10/10/13 – Mark Thornton – The Scott Horton Show

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All right, all right, welcome back to the show.
I'm Scott Horton.
This is my show, The Scott Horton Show.
We don't do no agenda on Thursdays.
But we are here at scotthorton.org.
Oh, by the way, I meant to say earlier, and this is important, the show is changing the time again.
I know, I just changed the time on you.
I'm about to change it again.
It's going to be 2 to 4 Central, 3 to 5 Eastern, starting Monday.
And I'm going to be live on the Liberty Express, which I think would be good.
All right, Mark Thornton is up.
He's the man over at the Ludwig von Mises Institute at mises.org.
And I believe second place behind Robert Blum in there for calling the housing bubble.
But still second place out of every economist in the whole wide world is a pretty good title there.
Welcome back, Mark.
How are you?
Hey, Scott.
Great to be on the show.
Thanks for having me on.
I'm doing great.
Well, good deal.
I'm very happy to have you here.
And I got a few things to go over with you.
First of all, I saw a thing at the New Republic that said Ron Paul is a stupid jerk and we hate him.
Yeah, actually, what he says is perfectly correct here about how to handle the debt ceiling problem.
Did you see that?
I did not see that.
Oh, you didn't?
I don't follow the New Republic very carefully.
I guess I just assumed that this one would be floating around just for how notable it was that they would have anything nice to say about Ron Paul at all.
They do build the insult right into the headline, like I implied there.
Ron Paul's surprisingly lucid solution to the debt ceiling impasse, and I know that you know what it is.
This deal where he said that, look, a big part of the debt, $1.6 trillion, apparently, is held by the Federal Reserve itself.
So they can just cancel out some denominators and drop the national debt by $1.6 trillion right off the bat without having to raise the debt ceiling.
Oh, yeah.
And there's a lot of other things that you can do in addition to that.
You know, last time around, when the debt ceiling was raised, I wrote an article saying that the best thing that they could do for the American economy and, indeed, the worldwide economy and the stability of money would be to pass a law that would lower the debt ceiling over time so that the government would be forced to run either a balanced budget or a small surplus in order to continue to meet the lowering of the national debt rather than raising it by trillions of dollars every time they get the gumption to do that sort of thing.
So, you know, there's cutting spending.
There's cutting the wages and benefits of government workers.
There's cutting of the military.
There's cutting of all this ridiculous spy network.
They just opened up a $2 billion NSA—I don't know what kind of center it is.
I guess it's a call center where they're, you know, swiping all of our phone information.
But there's so much we could do to reduce spending, to reduce the deficit, and, indeed, to reduce the national debt itself.
Ron Paul's solution would be an immediate, you know, an immediate drop, at least in the amount of paper that the government has issued out there.
All right.
Now, a couple of things here.
First of all, when you say having a ceiling, you know, you should be lowering it, it seems to me like, of course, that's exactly in the implication of having a ceiling at all.
What in the hell is the point of having a ceiling when all they ever do is raise it every time automatically without controversy, pretty much, maybe some faux controversy from time to time, you know, partisan politics or whatever.
You know, for the most part, they've done nothing but raise the debt ceiling every six months or whatever it is my entire life.
But it seems like whenever someone came up with the idea of having a ceiling, it must have been at least sold as this would be a way to really to limit the amount of debt and maybe one day we'll even lower the dang thing.
Yeah, it was, you know, a charade.
It was, you know, the idea that prior to the debt ceiling limit, the Treasury just issued, whatever much debt the Congress voted into place.
This is just another way of sort of signing off that Congress has to go through not just the budgetary process, which they're no longer doing, but they also have to go through the debt ceiling process.
And just think of what that would do if they did say, okay, we're going to reduce the debt ceiling over the next 20 years and eventually eliminate the national debt.
Well, all of a sudden, that would put the full faith and credit of the United States, the credit rating of the U.S. would improve, the strength of the dollar would improve, confidence in investing in the U.S. would improve, you know, entrepreneurs and corporations would be more likely to invest in the United States, you know, if they said we're not only balancing the budget, but we're going to reduce the national debt, we're therefore going to reduce the amount of interest that taxes have to be raised to pay that interest.
And so right across the board, you know, the government would have to start cutting things.
And, you know, there's a lot of things like the NSA spying program.
Well, that's got all the social media corporations and all the online Internet corporations, you know, they're moving operations overseas because they don't like what the U.S. government is doing in terms of taxes and regulations and spying and all the rest.
