03/27/13 – Mark Thornton – The Scott Horton Show

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Our first guest on the show today is the great Mark Thornton of Predicted and Explained the Housing Bubble back before it popped, of the Senior Fellow at the Ludwig von Mises Institute.
Welcome back to the show.
Mark, it's been about eight years or something.
Good to talk to you again.
Yes, Scott.
It's great to be back on the show.
It's been too long.
Yeah, I have no idea why it's been so long.
I'm just terrible.
But very good to talk to you again.
I will highly recommend that people go back to the archives and check out your great interviews about Star Wars and how a measly little trade dispute with the local tax enforcement cartel arrangement led to the Galactic Civil War and trillions of dead and the rise of the Dark Evil Empire.
So anyway, great stuff there, all at scotthorton.org, Mark Thornton's previous interviews.
So listen, the reason I brought you on is I was hoping you could teach me and those listening all about what's going on in Cyprus.
For starters here, a few different issues.
I want to ask you about Texas and Germany repatriating their gold and a couple other things.
But first of all, can you explain what's going on with – well, first of all, Cyprus is a little island in the Mediterranean Sea, right?
Why are all the people there getting ripped off?
What's happening?
Well, it's a very small place, but they have a lot of money apparently there, at least on the books.
And basically what you're seeing is fractional reserve banking taking its first steps down the road to its death.
And basically everybody needs to know that when they put money in banks, their money isn't in the bank.
They've given that money to somebody else.
And this is just the leaking out of this problem, this inherent problem of fractional reserve banking, and it's been exposed for really the first time in a major way in Cyprus.
But it's also going on in Greece and Italy and Spain and Portugal and other places around the world.
And the idea of Cyprus was they're going to back the guaranteed accounts with this huge European bailout, but the money isn't there.
And a lot of people in Cyprus and a lot of foreigners, particularly Russians, are going to lose a lot of their money because of the problems of fractional reserve banking.
Well, and now how unexpected was this?
I actually read a thing in The Atlantic saying that this is actually a fairer deal than as far as the problem of fractional reserve banking.
I mean, all that understood, I guess, but just with the situation where it is, really this is what's supposed to happen, that the investors, the shareholders, the debt holders, and ultimately the customers are responsible for making bad business decisions like putting their money in these banks that weren't trustworthy, something like that.
And it's better than just socializing the cost on everybody who didn't make the bad decision necessarily.
What do you think about that?
That is true.
The Europeans have created a lot of chaos in this bailout scenario.
And what they've essentially moved to is from a position of austerity where the wrong guys are hurt, they've moved more in the direction of what a bankruptcy court would have done, which is protect certain asset class owners and to make the pain fall on asset class owners that had the most to gain.
And so they have moved in the right direction in terms of what a bankruptcy court would have done in this situation.
But it's a larger problem.
Basically, European banks overall have lent out a lot of money to other countries that are bankrupt now and to other loans which have failed.
And there's just not enough money to cover all of the deposits throughout most of the Eurozone.
So they've improved the bailout over time in response to the outcry.
The idea of going after the money of guaranteed depositors, I mean, if that was the case, there would be a massive worldwide run on the banks.
Well, and this is the thing.
I mean, when you talk about the end of central banking, does that mean the beginning of people understanding what this means?
That whatever version of FDIC insurance you have in your country is actually not enough really to guarantee the loans and that really it is all a house of cards?
That's right.
I mean, in the United States, your money in the bank is guaranteed by the government, but they don't have the money to cover all of the bad loans either.
So they're hoping to string this out by bailing out the countries where the bankruptcy is exposed in places like Greece and Portugal and Cyprus.
But ultimately, over the entire system, governments don't have the funds or don't have access to the funds other than simply printing up the money, that there's not enough money to cover the entire system.
So they're trying to plug the gap in Cyprus, and they're trying to continue on the confidence game to generate confidence and to put out these little fires before they get out of control.
If you look at the overall numbers, they just don't balance out.
The Europeans have set aside 500 billion euros to meet future contingencies such as the Cyprus thing.
So the teeny country of Cyprus cost them 10 billion euros, or basically one-fiftieth of their emergency fund.
But Cyprus is a far smaller economy compared to places like France and Italy and Spain.
Those are going to be massive problems once they're uncovered.
So why don't they just do like Ben Bernanke and just monetize every kind of debt that there is in the world and flood at least the banks with enough new currency to fill in all their holes?
