03/18/08 – Bob Murphy – The Scott Horton Show

Alright y'all, welcome back to Anti-War Radio on Chaos 95.9 in Austin, Texas.
Our guest today is Robert P. Murphy.
He's a scholar from the Ludwig von Mises Institute of Austrian Economics and is the author of The Politically Incorrect Guide to Capitalism.
Welcome to the show, Bob.
Thanks for having me, Scott.
Well, it's great to talk to you again, and boy, you know, something that struck me as very odd was when some multi-bazillion dollar bailout of some investment bank I've never heard of was announced on a Sunday morning just the other day.
What's going on there on Wall Street and the Federal Reserve Bank there, Bob?
Okay, well, I'll try to give you a quick version of it.
So as I'm sure your listeners know, the real estate market has been tanking lately, and so what's happened now in terms of the financial sector on Wall Street is they had, the last few years, they've been buying up mortgages and bundling them and then selling these things called mortgage-backed securities.
And so while home prices were going through the roof, these things were great, and the investment banks were making money hand over fist on it.
And so now what happens is now that prices are falling, of course you've got a lot of people that they have negative equity, that they owe more on their mortgage than what their house would be worth if they sold it, and so a lot of people are walking away from their homes, so these monthly mortgage payments aren't flowing in as much, and there's a lot of uncertainty, and so these sophisticated new assets, these mortgage-backed securities, which are just claims on bundles of mortgages, these things now have an uncertain value.
And so a lot of places, you know, you'd have to be crazy to buy these things, and so their market price is now kind of up in the air.
And that's why the Carlyle Group fell apart last week, right?
Right, that was one of the major reasons for them, yeah, getting in trouble.
And so Bear Stearns now, they had a lot invested in these mortgage-backed securities, so they were in trouble, and my understanding is what happened is, early last week, a bunch of people, other Wall Street places were saying, you know, I don't know that we want to be on the other side of a deal that involves Bear Stearns, because if they go, if they just hit a liquidity crunch, you know, they just can't get financing, then we're going to be, you know, caught holding the bag if we're involved in a deal with them.
We can't get our money out.
And so a lot of places started, it was basically like a run on a bank, except it was a run on an investment bank, where if you're in the business of making deals between parties, if you all of a sudden can't get cash financing because everyone's afraid to deal with you, then you're kind of dead in the water.
And so they went, they were calling up the Federal Reserve and saying, you know, look, we're going to have to declare bankruptcy unless we get some cash injection.
And their claim was that they were still solvent, that, you know, it wasn't that they were unprofitable, it was just they were saying, because of this panic in the market, we can't get the cash we need to carry out our day-to-day operation.
And so as of Friday, the Fed said, okay, yeah, we will.
Basically what the Fed was doing, and this is kind of unprecedented, they were saying, all right, we will give you loans from our books of treasury notes, and we will take as collateral these mortgage-backed securities that nobody in the private sector would accept as collateral.
And so right there, what's going on is the Fed is basically guaranteeing the value of these things, and that if they do end up falling in value, that the taxpayers would be upset, the Fed would eat the loss.
And then over the weekend, like you said, even that wasn't enough that apparently bankers were calling up Paulson and others and saying, you know, you've got to stop this thing before the markets open in Asia, like late Sunday time, New York time.
You've got to have a deal in place, because this isn't enough.
Just guaranteeing.
Basically they said, we're going to give them a 28-day window as of Friday that the Fed was going to provide financing.
And that still wasn't enough to calm these fears, and so that's why.
The other stories about these attorneys just being in a hotel room or in a conference room for 72 hours straight and getting, like, three hours of sleep in order in Chinese over the weekend to try to put this deal together, looking over the books.
And even then, JP Morgan, who's the one that they made the formal offer, they're not particularly comfortable with it, and so the Fed has given some vague guarantee of, well, if all these mortgage-backed securities that you're now going to buy, if they tank in value, then the Federal Reserve will eat the loss.
So the taxpayers are on the hook, assuming this deal goes through.
But yeah, the reason was the idea, if they didn't come up with this scheme to rescue Bear Stearns and prevent it from just going bankrupt, then it would just cause a seizing up of the credit market, and everybody would panic, and it would be even worse than it is right now.
That was the theory.
Wow.
Well, so it sounds like the excesses of capitalism have gotten way out of control, and it's a good thing that the government is here to protect us, right?
