08/12/15 – Robert Higgs – The Scott Horton Show

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All right, you guys, welcome back to the show.
First guest up today is the great Robert Higgs.
Welcome back to the show, Bob.
How are you?
I'm fine, Scott.
It's been way too long since we talked, way, way too long.
Let me ask you, I wasn't sure what to say.
Are you now officially retired from the Independent Institute?
I am not retired from the Institute, but I'm working my way into retirement.
All right, good deal.
I heard that you were moving.
That's right.
We hope to actually make our move in October, but we've been involved in getting ready to move for years, actually.
All right, good deal.
So, yeah, there you go, Robert Higgs.
Check out his page on Amazon.
He's written a lot of very important books.
I guess, most importantly, not to sell anything else short, but especially for this show's purposes, Crisis and Leviathan, Critical Episodes in the Growth of American Government.
Also, Against Leviathan, The Transformation of the American Economy, 1865-1914, Depression War and Cold War, which is another extremely important book that I hope everyone will get themselves very familiar with.
I'm so thrilled to have you back on the show, Bob.
And there's a lot of different things I want to ask you about.
But, oh, there's one more thing I have to say about you before I start asking you things, and that is that, was it just this last weekend, you gave this incredible speech, War and the Growth of Government at Mises, where Lou awarded you the Rothbard Medal.
And that was really something to see in a great speech that you gave there.
War is the master key of the state, you said.
That was just this last weekend, right?
I believe that was on the 20th of July.
Oh, I'm sorry, that was a few weeks back.
Anyway, so there you go, War and the Growth of Government.
It's at Mises Media on YouTube.
Great speech that you gave there.
The master key, I like that, War is the health of the state.
The master key of the state, even.
Turn it up a notch from the great Randolph Bourne there.
All right, and you know what, I think we'll get back to that.
The thing I really want to ask you about is about prices in the 1920s.
The question is this.
They say that there's not much price inflation now, but we know that there's been a lot of monetary inflation.
And so the question is, how much lower do you think prices would be if they had let them collapse?
That's what I'm trying to get to.
And I've heard you explain the same kind of phenomenon in the 20s, and I just wonder if you could tell us where you think we are in the boom and bust cycle and if it's a big deflationary hole that's filled with phony money.
Is that just as bad as having an artificial bubble full of phony money?
Well, Scott, in the 1920s, what happened was after the fall of prices, which was quite substantial in 1920 and 21, the overall price level pretty much stayed the same.
It hardly changed at all from 1922 through 1929.
And, you know, for monetarists such as Milton Friedman, that signified a great success by the Federal Reserve System.
Look, they've achieved stable prices.
That's what all civilized people supposedly want.
But what should have happened instead was that the Fed should have been less activist in trying to help the British get back on the pound-sterling exchange with gold.
And if they had done so, then prices would have fallen even further because they never did fall back to anything close to the pre-war levels in the United States.
And so what was happening was that Fed policy in the 1920s was, in fact, creating easy credit conditions, particularly in certain years, and the result was to bring about malinvestments on a very large scale, particularly in real estate developments, offices, other forms of long-lived capital.
And that built up a lot of structural imbalances in the economy and resulted in the eventual beginning of a recession in 1929.
So that was the story of the price level at that time.
But the story this time is overwhelmingly that, yes, as you say, the Fed has engineered a tremendous increase in the monetary base, particularly the volume of commercial bank deposits in Federal Reserve Banks.
But the money supply itself, the actual medium of exchange that people use in buying and selling goods and services, has grown only fairly modestly.
It has grown, but it hasn't grown even in the same order of magnitude or several orders of magnitude as the monetary base.
And what this tells us is two things.
On the one hand, commercial banks have not wanted to lend money they could have lent, and there are a number of reasons for that, including their own apprehensions about their balance sheets after 2008.
And the other is that the public has not wanted to borrow money from commercial banks.
And part of the reason for that is that there was a big increase in the demand for cash to hold from 2008 onwards.
And so we've been in this extraordinary situation.
It's never happened before.
It's not anything like what happened in the 1920s, but there exists this gigantic potential for the money stock to increase enormously and thereby to trigger real hyperinflation.
But that potential has not been realized at all.
Basically, prices in general, not all prices, but the price indexes for final goods and services, have signified very low inflation since the recession, but some asset prices have run up considerably.