Well, see, in Europe, this is why it's come to light quicker than in other places, because the independent European economy such as Cyprus, they don't have an independent monetary authority to do that kind of contingency, to print up all these hundreds of billions and trillions of dollars that Ben Bernanke has.
They don't have that independence.
And the European Central Bank didn't even have the authority prior to this crisis to do things like that.
The idea was to have a sound monetary system to provide people with confidence to put money in banks and for banks to loan money and all that.
But they don't have that contingency until this crisis developed, and then they put together that 500 billion euro emergency contingency plan.
So it looks like that's ultimately what they're going to do, is just print up more and more and more and more money for this bailout.
But then again, all you've done is you've taken a crisis in the real economy and transferred it onto the government debt, and now they're transferring it from a fiscal problem to a huge monetary problem.
And the whole world is in on this problem.
The Federal Reserve is printing money like crazy and with 0% interest rates.
The European Central Bank is increasing its money supply as fast as it can.
The new government in Japan has promised to fight deflation with a massive increase in inflation.
And so the Chinese are in on it.
Most central banks are in on it.
Other countries have very easy monetary policies relative to their economic conditions, so that everybody is bringing down their interest rates trying to prevent, well, essentially we're in a currency war, Scott.
All of these countries from Norway to Korea into India, everybody's trying to prevent their currencies from appreciating against the U.S. dollar and the euro.
And so we've entered this currency war where everybody is trying to print more and more money to keep their governments going, their economies going, and it's just driving down the value of money worldwide.
And, you know, money is such a key element that we often take for granted, especially here in the United States because we've had the almighty dollar.
But, you know, that's so very important for everything we do.
All the contracts we're involved with, our wage rates, our savings, our bonds, our life insurance policies, everything is based on somewhat stable money.
And if they're going to go into this currency war, it's going to disrupt just about everything.
Okay, now, I was hoping you could stop right there and define exactly what you mean by currency war there.
For example, it's been said many times that a big part of the Arab Spring revolution was that those people were riding on an empty stomach, that, you know, basically they're living on $2 a day and now all of a sudden their $2 is only worth $1, which means they can't afford to feed their family and they get really interested in regime change all of a sudden, that kind of thing.
And there's a lot of history to that same kind of thing.
And so I guess, you know, I read a few things even at the time, back in 2011, where I think even in the Wall Street Journal they were saying, you know, this is actually partly because of our monetary policy, because when we inflate the governments of Tunisia, Egypt, and everywhere else, they have to inflate too in order to prevent the throwing off of the trade balances.
And so is that exactly what you mean, like that counts as currency war?
Because I guess I could imagine like a war of currencies where they're really trying to destroy each other rather than trying to just keep from being destroyed as the Americans do what they're doing.
Do you understand what I mean?
And really, you can tell I don't know what the hell I'm talking about, so that's why I asked such a general confused question like that.
No, Scott, I think you had it pretty much right.
The U.S. Federal Reserve Bank is increasing the money supply, trying to drive down the value of our dollar.
Now, I'm not going to get into the technical details, but basically when we drive the value of our dollar down, it makes it easier for us to export goods to other countries, and it makes it harder for other countries to export goods into the U.S.
The result, the idea here is to create more jobs in the export industries.
Companies like General Electric and Caterpillar and things like that, they export a lot of goods overseas, and so Ben Bernanke is hoping that by driving down the value of the dollar, they'll increase jobs in the export industries of the United States and export more goods out, employing more people.
But when other countries like the European Union or China see that, well, that hurts them.
It hurts their ability to export to the U.S., and so they inflate their money supplies to keep the value of the euro relatively the same as to the United States and likewise the Chinese currency to the U.S. dollar, and so they're just trying to keep up with us.
Norway is increasing its money supply to keep its currency from appreciating against its neighbors in Europe with the euro, and so everybody has to follow the lead of the U.S., the dominant world currency, in order to keep their currencies roughly in line with the U.S. dollar so that their export industries are not hurt.
And so that's what's involved with the currency war.
Now, of course, that causes all sorts of tensions, and as we saw in Cyprus, the northern European economies, which tend to, like Germany, tend to dominate European policy.
There was an article in the Wall Street Journal today that said that this deal in Cyprus does preserve the euro, but it sows the mistrust between the countries that are the haves and the countries that are the have-nots, and so the whole European Union is now more fragile as a result of this problem, and currency wars tend to generate this mistrust, the opposition to other countries, and historically, currency wars can lead to actual wars themselves.
And so, as I said before, people take money for granted.