Well, I realize you're being sarcastic there.
You know, it's funny that that's, of course, what a lot of people are, how they're interpreting what's going on, when, no, I mean, well, what is capitalism?
It's a profit-and-loss system, and the way capitalism works is if somebody screws up, then they should go out of business, and that provides discipline for everybody else.
I mean, remember when the home prices were going up and all these investment banks were making these newfangled financial engineering products, and people were saying, they were criticizing them and saying, you know, this stuff can't last, the fundamentals aren't here, this is a bubble in the housing sector, and at the time, I was a little bit perplexed as a free-market economist, I said, well, wait a minute, if it's so obviously wrong to be making these investments, I mean, don't these investment bankers care about their money more than you do, this critic sitting on the sidelines?
Why would they be throwing away all this money if it's so obviously a stupid investment?
And now we see, well, because they were more politically savvy than I was at the time, and they knew, well, no, if things really did get out of hand, then we'll just go to the government and they'll bail us out.
So the only way that the financial system can work properly the way it should in a free enterprise system is if you make risky investments, if you make money hand over fist for a few years because you're engaging in really risky activity, if it blows up in your face, then you have to be allowed to go out of business, and your investors have to lose all their money, and then that will provide a lesson to everybody else, and then the system should be more rational in the future.
So you're saying that the fact that these bankers, and even investment bankers, know that they can always turn to the Federal Reserve to bail them out, that's what encourages them to run their business in a shoddy way?
Exactly.
I mean, it's...
Pardon me, Bob, but that's the exact opposite of what I was told on NPR last night driving home from the store.
I heard the interviewee explain that the fact that the Federal Reserve is the lender of last resort is the entire basis of our economy.
This is why people trust the banks and the money at all, is because they know that at the end of the day, the lender of last resort in the form of the Federal Government is there.
Well, it's true.
I mean, given the way the system is set up, the government has this role to play, and it's always a tricky issue when you're a free market economist or a libertarian in general when someone says, well, what about just this one aspect of the government?
Should it be a different system?
Given everything else that's in place, like the question of should there be open borders or not, that's a harder question to answer because of the welfare state.
You know, there are things like that, or private road owners should be able to do whatever they want, but should the government be allowed to say people with spiked hair can't ride on the road?
Well, no, even though you would allow a private road owner to do something like that.
So it's really tricky.
You know, it's basically the fractional reserve banking system.
The reason that you need to have FDIC and you need to have the government backing up the banking system is because, yes, it's very vulnerable to a bank run, and maybe, you know, if it's an arguable case, maybe it is good that the government plays that role given that the banking system is so vulnerable to mass psychology, but that's only because the government intervenes in the first place and doesn't have a truly free market bank for the banking sector, that banks are allowed to lend out money, and they have far more in total deposits than they can actually pay off in terms of reserves in their vault, and that is largely due to the fact that banks are protected by government regulation.
And so if you really had just a truly what they would call a wildcat free banking system, yeah, there would be occasional bank runs, and certain banks would get sloppy, and they would make all sorts of loans and things like that, but they would go out of business, and they would keep the system generally honest, whereas what you have now is the government comes in, and it says, we're going to be the ones ensuring honesty and integrity in the financial system, and so we'll be the ones setting up the rules and auditing the banks and making sure everybody is above board, and then when things get out of hand, we'll be the ones using taxpayer money to bail them out.
And to me, just as I'm describing that, that's just, of course, a guaranteed recipe for failure that you're going to trust politicians to ensure integrity in the financial sector, and that's just ludicrous.
Right.
Well, and see, I think one of the things that your explanation sort of explains away the myth that you think, well, it's a better idea to just leave it to businessmen.
What you're saying is, leave it to the forces of nature.
The businessmen aren't any more trustworthy than the politicians, might not even be any better at what they do, but if there's a market, then the market will kick their ass when they fail, and they'll deserve to fail, and then we'll be all right.
The people who deserve to succeed will go on.
Right.