Okay.
Now, so I'm sorry I botched that question so badly about trying to paraphrase you on the 20s and getting it so poor.
But, yeah, so the 20s deal, as you're saying, the prices would have been falling, but the Fed was propping them up where they were staying relatively the same.
And really, so that was malinvestment there.
And then, as you've explained before, too, it was really toward the end of the 20s, I guess, 27, when they really started generating a big bubble in order to try to prop up the pound and all that.
So that was the analogy I was trying to make.
And then so what I'm learning is you're shooting that down, that we're not in a situation now where prices have been relatively stable, but they would be much lower, except for the fact that government has been filling that hole up with the money.
And you're saying that the difference is because the Fed has figured out this trick where they can pay the bank, they can create all this money out of nothing to bail out the banks and keep them whole no matter what, but pay them to keep the money all at the Fed rather than loaning it out?
Well, they do pay interest.
They started doing that in the fall of 2008.
But the interest rate they pay on deposits at the Fed is so negligible, Scott, that I think it's a mistake for people to make much of it.
They've only been paying for years now one quarter of one percent.
Now, because prices have increased somewhat, if only two or three percent a year, paying an interest rate of one quarter of one percent is paying a real interest rate that's negative.
In other words, the deposits that commercial banks are holding and the Federal Reserve banks are losing value in real terms year after year, even though the Fed is paying this little interest rate to them for holding those deposits.
So the explanation for why they're holding such a gigantic volume of deposits cannot really be because the Fed is paying interest on them.
There has to be something much more important going on.
All right, that's a great place to hold it.
We'll be right back with the great Robert Higgs right after this, y'all.
Hey, Al Scott Horton here.
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All right, y'all.
Welcome back to the show.
I'm Scott Horton.
It's my show, The Scott Horton Show.
I'm no economist, but I like the Austrian ones.
I got Bob Higgs on the line.
We're talking about money and monetary policy and what it all means.
And I'm basically a blind man poking around with a stick here trying to even ask right questions.
But, you know, he's being very patient.
It's nice.
So now, okay, where we left off, Bob, you were explaining how, no, it's not as the conventional wisdom goes, the Fed's scheme to pay interest to the banks to keep their money at the Fed.
That's keeping them from lending it out.
And as you said previously, that's keeping people from wanting to borrow it.
But so what is it then, especially the borrowers?
It seems like things are certainly looking better than they were in 2009.
And the interest rates are so low, isn't it a perfect time for people to be generating a giant bubble by borrowing a bunch of money?
Well, a couple of things have been happening, Scott.
On the one hand, the large corporations that do a lot of the borrowing from commercial banks have had plenty of liquidity of their own.
For years now, they've had large cash balances on their hands.
And if they wanted to undertake new investments, you know, launch into new lines of business or whatever that required a large expenditure, they could finance that out of internal sources in most cases.
So they're just not in the market to borrow when they already have money in the bank sitting there in their own short-term securities, earning practically nothing because interest rates in short-term securities are 1% or less and have been for years.
So on the one hand, you've got the big companies that don't need to borrow from the banks.
On the other hand, you've got the smaller companies, startups and so forth, that are high-risk borrowers.
And the banks are reluctant to lend to that kind of borrower and have been reluctant ever since the financial debacle of 2008 because so many of the banks themselves have shaky balance sheets.
If correct accounting had been employed back in 2008 and 2009, the accounts would have shown that many of the big banks were in fact bankrupt.
But because the assets they held, you know, people's notes to repay loans, were not being revalued downward as they should have been, these banks looked as if they were solvent but really weren't.
But they knew their situation, and because they knew it, they have been trying ever since to avoid risky loans and to rebuild their balance sheets and also to meet new capital requirements that have been put on them through the Basel system.
And so the banks certainly made it harder for people, say, to refinance mortgages.
I experienced that myself two or three years ago when I refinanced mine.
I never had to submit so much paperwork, so much documentation before, and even though I'm like a prime borrower, if I say so myself, they still weren't so eager to hand the money over to me without a lot of documentation.
And certainly they've been applying those kinds of more stringent standards to borrowers in general.
So that puts small firms and startup companies at a disadvantage, and they just get turned down when they go to the big banks for money.
So then where does that put us on the business cycle then?