And so, you know, I think the call for lowering the debt ceiling would be a significant shot in the arm.
All that uncertainty out there in the world of business and entrepreneurship would, all that uncertainty would be greatly reduced.
And so you'd see more investment and more job creation here in the United States.
So here's my thing.
I'm looking at this from the point of view of a little guy, literally and figuratively.
And I'm reading this thing about basically the bookkeeping trick.
And I've known this and I've been outraged about this since I read Jekyll Island in high school or whatever it was.
But you know, the Mandrake mechanism where the government, they print a bond and then they buy the bond basically with new money that they create just to buy the debt with and whatever.
But I was reminded when I was reading this New Republic article about this bookkeeping trick and the way that, yeah, we could just, you know, write this off, this, that, the other thing, it would just be a technicality and whatever.
And I was reminded how much I hate this, how outraged I am that literally, you know, all dollars are fungible and whatever, right?
So the way you could phrase it is, every dollar they've ever taken from me in taxes in my life, which amounts to nothing, a drop in the bucket to them.
But you know, diamond water problem and all that marginal utility, it's a hell of a lot to me, Mark.
It's a lot that they've taken from me.
All of that could have been pissed away in one instant of paying the interest on the debt to themselves on a bookkeeping trick, money that I could have used to improve my own life and the life of people I care about.
And I ain't the only one.
And it ain't fair.
This whole thing is such a ripoff.
It's incredible.
Well, you know, most people who are just watching the mainstream media, they have no idea if they're not watching, listening to your show or going to Mises.org, they're completely unaware of how this operation works, where by the treasury prints up government bonds and sells them to the big New York City bankers.
And then the Fed turns around and buys those bonds back from those banks.
And so the banks make a profit on those transactions.
But the Fed buys those bonds with just a bookkeeping entry in the computers that says, okay, these banks now have more cash on hand, so to speak, to make up for their required reserves that the Fed imposes upon them.
And then when that bond matures, well, the treasury pays the Fed and then issues another set of bonds.
And so it's, you know, it's a confidence game.
It's printing money out of thin air.
And you know, ultimately, it's a fool's errand.
I mean, ultimately, this, it seems like, you know, a magic wand.
I've gotten calls from a lot of people who are investigating, you know, money in banking, and they come across this business with the Federal Reserve and the banks, and they want to figure out how they can get in on it, because it's obviously a very lucrative sort of operation.
But you know, what we've done over time is we've devalued the purchasing power of dollars by, well, you know, a dollar today is the equivalent of two pennies in 1912, the year before the Federal Reserve was formed.
So they've basically evaporated 98% of the value or purchasing power of our dollars.
And you know, after World War II, the U.S. dollar was still valued as gold, and we were the world monopoly reserve currency, so that central banks were willing to hold our dollars as reserves to support their own currency, because they could always sell those dollars in order to get gold to back up their currency.
But now, what's happened in the last few years is that we've lost that monopoly status, that there are now new competitors with respect to reserve currencies.
And so other central banks are now starting to hold euros, Japanese yen, Swiss francs, Chinese yuan, and gold.
And central banks, you know, overseas central banks are holding gold as reserve.
And so they're ultimately undermining the value of the dollar.
And if these central banks around the world, if they were to dump their dollar reserves, that would be catastrophic here in the U.S.
The value of the dollar would plummet, and the price of our imports, you know, oil and gas, for example, would skyrocket in price.
And so this is a very dangerous situation, and I think that's why, you know, people might say, oh, yeah, sure, they're going to pass a law about lowering the debt ceiling.
But that's the type of thing we need to do to reestablish credibility in international markets and with investors and entrepreneurs, to back up the value and purchasing power of that dollar, and to get more investment started here in the U.S., and therefore more employment as well.
Well, yeah, and I want to go back to what you were saying about the high-tech companies that are now fleeing in terror from the business climate, with the Snowden revelations, the NSA spying and what have you, because their customers all over the world are fleeing them, because they're based here.
And so now they're just up and leaving.
If they want to stay in business, they've got to be somewhere else.
And so this is costing, you know, I am not the best at keeping up with the business press, but I've read that there's some real panic among the very biggest of these companies, too, even, you know, Google and Yahoo and the rest of them, that the NSA, the U.S. government is making them look real bad to their customers, and they're losing money.
They're losing their shirts.
Well, there are new entrepreneurs that are coming onto the market, small players in these marketplaces to take advantage of the situation.