That's a good point, and that's something, again, I want to stress to your listeners, and I suffered from this myself when I was in high school and I started getting interested in free market economics, and there's certain, I think Ayn Rand has an essay called something like Big Business is the most persecuted minority in America or something like that, and there is this, certain libertarians do think that, oh, people in business are noble and just, and they're being hounded by the government, and a small businessperson can run a mom-and-pop restaurant, yeah, they probably get screwed over by government regulations, but the people running huge investment banks, I mean, look at where Paulson came from, I mean, these guys are all, it's a revolving door of these huge investment banks and working for the treasury and so forth, so these guys all know each other, and they're all benefiting from each other, and I mean, if you just think about it, there's hundreds of billions of dollars the government has been pumping into the financial sector the last few months, and it's, another way to think about it is, it's not just the same group of people who would be in charge of the big banks under the current system versus if we had a truly free market financial sector, that the type of people who rise to power when you have to be friends with politicians and you have to wine and dine them and you have to know how to play the political game, those are a different type of person, those people are going to rise to power in the present environment, whereas they probably wouldn't be the CEO of Bear Stearns if they really had a free market, you know, they would be somebody else who was better at assessing the risk in the mortgage sector probably would have been in charge of these decisions rather than the people that were in charge, in fact.
Right, sort of like, that's why Halliburton hired Dick Cheney after he was, after Clinton won and he was no longer the Secretary of Defense, they said, now, here's a guy who can get us government contracts, there's nobody better than the former Secretary of Defense, let's make him the CEO.
Right, right, that's a great point, and it's, so everything is rational from the individual company's point of view, you know, you could argue the ethics of it, and certainly I wouldn't invite that person over to have a barbecue at my house, but it makes sense given the way the environment is that that's why these people rise through the ranks, and yeah, you can make your shareholders more money if you're on good, friendly terms with the Pentagon budgetary people, and you can get lucrative contracts, as opposed to the engineering whiz who really can, you know, knock down the enemy fighter jet, that that's not really what's important.
What's important is in the present environment, if you are a defense firm, that you are friendly with the people on the government, the ones who are giving you the contract, as opposed to actual, you know, product value and things like that, so it's, yeah, you're right, it's that the people in the financial sector now, because it is so heavily regulated, there's a lot of overlap between people who are legitimately good at serving their true clients, but also you have to know how to play the political game, and as we've seen, a lot of these companies, they're getting billions of dollars in either guarantees or actual handouts from the government, and that's really the problem with this mentality that, oh, certain banks are too big to fail.
Well, if you're too big to fail, then that's going to make you very risky.
You're going to go ahead and try to do things that make you a lot of money if you're right, and then if you're wrong, you know you're going to get bailed out.
Yeah.
Well, so let me ask you this.
The Austrian economists, can't even pronounce it, talk like the President this morning, but Ludwig von Mises, guys, you guys are always trying to point out that the Federal Reserve doesn't solve the problem of the business cycle, it creates it, and that, well, for example, like you've been saying, you've been pointing out how unjust it is that these billionaires basically are all on welfare, that they get taxpayer bailouts for all their bad business decisions, and I just want to ask you if you think that this is really what the Federal Reserve was created for in the first place, was to create booms and busts, that they know that's what it's for, and they don't mind, because when it's bust time, they all get bailed out and they get to buy up all our great stuff we made for pennies on the dollar, when we all go out of business, all us little guys, you know?
Right, that's, I don't know if they perceived it with such clarity that you just said, simply because not everyone even subscribes to the Austrian business cycle theory, so I think that would be putting a little bit too much, giving them too much credit, but I do definitely think that the historical origins, if you go and read Rothbard's historical account of the actual people involved in the formation of the Federal Reserve, certainly they were not disinterested public servants who thought, you know, we really ought to try to do what we can to repair the excesses of capitalism, and let's come in and really make things safe for this country, for the common man, but no, I mean, the people who were actually involved in the deal, they stood to profit greatly from it, and that's why they were the ones engineering the deal.
If you look at just about any government, big, huge new government program, the people who are actually involved with its implementation, as you might expect, are the ones who personally benefit from it.
And it's interesting, isn't it, that all this bailout money's coming out in this current housing crisis thing, there's all this new money being created for all these bailouts, but everybody on the low end are still losing their houses.
How come if the banks are being protected from all their losses, how come the people can't stay in their homes, then?
Right, that's a good point, and that's really where you see the argument here, where a lot of the Democratic proposals with the capital, the proposals to address the housing situation, they're coming at it from the point of view of the homeowners, and that's why they're saying things like, well, let's get rid of the penalty on prepaying your mortgage, let's freeze the armory adjustments, or let's postpone foreclosure, things like that, whereas the other side, the Republicans, typically their proposals are more about doing things to try to reassure the lenders, make sure that they don't lose any money.
