government had no choice but to come in and rein in these wildcat speculators, that story doesn't really fit the historical timetable.
Right, and in fact, when you look at what, well, let's see, what was going on between 1913 and 1929?
Oh, yeah, the First World War and the Roaring Twenties and all this brand new money created out of nothing.
Tell me, Bob, was it a giant bubble on Wall Street that popped?
Right, yeah, and this is a subtle point, and I haven't studied the historical statistics, so I'll speak in generalities.
But yeah, what you're saying is true, that what happened is part of the reason for the Federal Reserve to be put into place when it was is that World War I was breaking out and they knew if they were going to enter that war, the public wasn't going to stand for not only getting into foreign entanglement on the other side of the world, but then to have their taxes go through the roof or have deficits go through the roof, they weren't going to stand for that.
And so as you say, there's a third option, the government can just print money.
And again, this isn't a conspiracy theory on my part.
If you go read even Milton Friedman or people like that talking about what are the advantages of going off a gold standard and having fiat currency, one of the typical arguments they'll give is, well, in case of emergencies like war, it'll allow the government to finance things more easily than they otherwise would have.
And so even the proponents of this admit, yeah, of course they think if we're ever in a position where we have no choice but to fight for our liberty, but still the point is, in order to get into World War I, it would have been really hard if we stayed on the gold standard.
In fact, World War I is what killed the international gold standard.
All the major countries went off because they couldn't finance the war effort and still maintain their dollar or their currencies tied to gold.
So yeah, they printed money like crazy.
And during the 1920s, it's true, prices were fairly flat.
Somebody like Milton Friedman or the monetarists, they'll say, no, the Fed did a good job during the 20s.
But the point is, because it really wasn't, in many respects, also a real boom, like things really were getting more productive, prices would have been going down during the 20s in a purely free market.
We had stayed purely tied to gold and didn't have a fiat system.
But because of that inflation effect that kept prices higher than they would have been, and so you saw flat prices, and you're right, it fueled a boom on Wall Street, and then that, for whatever reason, popped in 1929.
And then from that point on, the government just did the most asking things possible.
I mean, the Great Depression wasn't the result of any single thing.
It was just a comedy of our tragedy of errors.
For example, the government jacked up income tax rates because the deficit was going up.
Because of the onset of the Great Depression, the tax base shrunk, and so revenues to the government were lower.
And so what did they do in 1930 or 1931?
They jacked up taxes.
So I mean, it's just like the economy was down, and then the government just kept kicking it.
Yeah.
So I mean, it's just insane what they did back then.
That's why we had the Great Depression.
Yeah.
And the tariffs, too, right?
Didn't they just basically shut down international trade and call it protection of American industry?
Right, yeah.
The Smoot-Hollis tariff was also, I don't remember exactly, it was like 1931, something like that.
See, the thing is, I know that there's a certain percentage of the audience whose eyes are glazed over, they've already pushed a CD back in or whatever, because the Great Depression is just so boring.
But to me, getting at this truth behind, no, the government caused the Great Depression in the first place, then they made it worse, and no, the war didn't bring us out of it, other than, I guess you could say, well, they finally lowered the interest rates and let some money circulate, as long as you promise to spend all the money on munitions, or whatever, I guess you could say that.
But undermining that, the foundational myth of the American empire, that's what we're doing here.
And well, when I learned this lesson, it was a big deal.
So I'd try to teach it to others, I guess.
Yeah, and even here, of course, I'm leaving my area of expertise in talking about foreign affairs, but I find that you can get people to admit that, yeah, it's possible the U.S. shouldn't have gone into World War I, that that wouldn't have been the end of the world.
And even standard history books might say things like, that if that may have changed history, it might not have sown the seeds for World War II.
I mean, just the standard list of reasons why the World War II happened, a lot of things will list the punitive treaty of Versailles and things like that, and the fact that U.S. entry into World War I really upset the equilibrium, the balance of power that had been in Europe for so long, and caused a crushing defeat for Germany, which paved the way for Hitler.