So they're offering, you know, hyper-secretive email accounts and other, you know, hyper-secretive online banking and that sort of thing to take advantage of the situation as customers are leaving the big players who are being basically forced to disclose information about their customers.
And they've even approached Congress to try to get a rule passed that they're allowed to tell the media how many times the NSA is coming to them and how much information they're actually asking.
But, of course, the NSA wants to keep that all secret if they don't want the public to know the extent to which their information is actually being disclosed to the government.
And, you know, some people, I know their initial reaction was, oh, so what?
You know, there's nothing I do on the Internet that I have to keep secret.
Everything I do is perfectly legal and perfectly honest.
But ultimately, these companies know.
They've looked at the history.
They've seen what's happened under other regimes in other countries and that this information is ultimately used in nefarious ways.
And, you know, it's used by spy organizations to essentially blackmail politicians, to blackmail judges, to make sure that judges are not squeezing the ability of these spy organizations to spy on people and to lift information randomly or haphazardly.
And so they're very concerned and they should be.
I mean, because, you know, there's a long history of spy organizations who have manipulated politics, who have manipulated budgets, who have manipulated the State Department and, you know, manipulated judges.
And so it's a very scary situation.
And these companies, they don't want to be totally beholden to the United States if that's the way we're going to act.
They want to expand overseas naturally.
And this is going to want to make them expand not just their products and their sales overseas, but their production and distribution overseas so that they're not totally beholden to the U.S. marketplace.
Yeah, now, it was funny when you said earlier about a lot of these people, they start learning monetary theory and they wonder, hey, how can I get in on this game?
And I was just going to say that, which we're a little off topic now, but anyway, whatever, it's my show.
I can go back if I want.
That's my whole motivation is it's just jealousy.
It's not fair that they get to transfer twenty thousand dollars to somebody, but then they still have twenty thousand dollars.
Well, wait a minute.
That ain't fair.
How come I can't do that?
Pay all my bills and then I still have all the money I had before I paid them.
If they get to do that, I ought to be able to.
And and since I know that I can't go into banking, certainly not on the level where they'll let me have my own fractional reserve ratio and stuff, then I have to just be anti-fractional reserve banking.
And that'll show them, Mark.
Yeah, I know it's, you know, and it's even worse than that, Scott, because the Federal Reserve system, you know, they have this small building, relatively small building in Washington, D.C.
When you look at it, you almost think, well, that's pretty insignificant.
But they have, you know, the 13 regional Federal Reserve banks and then they have other branches within each of those districts.
And each of those facilities are, you know, they're put together in the most expensive way possible.
And they hire an inordinate number of bureaucrats and economists and statisticians and bookkeepers, security guards, you know, all the rest.
And they're all paid top of the line salaries.
You know, even I, when I was planning to get my master's degree, I was looking at getting a job at the Federal Reserve because with a master's degree working at the Federal Reserve, I was making almost as much as my professors were at the state university.
So their budgets are completely bloated as much as possible.
They spend an enormous amount of money.
And I've been in the Richmond District Federal Reserve and in the loading bay where they bring cash in and, you know, move things around and that sort of thing.
It's so big that you can turn an 18-wheeler around inside of it.
And they have an arsenal of weaponry, multiple layers of security.
It's just inordinately costly.
And so you ought to, if you get a chance just to look at one of these district banks, it's very, very expensive.
And yet they have so much money that they earn on these so-called government bonds that they turn back to the Treasury.
I think it's averaging more than $50 billion a year.
So they buy up all these government bonds with electronic bookkeeping entries and then they make all this money that they can spend lavishly.
And they have these lavish conventions and so forth.
And even though they spend money hand over head, they're still turning back to the Treasury.
More than $50 billion.
So it's kind of like a shell game that, you know, we're moving money around.
But the ultimate reason and rationale for the whole thing is that the Treasury can borrow beyond its natural ability to borrow.
And, you know, and the American taxpayer is ultimately paying for all this.
All right.
But now, let's say, OK, I went to government school and I watch a lot of TV.
And if I got what I wanted, which is, you know, that I read about independently somehow, abolishing the empire and repealing, I don't know, 99 percent of the federal government or something like that in an instant.
Well, then and say, for example, instituting a regime of sound money instead of all of this inflation.
And then what would happen is everything would completely fall apart and everybody would starve to death.
And it would be like the Great Depression, a deflationary spiral.
And prices would all go so low that every business in the whole country would all go out of business.