Well, do you agree with the Democrats at all?
Should it be that if the banks, as long as the banks are getting these bailouts, that the people get to keep their houses?
Well, I mean, ideally, of course, I don't think the government should be doing anything, and just as I don't think there should be welfare for big bankers if somebody agreed to a mortgage they couldn't possibly finance, and that the only reason they got into the home was because they thought the price was going to go up and they were going to flip it, and then they miscalculated, I think, you know, that they shouldn't have the contract changed.
But it is, yeah, I mean, of course, my personal sense of fairness, if tons of money is going to be given to rescue, certainly if the government's going to spend billions of dollars, I would feel better if it went to helping poor people in dire straits rather than rich people on Wall Street.
Well, let me ask you this.
What percentage, because, you know, immediately when you say that I have images of, you know, all the infomercials, hey, you've never produced anything in your whole life, well, check it out, you can buy a house for free and sell it and make $50,000 in a day, it's great, but how much of this is that?
You know what I mean?
In fact, I read something, which, you know, I'm not good enough at the numbers to really understand all this stuff, that's why I got you on here, but I read something that Greg Palast wrote the other day where he broke down some numbers and said that, you know what, you have a family of four here, and their mortgage was this, and their interest on it was that, and this was a quarter of their income, and everything was fine.
It wasn't that they made a deal that they couldn't possibly afford.
They did everything right, and yet now their price has double-tripled on them, the value of their houses has been cut way down, whatever, and now they're in over their head because of what the government did to them, not because they really made bad decisions.
Right, yeah, I mean, it depends, too, how much, how you want to look at it, because, again, the whole reason for the housing bubble and burst was the crazy interest rate policies that Greenspan put in place.
Again, just remind your listeners, we're trying to understand here, why is it that home prices zoomed up in the early 2000s, and they peaked around 2006, and then all of a sudden they collapsed.
Well, gee, if you go and look at, you know, this isn't our figures that I'm making up here, just go look at the official government numbers as to what the interest federal funds rate was from 2003 to 2004, they kept it down at 1%, which is unprecedented, at least going back to the 70s.
And then they started ratcheting it back up.
So, in terms of the government's role in causing this huge boom in housing prices and then pulling the rug out from them, that's certainly largely the fault of the Federal Reserve.
And also, I mean, you're right, if somebody gets into a mortgage and it was an adjustable-rate mortgage and they really didn't understand what was going to happen or they thought interest rates were going to remain low and then interest rates get jacked up because of Federal Reserve policy, yeah, I mean, that's not...
I certainly would feel that it wasn't entirely the fault of somebody who gets into a home and then now all of a sudden interest rates...
I mean, we don't know what interest rates are going to do over the next two, three years if there's massive inflation.
Like, I think there could be...
I mean, the conventional 30-year mortgage rate might just be astronomical two, three years out.
And so, yeah, it's a little bit unfair to expect somebody who's just a blue-collar worker to be aware of all these possibilities.
And to the extent that those...the reason things change so drastically is because of crazy Federal Reserve action, yeah, in a sense you could say that that wasn't their fault, that's the government who's doing that to them.
Yeah, I wonder about that, because there seems a lot of characterization of, you know, everybody who is getting screwed out of their house here is really just some speculator-anyway kind of thing, and I wonder about...or they were a worker who got in way over their head.
And I just wonder, you know, I mean, in the end it looks like they did, but was it in any way obvious to them that they were getting in over their head at the time is the real question, I guess.
If you made what was blatantly a bad decision, well, I don't really feel that bad for you.
But if you did all the math and everything looked great for, you know, years into the future, and then now, you know, Bernanke and the boys come and screw you over, you know, I just wonder...
I don't know what the percentages are or what, but...
Yeah, you're right.
I don't know exactly...
I have seen certain analyses saying that, look, this isn't really just an issue of subprime mortgages, this is a more systemic problem.
So I definitely think you're right on that score, that this is not simply attributable to a few reckless people who got into a house that they couldn't possibly afford, that that's not what's going on here.
It's true.
I mean, anyone who's bought a house, I mean, you realize when you sit there at the closing and you go through all the...
