03/15/13 – Sheldon Richman – The Scott Horton Show

Hey y'all, Scott here.
Like I told you before, the Future Freedom Foundation at FFF.org represents the best of the libertarian movement.
Led by the fearless Jacob Hornberger, FFF writers James Bovard, Sheldon Richman, Wendy McElroy, Anthony Gregory, and many more.
Write the op-eds and the books, host the events, and give the speeches that are changing our world for the better.
Help support the Future Freedom Foundation.
Subscribe to their magazine, The Future of Freedom.
Or to contribute, just look for the big red donate button at the top of FFF.org.
Peace and freedom.
Thank you.
All right, y'all.
Welcome back to the show.
I'm Scott Horton.
Our first guest today is Sheldon Richman.
He is vice president of the Future Freedom Foundation, and he keeps his blog, Free Association, at SheldonRichman.com.
Welcome back to the show, Sheldon.
How are you doing?
I'm doing great and very happy to be with you again, Scott.
Okay, good.
Well, I'm very happy to have you here, and I was hoping you could teach me some things about the economy.
I saw where TV was saying that the Dow Jones Industrial Average is back up to where it was, and, in fact, even a little bit higher than it was before the crash at $14,000 and changed there, and how even though I don't own stock in any companies, I ought to be really happy about this because it means that everything is great now.
And you wrote this article saying, nuh-uh, and so I was wondering if you could explain.
Yeah, well, yeah, there's a little more to it than that, as you might expect if you watch the regular media often.
You're used to the idea that it's not quite the whole story.
Yeah, the Dow is back, but it's actually back to its 2000 level.
One thing they don't ever tell you about or rarely tell you about the Dow is that it's not adjusted for inflation.
So you're saying not the 2008 level before that crash, but the 2000 level now before or after that crash?
Yeah, the 2000 level.
See, the Dow was based on like a 30 blue chip.
Well, but the Dow crashed in March of 2000, right?
So before or after that?
Probably before a crash in 2000, yeah.
So that was the height of the dot-com bubble.
The NASDAQ crashed in the fall of 1999, and then the Dow crashed in the spring of 2000, right?
At the end of that bubble before they went ahead and redid the housing bubble instead.
Yeah, you see the Dow was computed.
The Dow consists of 30 blue chip, heavily traded companies that once in a while a new company is admitted and one leaves.
There's some companies that have been on there for a very long time, like GE and some defense contractors, military contractors.
But the way they compute the Dow is they take an average of that day's price of all those companies, or they take a sum of the price of all those companies, and then they divide it by this magic divisor, which is something like 0.13 something or other, which is – I don't know who cooks it up or how, but it's supposed to reflect things like stock splits and whatnot.
And then they come up with those numbers, so that's how they get $14,000 and change, as you pointed out.
But those stock prices is a money price, and money has depreciated over the years, thank you, Federal Reserve.
So if you really want to make a comparison over time, it would be fair to be using a constant dollar, and they don't do that.
And so it's only reaching its 2000 level.
So this is already nothing to celebrate.
But we might ask, okay, what's going on?
Why is it running up?
I mean, in recent months, obviously, it has been running up.
And we can find the source of that not in any great confidence in the economy, but in the Federal Reserve policy.
The Federal Reserve is keeping interest rates very low.
It's buying up long-term government debt in order to keep long-term interest rates low.
And people who want a better return on their money are looking to somewhere else.
And so where are they putting their money?
They're not going to put them in the government bonds because you get so little.
They're looking at the stock market and commodities.
And so this helps to explain the run-up.
It doesn't mean the economy is out of the recession.
Officially, of course, it was out of the recession in 2009.
But everybody knows it's a very, very anemic recovery.
Job creation has been disgustingly low.
And even more revealing, the job participation rate remains low.
Okay, it's fallen from like 63 percent before this recession down to, what, about 59 or so.
And it's barely recovered from the low point during the recession.
So there's nothing to celebrate here.
That's incredible, if I understand it right, and I'm afraid that I do.
But I think what you're saying is, go back in time to the year 2000, the entire decade of, or, you know, almost eight years there, of all that growth that then turned out to be a big hollow bubble of hot air of inflationary money funneled into the housing and stock markets that crashed in 2008.