So I mean, you have all those things in there, but you're right.
I mean, most people, they just think you're a neo-Nazi if you think that World War II wasn't a good episode for the American people.
Yeah, well, because we inherited all the empires that we fought against and the ones that we fought for at the end of it.
And that's why they call it the American century and all that.
You're supposed to forget the first 50 years, and it's the second 50 years when America was great because we got everybody else's stuff by default.
Right, right.
And tying it back to economics, then you've got the Bretton Woods Agreement, where instead of all the countries being tied to gold standard, now they're tied to the U.S. dollar.
Well, explain that, because, you know, the Bretton Woods thing has always kind of confused me.
I hear all kinds of different people say, well, yeah, see, that's the gold standard, and it didn't work.
And then other people say, well, no, that was only, I guess we're on pulses.
Ah, be careful, that was only a pseudo-gold standard, not the way it really should be.
Okay, sure.
So very simply, under the classical gold standard, like what would have happened in 1895 or something like that, anybody could, I mean, think of it this way.
The reason people were accepting green pieces of paper as money in the first place is that the government used to exchange that for a specified weight of gold.
All right, so, you know, originally, back in history, gold and silver and other real commodities were money.
It's not that some king just all of a sudden said, hey, let's all start using this little piece of, you know, this picture of me, and that'll be money.
No, people had to discover what money was in the first place, and so it was real commodities.
And so then governments, to get their people, to wean them off of gold, they started giving them pieces of paper that were supposed to be just substitute claim tickets on gold, like IOUs.
And so anybody, you could just walk into a government office and turn over a $10 bill and say, give me the appropriate amount of gold in return.
And the government had to do that, and that was the reason that the dollar circulated as money.
And then under FDR, he eliminated that for average citizens.
In fact, people under penalty of law had to turn in their gold, and that's why Fort Knox was converted into a gold repository, because if you take the country's gold at gunpoint, you've got to put it somewhere.
That's what they put in the Fort Knox.
And then under Bretton Woods, what happened is, because of the inflation during World War II, all the major governments said, okay, we can't just be printing money like crazy and just trust ourselves.
So they sort of had a pseudo-gold standard.
It was called the gold exchange standard, where other central banks could deliver dollars to the U.S. and say, give us gold.
I think it was $35 an ounce.
And so the U.S. was still pledged to give gold in exchange for green pieces of paper to other central banks, but not to average citizens.
And then Richard Nixon finally even took us off Bretton Woods.
He said, no, even if central banks try to redeem their dollars for gold, we're not going to do it.
Now the dollar, since Nixon took us off, the dollar is now tied to nothing.
It's just its own thing.
Well, in a sense, didn't they sort of replace the gold standard with an oil standard, and they made a deal with the Saudis that we'll bomb anybody that messes with you as long as you promise to sell your oil and dollars no matter what?
That wouldn't surprise me, but I don't know if that's true, and I haven't heard that.
Oh, I see.
Because, you know, they're saying now that the dollar is so weak that, well, Iran, for example, is talking about or maybe they already have switched to denominating their oil sales in euros.
And I guess I've heard a few people, I guess I've heard Ron Paul say that there's a certain tipping point where under this Bretton Woods agreement and even post-Bretton Woods, where you have this dollar standard for the world, that we're exporting so much currency that there's a breaking point when the dollar becomes so weak that everybody's going to want to dump their dollars from overseas, and they're all going to come flooding back here.
And at that point, then we'll have serious inflation, that kind of thing.
Do you think that's in the offing here?
Yeah, I mean, that's certainly possible that, yeah, what he's talking about is that right now, it's true, there's a lot of, the dollar is still the international currency.
And because of the legacy of Bretton Woods, everyone got used to using dollars because they could turn it into the U.S. at $35 an ounce, and Nixon took us off.
But at that point, people were so used to using dollars, they kept doing it.
So it was analogous to when FDR made everyone turn on their gold.
They had been used to having dollar bills on their wall.
They kept using it.
So people, you're right, so certain international transactions like gold, or sorry, like oil, are priced in dollars, West dollars.