They think it's always the same because it looks the same, but changes in monetary policy, such as the outrageous policies of Ben Bernanke, can do all sorts of things, and so, yes, it can have an impact on countries like Egypt, where the governments there felt that we've got to inflate our money supply to pay for the government and to keep our currency in line with the euro, to keep our currency in line with the U.S. dollar, and so, all of a sudden, the laborers in those countries, their wages now are providing less and less in terms of the goods and services that they can provide, and so it can get down to the point where, you know, people don't have enough money from their wages, their ability to work, to pay for food and the basic necessities of things, and when people go hungry, they get angry, and that anger, if it's at the social level, where everybody is angry and everybody is posting on Facebook and Twitter and social media, etc., that, you know, things are hard, things are getting worse, that is the type of thing that ultimately leads to social upheaval and a crisis in the economy, a crisis in confidence, and, you know, of course, the stock market's over there, have generally been closed or have been totally trashed as a result of all this, and so, you know, the crisis has not helped, and places like Egypt or Syria have obviously not helped the economies over there, but it's an indication of, you know, that things were bad over there, the rulership was bad, but these changes in money around the globe have helped ignite some of these social and political crises.
Well, and it's a double whammy, too, right?
First you have the collapse of the big artificial prosperity as prosperous as it seemed to be, I don't know, but then you have the even, you know, worse or at least the double whammy, the next thing to hit you is the inflation to try to make up for the giant crash that the previous inflation had caused, but I am still a bit confused about the notion of currency war as you define it here, Mark, because it seems to me like, you know, if Ben Bernanke raises this or that a quarter of a point or does this or that to try to undermine the euro, gain advantage one way or the other for, I don't know who counts as whatever American interest, maybe just the interest of the U.S. state benefiting at the expense of the Europeans or the Chinese or whoever, all they do is just adjust immediately as well, right?
That's why they're always yelling about China saying, oh, China, it's not fair the way you keep depreciating your dollars.
All they're saying is we wish you wouldn't when we undermine you by, you know, depreciating our dollars and damn you for keeping up with us is really all they're saying.
So, but I don't understand at that point then what's the point of this if it doesn't ever work, you know?
Well, Scott, we are talking about government here.
We are talking about politicians and, you know, and ultimately their interests, you know, you said what are their interests?
Well, their interests are the corporations basically.
Their interests are the banks, the big banks, you know, and all the big corporations who are generally exporters, right?
And so they're pushing this monetary policy to help those large corporations and those financial firms benefit.
They're bailing out the banks and they're trying to provide an indirect subsidy to these corporations.
And so, you know, it's, you know, and Ben Bernanke would not admit to any of this, that he's engaged in a currency war, but they're all basically passing the buck.
I mean, Mitt Romney said China was a currency manipulator, but basically China is just following our lead.
If we change our monetary policy to lower or raise the value of the dollar, they're going to change their monetary policy to lower or raise their currency.
So they're not really the lead manipulator.
It's the U.S. which is the lead manipulator in this currency war.
And unfortunately, Scott, once you start a currency war, it's very, very difficult to stop that currency war, to stop that monetary policy.
I mean, if Ben Bernanke is, you know, going along and buying up $50 billion of government debt every month, it's pretty hard to stop that process, because if he stopped it, interest rates would rise significantly.
And, you know, that would have, you know, bad short-term ramifications for the U.S. economy.
And so once you start these currency wars, once you start on down the road of, you know, runaway inflation, it's very hard to stop that, because there's a lot of pain and obvious pain associated with stopping that currency war.
But stopping that currency war is in the general interest of society over the long term.
But the short term, yes, there's going to be a lot of pain.
But, you know, like any kind of war, whether it's the drug war, currency wars, or actual wars, stopping them is very hard, and it takes responsible people to stand up and make that happen.
Okay, now I wanted to ask you about the Texas and German give me my gold, I want to hold it myself kind of attitude going on lately.
And I'm going to see if I can try to well, I don't know if I can work, you know, two topics into one question, but I'm sure you could address that in your answer to the question I really want to ask, which is that best I can tell from, you know, as an economist, I'm a great anti-war guy, as Lou Rockwell once said in a different context about someone else.
But anyway, so here's what I wanted to ask you.
The Austrian school, particularly you Mises Institute types said, hey, it's a giant housing bubble, and it's going to crash and it's going to be horrible.
And you have no idea just how big this sine wave is, but boy, is it going to hit you hard.
