07/16/13 – Mike Swanson – The Scott Horton Show

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Alright y'all, welcome back to the show here.
I'm Scott Horton.
This is the Scott Horton Show.
We're at scotthorton.org, noagenda, stream.com, talkstreamlive.com, and things like that.
Alright, our first guest on the show today is Mike Swanson.
You just heard my spot for his site, wallstreetwindow.com.
Hey Mike, how the hell are you?
Oh, I'm doing good Scott, good to talk to you.
Very good to have you here.
And this is no kind of, you know, paid infomercial spot or anything like that.
I just want to interview you about stuff because you write these great articles and I should be interviewing you about them all the time anyway.
Yeah, I appreciate it.
Good stuff here, yeah.
So, which one, this is the one that I was really interested in.
A lot of different points to go over here and you know how it works.
We've got plenty of time to do it too.
Traders excited over stock market, but this economy is not creating good jobs.
So, well, I don't know.
What the hell exactly does that mean anyway?
Because TV says that things are looking up.
Well, you've got two things going on there.
And one, of course, is the stock market has gone up the past couple of years.
A lot of it having to do with the fact that the Federal Reserve is doing this quantitative easing policy of financing the deficit and creating debt and maintaining super low interest rates.
And if you think back to the last decade, Alan Greenspan did the same thing in the 90s and that helped create the Internet bubble that crashed.
And they did create another bubble to bail that bubble out.
The housing bubble, it crashed.
Now we're creating a new bubble.
But I think this bubble is government debt, and that's much more dangerous down the road.
And I think, you know, we're at a point where there's a hidden factor in there, which I've talked about, and that's the military budget.
Because without controlling that, I don't think they can control the deficit anymore.
All right, now, well, let's stick with that for a minute, I guess.
Where Robert Higgs and Mother Jones and the National Priorities Project all come together and agree that it's approximately a trillion dollars a year blown on militarism, that must be right about correct, huh?
Yeah, yeah, that's exactly right.
And one way they get to that figure, though, is that they're also looking at the interest that past wars and past military spending has created that we have to finance.
So the actual military budget isn't exactly a trillion dollars.
You know, the impact of the budgets before that, that adds up to a trillion dollars.
And one thing that's amazing to me is, you know, these are all issues, you know, I've read Higgs and the other people, I listen to your show, and, you know, interested, of course, in the economy and all this stuff.
But we don't really realize, I don't think, the impact of military spending because we don't really see it.
For example, if you look at the jobs issue in the United States, most of the jobs that are being created now are low-pay real retail and restaurant jobs, and a lot of part-time jobs.
So they're not really, you know, great jobs that are consumer spending in a big way or anything like that.
But one thing that's fascinating, and I didn't know this, is that if you go to Walmart at the beginning of the month, you see all these people, you know, who haven't used food stamps and going in there.
And a lot of people see these people and think, well, they're the ones contributing to the deficit in their mind in the economy.
But in reality, most people are working.
I know lots of people who work for the sheriff's department that actually get food stamps because they don't make enough money if they have children and families.
And then the thing that's really shocking to me is that the biggest employer in the United States is the defense department.
They employ 3 million people.
So in a certain sense, I think the economy that the regular person lives in is bad right now.
It's been bad for years, and the job situation is bad.
And we're actually propping up the defense establishment, and are suffering for it at this point.
All right.
With my limited imagination and economic knowledge, I'm thinking that if we abolish the empire and fired all our soldiers and our 3 million Pentagon employees, well then, hell, that would drive wages down even more.
That would cause a gigantic glut in labor, and everybody would be out of a job.
Yeah, well, that's an argument.
However, I remember last year, and actually that's an argument.
I don't know if you're familiar with the book.
What's it called?
It was written in the 60s.
It had Iron Mountain in the title.
You know what I'm talking about?
Yeah, yeah, the report of the committee from Iron Mountain.
Yeah, and they always argue whether it was really meant to be a satire or not, but either way, it's great.
Yeah, yeah, it's a great little book, and one of the arguments in that book.
It's about the desirability of peace, and the whole thing is peace is not desirable at all.
How do we keep conflict going?
That's what it's about.
Yeah, and the argument, the reason we say you need to have war or a war-based society is, one, to hold people together just by having a state, and, second, for the economy.
And that book's argument was that inflation is a problem in the economy, and if you can just take people's money and just basically put it into a useless thing, which is what I would say the defense budget is once it gets past a certain point.
For example, if you take an F-22 airplane and they cost $150 million a piece and they don't really have a purpose in the wars we're fighting, they're just like a waste.
So you could argue, well, that's great, because that money could be creating inflation or something.
However, you know, that gets a bunch of baloney.
But the other argument...
Yeah, too much wealth in this society is what creates inflation, huh?
So that's why we have to destroy wealth.
Yeah, it's kind of crazy.