And so various countries need to maintain reserves of them.
And also, sort of underdeveloped or volatile countries, what they would often do to prove to outside investors that their currency was strong is they would maintain dollar reserves.
So China, for example, if you remember the Asian financial crisis in the late 90s, part of why China was able to get through that relatively unscathed, the other countries just got crushed in Asia, was because they had huge reserves of dollars.
And so they said to the outside world, we will exchange Chinese yuan for U.S. dollars at this specified rate.
And so it was in a sense like they were borrowing the Federal Reserve, or they were outsourcing or insourcing the Federal Reserve.
And so to you and me, that might sound dubious, but that sounds safer than pressing the Chinese central bank to a lot of people.
So when the dollar was relatively strong and inflation was fairly low in the U.S. and it looked like the U.S. had sensible economic policies, then it made sense that foreigners would hold dollars as a reserve, just the way right now a lot of people would hold gold, because it's just a store of value.
Outsiders, if you're in some country where you might have 30-40% inflation year-to-year, holding U.S. dollar bills is actually a store of value, you know, compared to your currency.
And so what Ron Paul and others are warning is that, look, if the dollar keeps deteriorating as it has been against foreign currencies, the U.S. starts heading into recession.
And then on top of that, you know, the U.S. people are angry for its foreign policy.
And you got people like Hugo Chavez and people around saying that, you know, we're not going to use the U.S. dollar anymore because it's the worst piece of paper.
And that's what they've been saying.
That's the rhetoric.
But yeah, if people all of a sudden switch to the euro or to something else, then there's no reason for all these foreigners around the world to hold these billions of dollars' worth of dollars.
And so what are they going to do with them?
They're not going to burn them up.
They're not going to flush them down the toilet.
They're going to go to try to buy U.S. stuff with it to get rid of them.
Or, you know, people try to convert it to their currency in the foreign exchange market.
And so, yeah, ultimately, all those dollar bills are going to flow back to the people who are still using them, namely Americans.
And so even if the Fed does nothing, in a sense, it'll be as if our money supply goes way up very quickly as all those dollars flow back.
Because the problem is, it's not going to be a gradual process over five years.
If all of a sudden, it's like a bank run.
If all of a sudden people think that the bank isn't solvent, it's not that over the course of a year people withdraw their money.
No, they all run and try to do it overnight.
And so that's going to happen if there's this tipping point where people all of a sudden fear the U.S. dollar.
Because if one major country does it, let's say China, all of a sudden says, you know what, we don't want the dollar anymore.
We think it's going to get hammered in in 08.
And so we're going to sell off all of our dollar-denominated assets and convert them to euros.
Well, that would be a huge move.
And then everyone around the world would say, wait a minute, when they do that, the dollar is going to tank.
And so then they would try to get rid of their dollars, too.
And so it would just be a massive panic, and the dollar would crash.
Right, because nobody wants to be the last one holding the bag.
Right.
But of course, the people who can't get rid of their dollar holdings are U.S. citizens.
That's what our money is.
And so we would be the ones left holding the bag.
Right.
Now, there's at least one theory, I don't know how accurate this is, that part of the purpose of the wars in the Middle East and the doctrine of regime change in Iraq and Iran is to make sure to keep them on the dollar standard, to keep the oil denominated in dollars.
And if that is the case, it sure seems ironic that it's really the wars over there that are destroying the dollar and making it the case that everybody's going to want to dump them in the first place.
Or, you know, it's like the Terminator, you know, comes from back in time, and that's where the technology to build them comes from.
Right.
I mean, it's, again, this is something I, what you say is plausible.
I don't know if that's true.
And I have read, in Ron Paul's new book, for example, he made some speeches where he listed specific, it was, these speeches were given before the Iraq invasion, where he listed specific military actions the U.S. had engaged, and then he brought up quotes from, like, the finance minister of that little po-dink country months before, where he had, you know, speculated about, maybe we should diversify out of our dollar holdings, and then all of a sudden the country gets invaded.