We're finally, at least the value of the Dow, never mind unemployment and all that nationwide for a moment, at least just in terms of the Dow, it's now finally back up to where it was at the height of the bubble that popped in 2000.
But it's also just a bubble.
And this isn't, you know, finally they let the economy rationalize and prices find their level.
And now we finally have real growth.
And isn't it sad that we're only at where we were in 2000?
But they just created another bubble.
But even this bubble has just got us back to 2000 levels.
That's how far in the hole we are.
That's what you're telling me.
Do I understand this thing right?
Yeah, that's what it appears to be, if you do this adjusting.
You know, of course, the bubble idea, being the good Keynesians that they are, they think that the bubble will change our psychology and make us all optimistic and run out on spend.
And that will lift the economy, you know, out of the doldrums.
That's sort of the Keynesian idea, right?
Animal spirits and all this.
They want to redo the animal spirits by making us feel good.
And the illusion of prosperity can make us go out and feel good.
So they're also trying to pump up housing prices and values because when we do that, we feel richer.
And, hey, we go out and feel good and spend.
But the problem is, first of all, the problem is not deficiency in spending.
As has been pointed out by many people, Bob Higgs in particular, consumer spending came back fairly quickly in this recession.
And so it's not been abnormally low.
So there's no way that you can say that the economic problems today are the result of inadequate aggregate demand.
But that's the key to the whole thing.
I mean, that's the key to all the MSNBC Keynesian pundits.
They think since there's inadequate demand, the government needs to spend, which is the good old Keynesian religion, right?
If we're not spending, well, someone's got to do it.
And so government is our spender of last resort.
But the point is, it's not the consumer spending has not been low.
It's come back and it's been high.
And I think just recently, you know, it made another surge.
So that's not the issue.
They won't face the fact that the whole Keynesian diagnosis is wrong and, therefore, the remedy prescribed by the Keynesians is wrong.
And so, I mean, this is really whatever consumer spending, in a way, that's kind of what accounts for the stock market bubble too, right?
Because, like you're saying, they hold the interest rates so low they make saving a felony, basically, right?
Little old lady can't have a savings account or she's going to get beaten down by inflation.
So now she's forced to speculate.
And what does she do with any of the extra money that she's got?
She's got to put in the stock market, invest in a housing company or something like that, right?
Right.
The government is continuing on this path of discouraging saving by keeping rates so low that, you know, why would you put money in a bank account?
And so anybody that does want to, say, make some money and look forward to retirement or something like that or just make their assets grow are going to need to turn to some form of stock market investment.
It may be direct, but it also may be, you know, indirect by getting into some kind of, you know, mutual fund or indexed thing.
But the point is, yeah, we're all sort of compelled by this policy to be oriented toward the stock market.
So this is one reason why the Dow, even though it represents a mere 30 companies, is sort of like something holy, right?
Sometimes the TV stations put the Dow in a little box, right, so you can watch the number all day and see how your life is going by how the Dow is going.
It's pretty ridiculous.
And it does look like a bubble, which means it will come to an end.
And then what happens?
We start over.
We're back in a recession.
Employment really has not recovered, as I have already said, but those people who maybe did find new jobs may be out of the jobs because those are not sustainable if they're the result of a bubble.
Once again, we're being led down this path, and the news media is right in there cheerleading about all the good news.
All right, now let me ask you – well, there's so many damn things I want to ask you about.
Well, let me ask you real quick about price inflation.
I don't know about you, but a lot of Austrian school libertarian-type economists were saying, uh-oh, look at all this new credit creation, new money creation by the central bank.
This is going to lead to massive price inflation.
And some of them said when, and some of them didn't.
I'm not exactly sure what your stand on it was.
And it seems like, hey, look, prices are going up on the shelf at the grocery store.
And, boy, anybody who tried to spend $20 on a tank of gas and saw that it barely filled them up a quarter tank lately knows what I'm talking about.
But then again, it hasn't been Weimar, Germany or anything even close to that at all like a lot of people thought.
And it seemed to me, and I'm the furthest thing from expert on this, but it seemed to me a couple of factors accounted for this.