And then we'd all be dead and it'd be all your fault.
That's that's what the mainstream economists think.
They have what I've termed a pop lit horse most phobia, which is fear of deflation.
And they all have that again.
How do you say it one more time?
Ah, pop lit horse most phobia.
I didn't actually come up with that.
A Greek translator came up with that.
And so I'm not sure why that is.
But a pop lit horse most phobia.
At least you can say it right.
That's cool.
Yeah, it's a mouthful, no doubt about it.
But I've got an article in the quarterly Journal of Austrian Economics that you that your listeners can find at Mises dot org.
I've got all these funny quotes from, you know, Paul Krugman and they're all afraid of deflation.
They think that just because we had deflation during the Great Depression, they think, OK, we had deflation, therefore deflation is what caused the Great Depression.
Well, we've had deflation, you know, numerous times throughout American history.
As a matter of fact, we've had long periods of deflation.
And, you know, the economy was roaring at very high real growth rates, population growth and so on and so forth.
So it's not deflation that causes recession.
It's bad investments that ultimately have to be go into recession.
And so there would be a period of time when all these bubble created activities in the American economy where they all have to come undone.
But deflation, rather than being afraid of it, you should not be afraid of it because deflation is actually what restores an economy to economic growth.
And just think of it, Scott, when we go into an economic crisis or an economic crash, the price of capital, the price of stocks, the price of land, all of those things fall dramatically.
You know, the Nasdaq, the tech bubble, when it imploded, the Nasdaq fell, I think, about 80 percent.
And so capital prices fall dramatically.
Labor prices, of course, also fall significantly with high rates of unemployment.
But think of it, consumer goods, they hardly fall at all.
Other than gasoline, most products in the stores just fall slightly.
And so with this deflationary pressure, what happens is capital drops significantly, labor drops, consumer goods don't drop so that entrepreneurs, if they're alert, they can say, hey, I can hire some labor.
I can buy some of this capital and I can produce consumer goods which are still relatively high in price and make a profit.
So it's deflation that wrings out all the bad investments and provides profit opportunities for entrepreneurs to bring that capital and labor together in a new form and fashion and produce consumer goods and make profits.
And so deflation, rather than spiraling out of control, is really should be seen as the shock absorber in the market economy, that it's the deflation that ultimately, you know, forces prices down in a way, you know, mainstream looks at only the price level, where Austrians look at the economy in a disaggregated fashion, where we're looking at capital in all different types of capital, labor in all different types of labor, consumer goods in all different types of consumer goods.
And what we see is clearly, and this has happened in every deflation, is that the price of capital and labor fall in such a way as to make profit opportunities available for entrepreneurs.
The only two times that deflation has not worked in this manner was during the Great Depression and during this great reformation or this great crisis that we're going through right now, where government has gone significantly out of its way to keep the price of capital and labor up, you know, to to keep to stimulate the economy, to, you know, reduce interest rates and keep the price of capital up.
And so FDR and Hoover during the 1930s and Bush and Obama in this crisis have acted in such a way as to prevent the market from allowing the market economy to restore things.
You know, in a crisis, capital owners, the capitalists have to be at risk and you have to take that capital away from them through bankruptcy and foreclosure.
And we've simply prevented that this time around and prevented the market economy from restoring equilibrium and restoring economic growth.
Well, now, see, they've got to understand what you're saying to a certain degree, right?
That's why they won't go ahead and taper off the inflation is they know it's just hot air they're blowing into a bubble.
They know it's not real wealth being built up in the economy.
Yeah, in a sense, you know, their their activities not only are preventing resolution, but they're also just creating more and more problems.
They're, you know, continuing to funnel resources in the direction of bubble activities, of unproductive activities.
And, you know, the most unproductive of all is government itself.
And frankly, if Ben Bernanke wasn't there pumping money, buying up government bonds, monetizing the national debt, buying up the mortgage backed securities of Fannie Mae and Freddie Mac, you know, things would look a lot different because we're wasting we're wasting resources.
And, you know, if Ben Bernanke wasn't doing that, the federal government would have to get its budget in order because interest rates would be rising and they'd be having a hard time selling their national debt into the marketplace.
Right now, foreigners are actually net sellers of U.S. government bonds.
And, you know, the American public is not really keen on buying U.S. government bonds.
And so if it wasn't for Ben Bernanke, there'd be very few buyers at current interest rates.