But the other argument is, well, it's a great jobs program.
And that was essentially, if you think back to last year during the presidential election, that was sort of an argument being made then, and they sent, if I remember correctly, the Romney people sent these letters off saying people could lose their jobs if he doesn't win.
Of course, none of that happened.
The defense industry was going to lay people off.
And I remember reading some studies at the time saying, well, the amount of money it costs to create one of these jobs is so much as, like, $80,000 or $100,000 to create, like, a 30,000 or 40,000 job.
But it's not cost effective if you're just trying to create jobs for people.
So probably there's a better way, you know, if you just want to employ these 3 million people to get them to do something else.
And I think even more important is that to really have sustainable economic growth and a real boom in the economy, you really need to see capital investment among private companies that want to, you know, invest in new technologies or expand their businesses.
And that will trickle over into hiring people in a sustainable way, in a productive way that contributes to the economy.
And one thing that's happening is that because interest rates are so low and there's so much government debt being created, it's crowding out private investment.
In fact, I was looking the other day at projections.
Some economists are making that private capital investment is going to decline next year.
You know, you don't want that kind of thing going on for a healthy economy.
So all this military spending and the debt to finance it has a negative impact also on the private marketplace.
Well, you know, it's funny.
The way you described at the beginning of the interview about how, well, remember in the 90s we had this prosperity, but then it was this dot-com and, you know, the NASDAQ and Dow bust of 99 and 2000, and then we did it again, and everybody thought they were rich for a minute.
Or not everybody, but a lot of people anyway thought they were rich for a minute, refinancing their house a couple times and getting a new car and whatever, whatever.
And then that all came to a terrible, abrupt end with this boom and bust.
And now you're telling me that the gains in the stock market and these kinds of things are just another one of these kind of fake bubbles.
But here's the thing.
So what would it take to just have real growth instead of all these dislocations?
You're saying it's the military spending, that without the military spending we wouldn't have these dislocations?
We could just have maybe slow and steady real growth of actual wealth and production and higher standards of living?
Well, I don't think it's really the defense spending that's the cause.
It's the Federal Reserve creating all this debt, which is going into the defense department.
You know, it's being used to fund it.
But I can't just say it's just the defense industry.
It's really the Fed enabling it and the impact of trying to manipulate interest rates and prevent recessions.
That's the real problem.
It's not something that's necessarily just starting now, but I think over the past, since the early 80s or 1987 or so, where the Fed decided that we don't want to see major stock market defunds or recessions or anything, and we're just going to try to prevent it or else.
Also, there's evidence that Alan Greenspan and some of the people around him became terrified that after the 1987 stock market crash that if the economy, if the market crashed too much, everything would just, like, stop, which is kind of a – it's actually not something to be as scared of as they were.
There's a beneficial effect to having recessions and temporary slowdowns in the economy.
It causes people to get more conservative, and those that are too much in debt pay their debts off.
Companies that don't need to be in business or are too overleveraged or whatnot, they get beat by competition and so forth.
The problem is that they keep – over the past couple decades, they've kept trying to prevent this from happening, and as a result, each bubble and each crisis, you build up more imbalances, and each one has become worse than the last one.
Right, but then, so at some point, how bad does it have to get for us to really liquidate all the bad debts and have a real – you know, an economy based on sound investments?
Because when people talk about, I guess, just number losses, maybe more trillions were lost in the crash of 2008 and all that kind of thing, but in the Great Depression, people starved to death, and they didn't sit at home on unemployment.
They literally could not find a single thing to do for a dime for a long time, right?
So we don't want it to get – and that's the monetarist argument.
That's the Bernanke argument, that we have to keep inflating because we can't let it get that low, and even if you're right – I don't think he would say this part – but even if you're right that we screwed up by inflating too many bubbles in a row now, but now it's really true that we can't let it crash all the way down because think of the dislocations that would come from that.
Think of the harm to people that would come from that.
So we have to keep inflating.
Well, I'd like to make one interesting point in a second about that, but one thing is it is terrible.
You know, the Depression was terrible, and if you look in the 1800s, there were also multiple depressions that took place, but the difference between the ones that happened then and the Great Depression or even the situation now is that you didn't have all this intervention on the part of a central bank, so they tended to be very quick in duration, you know, just six months or a year.
I don't know how some of our monitoring history in the 1800s is going to be an expert in it, but for example, there's one in the 1880s after Andrew Jackson, his second term, I think it was towards the end of it, there was one.
But if you look right now overseas, there's a crisis going on in Cyprus and Greece.
There's one building in Argentina.
They happen all the time, you know, and they're not the end of the world when they do happen, and things recover and stabilize and you get a boom.
Normally they just last about a year, but it's the state intervention that makes them drawn out.
You can read Murray Rothbard's book, The Great Depression, for that argument too for the 30s.