So, you know, and it's true that there are so many evil, rogue regimes around the world that the U.S. can always come with a pretext for invading them, because basically all governments are terrible, you know, especially the ones in third world countries.
So any, so it's, of course, they can always come with a reason and point to legitimately awful things this government had done, in order to say, no, that's why we invaded.
But you're right, I mean, violence in general, I think, is very ineffective for achieving your goals.
And so even if you were willing to use violence to try to prop up the demand for your currency, then in the long run, that would be self-defeating.
Just by trying to do that, in effect, you would be sowing the seeds of your own failure.
All right, now, in the last few minutes here, tell us about the Politically Incorrect Guide to Capitalism.
Well, that's a book that came out several months ago, and it's basically, I just go through, it's a lot of what we're talking about here.
I just go through and take major areas of what the conventional wisdom is on certain things that, you know, capitalism hurts the poor, capitalism is a great system for producing wealth, but it has excesses that the government needs to tame, or capitalism caused the Great Depression, or capitalism harms the environment, you need the government to come in and make sure that we also take into account our natural resources, all sorts of myths like that.
I just go through and show that actually, it's the exact opposite, that capitalism is the virtuous element in that equation, and that it's government regulations that cause the problems that the public blames on capitalism.
And so it's written in a very down-to-earth style, and I just try to take people, it's a bit provocative, like it's intentionally shocking as the Politically Incorrect Guide series tend to be, but then the analysis is very serious and straightforward, and I just try to, in a no-nonsense way, go through and explain why the conventional wisdom is wrong on all those points.
Yeah, and it's a fun read, too.
It is, I like, you're right, it is written in a kind of shocking manner, you know, abolish the minimum wage, and people go, what?
Abolish the minimum wage?
How could you possibly justify opposition to the minimum wage, Bob Murphy?
Well, because it puts poor people, unskilled people out of work, that the minimum wage, what the government is saying is, it's illegal for you to hire somebody that in your opinion is worth less than whatever it is, $5.65 an hour.
And so, you know, there are, if you think about why does a business hire workers, it's because they're gonna add more to the bottom line than their wages or salaries.
And so if there are people who are, for whatever reason, you know, maybe it's a high crime area, or maybe because of government regulations, there's so much overhead costs for hiring an employee, but whatever the reason, if there are certain workers that just aren't worth that much per hour, the government passing a law isn't gonna change that fact.
And so you just made it illegal to hire those people.
And so that's certainly not the way to help them, to help them get into the labor force and, you know, get their foot in the door.
You don't wanna make it illegal to hire them in the first place.
Yeah, it also creates the black market in labor and the demand basically for illegal immigrants, because only illegal immigrants can do the less than minimum wage jobs and not be able to go to court and sue you over it.
So it sort of creates a demand for the illegal immigration that everybody's so concerned about.
Well, you're right, that's a good point.
John Lott actually elaborates on that and explains why it's the case, because you might think, well, you know, a lot of people just do it under the table and some people do, but you wouldn't wanna do it under the table, less than minimum wage payment, because at any time, if you're a US citizen, you can go to court and then you get paid, I think it's double or triple damages.
Like they go back and look at how long you've been working and figure out what's the difference to bring up the minimum wage.
And then the employer has to pay, I think either double or triple that difference.
And so it's just, you know, that person would be a ticking time bomb for you to hire a US citizen under the table and pay them less than the minimum wage.
Like you say, there's no fear that an illegal immigrant is gonna run to the US courts and report you because they're gonna get deported.
And so it just puts a huge incentive for people to hire illegal immigrants, which a lot of people don't like, so.
Yeah, there you go.
Well, we just need a police state and cameras and sensors and a double fence road down the middle thing on the border, like Checkpoint Charlie and everything, and that'll fix it.
All right, well, everybody, please check out the Politically Incorrect Guide to Capitalism, because it will take whatever silly myths you believe in about the evils of the profit motive and private property ownership and so forth, and it will slay them for you, and then you'll be smart.
Thanks very much for your time today, Bob Murphy.
Thanks for having me, Scott.