One was there's basically a bottomless pit of bad debt that needed to be written off or could have been bought up with all of this money.
So it was basically just canceling out a hell of a lot of denominators where you had the whole world, bazillions of trillions of dollars in bad debts based on the bubble.
And then the other thing is all the derivatives and whatever, whatever.
And then the other thing is the Fed created all this money and it gave enough to the banks to keep them all whole and buy up all their bad debts.
Right.
But then it also pays them an interest rate to keep their money at the Fed and to not loan it out, even though they say that they're trying.
I mean, they do have interest rates really low.
It seems like they're trying to inflate on that end and try to encourage people to take out money and at least to spend it on a new kitchen, if not on a new supply of anything.
But they're also paying the banks, right, to not loan out that money at the same time.
Can you please help me understand, because I really don't.
Bernanke is trying to do what he wants to do without igniting an inflation.
And so far he has succeeded at that, but that doesn't mean he'll succeed in the future.
Is it that he's got a little Ron Paul on his shoulder screaming inflation, inflation, inflation, and so he's kind of afraid of what might happen?
His big fear has tended to be deflation, but at the same time I assume he doesn't want to set off any kind of big inflation.
So what he's been doing is, while he's been creating a lot of money, that's definitely true, they're buying billions of dollars worth of long-term government debt.
And they've been buying on the new, the QE3, they've been buying mortgage-backed securities from banks in the billions of dollars.
But at the same time they've been selling other short-term debt from their balance sheet, and therefore that takes money out.
So in a sense they're neutralizing the money creation, because while they're putting money in, they're taking other money out.
He's trying to affect interest rates without expanding the monetary base.
And that goes along with what you said there just before, that they're paying something like 0.25% to the banks if they leave their money in the banks' own Federal Reserve accounts.
So much of that money, most of the money, I'm not exactly sure, but I guess an awful lot of that money is on account at the Fed, and therefore not getting out into the economy.
The danger is, if confidence in the economy suddenly were to surge, and people wanted to borrow money, and the banks wanted to lend it, then we might see a surge in prices because of this inflation.
You've got to be careful when you talk about gas prices and other prices, gold prices, not to confuse relative prices with an overall price level.
And so it's easy to look at gas prices and say, oh, it's inflation, but other prices may be falling.
We haven't seen a lot of price inflation.
A lot of people say the CPI, in fact some people who've studied this pretty closely, think the CPI overstates the results of monetary inflation.
So gas prices, that's just from sanctions on Iran?
We do not see a raging inflation being ignited by this policy.
There are other problems.
The Fed can do other bad things besides inflate.
It can allocate credit, which it's been doing.
Jeffrey Rogers Hummel has pointed out how it's become the new central planner, because it allocates credit directly to favored interests, and it can manipulate interest rates, which can have a huge distorting effect.
But it can do bad things without creating inflation.
Now, how much money have they created, whether it's sitting on a shelf or not?
Well, I don't know the overall figure.
I know Operation Twist and the QEs, the various QEs, run into, well, I guess by now, trillions of dollars.
But like I said, it's not getting out into the economy for the various reasons we've just discussed.
Right.
But like you're saying, if the economy ever really did pick up, then it could.
And then by the multiplier of the reserve ratio, the banks are all creating even more money to loan out based on the money that they do have and that kind of thing.
That could really become a problem very quickly.
Well, Bernanke has assured that he'll pull that money out before that can happen.
But, of course, that means our entire fate is in the hands of Bernanke's, what, perceptiveness and timing.
And he's just a human being.
He's the guy behind the curtain.
He doesn't have any magic information.
And so I'm not terribly confident he'll know when to take that money out.
The other thing to remember...
Wait, wait, wait.
Hang on one second.
Even then, right, he'll be forcing the recession that he's been inflating this whole time to try to prevent.
Right.
And the politics will be very much against that.
Despite the myth of the independent Fed, the Federal Reserve Chairman is not oblivious to politics.
And you're right.
If he sees that there's inflation-induced growth going on, in other words, apparent growth going on, the politicians are going to be very reluctant to see him put a damper on that.
Because, you know, especially if employment is coming back on the basis of this illusion, they're still not going to want to see the illusion popped.