Yeah, in fact, well, it often happens that Rothbard gives, I guess, different levels of explanation of the business cycle, but the way he explains it in that one is, I think, really easy for the layman, and also the chapter on it in, I mean, this is just for the newbies.
The people who already know, they know where to look too, but in the manifesto, Libertarian Manifesto for a New Liberty, the explanation of the Austrian school theory of the business cycle in there is also very well done and very accessible to people not familiar too.
But, yeah, no, I'm with you.
I'm just trying to play devil's advocate a little bit because, of course, what— Let me give you another argument that almost no one has ever heard.
All right.
And to justify what the Fed's doing, to argue against what I just said, in 2009, there is an issue of Foreign Affairs, which is put out by the Council of Foreign Relations.
It's probably the most prestigious foreign policy think tank in the United States.
And this issue had a headline article.
It's a quarterly journal, and this one had a really important article.
The headline article was—I can't remember the title of it, but it was written by Peter Peterson, who is one of the top people in that organization, and he talks about debt, deficits, and all this kind of business.
And the question of the article was, is America in decline?
Are these debts going to harm the country?
And he was projecting that by 2030 it would, if nothing is done, that there would be some sort of financial crisis, and he was using the government congressional budget data.
Now, his argument, though, was what we should do to prevent this from happening is raise taxes, lower people's standard of living so the United States will import less goods, you know, we'll buy less stuff, create a better city.
So the financing of our trade deficit won't have to be so big.
And the bottom line is he was basically saying we can't make any major changes because to do that would mean dismantling the empire and lowering military spending.
We can't do that.
Just forget that.
Yeah, we can't do that.
The only other choice, and this is what he was arguing, was just lower everyone's standard of living.
You know, we'll have inflation, and we'll have higher taxes, and people will just have to, you know, be used to living at a lower standard of living.
And no one has ever read that.
I was like, this is amazing to read stuff like that in print, being advocated, and it was just like, wow.
Yeah, well, and he sure as hell didn't mean anybody on Park Avenue that they would have to reduce their standard of living.
That's where Pratt House is.
Oh, is it?
Yeah, the CFO headquarters there, man.
But I don't know.
I kind of wonder if sometimes that's kind of the direction the country's going in.
You know, I had a teacher back in the early 1990s who said, you know, I've been around the world, this, that, the other thing, and there are countries where you have the very rich people live in the high rises and everybody else lives in the slums, and that's it, and there is no middle class, and that's the way America's going.
So pick your side and fight for it.
But, you know, that's what's going on now is the billionaires have decided to abolish the thousandaires.
They want everyone on paycheck to paycheck.
It seems like that.
Well, yeah, to give you an example or a little story, the place I live in, it's a town or a city of about 50,000 people, and I live in southern Virginia, and it's a very depressed area because a lot of factories have shut down.
In fact, I was looking at some statistics, and out of 260 cities in the United States, if you rank them by per capita income, it's like 238, and the household income is like $17,000, and half the people, you know, are on assistance.
They have children.
Well, I was in the city, and it's also a rural county.
I was on someone's farmland a few months ago, and two F-22 fighter planes flew over us, and they're only about 1,000 feet up in there, and they're real, you know, fancy looking and impressive, and they come by this area once in a while because they fly to Norfolk, and they're doing training exercises.
Well, I looked on the Internet, and one of those planes cost $150 million, so that was $300 million of money that was spent to make these planes fly above us.
And the whole area I live in, the whole retail sales in any given year doesn't even amount to that much money.
So it's just amazing to think that that's the size of my day-to-day life, the stores or going to the grocery store, people I know, whatever, for the whole area is dwarfed by those two airplanes.
Well, you know, I'm kind of reminded of that mean old Bill Lind years ago on this show, and I say that kind of in jest, but he was saying, oh, forget it.
Yeah, no, just throw it in the trash.
The whole thing's over.
It's a free-for-all.
It's an imperial court, and what that means is no one is really in charge.
It's simply a matter of who can take over the Congress enough to exploit the state enough that they have the ability to reach into the honeypot and take for themselves.
It's a zero-sum game, and the race is on.
Who can use the government to cannibalize the entire country for their own personal benefit at the expense of everybody else, and there ain't a damn thing in the world that can be done to stop them now.
Well, one thing, too, is it could be that we're giving too much credit to these elites and people in charge and whatnot.
You know, it's one thing to plan things out, and another thing to actually do what you're trying to do, and a lot of times, you know, if you look at history, when power gets really, really super concentrated and you get these big divisions of society, usually at some point, the people at the top don't even know what they're doing.
I mean, that was his point, I think.
No one is in charge.
It's just a free-for-all.
It's a contest between bankers, farmers, arms merchants, old people and pill pushers and a few other of the most powerful interests, maybe mining interests or something, and oil companies, but they're willing to completely take everything if they can.