And then that's exactly what happened.
And people said, you know what, those Austrians are geniuses.
Maybe that theory of money and credit thing is right.
And the business cycle is actually the government paper money cycle.
And that's what causes our boom and bust and our terrible dislocation.
Why, after all, would so many businessmen make so many bad bets at the same time, right?
I'm trying to skip that part real quick here, right, to get to the good part, which is, but then you all said, correct me if I'm wrong, please, that, oh, no, you're creating so much new money.
You're going to have massive inflation and people are going to be completely wiped out by the giant inflation that you're creating to bail out all your buddies, the banks who made all the bad debts and otherwise would have had to suffer that economic correction.
And it seems that that has not happened.
So how come you're so right on the bubble and yet not at least completely right?
I mean, everybody's going to the grocery store and we know it's hard to go to the grocery store these days.
It's harder and harder, but it's not quite, I don't think, what we were hearing out of Mises' quarters, which were red alerts about Weimar Germany level hyperinflation and things like that.
And I said in the beginning of this question, I'm like ignorant.
I'm probably overstating the case in my question.
But anyway, please go ahead and address that.
Well, everybody can go to M-I-S-E-S dot O-R-G and get a free subscription to our daily articles where we provide daily analysis of the economy and other issues, policy issues that are relevant for just about everybody.
And, you know, of course, everybody, not just Austrian economists, but all economists believe in the quantity theory of money that if you increase the supply of money, prices are going to rise.
However, it's only the Austrian economists that disaggregate this phenomenon and show that it depends on how the money is put into the economy, and that will ultimately determine where prices go up the most.
And so, you know, for typical things, the prices have risen, and they've risen at a pretty good pace.
The old definition of the consumer price index was up about 7% last year, which is pretty high historically.
And if we look at disaggregating inflation and not looking just at consumer prices, you know, the Fed only wants to look at consumer prices minus gasoline and food.
Well, gasoline and food is where prices have gone up the most, but gold has gone up $1,000 an ounce during this crisis.
Commodity prices have gone up.
The producer price index is extremely high right now.
And, you know, if you look at the fat cat bankers in New York, well, Manhattan real estate prices are really high.
Leasing rates are at all-time highs.
Contemporary art markets and the auctions in New York City, all-time highs, high, high prices.
And so if we look at these other areas of oil prices and things of that nature, what we see is that the prices have risen significantly in these wholesale markets, and now we're seeing, you know, producer prices rise significantly, and gold prices and oil prices have risen significantly.
And so prices have risen.
And even, you know, if you go to the grocery store, you know that prices have risen.
It's just that the one government statistic where they claim to be reporting the effect of inflation on the economy, that has not risen very much.
But, of course, in the future it may.
You know, I saw this thing on TV.
They said housing prices are going up, and it's wonderful, and it's an economic recovery.
And, by the way, more homeless than ever and more unoccupied houses than ever.
Millions, I think, tens of millions of unoccupied homes in America, and yet prices are going up.
Is that all just a perversion of this monetary policy, Mark?
It's largely a result of that monetary policy.
You know, the Fed is buying $45 billion of mortgages every month, and they've kept the interest rate on mortgages incredibly low, artificially low, of course.
And so that has helped reduce the fallout of the housing bust, and it's turned it around temporarily, primarily because the way the system is set up, they've basically kept a lot of the foreclosures off of the market.
And those are those empty houses that people have abandoned over the last few years.
They've stopped paying their mortgage, and they've basically moved to places where they can find work, like North Dakota even.
And so, yeah, a lot of the changes that we've seen, the sharp uptick in housing prices that we've seen the last couple of months, is partly statistical, it's partly real, but that real part is basically fueled by the incredibly low interest rates that the Fed subsidies have provided for those who can qualify for a mortgage.
The rates are low, but it's extremely hard to get qualified anymore for a home mortgage.
All right, I'm sorry we have to leave it here.
It's my fault I called you late.
There's still much more to talk about.
I hope I can have you back on the show sometime very soon, Mark.
I'd love to do that, Scott.
Okay, great.
Thanks very much for your time today.
Bye-bye.
All right, everybody, that is the great Mark Thornton.
He is on the record, for real, predicted, not really just predicted, but explained all along too.
Big housing bubble, big crash coming over there at Mises.org.
You know, that's no lie.
Go look it up yourself.
He is a senior fellow at the Ludwig von Mises Institute.
That's Mises.org.
And we're going to be right back after this.
Hey, y'all, Scott here.
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