And so, you know, interest rates would go up, interest payments would go up, and the American public would, I think, force Congress to act in such a way as to reduce the amount of new government debt that it was issuing.
OK, good deal.
Well, so we got Mark on the phone still.
Mark Thornton from the Ludwig von Mises Institute, senior fellow there and early predictor of the housing bubble.
Is it your theory or you're just the popularizer of the theory of whenever there's the tallest building in the world being built, look out because it's a bubble and it's about to pop?
Well, Scott, in 1999, a real estate analyst from Hong Kong published some historical facts and called it an eerie correlation that the building of the world's tallest skyscraper coincided with an economic crisis.
And a lot of people made fun of him, you know, and said, oh, this is a ridiculous way of predicting markets.
But they just can't get the cause and effect.
They just don't.
Only the Austrians understand the cause of the business cycle.
Everybody else, you might as well be saying it's the position of Mars in the sky or something.
Yeah, I know.
And, you know, so I saw right through this and knew that the Austrian business cycle theory was was really at work here, you know, with speculative bubbles leading to these buildings of these record setting skyscrapers, you know, during periods of hyper speculation.
And so there was good technical theoretical reasons why this correlation would hold up over time.
And so I wrote an article for the quarterly Journal of Austrian Economics called Skyscrapers and Business Cycles.
And again, your your listeners can get all that stuff for free.
And which, by the way, they can get, what, hundreds of thousands of pages for free at Mises dot org.
It's unreal the amount of material there.
Yes.
And there's audio and you can fill up your your iPod and with audio and video lectures, thousands of articles, academic journal articles.
We we house a lot of the older libertarian publications that are no longer in business.
And today we're featuring on Mises dot org an article on the 40th anniversary of Mises's death.
He died this day in 1973.
And it's written by Professor Holtzman, who was the author of the intellectual biography of Ludwig von Mises.
It's called Mises, the last night of liberalism, which is just a fabulous, I mean, a fabulous history of the world, really.
But in particular, the work of Mises, the life of Mises, you know, getting trying to get away from the Nazis and, you know, working with the Austrian government and getting to the United States, reviving the Austrian school and really putting it on a very sound theoretical basis, you know, from A to Z, basically, of Austrian economics and inspiring the next generation of Austrian economists, including, you know, people like Ron Paul and myself and you and others.
And so it's a great little article.
You can't really call me an economist, but OK.
Well, you know, a lot more economics, Scott, than a lot of the professional economists that I know.
I mean, basically, a professional economist newly minted today, you know, they know a lot about statistics, econometrics, mathematics, but their knowledge of real world economics is quite limited.
And so, you know, if if if you were to say something or a recent Ph.
D.in economics was to say something, I would trust what you're you were saying over what they were saying.
All they need to learn is that everything is just politics.
It's all politics.
There's no honesty in any of it.
It's just wrestling over power, you know, like, for example, and this is, of course, the point that I would make above and beyond anything else, is that you can't have a world empire without a central bank waving their magic wand or they're really they're smoking machine gun and creating it out of nothing all day.
The American people would not tolerate some 20 percent hike in their taxes so that we can go try to steal Iraq and keep it on some, you know, long term Korea plan or whatever.
They would have rejected that invasion outright in the first place if they had thought they were going to have to pay for it.
Yeah.
Empires are losing propositions and our empire is put together in a in a modern sense, in the sense that, you know, our empire consists of countries that are basically self-governing, but they're under the sway of the U.S.
And so, you know, places like South Korea, places like Japan, the former British empire, like including Canada, you know, all of these countries like Saudi Arabia, for example, Israel, they're all under our sway, although Israel may actually have more sway over us than we have over them.
But it's a losing proposition.
All of these countries, we have to we give them money.
We give them resources.
We protect them with our military.
You know, we rent their bases.
You know, Philippines is another example.
And so empires are losing propositions.
They're extensions of military force, but they don't they don't contribute back.
And as a result, all empires are very costly.
And the the emperor eventually has to resort to inflation.
And it's the inflation that eats away at the domestic economy and the capital and the wealth of the domestic economy.
And ultimately, everything comes undone.
And of course, we saw that with England and its empire and ultimately resorting to inflation and finally whittling away their their domestic capital and wealth.
And you see what's left over is that the the emperor, the empire's possessions are now in many cases wealthier countries than the home country because of what empires do to the domestic economy.
The Soviet Union experienced the same thing.
The Roman Empire experienced the same thing.
I mean, they tried to make the empire pay, but ultimately it was a losing proposition.