There's not the slightest bit of what's good for anyone else.
Right.
So you could have, like, Peter Pierson got right in his Foreign Affairs article saying, well, here's the crisis of 2030, and we're just going to keep things going like this, but what if he's wrong?
And there actually is problems in five years or eight years or something, and then everything blows up before you ever think.
Right.
You just don't know what will happen.
No one can predict the future like that.
Well, now, so let me ask you about this.
Okay.
You know, you are, as far as I know, very successful at this whole investing thing and trying to predict the future the best you can.
So there's something that's been a discrepancy, which is that the people who best explain the bubble and predicted its popping, the Austrian school libertarian types in the last decade, many of their leaders, anyway, predicted a pretty widespread price inflation.
I know they underestimate CPI as much as they can, and they finagle the numbers as best they can, but it seems like rather than having anything like a hyperinflation, there's the buildup of these bubbles, like we've talked about.
But all this, you know, we have to bail out Wall Street so they can save Main Street.
Like you talk about, that hasn't happened.
The standard of living of the regular people has gone down.
The best job they can get is McDonald's or Wal-Mart or the Army or the temp service.
Kelly Services is here, as you say, in your article.
Yeah.
But so I wonder, where's all the price inflation?
And when I ask, I'll go ahead and say one more thing about that.
When I ask them about that, say Bob Murphy or Mark Thornton, they say, well, the thing is that Bernanke, I guess, got smart, and he pays the banks an interest rate now to keep the money that he's bailed them out with at the Fed and not loan it out.
But there's no law that says they can't loan it out.
It's just such a bad bet to loan it out right now that they're making a better return by keeping it at the Fed for just 2 percent or whatever it is, but that someday all that money still could be loaned out.
Or if confidence in the dollar overseas really gets much worse and all those dollars really start floating home, then we'll see that hyperinflation.
But basically they've been able to use bubble gum and string to put off the consequences that are still coming due.
And I just wonder what you think of that.
And I may be paraphrasing everyone terribly, so any error is mine.
I know them fellows, actually.
But it's complicated in the sense that in 2000, that's when I first actually knew them.
And if you look from 2002 until today, there has been inflation.
Gold has gone up.
Oil prices have gone up.
But there's been nothing like any sort of hyperinflation like they were predicting what happened or some people predicted.
And I remember back then, in those couple years before 2008, I was reading stuff about the current account deficit.
And it was articles saying, and that's sort of like our trade deficits, the amount of money we borrow from overseas to finance it.
And these articles are saying that when that gets to 5%, you get a crisis, a financial crisis.
So I was reading that thinking to myself, well, no wonder why gold is going up.
And I guess the dollar is going to blow up one day, right?
And then in 2008, the crisis came and that didn't happen.
The dollar went up, actually, and gold crashed.
And the point is that you can't really – it's interesting because you can see things coming on the horizon, but you can't really predict exactly how they're going to play out or what.
And they could still be proven correct in the end.
I think sort of maybe that was just an interruption in the real crisis that's coming down the road.
Yeah, after all, there were a bazillion dollars worth of bad bets that still needed to be liquidated that still are being liquidated.
Yeah, yeah, that's right.
So it's sort of a breakdown in the whole fractional reserve system.
People aren't taking out loans and the banks aren't loaning money or that much anyway, I guess.
I don't really know.
Is that right?
Yeah, yeah.
They'll only loan money to you if you're Walmart.
Yeah, yeah, basically, or you've got like a perfect balance sheet with assets already on it and you don't really need the money.
But so in other words, they're not taking risks on new entrepreneurs right now because they're still looking at a bear market.
Well, not just that, but it's hard for them to make money.
If you're a bank and you are putting money out for these low interest rates, it's hard to justify taking big risks too.
So I mean, I think that if the rates went up, it would actually have somewhat of a stimulative effect as long as they don't go up so high that it causes the government to have trouble financing its debt.
I think that's the potential for real problems, if that ever happens.
But even that won't necessarily lead to a total hyperinflation disaster.
Well, you know, I'm against all welfare programs because I'm an abolitionist and I'm against the state altogether.
And I really don't like the state bribing people into liking it by taking care of their basic needs and stuff like that, especially.
But on the other hand, it's the very last part of the government that I would abolish.
And I really like it when libertarians point out that the food stamp budget, as you write it here, $88 billion, that's nothing compared to what they spend on killing people, what they spend on bailing out bankers, what they spend on reading all our emails and tapping all our phone calls, violating all of our rights.
So the people who demagogue against the poor and the dependent are really missing the boat there.
It's those with the power are the ones who are really getting all the money.
I really like it when people who have money notice that.
Anyway, we've got to go.
Thanks, Mike, so much for sponsoring the show and your time on the show.
Yeah, thanks.
Great to talk to you.
Mike Swanson, everybody.
Wallstreetwindow.com.
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