I mean, no one could possibly read all that paperwork.
You'd just be there all day.
And so I do feel a bit of sympathy for people that, if they were being guided through the process by a shyster who was just trying to get the commission, and the person really did, you know, sort of say, yeah, the language says that, but don't worry.
I mean, I mean, because some of these things, like to say that your mortgage payment is going to double or triple, that sounds so inconceivable.
I can imagine if the writing did suggest that the person guiding them through would say, oh, come on, that would never really actually happen.
And you would just think, yeah, of course it's not going to happen.
Just like the warning labels on certain medications, you just think, oh, they just put that on to cover themselves, but that's not really going to happen.
So I am sympathetic, and I do think a lot of people probably were misled.
And again, the reason for these sort of predatory lenders, if that's the term you want to use, is because the home prices were going through the roof, and it was such a hot market.
And in fairness, probably a lot of those people didn't think that they were giving bad advice to their clients.
I mean, they had been making money for two or three years doing just that, and they probably thought, yeah, I'm getting these people into a home, and they're going to make a bundle off it, so why shouldn't I profit from that as well?
Right.
I'm sorry to get bogged down too much in the details, but I heard reference the other day to the resetting of fixed mortgages.
My understanding was you got the kind of mortgages that reset all the time or every couple of years or whatever that are the variable rate, and then you have your fixed rate that says, when I sign on the bottom line and it says that I only pay this rate for 30 years, that's my rate for 30 years.
No?
Am I confused?
Right.
I mean, that was my understanding.
You've got your conventional 30-year mortgages, and then you've got your adjustable rate mortgages.
Yeah, I heard him talking about the fixed ones were going to reset, and maybe just the guy on the news is as ignorant as me or worse.
Well, maybe what he was talking about was people refinancing.
Right now, rates are still lower than they have been in a while, mortgage rates, and so there's all the commercials for go ahead and refinance, even if you have a fix.
I know several people that have done that, where even if you have a fixed rate mortgage, you can go and refinance into another fixed rate mortgage on better terms for yourself.
Right.
They can't just tell you, oh yeah, you had a fixed rate mortgage, but now you don't anymore, pal.
They can't do that.
Not legally.
That's not my understanding.
Okay, that's good.
Well, yeah, I was confused by that.
Okay, now, I'm sorry.
Let's get back to the bigger picture here.
You wrote this article for Forbes Magazine saying, hey, let's go ahead and have a recession.
Stop prolonging it.
You're going to make it worse.
How?
Okay, so again, what everyone's talking about is, you know, the Fed's got to keep cutting rates to stimulate the economy, and look at how bad things are getting.
And the typical trade-off is, oh, you can either cut rates, the Fed can cut interest rates, and then that will stimulate the economy, will create jobs, and things will start booming again, but then we're going to get price inflation.
Or the Fed can be stingy, and it can keep rates high, and then we're going to have a painful recession, but at least we'll keep prices in check.
So that's the conventional wisdom.
But as I argue with a co-author, Lee Hoskins, there, that's actually wrong.
That, look, during the 70s, it was a famous period of stagflation, where we had massive inflation rates, double-digit rates for some of those years, and high unemployment at the same time.
And then during the 80s, at least after the initial recessions there, you had fairly steady, real growth with—there was still inflation, of course, but it was moderate compared to the 70s.
And right now, what's happening is we're seeing a return to the stagflation of the 70s, that gold prices have hit nominal highs, oil prices have hit all-time inflation-adjusted highs, that oil has never been more expensive relative to other commodities than it is right now.
And you've got the inflation numbers from—and this is the government's own numbers from last year—were the highest they've been in, like, 17 years.
The producer price index was the highest it's been since, I think, 1981.
So you really have the signs that we're starting to get in this situation where you've got prices are going up, and as we all know, the economy's stalling.
And so in that sort of environment, the last thing in the world you want to do is to signal to the rest of the world that, yeah, the Federal Reserve is going to print dollars with abandon in an effort just to stimulate the economy, and we'll deal with inflation down the road.
But that's telling the rest of the world, okay, the dollar's toast, and you've seen the dollar now is at an all-time low against the euro.
I think it's like a 12-year low against the yen.
And so the thing with the dollar is international investors, I mean, once they decide, okay, that's it, the U.S. has really just given up and it doesn't care anymore about the strength of its currency, they're going to start dumping the dollar like crazy because there's a lot of dollar holdings around the world from people who are just using it as a store of value.