And the empire breaks down.
And what you see in the aftermath is that the the originating economy has been decayed and the wealth was illusory.
And, you know, and it's so it's a losing proposition to have an empire.
And ultimately, inflation is the the key ingredient which the empire tries to, you know, extend itself in time.
But that's the main way in which the domestic wealth and capital is ultimately undermined and eaten away.
We know it's funny.
Well, first of all, footnotes, Mother Jones.
I forgot the name of the people who wrote it at Mother Jones, but Mother Jones magazine, the progressives, basically David Corn in them.
And, of course, the heroic Robert Higgs at the Independent Institute, Independent.org and Chris Hellman, Robert Higgs, the libertarian Austrian economist, of course, and Chris Hellman, who's a nonpartisan public policy think tank kind of guy in Washington, D.C. at the National Priorities Project.
They all when they combine the expenditures on nuclear weapons and homeland security and the long term costs of soldiers, health care and that kind of thing.
They say that the militarism budget in America is a trillion dollars a year, a full trillion.
And then when I was underlining my note about that, so I would remember to bring it up to you, I was reminded that somebody asked Mitt Romney a year ago, the Republican candidate for president at the time, whether he agreed with Ron Paul about a trillion dollar cut.
And that wasn't just directly to the military, but that was to government spending.
And he said, no, no, no, that would be taking a trillion dollars out of the economy right at the wrong time.
And you know what?
I mean, the thing of it is, is I know you have some fancy pants explanation for why that's wrong.
But on the face of it, Mark, that sounds right, doesn't it?
That if the government is spending a trillion dollars a year and then you make them stop, that that's a trillion dollars a year.
That's not getting spent into the economy.
Kind of.
Yeah.
Yeah.
That's that's I mean, if I was Mitt Romney, I would believe that, too.
Right.
Yes, I guess if you were Romney, you would believe that.
But it's the old GDP fallacy, Scott.
The idea and this is what mainstream economists have in their mind is, you know, they're focused on GDP.
If GDP goes up, that must mean we're better off.
If GDP goes down, we must be worse off.
And GDP was never meant to serve that function.
But that's.
Permeated the mindset of mainstream economists and mainstream media, and so they all have this this fallacy about GDP, that if we cut government spending, that there would be a reduction in our standard of living.
And that's just not the case if you're especially if you're eliminating the military expenditures and things like spying expenditures, those are all things that actually do us harm.
Those are all actually things that, you know, kill people and undermine their rights to privacy and, you know, do negative things and ruin the reputation of America and Americans overseas.
So those are actually negative expenditures.
They produce negative value.
And so if we got rid of them, it wouldn't reduce the number of bananas.
It wouldn't reduce the number of phone of cell phones.
It wouldn't reduce the number of light bulbs.
It wouldn't reduce, you know, anything that we truly value.
And so, you know, I really encourage everyone to follow Bob Higgs's work.
He's got a book out called Depression War and Cold War, where he demonstrates a lot of things.
But one of them is the fallacy that World War Two got us out of the Great Depression.
And he shows that, sure enough, if you if you draft eight million people and send them overseas and that, yeah, the unemployment rate's going to fall.
That's a no brainer.
But if you looked at...
If you drown them in the ocean, you get the same effect, right?
Yeah, exactly.
But if he what he looked at is, OK, how many Americans were there from 1930 to 1946?
What was the production of civilian goods?
And then he adjusted those civilian goods by inflation and on a per capita basis.
And what he found was that Americans were actually slightly worse off during World War Two than in the Great Depression.
So in terms of the amount of food that Americans could buy, the amount of clothing that Americans could buy, the amount of transportation that Americans could buy, it was actually less during World War Two and then in the Great Depression.
So it's a GDP skyrocketed because we were building all these tanks and planes and all this other stuff.
But if you look at real prosperity, you know, Americans were worse off.
It was harder to get a cup of coffee.
It was harder to put sugar in it.
It was harder to get to work because of a lack of transportation.
And so things were very, very bad off.
And so if we were to cut government spending.
Yes, GDP might decrease initially, but as those resources got reallocated back into the productive economy, you'd see rapid rates of economic growth from those from those initial drops.
But it's a statistical fallacy that that's called the GDP fallacy, or at least I call it the GDP fallacy.
And it's constantly, you know, every day I turn on the news now for months and months and months, you can see that GDP fallacy in the discussions regarding the government budget.
And and so we've got to realize that cutting government expenditures and reducing government employment is is a temporary statistical decrease in the economy.