They're going to want to keep it going.
So there's going to be... yeah, there's a real issue there, a very big issue there.
The government doesn't have a huge interest in inflating, because as Jeff Hummel has pointed out in a few different places, the government doesn't make money off inflation the way it used to for various reasons.
For one thing, it's a global economy, and people quickly shift out of currencies because they get information early.
And so there's no real big payback to the government from inflation, as far as monetizing the debt and all that stuff.
The consequences there are really insignificant.
And I see what you mean, too, about it.
We should always be careful when, you know, to take anecdotal evidence like a gas price or food prices, because it could be gas prices forcing food prices.
It could be, you know, maybe a drought in one place and a snowstorm in another, and some sanctions on Iran's oil supply and that kind of thing that have separate effects, you know, apart from any monetary policy whatsoever, right?
Yeah, that's right.
You've just got to be careful and not look at a couple of prices.
David Henderson has been writing about this on his blog.
Now, on the other hand, though, don't they manipulate the hell out of the CPI in order to make it seem that, you know, well, you know, if we make everybody's favorite brand of chips so expensive they can't afford it anymore, well, they'll just switch to a cheaper brand, and so we don't have to count that as an increased price in corn.
We can just say that, you know, people's preferences change, and so we get to add 0.2%, but then we'll subtract 2% again from our thing, you know?
Well, you know, indexes are always arbitrary.
That's definitely true.
They have a problem with quality improvements when they're looking at some basket of goods, you know, with a desire to compare prices across time.
But, you know, there was a commission, the Boskin Commission some years ago, Michael Boskin is, you know, a fairly free market guy at the Hoover Institution, and they concluded that the CPI overstates inflation.
So on the other hand, there are people that argue that it understates inflation.
So, you know, that argument has been made both ways.
It's hard to say, but any index is going to end up being arbitrary and include some subjective element because of things like quality.
That's right.
How do you compare buying a music player today with a music player, you know, 30 years ago?
Obviously it's not the same thing.
The quality is much different, and you can't just do a sort of a mechanical comparison of the price and say, oh, people are paying more today to have music at home than they did 30 years ago because the quality change is so dramatic.
And now, can you address the difference between or even maybe the manner in which they come up with the unemployment rate and how different you think the truth might be from that?
Yeah, well, you know, that's based on two different surveys.
They have the unemployment rate, and then they have the jobs added number.
If you look at the first Friday of every month, what is it, the Bureau of Labor Statistics or one of the government agencies releases, you know, what the last month looked like.
And it's always how many jobs were added and what the rate is.
The jobs added comes from a survey of businesses that actually call people.
They call businesses and say, did you add any jobs?
And the unemployment rate is the result of calling households saying, you know, are you working?
Are you looking for a job?
That sort of thing.
So there are two very different things, and you sometimes get, you know, anomalous results where the jobs seem to be added but unemployment rate went up.
And then you have this other issue with if you stop looking for work, you don't get counted.
So the unemployment rate could go down, not because people found jobs, but because a lot of people decided, what the heck, there are no jobs out there.
I'm staying home and watching soap operas.
So that's why there are people who think that the job participation rate is the better thing to look at or what's called the civil employment population ratio.
And like I said, that went from a high of 63 percent before this recession down to about, I think it's 59, about 59.
And in the late 1990s, it was as high as 65.
It's slightly over 58 percent today.
That's, you know, how many working-age people are actually working.
That's considered actually by some people at least a better assessment of what's going on.
Now, like at what point do they have an official point where they say, you know, at this percent that's officially a recession or that's not how they measure recession?
They just go by growth, not jobs.
No, I think a recession, the Bureau of Statistics, Economic Statistics, I forget what it's called up there in New England.
I believe that's two consecutive quarters of negative growth, GDP growth.
So it's not based on the unemployment rate.
So but if the bankers and the government are basically acting like mobsters and treating the country as the liquor store they've taken over and they're just liquidating all of our assets and then they're ready to torch the place for the insurance money at the end, that'll look like growth for a while as long as there's still something left to loot.
But meanwhile, we could be as unemployed as can be and starving to death in the street basically.