And once they determine that the euro is the better place for that function, there's going to be a massive flight from the dollar, and that's just going to exacerbate the problem.
Is there any purpose for deliberately debasing the currency?
I mean, other than just you don't want to raise taxes, but you want to have a war, for example, so you create a bunch of new money.
But other than that, is there any political, intelligent reason to debase the currency, other than the old canard about it'll help exports for a short time?
Is there any good reason to do this?
No, I don't.
I certainly am familiar with a few arguments for it, and you just mentioned them, that people say, well, it's good for the government to have the option of printing money because if you have an emergency like a war, people are going to go for tax hikes and then you've got to print the money to pay for it.
Or, like you said, that a lot of people now are saying, well, yeah, even though things are bad, the one silver lining is that as the dollar tanks, that makes our exports cheaper and so the rest of the world can buy them and so that boosts our exports.
But again, I mean, that's just purely mercantilist thinking that, no, I mean, really, the benefit of international trade is the stuff you get from foreigners, and you have to send them things in exchange in order to make them willing to send you stuff, but the goal of trade is for you to get things.
It's not for other people to get your stuff.
So to not answer your question, I don't know of any legitimate benefit from debasing the currency.
You just think about it, printing up more green pieces of paper or adding numbers to an electronic bank account, that doesn't make the country richer.
That doesn't allow you to consume more things.
It doesn't make your workers more productive.
And all it really does is just create more uncertainty for people, and it just causes people to not make as much investment decisions over the long term because they're not sure what the value of the currency is going to be three, five years down the road.
So really, we're talking about must be a very, very small number of people in this country who are the closely connected political interests who get all this money and all the benefit of all this new money at the expense, it sounds like, of the rest of our nation.
Right, and that's certainly true.
Now, I don't know how you want to quantify this, but to the extent that people falsely believe that rate cuts are a good thing and they'll stimulate the economy, I mean, there is some psychology involved.
And so I don't know if you would be able to get some sort of temporary effect when the Fed...
Let me put it this way.
If the Fed followed my advice, and I don't know if the announcement has come out yet today with their meeting today, if they came out and said we're not cutting rates at all, we're holding them steady, I think that Wall Street would have a huge drop.
It might even crash.
And there certainly would be panic probably throughout the land.
But the question is, is that, wouldn't that possibly be a good thing in the long run?
Wouldn't that be good if the rest of the world got a notice that, wow, the U.S. now really is serious when they say we have a strong dollar policy?
And if the government said we're not going to bail out any of these banks anymore yet, that would cause short-term pain.
It might even be a crisis in the minds of some, but once we got through that, things would be a lot better.
Whereas right now, we're just limping along, and the government just keeps trying to literally paper over the crises, and it's just going to make everybody poor in the long run.
Again, by printing money, you don't make more cars available.
You don't make more apples available for people.
All you do is really just create more uncertainty.
That's really what the function of money is.
It's to allow for transactions to go through.
It's to allow people to calculate, to make business decisions, and so you just undermine that function when you arbitrarily add billions of dollars here and there unpredictably.
And now, that's funny because you talk about the confidence or lack thereof or what have you, and if they were to announce a sound dollar policy and act like they really meant it, what effect that might have.
Mike L., in the comment section on the Stress blog this morning, linked to a Gary North article from February 18th where he says the Fed is deflating, and he's counting all the M1 and M3 and this and that, and he's saying that the Federal Reserve is actually, I think, buying up T-bills and that that is actually decreasing the money supply, and he says this must be some sort of attempt to shore up the dollar, but it seems like that wouldn't do any good unless, as you said, you made it clear that that's what you're doing and why.
And is that even right, that they're, at the same time we're talking about all this inflation and new money, that they're actually decreasing the money supply?
I haven't looked in the last few weeks at those numbers.