But longer term, as resources get reemployed towards productive purposes rather than destructive purposes, our standard of living will rise and we'll be better off as a result.
OK, good deal.
Well, you know, I have to especially put in the anti-militarism thing.
But to get back to our current situation with the monetary policy, and of course, we got the new lady is going to become the new Fed chairman and all this stuff now.
And I wanted to try to get to, well, first of all, you'll have to set straight my faulty premises as I try to lay them out the best I understand it and then set me straight.
But I got a question I want to try to get to here if I can figure out how to set it up right, which is it seems to me like so right now they keep inflating and inflating and inflating because they're trying to prevent the recession from getting as bad as it really could if they really let all the bad debts liquidate and all the deflation we have come and do come due.
But on the other hand, they can't really let the economy take off.
I mean, geez, I guess there's so many bad debts still being liquidated.
It would be a while anyway.
But they can't, you know, say, I don't know, a few years from now, if even during all this inflation, enough of the bad debts are liquidated that people can finally start getting back to work.
And after all, interest rates are low.
And so maybe they could get a loan and start a business.
And then you have all the fraction reserve ratios kicking in and people, the banks taking their money out of, you know, off of the shelf at the Fed and start loaning it out.
Then they have the problem of too much inflation coming on across the board, price inflation coming on or even if it was in just one sector housing or something.
But if it got totally out of control again.
So then at that point, they got to raise the interest rates and prevent the the healing of the recession that they're trying to prevent from ever happening in the first place from taking place or else they'll be completely screwed.
But then even at that point, if they raise the interest rates, then the price of the national debt becomes completely uncontrollable because back in the early 80s, when Volcker raised the rates up through the roof to beat all the price inflation, he was able to do it because the national debt was low enough that the Congress was still able to pay the interest on the debt.
But now that it's a 16 trillion dollar debt, we can't have interest rates higher than a few percent without the whole damn government going completely bankrupt that way.
So if any of those things made sense at all, could you please tell me what the hell is going to happen next?
I mean, am I even right at all about how that works?
It seems like they've got themselves in a really bad position, right?
They can't stop tapering, but they can't let the tapering succeed either.
Yeah, I mean, the continuing to not taper succeed.
That's what I mean.
Yeah, they're you know, the Fed most of the time is in control of things.
And as long as they don't get too far away from market tendencies, they can have a fairly strong control over things.
And they they look like they're the cure all to all economic problems.
Anytime there's a little ripple in the economy, they can step in and solve the problem.
For the economy, but as you suggest correctly, they are right now, they're in a catch 22 position where their control over things is a fleeting proposition because it's no the the idea of, you know, quantitative easing really isn't working to restore the economy.
And all of their efforts to keep down interest rates have kept unproductive, bubble generated activities going.
But that doesn't that that those type of activities don't create economic growth and jobs.
And so, you know, we're not sure ultimately what direction they're going to go.
But the two directions they can go is to unwind their previous policies to allow market determined interest rates.
And that would, of course, put pressure on the government to reduce its deficit and maybe even the debt because of the higher interest rates.
Or they can just continue on with, you know, inflation, quantitative easing of below market interest rates and etc.
But of course, ultimately, that devolves into higher rates of inflation, maybe hyper inflation and a crack up boom in the economy where you basically exhaust your capital base.
So.
What you laid out there are the various scenarios and what happens to the economy and what happens to the government budget based on the various scenarios.
And I think you've got them pretty well sketched out.
But it seems to me that for the time being, you know, because basically Bernanke took over from Greenspan, got whacked by the housing bubble, react in an extremist inflationist perspective in terms of bailing out the big banks.
Now, Yellen, Janet Yellen, is supposed to come in and looks like she's going to get whacked by another economic crisis.
And she is very dovish in terms of monetary policy.
So it's in all likelihood Yellen is going to follow Bernanke, who followed Greenspan, who basically would use monetary policy as a way of bailing out economic problems.
And see, this in and of itself is a problem.
If you start bailing out little economic crises, they become bigger economic crises because market players, you know, investors in the stock market, banks, financial firms and so on, they come to depend on and they have expectations that the Fed will bail out the economy or Wall Street or whatever it happens to be.
And so now we have, you know, market players have been making, investing and, you know, putting their money into the market with the expectations that the Fed is going to continue this ongoing policy of bailouts in the economy.
And, you know, so that's what's so wrong with the fact that Bernanke tampered with a taper.