We're still – I guess we're past the crash and deflation stage, but it doesn't sound like we're very far along in creating the next big bubbles before they pop.
But then again, I saw Alan Greenspan, the guy who did this to us last time on I think Bloomberg, something on the Internet the other day, saying that he's afraid that there's a giant bond bubble now.
What does that mean?
Well, what's happened is that since about the middle of 2009 or the latter part of 2009, there's been a feeble recovery in general.
Now, some sectors have hardly recovered at all.
For example, real estate construction, after its huge decline during the recession, has scarcely increased the volume of building at all.
So it's just been stuck at this low level for years and years.
However, banks have had money to lend to certain people, and some people have had their own sources of funds.
And the result has been with interest rates so low, as I was mentioning, short-term secure-type notes are only paying 1% or less.
If you go to the bank and get a CD, that won't even pay you 1%, which is a negative real rate of interest.
Now, this situation with the Fed holding interest rates, particularly at the short-term end, so low for so long has put people in a position where the only way to get a substantial real return on investment has been to put their money into riskier investments such as commodities, third-world economies, kind of oddball-type investments that the big investors know about and involve themselves in.
But we ordinary people know nothing about and don't have access to, basically, except through middlemen who accept our money and invest it on our behalf.
But the upshot has been, as I mentioned before, that even though general inflation in the usual sense that people measure it these days has been quite low, there's been quite a lot of asset price inflation in some markets.
The real estate has run up again in almost every part of the country from the crash lows in 2009, so real estate's run up, commodities ran up a lot, depending on the particular commodity, of course, how much it's run up.
Bonds ran up, and that's what Greenspan's referring to there, and that's just another way of saying interest rates have been kept low, say bond prices and interest rates move inversely by definition.
So you've got all these asset markets that have had substantial price increases.
Now, whether they've had bubbles or not is usually the sort of thing that we only can identify ex post.
When a bubble bursts, we can all kind of rush in and say, well, yeah, that was a bubble.
We should have known.
But bubbles are really much harder to identify ex ante, and so it may well be that there are some genuine bubbles in some of the asset markets right now.
And if so, it's inevitable that sooner or later they will burst, and there will be huge price decreases in these assets.
But it's really hard to say right now.
It's keeping speculators busy, and it's their business to make good guesses.
They have their own money in the game, and so they're probably making their best guesses, even though no one knows the future, even the greatest speculator on earth.
Well, so just from the position I'm in, which is not an educated one on this, but just looking at the economy out of my own eyes and experience, it seems like the exact same thing as the 1990s and the 2000s again, where TV says prosperity, and that's because, yeah, well, they're doing good because they've got stock market investments and that kind of thing, as far as they know it's good.
But for everybody at, say, at least the bottom half or whatever, nothing's hardly moved or changed at all.
It's still the Great Recession to us, and so that means the crash is coming soon again, I guess.
Well, I think actually the 90s were a more prosperous period across the board than the situation has been since 2008.
There has been some recovery in labor markets, but particularly the volume of private employment has been stuck at a very low level, four or five million jobs fewer than before the recession.
So that's been a real trouble sign there of just how poorly the economy has been performing.
A lot of people have dropped out of looking for work, or they've found ways of getting income, like going on disability benefits or some other kind of government handout that has allowed them to get by.
But this is certainly, to call the period since 2009 prosperity would be wrong.
It's been a period of limited recovery.
I don't think it's completely false recovery, but it's so little that many people, of course, have not noticed it because it hasn't really affected everybody.
Even when the average has gone up a little bit for people's real incomes, lots of people haven't participated in that increase.
So yes, it might look as if the recession has never ended to a lot of people, even though for the more fortunate ones things have not been so dire.
All right, I'm sorry.
I've got a million more things to ask you, but we're just all out of time.
I hope we can do this again soon, though.
Well, it's always good to talk to you, Scott.
Very good to have you back on the show, Bob.
Appreciate it.
Thanks a lot.
All right, so that's the great Robert Higgs.
He's at the Independent Institute, Independent.org.
He's also the author of Crisis and Leviathan, Against Leviathan, Depression War and Cold War, Neither Liberty Nor Safety, Delusions of Power, Resurgence of the Warfare State, Opposing the Crusader State.
That's not all.
More.
Arms, politics, and the economy, and more and more and more.
Check them out on Amazon.com.
Hey, Al.
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