What is certainly true is, if you look at the growth of the monetary base, which is the high-powered money, the stuff, the deposits with the Federal Reserve itself and actual cash and things like that, if you look at that number over the last few years, it's true that the Fed, it looks like it's being very disciplined, that it was growing at a certain rate and then it started tapering off the last few years, and so it's true that the Fed has not been as reckless as some might think when they talk about, you know, injecting billions of dollars here and there, but on the other hand, I mean, if you look at interest rates, the interest rate that the Fed controls, I mean, it has been cutting rates in an effort to stimulate the economy to provide liquidity, and I think what, my gut reaction on all this stuff, and I am familiar with Dr. North's analysis, is I think what's happening is, as the U.S. position has become more and more precarious, the demand to hold dollar-denominated assets has been shrinking, or at least growing more slowly than otherwise would have, and so as people around the world are less and less willing to hold dollars, that would make the price of the dollar go down in terms of its relative to other currencies, and so even though the Fed is not inflating as much as it has historically, it's still not enough to offset the falling price.
I see what you're saying, sort of like when the Congress slows the rate of increase of funding of a program and call it a cut.
Right, so now, again, I haven't read Dr. North's latest, perhaps the number really did drop an absolute value recently, but what I'm talking about when I say the last few years, the Fed has still been adding to the base money supply, it's just not growing as much as it had, let's say, over the past 20 years, on average, but it still wasn't injecting money, but again, this was occurring when we were having unprecedented U.S. trade deficits, and people kept saying, oh, this is unsustainable, and more and more foreigners were thinking, you know, at some point, one of us is going to have to blink and dump the dollar, and this is going to cause a run, and so when people have that mentality, they're going to start easing off on their holding of dollars and other assets, and again, so that's what I think might be happening, is that the demand for dollars has been dropping, and then the increase in supply has just been slowing, so that's still leading to a drop in the value of the dollar.
And now, we talked about the excuse, it's funny that people would cite this as an excuse, rather than exposing it as a real reason, which is my take on it, but the excuse that you need a central bank with the power to create money in order to fund a war, you know, if there's an emergency, you want to be able to fund the war without raising taxes, and that's what we've seen, is tax cuts, and these, you know, bogus little few hundred dollar refunds, and this and that, while at the same time, we have a trillion dollar war going on in Iraq and Afghanistan, well, trillion dollar occupations anyway, and so I wonder, you talk about the artificially low interest rates in the housing market, and all the effect that that has had on the dollar, what about all the deficit spending by the government in order to pay for the war?
Right, and again, just as an aside, on the general rationale that you needed to fund wars, of course, if you're a person like me who's very skeptical of foreign military engagement, that's just yet another reason that you don't want to have inflation.
You know, it's sort of like saying, well, what if you wanted, you know, give a bunch of little kids diseases, then you need to have this power, you know, and well, no, that's not a reason for it.
Yeah, you're right, the deficit spending, strictly speaking, a deficit is not inflationary, that if you were on a gold standard, let's say, a 100% gold standard, and there was no federal reserve, no fiat money, and the government spent more in a certain year than it took in tax revenues, that it would just borrow that from the private sector, and that would mean private spending would go down by that amount.
And so you wouldn't have an increase in overall prices as measured in ounces of gold, let's say.
But in the present environment, I do think, yes, there's a strong connection there that when the government runs a deficit that gives an impetus for the federal reserve to inflate the currency in order to reduce the real value of that debt.
And then there's actually, I mean, I've seen proposals, I think it was William F. Buckley, I don't want to put words in the guy's mouth, he's not here to defend himself anymore, but I'm pretty sure many years ago, I read an article by William F. Buckley saying, you know, let's just get rid of the national debt by monetizing it, by just printing up money, because we owe it to ourselves, and this is the fairest way, let's just be done with it once and for all.
So I mean, certainly, there are connections there that the government's running massive deficits that puts more pressure on the Fed to inflate, causing price inflation, reducing the servicing cost in real terms of that continued debt.
Yeah, because just the interest on it every year, in terms of money taken from the American people, just to pay the interest to the bondholders is bazillions, right?
What, tens of billions of dollars?
It's, you know, I don't know that off the top of my head, but no, I think it's, I'm pretty sure it's more than that.
But yeah, it's definitely up there.
As in maybe over $100 billion a year just in the interests of their share?
Yeah, it wouldn't surprise me.
Again, I don't know that that number off the top of my head, but yeah, it wouldn't surprise me if it were higher than that.
And the thing is, too, like you say, another way to see it is, what guides the interest on the national debt?
Well, it's how much, if it's the interest rate that the government needs to pay on its own, that instrument, like Treasury, securities, bonds, things like that.