You know, he was doing the right thing, very little of the right thing when he suggested that they would taper, which meant that the Fed would reduce its monthly purchases of U.S. government bonds and of mortgage-backed securities, that they were going to reduce that purchase over time.
And the markets adjusted to that just fine.
You know, they changed their expectations.
And then Bernanke blew it by tampering with the taper and reneging on that promise of a more rational monetary policy at the Federal Reserve.
And so I was very disappointed.
I think the market was disappointed that he went in that direction.
And the reason he went in that direction is that there's a measure of inflation in the economy that the Fed analyzes and Bernanke follows.
And it had one month where that price index was negative by one-tenth of one percent.
So, you know, that fear of deflation, that alpapalit-horsemoss phobia that I was talking about before, all it took was one-tenth of one percent for one month.
And Bernanke went back on his promise of tapering on the quantitative easing.
And, you know, the thing about the Fed is if it sets expectations correctly, the market will quickly and effectively adjust to those situations.
So, like with Volcker, you brought up Paul Volcker, who was chairman of the Fed in 1979 through the early 1980s.
And he just basically, you know, went out there with his big cigar and says, I'm just going to raise the freaking federal funds rate high enough to wring inflation expectations out of the system, and I don't care what you think, and I don't care what Congress thinks, and I don't care what the president thinks, I'm going to do that.
And so, you know, interest rates skyrocketed as a result.
Everybody changed their behavior and, you know, and went into, you know, crisis control mode at firms across the country.
You know, people were panicking, homebuilders were panicking, but they made the adjustments so that within, you know, a two-year period of time, basically, a lot of the economic problems had been wrung out of the system.
Inflation expectations had been wrung out of the systems, and interest rates returned to normal levels, and economic growth took place, and the stock market was set for a multi-year period of growth in the stock market and in the economy, and unemployment came down from over 10% to below 5%.
And so the Fed, you know, it has the ability, if it says, we know what to do, and, you know, if you had an Austrian there or Paul Volcker there, you know, and we're going to crush inflation expectations in this economy, and we're going to drive out all of these male investments out of the economy, and we're going to set the stage so that entrepreneurs can make a lot of profits by properly employing capital and hiring a lot of workers, and we're going to reduce their taxes, and we're going to reduce the inflation tax.
That's what they need to do.
It's funny, though, isn't it, that they just created another bubble right after they were done, right?
Paul Volcker, when he was done wringing all the inflation out, because then it popped again back in, what, 87 or 88?
Yeah, but, you know, back then, yeah, they were creating bubbles, but, I mean, the problems were a lot different.
You know, we had a, the stock market was at $1,000.
You know, we didn't pass a national debt past the trillion mark until the early 1980s.
And so the types of problems that they were generating back then pale in comparison to the types of problems that the Fed is creating now, because, you know, the Fed, it was more of a practical apparatus.
It wasn't this, you know, crazy mainstream academic apparatus that we have now, run by a bunch of MIT PhDs.
You know, and Yellen is an MIT PhD, and Draghi, Mario Draghi, over at the European Monetary Central Bank, he not only has MIT, he was office mates with Bernanke when they were graduate students.
So it's this MIT mentality, it's kind of a mechanistic engineering mentality, that they can flip switches and turn dials and make the economy work.
They actually think that they're like the engineer driving the train.
And the only thing they're doing is driving us off the track, basically.
And the types of bubbles that they're blowing are immensely larger than back in the, back in the 70s and 80s, which were bad.
But I think the Volcker experience is some indication of how the Austrian approach would work, is that you'd have a lot of pain up front, but long run, you'd have much greater stability, much greater economic growth, and a lot more, excuse me, a lot less uncertainty for all the players out there in the economy, the workers, the entrepreneurs, the management.
Their level of uncertainty would be greatly reduced, and as a consequence, they could do more directly of what they're supposed to be doing, rather than sitting around worrying about what's going to happen at the Federal Reserve.
Right.
And now remember, everybody, Ben Bernanke, he's the Chicago School, the right-wing Republican monetarist, and this Yellen character, she's the Keynesian Democrat liberal.
And Mark Thornton, he's the Mises Institute, Ludwig von Mises Institute of Austrian Economics, mises.org.
Thanks, Mark.
Thank you, Scott.
Enjoyed it.
You can follow him on Twitter, too, by the way.
I think it's just at Mark Thornton.
Well, you can search him on there.
Hey, all.
Scott here.
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