Yeah, and we all need to be skeptical of these numbers because, don't forget, GDP can grow, but that just tells us, say, that government spending has increased.
It says nothing about quality.
It only talks about quantity.
You know, who cares if there's more spending going on, if it's spending on bombs that are going to be dropped on people, you know, far away.
That will show up in the GDP.
Who cares?
Well, some people care because they make money off making bombs, but the rest of us shouldn't care.
You can't eat bombs.
We don't get a rising standard of living as a result of that.
So this fixation on GDP, just like the fixation on the Dow, is a big distraction, but it all feeds this sort of simplistic, it's worse than simplistic, this totally wrong Keynesian worldview that we just need to get spending up.
If we get spending up, you know, we'll have full employment, and government needs to do this because, you know, the market can't do it on its own, except under very rare circumstances.
That's so funny, right, because you don't have to know anything to just know the argument Adam Serdman says.
So if we spend everything we've got, then we'll have everything or we'll have lost everything.
I mean, come on.
Oh, look, Paul Krugman said just recently in his debate with Joe Scarborough on, what was it, Charlie Rose's show, that even cutting wasteful spending, even cutting spending that everybody agrees is wasteful is the wrong thing to do today.
He says that.
You know, you can't caricature him and that kind, really, because, you know, if you say something absurd and put it in their mouth, it's something they already believe, so you can't really caricature them.
He said it would be wrong to cut wasteful spending now, wasteful government spending, because they have this idea that any spending is good.
Why?
Because government workers get their salaries and go out and buy stuff in stores, and therefore store owners hire more people, and then those people who just got hired go out and spend their income, so other store owners hire more people.
And before you know it, the whole economy's humming.
Why?
Because people have been, because government's borrowing to expand programs and hire more people and write more contracts.
That's the Keynesian logic.
It's spending our way to prosperity.
Well, at least it's good for, well, I guess it was good for building an empire, but it's going to be good for killing the empire eventually, too, right?
Give us some silver lining here.
Well, as Herb Stein famously said, anything that can't go on forever will end.
Yeah.
All right.
Everybody, that's the great Sheldon Richman.
He's the vice president of the Future Freedom Foundation at FFF.org.
And we're going to be back after this here.
Hey, y'all, Scott Horton here for the Council for the National Interest at councilforthenationalinterest.org.
CNI stands against America's negative role in the ongoing Israeli-Palestinian conflict, the war party's relentless push to bomb Iran, and the roles played by twisted Christian Zionism and neocon-engineered Islamophobia in justifying it all.
The Council for the National Interest works tirelessly to expose and oppose our government's most destructive policies, but they can't do it without you.
Support CNI's push to straighten out America's crooked course.
Check out the Council for the National Interest at councilforthenationalinterest.org and click Donate under About Us at the top of the page.
That's councilforthenationalinterest.org.
Man, you need some Liberty stickers for the back of your truck.
At libertystickers.com, they've got great state hate, like Pearl Harbor was an inside job.
The Democrats want your guns.
U.S. Army, die for Israel.
Police brutality, not just for black people anymore.
At government school, why you and your kids are so stupid.
Check out these and a thousand other great ones at libertystickers.com.
And, of course, they'll take care of all your custom printing for your band or your business at thebumpersticker.com.
That's libertystickers.com.
Everyone else's stickers suck.
Hey all, Scott Horton here, inviting you to check out wallstreetwindow.com.
It's a financial blog written by former hedge fund manager Mike Swanson, who's investing in commodities, mining stocks, and European markets.
Wall Street Window is unique in that Mike shows people what he's really investing in and updates you when he buys or sells in his main account.
Mike thinks his positions are going to go up because of all the money the Federal Reserve is printing to finance the deficit.
See what happens at wallstreetwindow.com.
And Mike's got a great new book coming out, so also keep your eye on writermichaelswanson.com for more details.
Hey everybody, Scott Horton here.
You ought to consider advertising on the show.
Here's how it'll work.
You give me money, and then I'll tell everybody how great your stuff is, they'll buy it, and we'll all be rich as Republicans.
Sound pretty good?
Shoot me an email, scott at scotthorton.org, and we'll work it out.