And so that is indirectly affected by Federal Reserve policy, because the Fed sets the federal funds rate, and then that, in turn, influences what these other interest rates are.
And so clearly, the higher the interest rates are on government debt, that raises the cost of servicing the debt.
And so the Fed has an interest to keep interest rates low.
All right.
I'm sorry, I had a question, but I forgot what it was.
I guess I basically just wanted to wrap up.
Let's try to see if I can figure out a good way to ask this question, and maybe I'll edit it to where this sounds smart at the end for the MP3 archive.
But is this the biggest scam in the history of the world, central banking?
It sounds like you have a partnership between the very richest people in our society and the government, where all they do is create money out of nothing for each other all day at the expense of all the rest of us.
I mean, this sounds like the pinnacle of corruption, the kind that you can't even really describe without it being called a conspiracy theory that you would even focus on.
Right.
I mean, it is true.
If you just break it down to the bare essentials, forget about the open market operations and all these complicated things to learn about and your principles of macro class, and you just picture that the government literally has a printing press that is printing up $100 bills and injecting them at various points.
It's not mailing it to every taxpayer like those rebate checks.
It's giving them out to certain privileged bankers, and depending on its mood and depending on the situation, sometimes it prints more and sometimes it prints less.
I mean, that would just strike people as absolutely insane.
When you read accounts of kings back in the feudal period and they would debase the coinage, they just sound like criminals.
It's just obvious that, oh, what a bunch of thieves that they would take coins from their subjects and then clip some of the gold and then give back the debased coins so that they could personally spend that money.
I mean, it's obviously that they're stealing from their subjects, but yet there's just been such a confusion and just so much mystery imbued with what the government does right now in our system that it's hard to even understand what's going on.
And so we need to break it down, though, to the basics and think of it in those terms.
And the very idea that we would trust a printing press to a bunch of politicians or people who are put in power by politicians is just crazy.
But yet, that's what we do.
Yep.
And continue to do.
Although, I'll tell you what, though, I've noticed that this time around and I don't know, you know, I guess I have to assume that a great deal of this is due to the efforts of Dr. Ron Paul over the past year.
But it seems like the debate over what's happened to the currency and how it's happened has been a lot more honest.
It seems like just in terms of some of the jargon used and so forth, it seems like they're basically having to admit that, yeah, it's the government running the presses that's debasing the value of the currency, which is something that usually they try to keep, you know, very disconnected where we're supposed to confuse all the causes and effects.
That's a good point, Scott.
And you're right.
I've noticed even among just sort of free market economists that this time around, a lot of them are very willing to just say, yeah, the reason for this mess right now is the Federal Reserve.
Now, some of them are just saying that the Fed has to be more careful in the future and we need to have better Fed policies and things like that.
But you'll see more and more people just calling for the abolition of the Fed.
In fact, if your listeners go to YouTube and just type in Jim Rogers, which is R-O-G-E-R-S, no D in there, and abolish the Fed.
I mean, this was an investment guru, made a lot of money on commodities and other things.
And he was on CNBC, I think just yesterday.
And they said, OK, well, what would you do if you were Fed chairman?
He said, I would abolish the Fed and then I would resign.
And the people at CNBC, they all laughed at him.
But I mean, it's a great little segment there.
He goes on for ten minutes and he's just he blows these people up and they have all he didn't eat.
They're not taking him seriously, but it was amazing to see someone on CNBC saying abolish the Fed.
It was great.
Well, you know, I think we discussed this before was when Alan Greenspan went on Jon Stewart's show and Jon Stewart said, yeah, but I thought we had a free market.
Why should the little old lady have her interest rate lowered so that you can make some guys on Wall Street feel better?
And he didn't have a good answer for that.
And then he asked him, why does the Fed even exist?
Why can't we just get rid of the Fed and have free market interest rates?
And Greenspan basically shrugged and said, I don't know.
Right, right.
It's like you said, the people thinking outside the box like Jon Stewart.
And yeah, this time around, I think what the Fed did was just so monumentally boneheaded.
And the consequences of it now are just so terrible that you're right.
I think a lot of people are finally sitting up and saying, you know, this really is a strange system that we have in place here.
That's Robert P. Murphy from the Ludwig von Mises Institute, mises.org, M-I-S-E-S.org, where you can learn all about Austrian economics.
Thanks very much for your perspective today, Bob.
Thanks for having me, Scott.